events affecting the realization of assets such as receivables or
inventories . . . ordinarily will require adjustment of financial
Plaintiffs also appear to contend that the fact that Nortel was FVC's
largest customer gives rise to an inference of scienter; FVC officials
must have known prior to January 1999 that Nortel would no longer act as
an OEM. The Complaint and opposition, however, are devoid of any factual
allegations that even suggest that Nortel and FVC must have restructured
their relationship in the fourth quarter 1998 rather than the first
quarter 1999 as FVC publicly stated. Similarly, the fact that the alleged
false statements were significant, that is, that FVC reported a profit
when in fact it had a loss, does not support an inference of scienter in
the absence of any allegations that suggest that Nortel advised FVC in
the fourth quarter 1998 of the restructuring.
In sum, the theory upon which plaintiffs' lawsuit is now premised
— that FAS 16 and APB 20 demonstrate that FVC must have known about
the change in its relationship with Nortel before the close of the fourth
quarter — is demonstrably false. As such, the Complaint is devoid
of any allegations that even remotely suggest that Nortel advised FVC of
its restructuring of its relationship with FVC prior to the dissemination
of the January 1999 press releases.
B. The Stock Sales
Having determined that plaintiffs' allegations as to the timing of
Nortel's communications with FVC concerning its restructuring of its
relationship with FVC do not give rise to any inference that defendants
engaged in fraud, or even recklessness, the Court must still determine
whether plaintiffs' allegations of the defendants' stock sales give rise
to a strong inference of at least deliberate recklessness. Under binding
Ninth Circuit law, of course, stock sales showing motive and opportunity
alone are insufficient to create a strong inference of the requisite
intent. See Silicon Graphics, 183 F.3d at 974, 979. Nonetheless, for the
reasons stated below, the Court concludes that the allegations as to
defendants' stock sales are insufficient to satisfy the PSLRA whether
considered alone or as part of the totality of the circumstances.
"Although `unusual' or `suspicious' stock sales by corporate insiders
may constitute circumstantial evidence of scienter, . . . insider trading
is suspicious only when it is `dramatically out of line with prior
trading practices at times calculated to maximize the personal benefit
from undisclosed inside information.'" Silicon Graphic, 183 F.3d at 986
(quoting In re Apple Computer Sec. Litig., 886 F.2d 1109, 1117 (9th Cir.
1989)). The factors a Court should consider include: "(1) the amount and
percentage of shares sold by insiders: (2) the timing of the sales; and
(3) whether the sales were consistent with the insider's prior trading
1. The mount and percentage sold by insiders
According to plaintiffs, the defendants collectively sold 13.3% of all
stock and options controlled by them; 535,000 shares for $7,525,850 in
proceeds. Thus, the defendants retailed over 86% of their exercisable
stock shares. This percentage, in and of itself, is not suspicious and in
fact suggests that defendants were not aware at the time of their stock
sales that the January 1999 press releases contained false information.
See Silicon Graphics, 183 F.3d at 987 (no strong inference of fraud where
defendants retained 90% of their holdings); In re Apple Computer Sec.
Litig., 886 F.2d 1109, 1117 (9th Cir. 1989) (holding on summary judgment
that sales of 8% of total holdings of $84 million were
insufficient to create a triable issue); see also Worlds of Wonder Sec.
Litig., 35 F.3d 1407, 1425 (9th Cir. 1994) (minimal sales of stock
negates inference of scienter).
Moreover, all insiders (officers and directors) retained over 90% of
their stock holdings. See Silicon Graphics, 183 F.3d at 986 (court can
consider SEC filings under incorporation by reference doctrine). This
percentage is more meaningful than the percentage of stock sold by
defendants where, as here, the complaint is devoid of any specific
allegations as to any defendant. To hold otherwise would allow a
securities fraud plaintiff to "cherry-pick" defendants based solely on
the fact of whether, and how much, an insider sold.
The individual percentages of stock sold by each defendant are likewise
not sufficiently suspicious to support a strong inference of
recklessness, let alone deliberate recklessness. Only one defendant,
James Nielson, sold more than 30% of his holdings, Ralph Ungermann, the
largest shareholder, sold 200,000 shares; only 7.33% of his holdings.
Thus, he retained over 92% of his holdings, a decision which cost him,
according to plaintiffs' calculations of the decline in the value of the
stock, over $9 million. See Silicon Graphics, 183 F.3d at 987 (holding
that selling 7.7% of stock does not support a strong inference of
deliberate recklessness). Mitchell, the CFO, and Sequeria, the Chief
Technology Officer. each retained over 80% of their holdings. These
percentages are also insufficient to support an inference of scienter,
especially in absence of any other allegations in the Complaint which
suggest that these defendants (or anyone at FVC) were aware in January
1999 that the January 1999 press releases contained false information.
McMillian, the Vice President Sales, sold 29% of his shares. While this
amount is larger than the other defendants, it is insufficient to support
an inference that the other defendants were engaged in fraud, especially
in light of the fact that his holdings are a tiny percentage of all
insider holdings. See Silicon Graphics, 183 F.3d at 987. This percentage
is likewise insufficient to support an inference of scienter as to
McMillian in light of the Complaint's lack of any factual allegations
that suggest that (1) Nortel advised FVC in the fourth quarter 1998 of
its change in practice, (2) McMillian was aware of Nortel's change of
practice before the press releases were issued, and (3) McMillian saw the
press releases before they were issued, knew the figures announced were
wrong, and had the ability to control the content of the press releases.
Defendant Nielsen did sell what appears to be a "suspicious" amount of
stock: 92% of his holdings. Nielson, however, held far fewer shares than
any other defendant. See Silicon Graphics, 183 F.3d at 987. Moreover, his
position — Vice President of FVC's Business Access Unit — does
not in and of itself suggest that he would be aware of the alleged false
statements in the January 1999 press releases and, as is the case with
the other defendants, the Complaint is wholly lacking in any allegations
that suggest Nielson had any knowledge of any alleged false statements.
See Silicon Graphics, 183 F.3d at 987. In sum, the selling of a high
percentage of shares by a Vice President cannot — without more
— support an inference of scienter let alone a strong inference.
Finally, the fact that FVC's President and CEO, who became CEO just
prior to the January press releases, did not sell any of his stock (and,
accordingly, was not named as a defendant) negates any slight inference
of scienter. One would expect that if, as plaintiffs allege, the Chief
Technology Officer was aware that the January 1999 press releases
contained false information the CEO and President — the person
who made the allegedly false statements — would also know they were
false an act as the other defendants. See NetManage. 1998 WL 917794 *4.
The fact that Beyer joined FVC in January 1999 is an unsatisfactory
explanation for his lack of sales of stock. Plaintiffs do not explain how
the other defendants kept Beyer in the dark about a significant
restructuring of FVC's relationship with its largest customer, especially
since if the discussions between FVC and Nortel did not occur in the
first quarter 1999 as FVC stated. Beyer — who was FVC's CEO dining
that entire quarter — would know.
2. The timing of the sales and prior practice
The timing of defendants' sales is likewise insufficiently suspicious.
As plaintiffs concede, after the April 1998 IPO defendants were
prohibited from selling their stock until October 1998. Plaintiffs'
opposition attempts to make much of the fact that none of the defendants,
other than Sequeira, sold any stock between that time and shortly after
the January press releases. They contend that defendants' delay somehow
supports an inference that defendants knew the results announced in
January were false. However, the opposite inference is equally, if not
more, plausible. That is, that defendants did not sell between October
1998 and February 1999 because they honestly believed that FVC was going
to post an annual profit for the first time and they wanted to wait until
that announcement to sell their stock.
At oral argument plaintiffs stated that the fact that defendants did
not sell any stock during the fourth quarter 1998 does not support an
inference one way or another. Instead, plaintiffs emphasize that
defendants collectively sold 13.3% of their stock during the three-week
period following the January press releases. The Complaint lacks any
factual allegations, however, that suggest that such timing is
suspicious. One would expect shareholders of a company which only
recently went public to sell significant sums of stock shortly after the
company announced its most profitable quarter in its history. Indeed,
if, as plaintiffs contend, defendants knew in January that the fourth
quarter financials were false, one would expect that defendants would
have continued to sell their stock into March as it became apparent that
they were going to have to announce that PVC had actually posted a loss
for the fourth quarter. Yet, the Complaint does not allege that any of
the defendants made any significant sales in March or early April.
In sum, the defendants' stock sales when considered in connection with
the allegations of the Complaint as a whole do not give rise to a strong
inference of recklessness, deliberate recklessness, or conscious
misconduct. Under Silicon, Graphics that is the end of the Court's
inquiry. Even if stock sales alone, however, could give rise to a strong
inference of scienter the stock sales alleged here do not come close to
C. Control Person Allegations
Plaintiffs also contend that defendants are liable as "control persons"
under section 20(a) of the Exchange Act. To establish "control person"
liability, plaintiffs must show that a primary violation of 10b-5 was
committed and that each defendant "directly or indirectly" controlled the
violator. See Paracor Finance, Inc. v. General Electric Capital,
96 F.3d 1151, 1161 (9th Cir. 1996). As is stated above, plaintiffs have
failed to plead a violation of 10b-5. For this reason alone plaintiffs'
section 20a claim fails.
D. Leave to Amend
The Complaint will be dismissed without leave to amend. Plaintiffs had
four months to draft the Complaint after the initial lawsuit was filed.
The Complaint was filed after the Silicon Graphics decision so plaintiffs
had ample notice of the appropriate standards. Moreover, lead plaintiffs
are represented by experienced counsel who have litigated dozens of cases
under the PSLRA. Finally, and most importantly, there is nothing in
plaintiffs' opposition, or plaintiffs' presentation at oral argument, both
of which went well beyond the allegations of the Complaint, that suggests
that plaintiffs will be able to correct the glaring deficiencies in their
Complaint if they are given leave to amend, especially in light of the
fact that they are not permitted to engage in any discovery. See Foman
v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962) (although
leave to amend shall be given freely when justice so requires, futile
amendments should not be permitted).
For the foregoing reasons defendants' motion to dismiss is GRANTED
without leave to amend.
IT IS SO ORDERED.
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