BRUCE G. VANYO (060134)
JEROME F. BIRN, JR. (128561)
REBECCA A.
MITCHELLS (151683)
WILSON SONSINI GOODRICH & ROSATI
Professional
Corporation
650 Page Mill Road
Palo Alto, California
94304-1050
Telephone: (650) 493-9300
Facsimile: (650) 565-5100
Attorneys for All Defendants
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
|
IN RE SILICON GRAPHICS, INC. II __________________________________ This Document Relates to ALL
ACTIONS |
) |
No. C-97-4362-CAL CLASS ACTION DEFENDANTS' NOTICE OF Date: December 3, 1999 |
INTRODUCTION AND SUMMARY OF THE ARGUMENT
I. The Alleged Forward-Looking Statements Are Protected From Liability By The Bespeaks Caution Doctrine
II. Plaintiffs Fail To State A Claim Against Defendants For Statements By Market Analysts
III. Plaintiffs Fail To Satisfy The Stringent Pleading Standards Of The Reform Act
A. Plaintiffs' Allegations Fail To Satisfy The Information And Belief Provision
B. Plaintiffs Fail To Allege With Particularity That The Alleged Statements Were False When Made
C. Plaintiffs Fail To Allege Specific Facts Giving Rise To A Strong Inference Of Fraudulent Intent
IV. Plaintiffs Fail To State A Claim Against Non-Speaking Defendants Coleman, McBride Or Orton
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Grossman v. Novell, Inc., 120 F.3d 1112 (10th Cir. 1997)
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In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999)
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In re Caere Corp. Sec. Litig., 837 F. Supp. 1054 (N.D. Cal. 1993)
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In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357 (3d Cir. 1993)
In re GlenFed, Inc. Sec. Litig., 60 F.3d 591 (9th Cir. 1995)
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In re Stac Elecs. Sec. Litig., 89 F.3d 1399 (9th Cir. 1996)
In re Syntex Corp. Sec. Litig., 855 F. Supp. 1086 (N.D. Cal.
1994),
aff'd, 95 F.3d 922 (9th Cir.
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In re Syntex Corp. Sec. Litig., 95 F.3d 922 (9th Cir. 1996)
In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994)
In re WRT Energy Sec. Litig., [1997 Tr. Binder] Fed. Sec. L.
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Karacand v. Edwards, 53 F. Supp. 2d 1236 (D. Utah 1999)
Kramer v. Time Warner Inc., 937 F.2d 767 (2d Cir. 1991)
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Pache v. Wallace, [1995 Tr. Binder], Fed. Sec. L. Rep. (CCH) ¶
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Raab v. General Physics Corp., 4 F.3d 286 (4th Cir. 1993)
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Wool v. Tandem Computers, Inc., 818 F.2d 1433 (9th Cir. 1987)
15 U.S.C. § 78u-4(b)(1)
15 U.S.C. § 78u-4(b)(1)(B)
15 U.S.C. § 78u-4(b)(2)
15 U.S.C. § 78u-5(c)
H.R. Conf. Rep. No. 104-369 (1995)
Please take notice that on December 3, 1999, at 9:30 a.m., before the Hon. Charles A. Legge, in Courtroom 10 of the U.S. District Court for the Northern District of California, located at 450 Golden Gate Avenue, San Francisco, California, all defendants shall move to dismiss the consolidated complaint. This motion is based on plaintiffs' failure to allege particular facts showing that a statement was false when made, and to allege particular facts giving rise to a "strong inference" that defendants made the alleged statements with scienter, as required under Private Securities Litigation Reform Act of 1995 ("Reform Act"), 15 U.S.C. § 78u-4.
This is a shareholder class action against Silicon Graphics, Inc. ("SGI") and certain of its officers and directors. Plaintiffs allege that during the class period, July 24, 1997 - October 6, 1997, defendants made false statements about SGI's prospects for its first quarter of fiscal year 1998, ending September 30, 1997. SGI's results for the first quarter were disappointing. Plaintiffs allege that defendants knew that their predictions for first quarter results were false when made because demand for SGI's products could not meet expected results.
Plaintiffs' story about product demand in the first quarter of 1998 actually focuses on the fourth quarter of 1997. After reporting nearly two years of disappointing results, SGI reported a "spectacular" fourth quarter of 1997, with revenues for the first time exceeding $1 billion. Although SGI had introduced new products earlier in fiscal 1997 and received a flood of orders, SGI was unable to manufacture and ship all of these orders, leading to a large order backlog. SGI fully disclosed this issue in its SEC filings, and it was widely reported by analysts. Those execution problems were largely resolved in the fourth quarter, allowing SGI to ship the orders on the backlog and recognize the associated revenue. In addition, as analysts reported, SGI's great fourth quarter results were also due to new orders, which increased $125 million over the prior quarter.
Even though SGI disclosed its the backlogged orders and their contribution to fourth quarter results, plaintiffs contend that SGI nonetheless falsely stated that its results for the first quarter of 1998 would be as favorable as those for the fourth quarter of 1997. According to plaintiffs, SGI pulled into the fourth quarter orders scheduled to ship in the first quarter by inducing customers to accept earlier shipment through special terms. Plaintiffs do not allege that these so-called "pull-ins" were anything other than legitimate sales to legitimate customers. Plaintiffs do not contend that SGI improperly recognized any of these sales as revenue in the fourth quarter. Plaintiffs do not even identify a single "pulled in" sale or special term. Rather, plaintiffs' only contention is that SGI's accurate statement of its results for the fourth quarter misleadingly suggested that demand for its products was increasing. Plaintiffs fail to allege one particular fact showing that SGI actually knew that it would miss its first quarter forecast because of alleged fourth quarter pull-ins.
The complaint's scienter allegations go nowhere. Plaintiffs say that CEO McCracken was "motivated" to engage in fraud so that he could pay for his divorce that resulted from an extramarital affair with a young SGI employee. At the same, however, plaintiffs admit that McCracken did not sell any stock during the class period but exercised an option and acquired 48,303 shares of SGI stock. Plaintiffs repeatedly malign defendant Kelly, SGI's CFO, because he was not a C.P.A.--not a requirement to be CFO--but concede that Kelly did not sell a single share of SGI stock during the class period. Thus, plaintiffs would have the Court believe that SGI committed a massive fraud where its CEO and CFO did not sell one share of stock or otherwise personally benefit from the fraud.
Equally insubstantial is plaintiffs' allegation of fraud based on SGI's offer to exchange zero coupon debentures with senior convertible notes. This exchange was a business decision that allowed SGI to avoid a put option in the debentures that, if exercised, would have required the company to buy back the debentures thirteen months later in November 1998. Plaintiffs do not allege that any aspect of the exchange was improper. The debenture holders were free to reject the exchange. Plaintiffs do not allege that any debenture holder complained about the terms of the exchange. No facts are alleged that permit the Court to draw a strong inference that SGI made fraudulent statements to induce a successful exchange of debentures.
In sum, plaintiffs rely on nothing but speculation that defendants knew the first quarter would be disappointing because they had pulled in sales from the first quarter into the fourth quarter. No facts are alleged to support this conclusion. This type of conclusory pleading would not have survived under prior law and cannot survive the Reform Act.
SGI is headquartered in Mountain View, California, and develops, manufactures, and markets high-technology computer equipment and software. Complaint ¶¶ 36, 59. In this highly-competitive and rapidly-changing market, SGI's results did not always meet market expectations. In the seven quarters before the fourth quarter of fiscal 1997 (ending June 30, 1997), SGI reported financial results below market expectations. Id. ¶¶ 2, 61-62. Market analysts and SGI shareholders were allegedly "furious," causing "intense criticism of SGI and its top executives by securities analysts and SGI's stockholders, many of whom believed SGI had deceived them about its business and prospects during FY96 and called into question McCracken's leadership of SGI." Id. ¶ 8.
Although SGI introduced new products in early fiscal 1997, execution problems delayed shipments. Id. ¶¶ 61, 76. SGI had a high backlog of orders by the fourth quarter. The execution problems were largely resolved in the fourth quarter, however, allowing SGI to ship the backlogged orders and recognize that revenue. Id. This backlog issue was widely reported by analysts. Id.
The shipment of backlogged orders contributed to the success of the fourth quarter. On July 24, 1997, SGI announced fourth quarter revenues of $1.2 billion, an increase of 28% from the prior quarter. Id. ¶ 68. SGI said that it was finally able to "ship [its] entire product line without significant restraints," and that backlog was reduced by $172 million. Id. ¶¶ 72, 76. But the fourth quarter success was not due solely to shipping backlogged orders. Market analysts also reported that new orders showed a $125 million sequential gain to about $975 million. Id. ¶ 76. Thus, SGI's press release noted that "new products are finding strong acceptance with customers." Id. ¶ 68. Market analysts reacted cautiously yet positively to the good results. Id. ¶¶ 70-76.
Plaintiffs do not allege that the SGI reported inaccurate fourth quarter results. Rather, plaintiffs contend that the results were "illusory" because the results did not indicate growing demand for SGI products. Id. ¶ 13. Plaintiffs say that fourth quarter results were largely achieved because defendants induced customers to accept shipment of products in the fourth quarter that were originally intended to be shipped in the first quarter 1998. SGI allegedly "induc[ed] certain customers to accept millions of dollars of shipments of graphics computer workstations and computer servers before they otherwise would have done so by offering them deep price discounts, extremely generous extended payment terms and even the right to return product they did not want or could not resell." Id. ¶¶ 3, 66. Plaintiffs fail to identify a single sale "pulled into" the fourth quarter, any specific customers offered special terms, the details of the special terms. Plaintiffs also fail to allege any fact showing that defendants knew that these pull-ins would cause SGI to miss its first quarter forecast.
On October 6, 1997, SGI announced lower than expected first quarter preliminary results, with revenues of $750-760 million instead of the expected $900 million. Id. ¶ 88. SGI stated that, in hindsight, its forecasting tools were not "accurate as they need to be" and that "our strong Q4 probably drained the pipeline to a greater extent than we had realized." Id. ¶ 89. Plaintiffs conclude without factual basis that what SGI determined in hindsight was actually known throughout the first quarter.
Plaintiffs allege that defendants were motivated to engage in fraud to collect executive bonuses, to sell stock options, and to convince holders of zero coupon debentures to trade their coupons for senior convertible notes. Id. ¶¶ 42-50, 97-106. Plaintiffs also contend that the July 24 announcement of the fourth quarter results was timed to "dilute" the market's reaction to a "highly critical expose" about SGI in Business Week. Id. ¶¶ 14, 77. Plaintiffs fail to allege any specific facts supporting such "motives."
Plaintiffs admit that neither CEO McCracken nor CFO Kelly sold one share of SGI stock during the class period; indeed, McCracken exercised an option to acquire 48,303 shares, which he retained. Id. ¶ 37(a). As to the other individual defendants, plaintiffs merely allege the amount of stock each sold. Plaintiffs fail to allege the total amount of their SGI holdings or their defendant's pre-class period trading patterns. Id. ¶v99.
All of the alleged statements allegedly made by the defendants are protected from liability under the "bespeaks caution" doctrine. The doctrine precludes liability for forward-looking accompanied by meaningful cautionary disclosures concerning the subject matter of the alleged misrepresentation. In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1408 (9th Cir. 1996) (citing In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1414 (9th Cir. 1994)).2 The essence of the doctrine is that if a company warns investors in a meaningful way of the risks facing its business, then investors cannot claim that they were misled. Karacand v. Edwards, 53 F. Supp. 2d 1236, 1243 (D. Utah 1999). Courts may "rule as a matter of law" that "defendants' forward-looking representations contained sufficient enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud." Worlds of Wonder, 35 F.3d at 1413. Courts have applied the bespeaks caution doctrine to dismiss claims based on alleged misstatements in publicly-available documents, such as SEC filings, press releases, or transcripts of speeches.3 In enacting the Reform Act, Congress expressly encouraged further development of the doctrine. H.R. Conf. Rep. No. 104-369, at 46 (1995) attached at Exhibit 1 to the Declaration of Rebecca A. Mitchells ("Mitchells Decl.") ("The Conference Committee does not intend for the safe harbor provisions to replace the judicial 'bespeaks caution' doctrine or to foreclose further development of that doctrine by the courts").
Where a company has disclosed the relevant risks of investing in its stock, the company need not reiterate those risks every time it makes a public statement. The company's risk disclosures apply to subsequent statements even if the company does not reiterate all of the risks. In Grossman v. Novell, 120 F.3d at 1121-23, the Tenth Circuit affirmed dismissal of a complaint challenging statements made in press releases and interviews because the company previously had disclosed the risks it faced in its SEC filings. The court recognized that once risks are prominently disclosed through SEC filings, a company need not repeat them every time it makes a statement.4
All of the alleged statements by defendants are "forward-looking" statements anticipating first quarter results. To the extent SGI commented on demand in the fourth quarter, plaintiffs are contending that these statements relate directly to SGI's optimistic statements about first quarter results. See Harris v. IVAX Corp., 182 F.3d 799, 806-07 (11th Cir. 1999) (statement that contains both forward and non-forward looking statements considered forward looking where non-forward looking portions underlie and support the forward-looking statements).
SGI's July 24 press release relates to the prediction that SGI was "aligned to build on this success and we are encouraged by our prospects for fiscal 1998." Complaint ¶ 68. The alleged same day conference call included a projection of first quarter revenues of $900-$950, earnings per share at $.20, growth at 15% in fiscal year 1998, and a 10% operating profit margin. Id. ¶ 69.
The alleged media reports that followed the fourth quarter results likewise anticipate first quarter results. For example, defendant Kelly allegedly stated that "as we head into fiscal '98, we think we are moving into the right part of the product cycle." Id. ¶ 73. Defendant Kelly purportedly stated that "[w]e're looking for a very good growth rates in fiscal '98." Id. ¶ 74. Defendant McCracken's alleged statement in August 1997, hoping for "revenue growth of 15% next year" and his alleged September statement that SGI "is really tuned up right for the 1997, 1998 market and I think the momentum is there" predict the outcome of the first quarter. Id. ¶¶ 82, 84. Likewise, plaintiffs highlight the statement in the annual shareholder report that SGI had "great confidence as we look forward to 1998." Id. ¶ 87. Moreover, defendant Lauer wrote in his August 11 letter to Business Week, "We are very optimistic about this coming year and beyond. . . . Our entire organization is aligned to build on this success as we enter the new fiscal year." Id. ¶ 80.
Many of the alleged statements themselves bespoke caution. The July 25 Bloomberg News story (¶ 74) paraphrases defendant Kelly as cautioning that "the company doesn't expect first-quarter revenue to exceed $1 billion because of traditional slower orders in the summer." He also warned that "there's strong competition from bigger Sun Microsystems Inc. and Hewlett-Packard Co., which also have reported strong sales of servers for businesses." In the July 25 article of The San Francisco Chronicle (¶ 75), Kelly purportedly advised that the fourth quarter results were only "'the first in a series of steps that will go a long way to repairing the credibility of the company.'" In the September 3 interview, defendant McCracken cautioned that "there are some discontinuities in the work station market with multiple operating systems at the present time." Mitchells Decl. Ex 5.
In addition to the warnings contained in the challenged statements themselves, SGI had flooded the market with other warnings about product demand, backlog, and factors affecting forecasts in its Form 10-Q for the third fiscal quarter of 1997, which was filed with the SEC on May 15, 1997, just prior to the class period. These risk disclosures are set out in detail in the accompanying motion for summary judgment, which is incorporated herein. SGI made these same or similar disclosures in its Form 10-Q reports for the second and third fiscal quarters of 1996.5
Thus, all of defendants' alleged statements are precluded from liability under the bespeaks caution doctrine.
All of the statements attributed to defendants are precluded from liability under the bespeaks caution doctrine. The remaining statements at issue were made by independent market analysts in their published reports. Complaint ¶¶ 55, 76. Plaintiffs also allege that defendants made false statements to analysts during conference calls and in other unspecified "communications." Id. ¶ 55.
To state a claim based on statements in a report by an independent market analyst, plaintiffs must allege specific facts showing that the defendants were so entangled with these analyst reports that the defendants effectively adopted them as their own. Plaintiffs must plead facts showing that the defendants "'put their imprimatur, express or implied, on the projections.'" In re Syntex Corp. Sec. Litig., 95 F.3d 922, 934 (9th Cir. 1996) (citations omitted). Merely alleging that the defendant provided some information to the analyst is not enough to make the defendant liability for the analyst's estimate and report. In re Caere Corp. Sec. Litig., 837 F. Supp. 1054, 1059 (N.D. Cal. 1993). To allege that a defendant was "entangled" with an analyst report, plaintiffs must name the insider who adopted the analyst's report, point to specific interactions between the insider and the analyst by which the defendant adopted the analyst's forecast, and state the dates on which those acts occurred. Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231, 1249 (N.D. Cal. 1998); In re Syntex Corp. Sec. Litig., 855 F. Supp. 1086, 1097 (N.D. Cal. 1994), aff'd, 95 F.3d 922 (9th Cir. 1996).
Plaintiffs' allegations fall woefully short of this demanding standard. Plaintiffs merely conclude that SGI "communicate[d] regularly with securities analysts, including scheduled telephone conference calls" and through unspecified "meetings, written financial releases, and analyst briefings." Complaint ¶ 55. These are precisely the type of conclusory allegations that courts repeatedly have rejected as insufficient to show entanglement with an analyst's report.6
To state a claim against SGI for statements by defendants to the analysts, plaintiffs must specify the misrepresentation, who made the representation, when, and how it was false. Cooper v. Pickett, 137 F.3d 616, 624-25 (9th Cir. 1997). Plaintiffs do not provide this level of specificity. The only statements that SGI allegedly made to securities analysts were at the July 24 conference call and the September 5 conference. As discussed above, these statements are not actionable. Therefore, plaintiffs cannot state a claim against SGI for statements to analysts.
In In re Silicon Graphics, Inc. Securities Litigation, 183 F.3d 970 (1999), the Ninth Circuit dismissed a complaint with far more detailed allegations than the complaint here. The court held that the complaint failed to satisfy the Reform Act's scienter pleading standard and the Reform Act's particularity requirement for alleging fraud based on information and belief.
When allegations are pleaded on information and belief, the Reform Act requires plaintiff to "state with particularity all facts" on which plaintiff bases its belief of fraud. 15 U.S.C. § 78u-4(b)(1). The Ninth Circuit held that this provision requires plaintiff to "provide a list of all relevant circumstances in great detail." Silicon Graphics, 183 F.3d at 984 . The court held that this provision could not be satisfied by the allegation that plaintiff's belief of fraud was based on
investigation of [plaintiffs'] counsel, which included a review of SGI's SEC filings, securities analysts reports and advisories about the Company, press releases issued by the Company, media reports about the Company and discussions with consultants....
Id. at 985. The complaint here contains a similar boilerplate paragraph, which states without any particularity that plaintiffs' allegations are based on the investigation of counsel, SGI's press releases and SEC filings, "private investigations and discussions with consultants." Complaint ¶ 119. There is no meaningful difference between the boilerplate allegations rejected by the Ninth Circuit and the boilerplate allegations in the second amended complaint here.7
The Ninth Circuit also held that allegations of internal company reports, such as "Stop Ship" reports and "Flash Reports," failed to satisfy the information and belief provision. The court rejected the allegation that "certain specified sources will reveal, after appropriate discovery, facts that will validate her claim." Silicon Graphics, 183 F.3d at 985. The court held that "[i]t is not sufficient for a plaintiff's pleadings to set forth a belief that certain unspecified sources will reveal, after appropriate discovery, facts that will validate her claim." Id. The SGI plaintiff had failed to allege "the sources of her information with respect to the reports, how she learned of the reports, who drafted them, or which officers received them." Id. Thus, if the plaintiff asserts that the allegations are supported by internal reports and other sources, the complaint must include the contents of the reports and identify the sources.8
Plaintiffs allege that defendants knew that their statements were false when made "via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto)," conversations with unidentified "corporate officers and employees," attendance at regular management and Board meetings. Complaint ¶ 37. These are precisely the kind of boilerplate, nonspecific allegations rejected in Silicon Graphics as insufficient to satisfy the information and belief provision.
Plaintiffs' failure to allege facts supporting their belief of fraud is reason alone to dismiss the complaint.
As this Court held in Ronconi v. Larkin, before the Reform Act plaintiffs were required to "'set forth an explanation as to why the statement or omission complained of was false or misleading.'" [1998 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,212, at 90,891 (N.D. Cal. May 4, 1998) (quoting In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) (en banc)). "[P]laintiffs 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. The Court held that plaintiffs may not simply allege that the reason a statement was false was because the opposite of the statement was true. Id. The Reform Act requires plaintiffs to "'specify each statement alleged to have been misleading,'" and the "'reasons why the statement is misleading.'" Id. at 90,890 (quoting 15 U.S.C. § 78u-4(b)(1)). To state a claim based on a statement that is misleading because of omitted information, plaintiffs must also allege that the defendants "omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading. . . ." 15 U.S.C. § 78u-4(b)(1)(B). Plaintiffs must allege specific contemporaneous facts showing that the statements were false when made.9
Plaintiffs allege that all of defendants' statements were false or misleading because of the same laundry list of "reasons." Complaint ¶¶ 30, 95. These "reasons" concern two issues predictions about first quarter results and whether SGI's admittedly accurate fourth quarter results constituted a prediction about increased demand for SGI's products.
Plaintiffs do not allege that SGI falsely reported any fourth quarter financial data. Rather, plaintiffs allege that SGI's statements characterizing the fourth quarter were misleading because fourth quarter results were caused by "pull-ins," not increased demand for SGI products. Id. ¶ 95. Plaintiffs fail to allege any facts to back up this assertion. Plaintiffs' list of purported "reasons" contains nothing but conclusory allegations that the opposite of SGI's statements were true. For instance, plaintiffs allege that defendants' statements that SGI successfully executed shipments of backlogged products in the fourth quarter were misleading because the "results were not due to effective 'execution' by SGI's management team." Id. ¶ 95(a). Plaintiffs do not dispute that SGI shipped backlogged orders in the fourth quarter and that customers accepted the product. This Court rejected the same pleading tactic in Ronconi.
Plaintiffs also allege that defendants' statements that SGI reduced backlog to a manageable level were false because an unidentified "significant part of the backlog reduction was involuntary, due to the failure of SGI to obtain new orders" in the fourth quarter. Id. ¶ 95(f). This conclusion is refuted by plaintiffs' own allegations. Plaintiffs do not dispute that SGI reduced backlog from $709 million in the third quarter to $537 million by the end of the fourth quarter. Thus, SGI reduced backlog by $172 million in a quarter in which it reported revenues of over $1 billion. On its face, this hardly gives rise to a strong inference that SGI drastically drained its backlog in the fourth quarter because it was unable to obtain new orders, or that its backlog level was unmanageable. Moreover, plaintiffs do not allege that the remaining backlog going into the first quarter consisted of anything other than legitimate orders by legitimate customers. Plaintiffs allege no facts demonstrating what portion of the backlog SGI intended to ship in the first quarter, or what portion SGI in fact shipped. Plaintiffs fail to allege any facts demonstrating that SGI actually knew heading into the first quarter that its backlog of over $500 million was insufficient to attain its first quarter forecast.
Plaintiffs also contend that the statements that SGI's "new products are finding strong acceptance with customers" and that server sales were strong in the fourth quarter were misleading because the OctaneTM and OriginTM 2000 products were "encountering very weak customer acceptance" and SGI was having a "very difficult time closing sales of these products." Id. ¶ 95(b)(d)(e). Again, plaintiffs fail to allege any contemporaneous facts supporting their conclusion. Although plaintiffs allege that "very weak customer acceptance" forced SGI to "offer customers significant sales incentives including steep price discounts, extended payment terms and the right to later return merchandise if unsold or unwanted," id. ¶ 95(b)(c), plaintiffs fail to identify a single customer, the terms of any specific "incentive," or the specific impact on first quarter results. Without such supporting contemporaneous facts, plaintiffs' allegations are sheer speculation. In Health Management, [1998 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,325, at 91,021, plaintiffs alleged that the company's press releases were misleading because it had collection problems from unspecified customers. The court held such allegations "wholly insufficient under Rule 9(b), let alone the PSLRA." Plaintiffs failed to "specify the customers involved, the nature of the customer's supposed payment problems, [and] the nature or genesis of the alleged 'increased competition. . . . '" Id. Likewise, the complaint here does not identify the supposed competitors, the dissatisfied customers, the extent of the purported shipping delays, the terms of these supposed sales incentives, or the specific effect of these things on "customer acceptance" of the new products. Finally, plaintiffs' allegation that SGI gave special discounts to customers in the fourth quarter is contrary to SGI's reported financial results, which plaintiffs do not dispute: in the fourth quarter, SGI's gross margins rose dramatically from the third quarter's 43% to 49%.
Plaintiffs' allegation that SGI's first quarter forecasts were false depend entirely upon their allegations that SGI misrepresented the reasons for its strong fourth quarter. Complaint ¶ 95(i)-(l). Plaintiffs allege that during the fourth quarter SGI "pulled in" sales from the first quarter. Because the allegations regarding the fourth quarter fail to state a claim, the allegations about first quarter are likewise are insufficient.
Moreover, SGI's statements about the first quarter constitute nonactionable puffing. It is well-established that statements of general optimism or corporate bravado are not materially misleading as a matter of law because "investors know how to devalue the optimism of corporate executives, who have a personal stake in the future success of the Company." In re Software Publishing Sec. Litig., [1993-94 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,094, at 98,757 (N.D. Cal. Feb. 2, 1994) (citations omitted); see Raab v. General Physics Corp., 4 F.3d 286, 289 (4th Cir. 1993) ("No reasonable investor would rely on these [puffing] statements, and they are certainly not specific enough to perpetrate a fraud on the market").
At issue here are nothing but the same type of vague statements of optimism: "we are encouraged by our prospects for fiscal 1998"; "We are very optimistic about this coming year and beyond"; "Well, I think that our company is really tuned up right for the 1997, 1998 market and I think the momentum is there"; "The changes we've made over the last year . . . give us great confidence as we look forward to 1998." Complaint ¶¶ 68, 72, 80, 84, 87. These alleged statements are in no meaningful way different from statements courts have held to be non-actionable puffing.10
Plaintiffs allege that SGI's statements about its improved forecasting procedure were false because "SGI's internal budgeting and forecasting systems were in disarray and not capable of generating accurate or reliable information." Id. ¶ 95(g). Plaintiffs are merely trying to allege the falsity of a statement by stating that the opposite is true--a tactic rejected by this Court in Ronconi. Such allegations are not meaningfully different from the allegations about "troubled operations" and "difficulty in merging" that this Court held insufficient in Ronconi, [1998 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,212, at 90,891.
Thus, none of the defendants' alleged statements are actionable because plaintiffs failed to allege with sufficient particularity any "reason" why the alleged statements were false when made.
Because all of defendants' alleged statements are forward-looking, plaintiffs must allege specific facts giving rise to a strong inference that a defendant "actually knew" that his statement was false when made. 15 U.S.C. § 78u-5(c). The Ninth Circuit held that a "fact" is an "'event or circumstance'" or a "'truth known by actual experience or observation.'" Silicon Graphics, 183 F.3d at 983. Plaintiffs may not rely on conclusory allegations: "It is not enough for [plaintiff] to state facts giving rise to a mere speculative inference of [intent], or even to a reasonable inference of [intent]. The PSLRA requires . . . that [plaintiff] state with particularity facts giving rise to a strong inference of the required state of mind . . . ." Id. at 985; see also In re Comshare, Inc. Sec. Litig., 183 F.3d 542, 549 (6th Cir. 1999) (the Reform Act "changed what a plaintiff must plead in his complaint in order to survive a motion to dismiss," plaintiff must "'state with particularity facts giving rise to a strong inference that the defendant acted with'" scienter) (citation omitted); Greebel v. FTP Software, Inc., No. 98-2194, 1999 U.S. App. LEXIS 25211, at *30 (1st Cir. Oct. 8, 1999) ("[t]he most salient feature of the PSLRA is that whatever the characteristic pattern of facts alleged, those facts must now present a strong inference of scienter. A mere reasonable inference is insufficient to survive a motion to dismiss") (Mitchells Decl. Ex. 14).
In Silicon Graphics, the Ninth Circuit held that allegations relating to a defendant's "motive and opportunity" to engage in fraud were alone insufficient to satisfy the Reform Act's state of mind pleading standard. 183 F.3d at 974. Such allegations may provide some "reasonable inference of intent," but "are not sufficient to establish a strong inference of deliberate recklessness." Id.; see Comshare, 183 F.3d at 549 (plaintiffs cannot allege scienter under the Reform Act by "merely establishing that a defendant had the motive and opportunity to commit securities fraud"); Bryant, 187 F.3d at 1285 ("we reject the notion that allegations of motive and opportunity to commit fraud, standing alone, are sufficient to establish scienter" under the Reform Act).
Plaintiffs' allegations fail to satisfy this stringent standard. Plaintiffs fail to allege any facts showing the defendants actually knew that their statements were false when made. Plaintiffs offer no more than the type of conclusory allegations rejected by the Ninth Circuit and many other courts, even before the Reform Act.
Plaintiffs allege that each defendant, based on his "position with the Company [] , knew the adverse non-public information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto)." Complaint ¶ 37. This kind of boilerplate allegation was soundly rejected in Silicon Graphics. The Ninth Circuit held that allegations of generic internal company reports failed to satisfy not only the information and belief provision as discussed above, but also failed to give rise to a strong inference of scienter. 183 F.3d at 984-85. Such allegations "would have us speculate as to the basis for the allegations about the contents of the reports, the severity of the problems, and the knowledge of the officers. We decline to do so." Id. at 985. Indeed, the Ninth Circuit rejected allegations that identified "Stop Ship" and "Flash" reports as the bases for the defendants' knowledge. Here, plaintiffs fail to allege even this level of detail, instead falling back on allegations of generic company reports that nearly every public company generates.11
Likewise, plaintiffs' allegation that defendants knew about the "adverse information" because of "conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith" (Complaint ¶ 37) is equally vague and insufficient as unidentified internal corporate reports. Thus, plaintiffs fail to allege any facts with sufficient particularity showing that the SGI's actual knowledge.
In Silicon Graphics, the Ninth Circuit held that allegations of a defendant's stock sales may constitute circumstantial evidence of scienter only if the insider trading is so "suspicious" that it is "'dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside information.'" 183 F.3d at 986 (citation omitted). It is plaintiffs' burden to plead particular facts giving rise to the required state of mind. Plaintiffs cannot carry this burden merely by alleging the amount of stock sold during the class period. To show that sales were "suspicious," plaintiffs must allege the percentage of shares traded during the class period compared to the total amount of stock and vested options that the defendant could have sold. Id. This comports with common sense. A plaintiff cannot allege that a defendant was motivated to engage in fraud to sell stock at artificially-inflated prices if the defendant sold only a small percentage of the stock he could have sold. Moreover, a plaintiff must allege whether a defendant's sales "were consistent with [his] prior trading history." Id. Absent such allegations, mere allegations that defendants sold stock cannot support a strong inference of scienter. See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 540-41 n.10 (3d Cir. 1999) (plaintiffs' burden to allege facts, including percentage of stock sold, supporting inference of scienter); Comshare, 183 F.3d at 553 (allegations showing that defendants profited from selling stock during the class period insufficient to plead scienter).
In Silicon Graphics, the court held that defendant McCracken's sale of 2.6% of his SGI holdings was insufficient as a matter of law to support a plead scienter. Silicon Graphics, 183 F.3d at 987. In this case, plaintiffs do not allege that McCracken sold any of his SGI stock. Indeed, McCracken exercised an option and acquired 48,303 shares that he retained throughout the class period. In addition, Kelly, SGI's CFO, did not sell any stock during the class period. Given that most of the statements were allegedly by McCracken or Kelly, their failure to trade any stock negates a strong inference that they made any false statements.
The allegations about the remaining four officer defendants' sales fail to give rise to a strong inference of fraudulent intent. First, plaintiffs fail to satisfy their burden by alleging the percentage of their total SGI holdings that each of these defendants sold during the class period. Second, plaintiffs aggregate the pre-class period sales of all defendants. Complaint ¶ 22. The Reform Act specifically rejects this "aggregation" technique; plaintiffs must allege a strong inference that "the defendant" acted with scienter. 15 U.S.C. § 78u-4(b)(2). Indeed, in Silicon Graphics, the court analyzed separately each defendant's stock trading patterns and percentages sold. 183 F.3d at 987. Thus, plaintiffs fail to satisfy their pleading burden to allege that each defendant's stock sales were "unusual or suspicious."
Moreover, plaintiffs distort the percentages sold by each defendant. Plaintiffs allege the number of shares each defendant sold by exercising options, and then allege that defendants sold 100% of "options acquired/shares sold." Complaint ¶ 97. Plaintiffs misleadingly make it appear as if these defendants exercised and sold all of their options. That is wrong. These defendants had been SGI officers for years and had many more stock options. In Silicon Graphics, the Ninth Circuit held that plaintiffs cannot show that a defendants' class period stock trading was suspicious without alleging the percentage of total holdings each defendant sold, including vested options. 183 F.3d at 987. Plaintiffs fail to meet their pleading burden of showing that class period sales were suspicious because they allege no facts concerning defendants' SGI total holdings.
Defendants' SEC filings demonstrate that neither Coleman, Orton, nor Lauer sold a "suspicious" amount of their total SGI holdings.12 Coleman and Orton, who made none of the allegedly false statements, sold only about 7.4% and 28% of their respective SGI holdings. Likewise, Lauer sold only about 19% of his SGI holdings. These percentages are insufficient to raise a strong inference of scienter. E.g., Silicon Graphics, 183 F.3d at 987 (officer's sale of 7.7% insufficient); Allison v. Brooktree Corp., 999 F. Supp. 1342, 1352-53 (S.D. Cal. 1998) (officer's sale of 14% insufficient); Havenick v Network Express, Inc., 981 F. Supp. 480, 528 (E.D. Mich. 1997) (sales by CEO and CTO of 20% and 19%, respectively, insufficient); Health Management, [1998 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,235, at 91,023 n.3 (vice presidents' sales of 22.94%, 23.53% and 24.92% insufficient); Head v. NetManage, Inc., [1998 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,412, at 91,860-61 (N.D. Cal. Dec. 30, 1998) (defendants officers sales of 94% and 76% insufficient given that they did not make any of the allegedly false statements).
Defendant McBride's sales negate an inference of scienter because his sales occurred at the beginning of the class period. An insider allegedly motivated to engage in insider trading does not stop selling stock months before the end of the purported fraud. See Plevy v. Haggerty, [1998 Supp. Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,309, at 91,455-56 (C.D. Cal. Aug. 21, 1998) (stock sales not suspicious in part because they occurred months before the negative earnings announcement).
Accordingly, plaintiffs' stock sale allegations fail to give rise to a strong inference of fraudulent intent.
In Silicon Graphics, the Ninth Circuit held that allegations regarding a defendant's "motive" were insufficient standing alone to give rise to a strong inference of scienter. 183 F.3d at 974. Plaintiffs' other allegations concerning executive compensation should be swiftly dismissed.
Plaintiffs allege that defendants were motivated to inflate the stock price in order to "restore[] significant value to their stock options and shares." Complaint ¶ 50. Even before the Reform Act, courts in the Second Circuit rejected this precise theory. In Shields, no defendant was alleged to have sold stock. The court found this dispositive: "[a]bsent some comparable allegation to explain how a defendant benefits from an inflated stock price, stock ownership does not provide sufficient motive to sustain the pleading burden[.]" Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1131 (2d Cir. 1994).13 The fact that McCracken and Kelly held options to purchase SGI stock is insufficient to support an inference of intent.
Plaintiffs allege that four of the individual defendants were "motivated" to commit fraud to get executive bonuses dependent upon SGI's financial performance. Complaint ¶ 49. Before the Reform Act, however, the Second Circuit held that such an allegation failed to give rise to a strong inference of fraud. In Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995), plaintiffs attempted to establish a motive and opportunity to commit fraud by alleging that "all defendant officers of IMCERA were motivated to inflate the value of IMCERA stock because the increase in stock price had a direct effect on their executive compensation[.]" The Second Circuit emphatically rejected this allegation, stating that "the existence, without more, of executive compensation dependent upon stock value does not give rise to a strong inference of scienter. Id. (emphasis added) (citations omitted).14 Thus, the alleged "motives" here would be insufficient to plead scienter even before the Reform Act and Silicon Graphics. See also Comshare, 183 F.3d at 553 (holding insufficient motive allegations that defendants "stood to receive greater compensation if Comshare's stock prices increased").
Plaintiffs allege that SGI was motivated to make false statements to encourage holders of zero coupon debentures to exchange their debentures for senior convertible notes. Complaint ¶¶ 43-48. In August 1997, SGI offered debenture holders the right to exchange their debentures for senior notes. Plaintiffs say that SGI was motivated to proceed with this exchange offer because the debentures had a put option maturing in November 1998 that allowed the debenture holders to put the debentures to SGI if SGI's stock price was less than $33 per share. Id. Plaintiffs speculate that, "given the actual condition of SGI's business," SGI allegedly knew in August 1997 that all of the put options would be exercised in November 1998, which would "gravely injure[] SGI's financial condition." Id. ¶ 5, 44.
Plaintiffs do not allege that anything about the exchange or its terms were improper, or that the debenture holders ever complained. Plaintiffs fail to allege any facts showing that the success of the exchange depended on SGI's current stock price. Thus, SGI could not have been "motivated" to inflate the stock price to complete the exchange. Plaintiffs allege no more than that SGI made a legitimate business decision to offer the exchange to avoid the later put option. A legitimate business decision in the company's best long-term interest cannot give rise to a strong inference of securities fraud. See Philip Morris, 75 F.3d at 813-14 (rejecting allegation that defendants were motivated to "maintain[] the company's bond or credit ratings at the highest possible level" because "'[i]f scienter could be pleaded on that basis alone, virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions'") (citations omitted); In re 1993 Corning Sec. Litig., [1996-97 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,244, at 95,376, 95,381 (S.D.N.Y. May 14, 1996) (rejecting "the concept of motive predicated upon the desire to maximize the marketability of debt securities and to minimize interest rates").
Thus, plaintiffs have failed to allege specific facts giving rise to a strong inference of scienter.
Plaintiffs do not allege that defendant Coleman, the Company's Vice President of Administration, or defendant McBride, Vice President and Controller, personally made any of the allegedly false statements. In Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 177 (1994), the Supreme Court held that Section 10(b) prohibits only "the making of a material misstatement (or omission) or the commission of a manipulative act." A defendant may be liable only if the allegations meet "all of the requirements for primary liability under Rule 10b-5." Id. at 191. Because plaintiffs do not allege that Coleman and McBride made any statements, the complaint does not state a claim against them.
As to defendant Orton, the Company's Vice President of Advanced Systems, plaintiffs allege that a group of the individual defendants, including Orton, made statements at the September 5 analyst conference. Complaint ¶ 86. Plaintiffs fail, however, to attribute any of these alleged statements specifically to Orton. Under Central Bank, plaintiffs have failed to state a claim against Orton.
Plaintiffs seek to state a claim against Coleman, McBride and Orton under the group-published information doctrine. Id. ¶¶ 37(c)-(e), 39, 40. This doctrine allows a plaintiff to meet the pleading requirements of Rule 9(b) by creating a presumption that certain officers of a company acted collectively to publish the company's allegedly false reports. In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 593 (9th Cir. 1995). Plaintiffs cannot rely on this doctrine for two reasons. First, the doctrine was developed before the Reform Act to allow a plaintiff to meet Rule 9(b). The doctrine is no longer valid. The Reform Act does not tolerate presumptions of fraud, but requires plaintiff to plead "with respect to each act or omission" specific facts showing that "the defendant acted" with fraudulent intent. 15 U.S.C. § 78u-4(b)(2). See Allison, 999 F. Supp. at 1350 (group published doctrine conflicts with and therefore is no longer valid under the Reform Act); Coates v. Heartland Wireless Communications, Inc., 26 F. Supp. 2d 910, 916 (N.D. Tex. 1998) (same).
Second, even under the group pleading doctrine, the complaint is insufficient. To apply the doctrine to an officer, plaintiffs must satisfy a "stricter requirement. Since all of the inside officers in a corporation, by virtue of their positions, are involved in daily corporate activities, merely pleading as much is not sufficient to establish their liability under the group pleading exception." In re Oak Tech. Sec. Litig., 1997 U.S. Dist. LEXIS 18503, at *32. Plaintiffs must plead that these officers were involved not only in "preparation or communication of allegedly misleading information." Id. at *33 (refusing to apply doctrine to vice presidents because complaint failed to allege that they were involved in the preparation or communication of specific statements); In re Ross Sys. Sec. Litig., [1994-95 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,363, at 90,496 (N.D. Cal. July 21, 1994) ("[I]t is generally not enough to base allegations on general job descriptions of corporate positions and allege knowledge or actions flowing primarily from an interpretation of those positions").
The group published information doctrine applies only to statements contained in group published documents, such as prospectuses, registration statements, annual reports, press releases and other public filings. Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1440 (9th Cir. 1987); Smith v. Network Equip. Techs., Inc., [1990-91 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 95,659, at 98,093 (N.D. Cal. Oct. 19, 1990). The doctrine does not apply to oral statements. In re Interactive Network, Inc. Sec. Litig., 948 F. Supp. 917, 923 (N.D. Cal. 1996). Thus, the doctrine here could only apply to the Company's press release of the fourth quarter results and 1997 Annual Report. However, plaintiffs fail to allege that Coleman, McBride and Orton were involved with the preparation or communication of these statements. Plaintiffs conclusory allegations that all of the individual defendants "controlled" all of SGI's published information are insufficient to invoke the group published information doctrine as to Coleman, McBride and Orton. Accordingly, the allegations are insufficient as to these defendants.
For the foregoing reasons, defendants respectfully request that the Court grant their motion to dismiss the consolidated complaint.
|
Dated: October 21, 1999 |
Respectfully submitted, WILSON SONSINI GOODRICH & ROSATI _______________________________ Attorneys for All Defendants |
1 In their accompanying motion for summary judgment, defendants show that the alleged statements during the July 24 conference call and the September 5 analyst conference are precluded from liability under the Reform Act's Safe Harbor provision. As discussed herein, these statements are also precluded from liability under the bespeaks caution doctrine.
2 See Grossman v. Novell, Inc., 120 F.3d 1112, 1121-23 (10th Cir. 1997) (dismissing complaint based on cautionary statements in registration statement); Saltzberg v. TM Sterling/Austin Assocs. Ltd., 45 F.3d 399, 400 (11th Cir. 1995) (dismissing complaint based on cautionary language in private placement memorandum); In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 364 (3d Cir. 1993) (dismissing complaint where prospectus "took considerable care to convey to potential investors the extreme risks inherent in the venture while simultaneously carefully alerting the investors to a variety of obstacles the [casino] would face"); Romani v. Shearson Lehman Hutton, 929 F.2d 875, 879 (1st Cir. 1991) (documents that "clearly 'bespeak caution' are not the stuff of which securities fraud claims are made") (citation omitted).
3 See San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 811 (2d Cir. 1996) (press release); Pache v. Wallace, [1995 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,643, at 91,967-68 (E.D. Pa. Mar. 20, 1995) (Form 10-K and Form 10-Qs), aff'd mem., 72 F.3d 123 (3d Cir. 1995); In re Seagate Tech. II Sec. Litig., [1994-1995 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,530, at 91,587 (N.D. Cal. Feb. 8, 1995) (speech by CEO), aff'd mem., 98 F.3d 1346 (9th Cir. 1996).
4 See Hillson Partners Ltd. Partnership v. Adage, Inc., 42 F.3d 204, 218 (4th Cir. 1994) (where problems and risks surrounding subsidiary's financial performance were disclosed in prior SEC filings, later projections in press releases not actionable); Anderson v. Clow, [1994-1995 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,367, at 90,527 (S.D. Cal. June 29, 1994) (where prospectus warned of risks defendants not "obliged to repeat these disclosures when they spoke to the press"), aff'd, 89 F.3d 1399 (9th Cir. 1996) ; In re Interactive Network Sec. Litig., No. C-95-0026 DLJ, slip op. at 9-10 (N.D. Cal. Apr. 4, 1997) (cautionary statements, though not always repeated, were "sufficient to put investors on notice") (Mitchells Decl. Ex. 2); In re OPTi, Inc. Sec. Litig., No. C-95-3434 SBA, slip op. at 25 (N.D. Cal. Mar. 31, 1997) (in light of defendants' specific warnings, no reasonable investor would have been misled) (Mitchells Decl. Ex. 3); In re SciClone Pharmaceuticals Sec. Litig., No. C-94-1485 SBA, slip op. at 18 (N.D. Cal. Mar. 10, 1995) (dismissing complaint with prejudice based upon "detailed cautionary language" in prospectus) (Mitchells Decl. Ex. 4).
5 Defendants request the Court to take judicial notice of these portions of SGI's Form 10-Qs (Mitchells Decl. Exs. 6-8). In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999) (taking judicial notice of SEC filings not cited in complaint); Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991) (same); see Bryant v. Avado Foods, Inc., 187 F.3d 1271, 1277 (11th Cir. 1999) (taking judicial notice of SEC filings not in complaint to decide motion to dismiss based on bespeaks caution doctrine).
6 See, e.g., In re Boston Tech., Inc. Sec. Litig., 8 F. Supp. 2d 43, 58-59, 64 (D. Mass. 1998); David T. O'Neal Trust Dated 4/1/77 v. Vanstar Corp., No. C 98-0216-MJJ, slip op. at 9 (N.D. Cal. Dec. 22, 1998) (Mitchells Decl. Ex. 9); Wenger, 2 F. Supp. 2d at 1249; Copperstone v. TCSI Corp., No. C 97-3295-SBA, slip op. at 11-12 (N.D. Cal. Jan. 19, 1999) (Mitchells Decl. Ex. 10).
7 See Head v. NetManage, Inc., No. 97-4385-CRB, slip op. at 2 (N.D. Cal. Feb. 24, 1998) ("A complaint made 'upon the investigation of counsel' is the same as a complaint made 'upon information and belief.'") (Mitchells Decl. Ex. 11); In re Health Mgmt Sys., Inc. Sec. Litig., [1998 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,235, at 91,020-21 (S.D.N.Y. June 1, 1998) (allegations based on "investigation of counsel" and unspecified articles, SEC filings and matters of public record fail to satisfy information and belief standard).
8 Even before Silicon Graphics, courts rejected unidentified sources as insufficient under the Reform Act. See Novak v. Kasaks, 26 F. Supp. 2d 658, 661 (S.D.N.Y. 1998) ("Plaintiffs' failure to identify these [anonymous former employees and consultants] . . . is contrary to the particularity requirements" of the Reform Act."); Chan v. Orthologic Corp., No. CIV-96-1514-PHX, 1998 WL 1018624, at *16 (D. Ariz. Feb. 5, 1998) ("Plaintiffs must set out specific facts regarding the source (documents, informants, etc.) of their information about the [alleged] meeting.") (Mitchells Decl. Ex. 12).
9 See In re Oak Tech. Sec. Litig., No. 96-20552-SW, 1997 U.S. Dist. LEXIS 18503, at *15 (N.D. Cal. Aug. 1, 1997) (as to statement of "increasing" sales of chips, plaintiff failed to allege supporting contemporaneous facts that Toshiba was making similar chips and customers informed defendants that they would decrease their purchases) (Mitchells Decl. Ex. 13); Health Management, [1998 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,325, at 91,021 (complaint fails to specify how statements made in press release were false when made).
10 E.g., Caere, 837 F. Supp. at 1057-58 (dismissing as puffing statement that company was "'well-positioned' for growth"); Siegel v. Lyons, [1996-97 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,227, at 95,223 (N.D. Cal. Apr. 26, 1996) (dismissing as puffing statement that "[w]e are pleased . . . the position we've established in the rapidly expanding client/server market").
11 Under prior Second Circuit law, courts held that allegations that defendants had "access" to negative information did not give rise to a strong inference of fraud. In re WRT Energy Sec. Litig., [1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,560, at 97,795 (S.D.N.Y. Sept. 15, 1997) (Rule 9(b) "would too easily be thwarted if plaintiffs could plead scienter against individuals holding senior management positions merely by alleging that 'due to their positions with [the company] and access to inside information, they must have known' about the alleged misrepresentations and omissions"); Duncan v. Pencer, [1995-96 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,043, at 94,209 (S.D.N.Y. Jan. 18, 1996) (rejecting allegation that "due to their positions with Cott and access to inside information, [defendants] must have known of the falsity of Cott's consolidated 1993 financial statements").
12 Defendants request that the Court take judicial notice of these defendants' Form 4s, and excerpts from the Company's proxy statement filed with the SEC on Sept. 25, 1997, (Mitchells Decl. Exs. 15-19), which confirm these percentages. See Silicon Graphics, 183 F.3d at 986 (proper to take judicial notice of Form 3s and 4s to determine percentage of stock sold); Advanta, 180 F.3d at 540 (same).
13 Accord WRT Energy, [1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,560, at 97,794 (rejecting allegation that "[d]efendants would be motivated [to commit fraud] by their ownership of WRT stock"); Salinger v. Projectavision, Inc., 972 F. Supp. 222, 233 (S.D.N.Y. 1997) ("allegations regarding stock ownership are deficient because the Second Amended Complaint fails to provide any specifics of such sales of shares that would give rise to the necessary strong inference of fraud"); Geiger v. Solomon-Page Group, Ltd., 933 F. Supp. 1180, 1190 (S.D.N.Y. 1996) ("Nor does a conclusory allegation of a defendant's stock ownership provide a sufficient motive without allegations of the specific circumstances of the sales of such shares giving rise to a strong inference of an intent to deceive the investing public").
14 See also WRT Energy, [1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) at ¶ 99,560, at 97,794 (rejecting claim that defendants were motivated "by the prospect of receiving enhanced compensation and benefits"); Salinger, 972 F. Supp. at 234 ("a generalized interest in executive compensation tied to stock price performance is not a sufficient motive for fraud"); Geiger, 933 F. Supp. at 1190 ("officers and directors typically have part of their compensation linked to the price of the company's shares and will naturally have an interest in a high stock price based on this link. Such an unparticularized interest in executive compensation tied to stock price performance is not a sufficient motive for fraud"); Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir. 1994) (rejecting allegation that defendants inflated company's stock price A[to] preserv[e] defendants' positions, perquisites and emoluments of office, secur[e], maintain[] and/or increas[e] compensation for themselves, and/or inflat[e] the value of their shares and options"; Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir. 1994) ("Accepting the plaintiffs' allegation of motive--basically that the defendant officers and directors were motivated by incentive compensation--would effectively eliminate the state of mind requirement. . . .").
Source: File to director from Wilson Sonsini Goodrich & Rosati