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ALFUS v. PYRAMID TECH. CORP.

April 11, 1991

MARJORIE D. ALFUS, On Behalf of Herself and All Others Similarly Situated, Plaintiff,
v.
PYRAMID TECHNOLOGY CORP., RICHARD D. DOLINAR, WILLIAM SHELLOOE, WILLIAM D. ROLLNICK, STEPHEN G. TOLCHIN, AND KENT L. ROBERTSON, Defendants


Robert F. Peckham, United States District Judge.


The opinion of the court was delivered by: PECKHAM

ROBERT F. PECKHAM, UNITED STATES DISTRICT JUDGE

 This matter comes before the court on defendants' second motion to dismiss the first amended complaint, and individual defendant Rollnick's motion to dismiss and to strike portions of the first amended complaint in the above-captioned matter. Plaintiff having remedied deficiencies in the original complaint, defendants' second motion to dismiss is DENIED in part and GRANTED in part for the reasons set forth herein.

 INTRODUCTION

 This is a securities fraud class action brought against Pyramid Technology Corp. ("Pyramid"), several of its officers and one of its outside directors ("Defendant Rollnick"). Previously, defendants moved the court to dismiss the original complaint on the grounds that plaintiff had failed to state a claim under Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and failed to satisfy the particularity requirements of Rule 9(b) of the Federal Rules of Civil Procedure. In addition defendants sought the dismissal of the secondary liability claims of conspiracy and aiding and abetting, the insider trading claim and the negligent misrepresentation claim. Defendant Rollnick joined the motion to dismiss, and moved on his own behalf to strike the allegations of conspiracy against him and to dismiss the allegations of insider trading.

 On March 30, 1990, this Court granted defendants' motion to dismiss, and granted plaintiff 30 days leave to amend her complaint to address certain deficiencies found in the complaint. Defendants now move to dismiss the first amended complaint and strike portions thereof, on the grounds that the deficiencies have not been corrected, and in particular that the complaint still lacks the necessary allegation of scienter to commit securities fraud. Defendant Rollnick joins in the motion, and moves on his own behalf, seeking an order striking the conspiracy allegations against him and striking the disgorgement remedy from the prayer.

 BACKGROUND

 The facts are as laid out in our March 30, 1990 Order. Pyramid produces super minicomputer systems, and dominates the so-called UNIX computer market. Pyramid's stock price rose steadily from late 1987 until early 1989, but dropped relatively sharply on March 22 and 23, 1989. The stock sold for $ 5.50 a share in November, 1987, rose to a high of $ 18.75 a share on March 13, 1989, and declined to $ 14.00 per share on March 22, 1989, when Pyramid cautioned three securities analysts to lower their estimates of Pyramid's earnings for the quarter ending March 31, 1989. The announcement caused Pyramid's stock to drop 28.6 percent in two days, and was followed by plaintiff's suit. On June 5, 1989, defendants reportedly revealed that due to delays in shipments of its Corporate MIServer line of products, Pyramid might actually suffer a loss for its third quarter fiscal 1989. Pyramid stock allegedly plunged by $ 3-1/2 to $ 9-3/4 per share.

 The Amended Complaint claims a class consisting of all purchasers of Pyramid stock between October 31, 1988, the date that Pyramid reported its results for fiscal 1988, and June 5, 1989, the day Pyramid made its second adverse announcement regarding its financial health. The named plaintiff, Marjorie Alfus, purchased 1000 shares of Pyramid stock at $ 16.25 a share on January 9, 1989, and 1200 shares at $ 18.75 on February 7, 1989.

 The original complaint made essentially two allegations concerning the Rule 10b-5 claim. Pyramid allegedly represented that there was an increasing demand for its product when in fact it knew that its dominant market share made it unlikely that the Company would duplicate past growth rates. Plaintiff based its allegations on statements made in several press releases and an annual and quarterly report. Plaintiff also asserted that a statement introducing Pyramid's new product, the Corporate MIServer, was misleading for failing to disclose that there were no "firm" orders for the product. Plaintiff also contended that the March 22, 1989 inquiry made by the securities analysts was alone enough to establish defendants' failure to disclose material information that it had well before that date.

 Finally, plaintiff alleged that, in addition to being liable as direct participants, each defendant also conspired or aided and abetted the scheme to artificially maintain the price of Pyramid's common stock for their personal benefit. Count II of the complaint alleged that defendants illegally sold their stock based on inside information, and Count III contended that defendants were liable for negligent misrepresentation.

 On March 30, 1990, this Court granted defendants' motion to dismiss, on the grounds that no facts were produced to support plaintiff's allegations that omissions by corporate insiders made the statements misleading, or that the statements were made other than in good faith, and that the complaint failed to allege that corporate insiders were aware of, or were reckless in not disclosing that significant technical problems existed with the Corporate MIServer. Alfus v. Pyramid Technology Corp., 745 F. Supp. 1511 (N.D. Cal. 1990). Plaintiff was granted 30 days leave to amend her complaint to address these deficiencies.

 On September 17, 1990, plaintiff filed a first amended complaint for violation of Section 10(b) and Section 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. Defendants now move to dismiss the first amended complaint and strike portions thereof, on the grounds that the deficiencies have not been corrected, and that the complaint still lacks the necessary facts to allege securities fraud.

 DISCUSSION

 A. Legal Standard for a Motion to Dismiss

 Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, defendants move to dismiss all counts for failure to state a claim upon which relief can be granted. Defendant Rollnick joins in the motion, and moves on his own behalf to dismiss and to strike certain portions of the amended complaint. In considering defendants' motion to dismiss, the Court must presume that the plaintiff's allegations are true, and grant the motion only if it appears "beyond doubt" that the plaintiff can prove no set of facts entitling her to relief. Sun Savings & Loan Assoc. v. Dierdorff, 825 F.2d 187, 191 (9th Cir. 1987); Federal Sav. & Loan Ins. Corp. v. Musacchio, 695 F. Supp. 1053, 1058 (N.D. Cal. 1988). Motions to dismiss will therefore be viewed with disfavor under this liberal standard. Intake Water Co. v. Yellowstone River Compact Comm., 590 F. Supp. 293 (D.C. Mont. 1983), aff'd, 769 F.2d 568 (9th Cir.), cert. denied, 476 U.S. 1163, 106 S. Ct. 2288, 90 L. Ed. 2d 729 (1985). A complaint may be dismissed as a matter of law for two reasons: (1) lack of a cognizable legal theory or (2) insufficient facts under a cognizable theory. 2A J. Moore, Moore's Federal Practice P 12.08 at 2271 (2d ed. 1982), cited in Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984). To dismiss, "it must appear to a certainty that the plaintiff would not be entitled to relief under any set of facts that could be proved." Wool v. Tandem Computers Inc., 818 F.2d 1433, 1439 (9th Cir. 1987).

 B. Class Period

 In her Amended Complaint, plaintiff seeks to extend the class period to June 5, 1989, the day of Pyramid's second adverse announcement concerning its financial health, and almost eleven weeks after Pyramid's March 22 disclosure to securities analysts. The class period set forth in ...


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