The opinion of the court was delivered by: Fogel, District Judge.
Defendants' motion to dismiss, heard June 7, 1999, argues that
Plaintiffs in this consolidated class action have failed to meet the
heightened pleading standard set by the Private Securities Litigation
Reform Act of 1995. For the reasons stated below, the motion is granted.
Plaintiffs allege that defendant Read-Rite, along with individual
defendants, violated various securities laws by making false and
misleading statements in connection with the transfer of publicly traded
securities. The class of plaintiffs who purchased Read-Rite stock during
the period from April 19, 1995, through January 22, 1996, are referred to
herein as the "Ferrari Plaintiffs." Ferrari Plaintiffs allege that
Defendants' false representations served to prop up stock prices until a
damaging price correction following Read-Rite's January 22 announcement
that earnings per share and revenue were below forecast. "Nevius
Plaintiffs", that is, those plaintiffs who purchased stock during the
period from March 2, 1996, through June 2, 1996, allege a similar pattern
of conduct. Plaintiffs' allegations and theories are described more
particularly in the Court's Order of August 17, 1998 granting Defendants'
prior motion to dismiss.
II. Sufficiency of Ferrari Plaintiffs' Allegations
The Order of August 17, 1998 identified the following deficiencies in
Ferrari Plaintiffs' allegations:
First, the complaint does not identify adequately
what portions of the representations [P]laintiffs
believe were false or misleading. . . . [¶]
Second, the complaint does not identify adequately why
any of the representations are false or misleading.
. . . [¶] Third, and more fundamentally, the
complaint does not allege sufficiently specific facts
regarding the alleged negative conditions or specific
facts showing that [D]efendants had knowledge of those
Under the Private Securities Litigation Reform Act (the "Reform Act"),
Plaintiffs must "state with particularity facts giving rise to a strong
inference" of the required scienter. The Ninth Circuit has recently
established a very high threshold for the factual and logical strength of
the required implication and for the level of scienter which must be
strongly implied. See In re Silicon Graphics Inc. Securities Litigation,
183 F.3d 970 (9th Cir. 1999).*fn1 In particular, specific facts must be
alleged which strongly imply Defendants' actual knowledge, or at least
recklessness of such an "extent that it reflects some degree of
intentional or conscious misconduct". Id. at 977. This degree of
recklessness has been characterized as "deliberate recklessness".
With respect to the current pleading, the analysis set forth in the
prior Order largely is still applicable and will not be repeated here in
detail. At bottom, the allegations seemingly intended to imply
Defendants' knowledge rest on the assumption that persons with the job
titles or duties of the individual defendants would surely have known the
facts in question. Such assumptions, while not unreasonable in some
instances, do not amount to the sort of strong implication of scienter
required by the Reform Act as interpreted in Silicon Graphics. "It is not
enough . . . to state facts giving rise to a mere . . . reasonably
inference of deliberate recklessness." Id. at 985.
One category of scienter-related allegations, new to the current
pleading, deserves separate mention. Specifically, Ferrari Plaintiffs now
contend that heavy stock trading activities of the individual defendants
amount to insider trading and constitute an indicator of requisite
scienter. Stock trading activities which are suspicious in timing or
amount indeed can support an inference of deliberate recklessness. Id. at
986; Provenz v. Miller 102 F.3d 1478 (9th Cir. 1996). However, the
implication of deliberate recklessness still must be a strong one. In
assessing whether the facts pleaded strongly imply deliberate
recklessness, relevant factors 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 history."
Here, timing is dispositive and militates against finding a strong
implication of the required scienter. Each of the individual defendants
whose stock trading activity is graphically represented in the current
pleading are alleged to have traded during the Ferrari class period. On
the graphs provided for each such individual, time progresses along the
x-axis, while the y-axis apparently represents both dollars per share
(with reference to the line graph aspect of each figure) and proceeds
received by an individual defendant on particular placements (with
respect to bar graph aspect of each figure). Although precise timing
cannot be determined from the pleading based upon these graphics, certain
observations can be made.
Lori Holland's alleged trading activities differ from those of the
other individual defendants in that she sold stock in November of 1995.
However, the current pleading also reveals that Holland resigned from
Read-Rite on November 2, 1995, which appears roughly to coincide with her
stock sales. The resignation of a high level executive, by itself, surely
cannot be taken to strongly imply the requisite scienter and, likewise,
the sale of stock in conjunction with the departure of a high level
executive also is insufficient to show scienter.
In sum, the Court concludes that Ferrari Plaintiffs have not, and
cannot, adequately plead scienter under the Reform Act, ...