The opinion of the court was delivered by: SMITH
Defendant Silicon Graphics, Inc. ("SGI") is a Delaware corporation that designs and sells desktop graphics workstations, multi-processor servers, advanced computing platforms, and application software. The company's stock is traded on the New York Stock Exchange. Plaintiffs' complaint arises out of fluctuations in SGI's stock price during the fall of 1995.
On August 21, 1995, SGI stock reached an all-time high of $ 44-7/8 before declining into the high $ 20s due to investor concern that SGI would be unable to maintain its historic high growth rates in the face of increased competition. On October 19, 1995, SGI announced the results for the first quarter of fiscal year 1996. The market viewed these results as disappointing, although they showed a thirty-three percent growth in revenue. SGI reassured analysts and investors that it still expected to meet its growth targets. In a press release, and also in a conference call with analysts, SGI provided explanations for the shortfall and suggested reasons why the second quarter results would be better. SGI issued periodic updates throughout the fall, reasserting its confidence about second quarter results. As a result, the stock price rebounded into the high $ 30 range.
In December 1995, on rumors that the second quarter results might also be lower than anticipated, the stock fell again, this time dipping into the mid-$ 20 range. When SGI confirmed the rumors in early January 1996, the stock fell to a low of approximately $ 22 per share. In response, plaintiffs filed their first class action complaint on January 29, 1996. A derivative action was filed on March 22, 1996. Both complaints related to the December 1995/January 1996 drop in SGI's stock price.
In September 1996, the Court dismissed the class action complaint for failure to plead scienter adequately under the Private Securities Reform Act of 1995 ("SRA"). At the same time, the Court dismissed the derivative complaint because plaintiffs had failed to make the required demand that the company's board take action. The Court gave plaintiffs leave to amend both complaints; however, plaintiffs chose to amend only the class action complaint.
In their First Amended Complaint ("FAC"), plaintiffs again allege that SGI and the individual defendants
violated federal securities law by issuing false and misleading information about the company in an effort to inflate the price of SGI stock for the purpose of selling their own stock at a substantial profit. Plaintiffs have brought this case on behalf of themselves and all persons who purchased SGI stock during the period between September 13, 1995 and December 29, 1995.
I. Plaintiffs' Allegations
The following section is based on plaintiffs' allegations, which are taken as true for purposes of the motion to dismiss. During September 1995, SGI executives became concerned that the company would not meet its growth and revenue targets because of production problems with its most important new product, the Indigo2 IMPACT workstation. Out of fear that SGI's sales and stock price would decline if this information became public, defendants agreed to conceal the problems from the public. When revenues and stock prices declined anyway in September and October 1995, defendants devised a scheme to boost stock prices to protect the company's interests and their individual stakes.
As a part of their scheme, defendants made material misrepresentations about SGI's growth prospects and general financial condition, and failed to disclose adverse facts about SGI's products, management, and competitors. For example, defendants asserted a high sales volume, when in fact sales where materially below SGI's internal targets. SGI also failed to disclose that it had insufficient component parts to produce the Indigo2 IMPACT workstations required to meet demand, instead maintaining that the shortage of workstations was due to unanticipated heavy demand for the product. Defendants disseminated this false and misleading information to the market through SGI's report to shareholders, numerous press reports, and meetings with securities analysts.
Defendants' efforts to boost stock prices were a success. As a result of the misrepresentations, SGI's stock price rose to $ 38-3/4. Meanwhile, aided by an SGI one million share stock repurchase plan, defendants cumulatively sold nearly 400,000 shares of their own SGI stock, reaping combined profits of approximately $ 14 million. After defendants had collected their profits, they announced "disastrous" second quarter results, which sent the stock plummeting to $ 21-1/8. As a result, plaintiffs and potential class members suffered financial damages. Plaintiffs seek to impose direct liability on defendants for their individual misrepresentations, insider trading, participation in the fraudulent scheme, and under a theory of control person liability.
Defendants contend that SGI has experienced rapid growth in recent years, and continued to grow even during the class period. During the fall of 1995, defendants conducted business as usual, making normal statements to shareholders, the press, and industry analysts about the company's performance and anticipated performance. In hindsight, SGI's forecasts may have been optimistic, but there was no fraud involved.
Defendants argue that plaintiffs have not adequately pled their case under the Private Securities Litigation Reform Act. They point out that the FAC is pled on information and belief, and fails to provide any foundational statement of facts, as required by the Second Circuit law on which the SRA arguably is based. Moreover, they contend that even if the "facts" in the FAC are accepted as true, they do not create a strong inference of fraud. Certain individual defendants also seek summary judgment, because they did not make any allegedly false or misleading statements, and did not trade contemporaneously with plaintiffs.
A. Federal Rule of Civil Procedure 12(b)(6)
A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of the complaint. See North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). Dismissal of an action pursuant to Rule 12(b)(6) is appropriate only where it "'appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" See Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1482 (9th Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)).
In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court must assume all factual allegations to be true and must construe them in the light most favorable to the nonmoving party. See North Star, 720 F.2d at 580. Legal conclusions need not be taken as true merely because they are cast in the form of factual allegations, however. Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981). Further, the Court need not accept as true allegations that contradict facts that have been judicially noticed. See Employers Ins. v. Musick, Peeler, & Garrett, 871 F. Supp. 381, 385 (S.D. Cal. 1994).
B. Federal Rule of Civil Procedure 9(b)
Allegations of fraud must satisfy the requirements of Rule 9(b) to survive a motion to dismiss. Rule 9(b) provides: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." The purpose of Rule 9(b) is to prevent the filing of a complaint as a pretext for the discovery of unknown wrongs. See Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985).
To satisfy Rule 9(b), securities class action plaintiffs must allege fraud with enough particularity to give defendants notice of the specific charges against them so that defendants may respond to the charges. See Kaplan v. Rose, 49 F.3d 1363, 1369 (9th Cir. 1994); Neubronner v. Milken, 6 F.3d 666, 671-72 (9th Cir. 1993). A complaint satisfies this standard if it "state[s] precisely the time, place, and nature of the misleading statements, misrepresentations, and specific acts of fraud." Kaplan, 49 F.3d at 1370; see also Neubronner, 6 F.3d at 672.
Rule 9(b) also requires that a plaintiff plead with sufficient particularity attribution of the alleged misrepresentations or omissions to each defendant; the plaintiff is obligated to "distinguish among those they sue and enlighten each defendant as to his or her part in the alleged fraud." Erickson v. Kiddie, 1986 WL 544, *7 (N.D. Cal. 1986) (quoting Bruns v. Ledbetter, 583 F. Supp. 1050, 1052 (S.D. Cal. 1984)); see also Lubin v. Sybedon Corp., 688 F. Supp. 1425, 1443 (N.D. Cal. 1988) (finding plaintiff's "'dragnet' tactic of indiscriminately grouping all of the individual defendants into one wrongdoing monolith" failed to fulfill requirements of Rule 9(b)).
In most fraud actions, the requirements of Rule 9(b) may be "relaxed as to matters peculiarly within the opposing party's knowledge," if the plaintiffs cannot be expected to have personal knowledge of the facts prior to discovery. See Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987) (citations omitted). In securities actions, however, Congress has provided that "if an allegation . . . is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). In so providing, Congress intended to assure that the requirements of Rule 9(b) were met in all securities fraud cases, including those pled on information and belief. See H.R. Conf. Rep. No. 104-369, at 41 (1995) ("Conf. Rep.").
C. Federal Rule of Civil Procedure 56
To withstand a motion for summary judgment, the opposing party must set forth specific facts showing that there is a genuine issue of material fact in dispute. See Fed. R. Civ. P. 56(e). A dispute about a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the non-moving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). If the nonmoving party fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial, the moving party is entitled to a judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986).
In opposing summary judgment, plaintiff is not entitled to rely on the allegations of his complaint. He "must produce at least some 'significant probative evidence tending to support the complaint.'" T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987) (quoting First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 290, 20 L. Ed. 2d 569, 88 S. Ct. 1575 (1968)).
The Court does not make credibility determinations with respect to evidence offered, and is required to draw all inferences in the light most favorable to the non-moving party. See T.W. Elec. Serv., Inc., 809 F.2d at 630-31 (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986)). Summary judgment is therefore not appropriate "where contradictory inferences may reasonably be drawn from undisputed evidentiary facts . . . ." Hollingsworth Solderless Terminal Co. v. Turley, 622 F.2d 1324, 1335 (9th Cir. 1980).
Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), makes it unlawful for any person "to use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange Commission] may prescribe." 15 U.S.C. §§ 78j(b). One such rule is Rule 10b-5, which makes it unlawful "to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5 (1995). To allege securities fraud under Rule 10b-5 successfully, plaintiffs must allege both reliance on a material misstatement and scienter. See Hanon v. Dataproducts Corp., 976 F.2d 497, 506-07 (9th Cir. 1992).
Plaintiffs may allege reliance using the "fraud on the market" theory. "In the usual claim under Section 10(b), the plaintiff must show individual reliance on a material misstatement. Under the fraud on the market theory, the plaintiff has the benefit of a presumption that he has indirectly relied on the alleged misstatement, by relying on the integrity of the stock price established by the market." In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113-14 (9th Cir. 1989). Defendants may respond to a claim of fraud on the market by asserting that the information allegedly withheld from the market had in fact entered the market. See Id. at 1114.
In Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S. Ct. 1439, 128 L. Ed. 2d 119 (1994), the Supreme Court held that "§ 10(b) . . . prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act. . . . The proscription does not include giving aid to a person who commits a manipulative or deceptive act." 114 S. Ct. at 1448. The Supreme Court therefore found that section 10(b) did not create liability for aiding and abetting the securities violations of others. Such secondary participation is beyond the scope of the statute.
A. The Private Securities Litigation Reform Act of 1995
In December 1995, Congress enacted the private Securities Litigation Reform Act of 1995 ("SRA"), Pub. L. No. 104-67, which amends the Securities Exchange Acts of 1933, 15 U.S.C. § 77a-77bbbb, and 1934, 15 U.S.C. § 78a-78111. The SRA applies to private class actions, such as this one, brought pursuant to the Federal Rules of Civil Procedure. See 15 U.S.C. § 77z-1(a)(1). The SRA prescribes new procedures and substantive standards for private securities litigation. For purposes of this motion, the most important of these changes is the new law's heightened pleading standard.
Although they neglected to raise the argument in opposing the earlier motion to dismiss, plaintiffs now contend that the Court should not apply the SRA to this case because the effect of doing so would be impermissibly retroactive.
Section 108 of the SRA reads, "the amendments made by this title shall not affect or apply to any private action arising under title I of the Securities Exchange Act of 1934 or title I of the Securities Act of 1933, commenced before and pending on the date of enactment of this Act." P.L. No. 104-67, 109 Stat. 737, 758 (1995). This language makes clear that Congress intended the SRA to apply to all cases filed after its enactment.
Plaintiffs argue that because the applicability clause is silent as to pre-enactment conduct, the Court must perform a retroactivity analysis. In support of their argument, plaintiffs cite a number of cases in which courts considered the retroactivity of laws that were totally silent about applicability. See, e.g., Alvarez-Machain v. United States, 96 F.3d 1246, 1252 (9th Cir. 1996) (Torture Victim Protection Act); United States ex rel. Schumer v. Hughes Aircraft Co., 63 F.3d 1512, 1517 (9th Cir. 1995), cert. granted in part, 117 S. Ct. 293 (1996) (False Claims Act). These cases are inapposite; Congress set a specific limit on the SRA's applicability in § 108.
The legislative history confirms that Congress intended the SRA to apply to any claim filed after the law's enactment. During the debate on the predecessor bill to the SRA, the House of Representatives considered and rejected an amendment that would have permitted some plaintiffs to sue under existing law for a period of three years after enactment. See 141 Cong. Rec. H2831 (Mar. 8, 1995) (introducing the "Dingell Amendment"). Both the proponents and opponents of the proposed amendment appear to have understood that lawsuits filed after securities reform was enacted would be subject to the new law. See, e.g., 141 Cong. Rec. H3834 (Mar. 8, 1995) (statements of Rep. Bryant and Rep. Cox).
Because Congress prescribed the scope of the SRA, and because the legislative history reflects Congress's intent to do so, the Court need not consider whether the Act's is impermissibly retroactive. See United States v. $ 814,254.76, 51 F.3d 207, 209, 212 ...