The opinion of the court was delivered by: BREWSTER
ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS EICHEN, OLSON, WHITTLER, PROXIMA, VOGT, TAMKIN, ZOELLER, AND MINICH'S MOTIONS TO DISMISS AND GRANTING SEIBER, JOHNSON, NASH, THOMAS AND PARKER'S MOTION TO DISMISS
On March 3, 1997, the above-entitled action came on for hearing upon Defendant's motions to dismiss the complaint pursuant to Rule 12(b)(6) or 9(b). Upon due consideration of the moving and responding papers and the arguments of counsel therein, and for the reasons discussed below, the Court hereby DENIES in part and GRANTS in part Defendants Eichen, Olson, Whittler and Proxima's motion to dismiss, DENIES in part and GRANTS in PART Defendants Vogt, Tamkin, Zoeller, and Minich's motion to dismiss, and GRANTS Defendants Seiber, Johnson, Nash, Thomas and Parker's motion to dismiss.
A. Procedural and Factual Background
Proxima Corporation (Proxima) is a San Diego based high-tech company that designs and manufactures multimedia projection equipment that allows users to project images and video directly from a computer or VCR onto a large screen. The instant action is a class action filed on behalf of all purchasers of Proxima common stock between July 26, 1994 and August 17, 1995 (the Class Period). Plaintiffs claim that during the Class Period the defendants
artificially inflated Proxima stock by falsely representing the Proxima had successfully developed and was introducing new products which would lead to substantial revenue and earnings gains throughout Fiscal 1996 and 1997, and that the development of Proxima's new microlaser projector products was also succeeding and on schedule.
In the complaint, Plaintiffs list 40 allegedly false and misleading statements that form the basis of Plaintiffs' claim for violation of Rule 10b-5. These statements were made in a variety of settings and by numerous different people, including statements in (1) press releases, (2) shareholders reports, (3) newspaper articles, (4) analysts' reports, and (5) statements made at trade conferences. Plaintiffs allege that the individual Defendants "were each aware of and approved the false statements issued by or on behalf of Proxima during the Class Period." (Compl. P 23). These statements are grouped together into five different time periods. (Compl. PP 46, 55, 59, 65, 78). Following each grouping, Plaintiffs list the reasons why these statements were false and misleading when made. The reasons all relate to information that Plaintiffs allege the Defendants "knew based on their access to material non-public corporate data," but failed to disclose at the time the positive and reassuring statements were made to the public. Plaintiffs contend that at the time that the statements were made the Defendants knew:
(1) the Proxima was not on schedule or making any progress in develping a microlaser projector due to technical and other difficulties and therefor would not be able to produce a laser projection product in the foreseeable future;
(2) that Proxima's microlaser projection product development efforts with Laser Power Corporation were a failure, as those efforts were not making any real or significant progress in developing a commercially feasible projection product;
(3) that Proxima's ongoing investment in Laser Power Corporation to develop a laser projection product was gravely impaired due to the complete lack of success of Laser Power Corporation to make progress in developing a commercially feasible laser projection product and that such investment would likely have to be written down or written off in the foreseeable future which would have an adverse impact on Proxima's earnings;
(4) that Proxima was encountering serious and persistent difficulties in completing the development of its DP5100 product due to the inability of its OEM Hitachi to obtain adequate supplies of polysilicon glass panels of sufficient quality to manufacture that product in commercial quantities;
(5) that Proxima's OEM for its DP5100 product was unable to manufacture commercial quantities of that product due to its inability to obtain adequate supplies of polysilicon glass panels for that product from its supplier;
(6) that Proxima was unable to manufacture commercial quantities of its new 500 lumen DP2900 projector due to an inability to obtain adequate supplies of the metal halide lights for that product;
(7) that Proxima was unable to manufacture commercial quantities of its DP2710 desktop projector due to component part shortages;
(8) that Proxima was unable to manufacture commercial quantities of its DP2810 product line due to component part shortages;
(9) that Proxima's product introduction and shipment dates for its DP5100, DP2710, DP2810 AND DP2900 products were illusory and completely unrealistic because Proxima was not able to manufacture commercial quantities of those products due to component part shortages for them;
(10) that Proxima would not be able to gain market share during Fiscal 1996 as it was unable to introduce in a timely fashion the new brighter, lighter-weight projection products necessary for it to maintain its competitive position and gain market share;
(11) the Proxima was losing market share to In-Focus Systems due to Proxima's inability to introduce the DP5100 product in a timely fashion;
(12) that Proxima's competitive position was weakening and being underminded due to its inability to develop and introduce in a timely fashion its DP5100 product;
(13) that Proxima's product research and development activities were very troubled and were failing to make adequate progress in developing new products in a timely fashion which were indispensable for Proxima to gain market share, maintain its competitive position and generate the revenues necessary to meet the revenue and earnings forecasts being made by and for it; and
(14) that defendant Paul Eichen was not leaving Proxima out of a desire to start a new company but rather because he knew that Proxima's competitive position was gravely impaired due to the difficulties it was having in developing new products and that this would result in serious problems for the Company in the near term.
Despite the numerous positive and encouraging statements being publicly made by Proxima, Plaintiffs allege that on August 17, 1995, Proxima "shocked the market" by revealing that its Fiscal 1996 Earnings Per Share (EPS) were going to be much worse than forecast due to is inability to produce in quantity its DP5100, DP2710, DP2810 and DP2900 products. Proxima revealed that (i) Hitachi, which manufactured the DP5100 product for Proxima, could not successfully manufacture the poly-silicon based product in volume because it could not obtain a supply of polysilicon glass, requiring Proxima to attempt to locate a second source of supply of polysilicon glass; (ii) it could not obtain enough metal halide lamps for its DP2900 product line; and (iii) it was suffering form component supply problems for its DP2710 and DP2810 flagship products and, as a result, sales of these products would be well below expectations during fiscal 1996. (Compl. P 79). As a result of this announcement, Proxima's stock fell over seven dollars per share. Id.
Beyond the alleged false and misleading statements, Plaintiffs additionally allege that the individual Defendants willfully participated in a scheme and fraudulent course of business that defrauded and damaged Class members by selling off their stock at artificially inflated prices. Plaintiffs chart the Defendants' sale of stock in the complaint. (Compl. P 13).
Defendants now move this Court to dismiss the complaint under Federal Rules of Civil Procedure 12(b)(6) and 9(b). Defendants filed two separate motions to dismiss. One motion was filed on behalf of Defendants Proxima, Eichen, Olson, and Whittler. The other motion was filed on behalf of Defendants Johnson, Parker, Tamkin, Vogt, Zoeller, Minich, Seiber, Thomas and Nash. The second group of Defendants also joined in the motion file by the first group.
1. Motion to dismiss under 12(b)(6)
A motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6) tests the legal sufficiency of the claims in the complaint. A claim can only be dismissed without leave to amend if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). This court must accept as true all material allegations in the complaint, as well as reasonable inferences to be drawn from them, and must construe the complaint in the light most favorable to plaintiff. N.L. Industries, Inc., v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986); Parks School of Business, Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). The court need not, however, accept every allegation in the complaint as true; rather, the court "will examine whether conclusory allegations follow form the description of facts as alleged by the plaintiff." Holden v. Hagopian, 978 F.2d 1115, 1121 (9th Cir. 1992) (citation omitted).
In addition, when deciding a motion to dismiss, a court may consider "documents whose contents are alleged in the complaint and whose authenticity no party questions, but which are not physically attached to the pleading." Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir.), cert. denied, 512 U.S. 1219, 114 S. Ct. 2704, 129 L. Ed. 2d 832 (1994). The court may also consider any matter that is subject to judicial notice, such as public records. MGIC Indem. Corp. Weisman, 803 F.2d 500, 504 (9th Cir. 1986).
2. Heightened Pleading Standard of Rule 9(b)
At the pleading stage, a court may also dismiss a section 10(b) claim under Federal Rule of Civil Procedure 9(b). Rule 9(b) imposes heightened pleading requirements by requiring that a plaintiff plead the alleged fraud with particularity. The Ninth Circuit discussed the requirements of Rule 9(b) in Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985), stating;
Rule 9(b) ensures that allegations of fraud are specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge ...