The opinion of the court was delivered by: Wilken, District Judge.
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS PLAINTIFFS' CORRECTED
CONSOLIDATED COMPLAINT AND GRANTING PLAINTIFFS LEAVE TO AMEND
This Document Relates to All Actions.
In this class action for securities fraud, Plaintiffs allege that
Defendants knowingly misrepresented to the investment community that
Secure Computing Corporation was growing and increasing its earnings
during the class period. Defendants move to dismiss Plaintiffs' corrected
consolidated complaint for failure to state a claim. Plaintiffs oppose
the motion. A hearing on the motion was held on June 9, 2000. Having
considered the papers filed by the parties and oral argument on the
motion, the Court dismisses Plaintiffs' corrected consolidated
complaint, with leave to amend.
Defendant Secure Computing Corporation designs, develops, markets and
sells a variety of security products and services for computer networks.
See Corrected Consolidated Complaint (CCC) ¶¶ 3, 20. Individual
Defendants Jeffrey H. Waxman, Timothy P. McGurran, Patrick Regester, Gary
D. Taggart, Howard Smith and Christine Hughes were officers of Secure and
members of its executive committee during the relevant time period. See
id. ¶¶ 21-22. Plaintiffs allege that all six individual Defendants
qualify as controlling persons and are collectively liable for the false
statements of the company. See id. ¶¶ 23-24.
Plaintiffs are an uncertified class composed of all individuals who
purchased or otherwise acquired Secure's common stock between November
10, 1998 and March 31, 1999, inclusive. See id. ¶ 1. Plaintiffs
contend that, motivated by a "highly unusual compensation scheme" that
rewarded short-term increases in the company's stock price, and through
"hype and false financials," Defendants violated §§ 10(b) and 20(a) of
the Securities and Exchange Act of 1934 and Securities and Exchange
Commission (SEC) Rule 10b-5. See id. ¶¶ 2, 11.
Plaintiffs identify numerous statements made by or allegedly approved
or adopted by Defendants, including statements made during an interview
with The Wall Street Transcript, see id. ¶ 42; press releases, see
id. ¶¶ 39, 43, 47; presentations to analysts and major investors, see
id. ¶¶ 40, 45, 51, 54; reports by analysts, see id. ¶¶ 41, 46, 49,
52; and the company's financial statements for the fourth quarter of
1998, see id. ¶¶ 60-64. Plaintiffs allege that, for a variety of
reasons, some of these statements were false or misleading. See id.
¶¶ 30-37, 59(a)-(g), 65-70. According to Plaintiffs, the facts plead
give rise to a strong inference that Defendants' actions were at least
deliberately reckless. See id. ¶¶ 28-29, 72-83.
During the period in which these alleged misrepresentations were made,
Secure's stock price rose from just under $15 per share on November 10,
1998, the beginning of the class period, to highs in excess of $25 per
share in late January, 1999. See id. ¶ 9 (chart). On March 31, 1999,
the last day of the class period, Secure's stock price closed at over $10
per share. See id. After the close of trading on March 31, 1999, Secure
issued a press release announcing that its revenues for the first quarter
of 1999 were significantly below prior forecasts. See id. ¶ 56. The
next day, Secure's stock price dropped to a low of $5 9/16 and ended the
day at $5 7/8. See id. ¶ 58. According to Plaintiffs, the resulting
damages that they incurred were
proximately caused by their reasonable reliance on the false and
misleading statements made by Defendants. See id. ¶ 71.
A motion to dismiss for failure to state a claim will be denied unless
it appears that the plaintiff can prove no set of facts which would
entitle it to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct.
99, 2 L.Ed.2d 80 (1957); Fidelity Fin. Corp. v. Federal Home Loan Bank of
San Francisco, 792 F.2d 1432, 1435 (9th Cir. 1986). Dismissal of a
complaint can be based on either the lack of a cognizable legal theory or
the lack of sufficient facts alleged under a cognizable legal theory. See
Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988).
In 1995, Congress enacted the Private Securities Litigation Reform Act
of 1995 (PSLRA), Pub.L. No. 104-67, which amends the Securities Exchange
Act of 1934, 15 U.S.C. § 78a-78ll. Section 10(b) of the Securities
Exchange Act of 1934 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 [SEC] may prescribe." 15 U.S.C. § 78j(b);
see also 17 C.F.R. § 240.10b-5 (Rule 10b-5). To state a claim under
§ 10(b), a plaintiff must allege: "(1) a misrepresentation or
omission of material fact, (2) reliance, (3) scienter, and (4) resulting
damages." Paracor Finance, Inc. v. General Elec. Capital Corp.,
96 F.3d 1151, 1157 (9th Cir. 1996); see also McCormick v. Fund Am. Cos.,
26 F.3d 869, 875 (9th Cir. 1994).
Plaintiffs must plead securities fraud with particularity, pursuant to
Rule 9(b) of the Federal Rules of Civil Procedure. See In re GlenFed,
Inc. Sec. Litig., 42 F.3d 1541, 1543 (9th Cir. 1994) (en banc). Further,
although Rule 9(b) does not require that scienter be plead with
particularity, see Concha v. London, 62 F.3d 1493, 1503 (9th Cir. 1995),
the PSLRA does. See 15 U.S.C. § 78u-4(b)(2).
Rule 9(b) provides that "in all averments of fraud or mistake, the
circumstances constituting fraud or mistake shall be stated with
particularity." The allegations must be "specific enough to give
defendants notice of the particular misconduct which is alleged to
constitute the fraud charged so that they can defend against the charge
and not just deny that they have done anything wrong." Semegen v.
Weidner, 780 F.2d 727, 731 (9th Cir. 1985). The PSLRA requires that the
complaint "specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if an allegation
regarding the statement or omission 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).
Except with respect to allegations made on information and belief, the
PSLRA pleading standard for allegations about the circumstances
constituting fraud is the same as the Ninth Circuit's pre-PSLRA
standard. Before the enactment of the PSLRA, plaintiffs were already
required to plead specifically the time, place and nature of the alleged
misrepresentations, see Wool v. Tandem Computers, Inc., 818 F.2d 1433,
1439 (9th Cir. 1987), and to explain why each alleged misstatement or
omission was false or misleading when made, see GlenFed, 42 F.3d at
The PSLRA's requirement regarding allegations plead on information and
belief is somewhat stricter than the Ninth Circuit's pre-PSLRA standard.
For allegations made on information and belief, pre-PSLRA case law in the
Ninth Circuit required "a statement of the facts upon which the belief is
founded," see Wool, 818 F.2d at 1439, but did not expressly require
that plaintiffs specifically plead all facts upon ...