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
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, as interpreted in
III. Sufficiency of the Nevius Allegations
The only defendants named in the Nevius Portion of the suit are
Read-Rite and two individuals. The individuals are Read-Rite's Chairman
and Chief Executive Officer Cyril Yansouni and its President, Chief
Operating Officer and director Fred Schwettmann. Nevius Plaintiffs
identify and allege falsity (or misleading character) of several
representations made on April 17 and 18, 1996. However, the Nevius
Plaintiffs, like the Ferrari Plaintiffs, fail adequately to allege
The only support for an inference of scienter comes from generic
allegations concerning what Yansouni and Schwettmann would know by virtue
of their positions. In other words, Nevius Plaintiffs identify certain
representations and ask the Court to infer that Yansouni and Schwettmann
(and Read-Rite) must have been aware of their falsity. Such an inference
is not strongly supported.
On April 17, 1996, Yansouni allegedly stated in a press release that
"[w]e enter the third quarter of fiscal 1996 having achieved design-ins
for a number of new products using our advanced inductive Tripad heads".
However, rather than stating "with particularity all facts `on which
their belief is based,'" (In re Silicon Graphics 183 F.3d at 983 quoting
15 U.S.C. § 78u-4 (b)), Nevius Plaintiffs allege only that the
representation is false because "the Company had not achieved design-ins
for a `number' of new products." The intended implication here appears to
be that if Read-Rite had achieved any quantity of "design-ins", these
"design-ins" were not accurately quantified by the word "number." This
conclusion is not strongly implied by the other allegations of the
complaint and, even if it were, this would only amount to a conclusion
that the April 17, 1996 representation was false. In this case, falsity
of the statement by itself does not strongly imply the speaker's
knowledge of falsity.
On April 18, 1996, Yansouni and/or Schwettmann allegedly stated during
a conference call that Read-Rite had transitioned to Tripad II and had
completed the development of Tripad III. There are allegations which
would support the conclusion that any such representation made on April
18, 1996 would have been false. However, the amended complaint contains
no factually particular allegations which strongly imply Defendants'
contemporaneous knowledge that the statements were false when made.
Nevius Plaintiffs also discuss alleged misrepresentations made on March
2 and March 13, 1996. On March 2, Yansouni allegedly stated that
Read-Rite products were then "being designed into some Conner products,"
a statement which allegedly was misleading because Read-Rite's most
advanced products were not then being designed into Conner products.
Assuming arguendo that the amended complaint adequately discloses facts
underlying the conclusion that Read-Rite's advanced products were not
being designed in, and assuming further that such a statement would be
misleading without qualifiers,
scienter still is not adequately pleaded. One reasonably could infer that
persons with Yansouni's and Schwettmann's respective job titles would be
aware of major developments concerning a key customer's refusal to
implement a major product line. However, under current law, the mere
existence of a reasonable inference does not satisfy the Reform Act's
requirement of a strong implication. In re Silicon Graphics, 183 F.3d at
The allegations concerning the March 13 representations suffer from the
same deficiency as do the allegations concerning the March 2
representations. Additionally, it is more difficult to characterize the
March 13 comments as being false or misleading statements upon which
investors may have relied as a measure of Read-Rite's good fiscal
health. Essentially, comments attributed to "the Company," apparently
designed to dampen market expectations, allegedly were misleading because
they attempted to justify Read-Rite's ongoing poor performance by
referring to costs and liabilities which had not yet been realized. These
allegations fail to meet the Silicon Graphics standard for pleading
scienter whether or not this theory of misrepresentation is otherwise
The Nevius portion of this action differs from the Ferrari allegations
in one important respect. The Court concludes that amendment may be
possible, based upon the representations of counsel concerning the
availability of facts which would bear on scienter, and based upon the
generally sound "feel" of the pleading, notwithstanding its current
failure to meet the heightened standards of the Reform Act.
(1) With respect to Ferrari Plaintiffs, Defendants'
motion to dismiss is granted without leave to amend.
(2) With respect to Nevius Plaintiffs, Defendants'
motion to dismiss is granted with leave to amend.
Nevius Plaintiffs may file an amended pleading within
30 days of the date this Order is filed.