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June 14, 2000


The opinion of the court was delivered by: Wilken, District Judge.


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.


I. Legal Standard

A. Rule 12(b)(6)

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).

B. Securities Fraud

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 1549.

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 ...

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