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IN RE READ-RITE CORP. SECURITIES LITIGATION

March 1, 2000

IN RE READ-RITE CORP. SECURITIES LITIGATION. THIS DOCUMENT RELATES TO ALL ACTIONS.


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.

I. Overview

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 conditions.

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.

First, of the individuals whose trading has been charted only one, defendant Lori Holland, sold stock in the approximately four and one-half months preceding Read-Rite's negative disclosures on January 22, 1996. Trading activities of the other individual defendants, occurring many months prior to the announcement which triggered the stock price correction upon which this action pivots, do not amount to a strong implication of the requisite scienter. This is particularly true because the graphs reveal that the trades occurred during a period rapidly increasing share prices which may be expected to induce heavy trading activity as traders speculate when share prices will peak.

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, ...


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