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October 2, 2000


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


Defendant Price Waterhouse Coopers, LLP moves to dismiss Plaintiffs' Second Amended Class Action Complaint for failure to comply with the pleading requirements of the Private Securities Litigation Reform Act of 1995, Pub.L. No. 104-67, 109 Stat. 743 (1995). The Court has jurisdiction pursuant to 15 U.S.C. § 78aa and 28 U.S.C. § 1331. Having read and considered the papers submitted, the Court GRANTS the motion for the reasons expressed below.


Altris Software, Inc. ("Altris") is a producer and seller of document management software whose stock traded on the NASDAQ National Market System. (SACAC ¶¶ 2, 36.)*fn1 Altris retained Defendant Price WaterhouseCoopers LLP ("Price Waterhouse"), a certified public accounting firm, to audit the company's 1996 financial statements. (Id. ¶¶ 19, 54.) In connection with the audit, Altris furnished Price Waterhouse with extensive documentation including written contracts, purchase orders, invoices, shipping documents, billing and payment data and installation schedules for at least 25 large transactions. (Id. ¶¶ 5, 57.) At the conclusion of its audit, Price Waterhouse issued an opinion stating that Altris' financial statements complied with Generally Accepted Accounting Principles ("GAAP") and that Price Waterhouse had conducted its audit in accordance with Generally Accepted Auditing Standards ("GAAS").*fn2 On March 29, 1997 Altris filed its Form 10-K with the Securities and Exchange Commission ("SEC") for the fiscal year ended December 31, 1996. (Id. ¶¶ 5, 21.) The Form 10-K included the Price Waterhouse audit opinion. (Id. ¶¶ 21, 107.)

Approximately one year later, Altris publicly announced that it had overstated its revenues, earnings and receivables for all of 1996 and the first three quarters of 1997. (Id. ¶¶ 2, 27, 40.) Altris advised investors that Price Waterhouse had withdrawn its audit opinion, and that the company would likely issue a restatement reflecting significantly lower revenues than previously reported in the Form 10-K. (Id. ¶ 27.)

Later in 1998, Altris issued an Amended Form 10-K that included restated financial results and acknowledged that the company had improperly recognized software sales revenue. For example, Altris admitted that it improperly recognized revenue from transactions where delivery of the product had not occurred, where customers maintained unexpired cancellation rights, and where collectability was doubtful. (Id. ¶¶ 37-40.) The restatement reduced 1996 revenues from $24.5 million to $19.5 million and decreased 1996 receivables from $9.7 million to $5.0 million. (Id. ¶¶ 14, 28, 41.) Overall, the restatement transformed Altris' previously-reported net income of $2.4 million in 1996 into a loss of approximately $2.5 million. (Id.)


Price Waterhouse subsequently moved to dismiss for failure to plead fraud in accordance with the Private Securities Litigation Reform Act of 1995, Pub.L. No. 104-67, 109 Stat. 743 (1995) ("Reform Act"), and for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. By order dated April 30, 1999 this Court granted the motion, dismissed Plaintiffs' state law claim with prejudice and dismissed the federal claim with leave to amend. (See Order Granting Defendant Price Waterhouse's Motion to Dismiss; Granting Leave to Amend, Fed. Sec. L. Rep. ¶ 90,491, 1999 U.S. Dist. LEXIS 7949, 1999 WL 540893 (S.D.Cal.) ("Altris I").)

On August 30, 1999 Plaintiffs filed the currently-operative Second Amended Complaint alleging a single claim under Section 10(b) and Rule 10b-5.*fn4 Plaintiffs accuse Price Waterhouse of deliberately ignoring the improperly recognized revenue reflected in Altris' Form 10-K. The Class Period spans from February 26, 1997 (one day after the audit report) until March 11, 1998 (the date Altris indicated that it planned to restate its revenues). (SACAC ¶ 1.) Price Waterhouse now moves to dismiss for failure to plead fraudulent intent in accordance with the Reform Act.


To state a claim under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, Plaintiffs must allege (1) a misstatement or omission of material fact, (2) made with scienter, (3) on which Plaintiffs relied that (4) proximately caused their injury. See McCormick Fund v. American Cos., Inc., 26 F.3d 869, 875 (9th Cir. 1994). Here, Price Waterhouse challenges the Second Amended Complaint only as to the element of scienter, the "mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976).

Plaintiffs may establish scienter by showing that Price Waterhouse acted deliberately, knowingly or recklessly. Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir. 1978). Recklessness in securities fraud actions, however, requires far more than carelessness or gross negligence; "it instead embraces a conscious state of mind that is inherently deceptive." In re Baesa Securities Litig., 969 F. Supp. 238, 241 (S.D.N.Y. 1997). Recklessness involves conduct presenting such an "extreme departure from the standards of ordinary care . . . that it was either known to the defendant or so obvious that [he or she] must have been aware of it." Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990) (en banc) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)). As recently clarified by the Ninth Circuit:

Our definition of recklessness . . . strongly suggests that we continued to view it as a form of intentional or knowing misconduct. We used the terms "known" and "must have been aware," which suggest consciousness or deliberateness . . . [R]ecklessness only satisfies scienter under § 10(b) to the extent it reflects some degree of intentional or knowing misconduct.

In re Silicon Graphics, Inc. Securities Litig., 183 F.3d 970, 976-77 (9th Cir. 1999) ("Silicon Graphics"); see also Greebel v. FTP Software, Inc., 194 F.3d 185, 199 (1st Cir. 1999) ("We believe `reckless' in these circumstances comes closer to being a lesser form of intent than merely a greater degree of ordinary negligence. We perceive it to be not just a difference in degree, but also in kind.") (citation omitted); Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 121 (2d Cir. 1982) (holding that recklessness on the part ...

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