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November 14, 2000


The opinion of the court was delivered by: Hamilton, United States District Judge



This is a proposed class action alleging violation of the federal securities laws. Plaintiffs are individuals who purchased stock of defendant Autodesk, Inc. ("Autodesk") between September 14, 1998, and May 4, 1999 ("the class period"). During the class period, defendant Carol A. Bartz ("Bartz") was the Chief Executive Officer and Chairman of the Board of Autodesk; defendant Eric B. Herr ("Herr") was President and Chief Operations Officer, and defendant Christine Tsingos ("Tsingos") was the Treasurer. Defendant U.S. Bancorp Piper Jaffray ("Piper Jaffray") served as Autodesk's financial advisor and underwriter of Autodesk's March 1999 secondary offering.

Autodesk creates and sells computer-aided-design ("CAD") software for use by mechanical designers and engineers, architects, civil engineers, and mapping and geographic information systems designers and professionals, as well as by educators and students in the above areas. Autodesk's principal product is the AutoCAD, a computer aided design tool which has historically provided the largest percentage of Autodesk's revenues.

Plaintiffs claim that because the AutoCAD is Autodesk's primary product, the rise and fall of the price of its stock has historically reflected the life-cycles of the various versions or upgrades of AutoCAD that have been released over the years. According to plaintiffs, Autodesk was unable to achieve any real growth during the years 1995 through 1997 because the R13 AutoCAD upgrade, released in 1995, was bug-ridden and technically flawed. Plaintiffs contend that as a result of this poor performance, Autodesk's top three executives (defendants Bartz, Herr, and Tsingos) were under increasing pressure from Autodesk's board and large investors to make some significant acquisitions that would diversify Autodesk's product line and lessen Autodesk's dependence on the AutoCAD line.

Beginning in the summer of 1997, Autodesk management began meeting with management of Discreet Logic, Inc., to discuss the possible acquisition of Discreet Logic by Autodesk. Plaintiffs claim that Bartz, Herr, and Tsingos knew that any significant acquisition could be made only by using Autodesk's stock as "currency" to pay for the acquisition, and that during the period when the acquisition of Discreet Logic was being negotiated, they were under pressure to raise the value of the stock as high as possible so that fewer shares of stock would have to be turned over to pay for the acquisition. Plaintiffs claim that defendants issued false statements to the public during the period between mid-September 1998 and early April 1999 in an attempt to artificially bolster the price of the stock until the completion of the acquisition of Discreet Logic in March 1999. On the same date that the shareholders voted to approve the acquisition, Autodesk also completed a secondary public offering of 3 million shares of Autodesk stock.

Plaintiffs allege that defendants issued statements that were false or misleading regarding the sales of the R14 AutoCAD (successor to the R13), and regarding the progress of the testing and development of the R14's successor product the R15 AutoCAD 2000, which was released in March 1999. Plaintiffs allege that these false statements were made by Bartz, Herr, and/or Tsingos during meetings or conferences with groups of analysts and large investors, and also appeared in written reports issued by Piper Jaffray analyst Hany Nada, in financial news service reports of interviews with Herr and Bartz, and in one or more Autodesk press releases.

Specifically, plaintiffs claim that defendants represented that sales of the R14 were strong, but failed to disclose that the reason the sales were strong was that Autodesk had implemented a customer incentive program (the "VIP Upgrade" program) which offered purchasers of the R14 the opportunity to obtain the upcoming R15 upgrade at a discount as well as a retailer discount incentive program, which encouraged retailers to order more of the R14 product than they could reasonably hope to sell. Plaintiffs also allege that defendants falsely stated that the release of the R15 would have a positive impact on Autodesk's revenue and earnings per share in FY 2000.

Plaintiffs claim that the market relied on the alleged false statements, and that the price of Autodesk's stock was thereby kept artificially high. Plaintiffs claim that the purpose of the scheme was to enable Autodesk to acquire Discreet Logic for the fewest number of shares possible. In so doing, defendants Bartz and Herr also assured themselves of large bonuses. Plaintiffs claim that when Autodesk announced that revenue and earnings per share were significantly lower in FY 2000 than defendants had predicted, the price of the stock dropped accordingly.

Plaintiffs also allege that Piper Jaffray agreed to participate in the scheme to inflate Autodesk's stock, including promising to issue positive research reports on Autodesk. Plaintiffs claim that Piper Jaffray knew that Autodesk could not complete either the Discreet Logic acquisition or the secondary offering unless the price of the stock was kept high, and that Piper Jaffray was motivated to participate in the scheme because of the fee it was to receive for underwriting the secondary offering.

Plaintiffs filed this action alleging securities fraud in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission. The Autodesk defendants and Piper Jaffray now move to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.


A. Legal Standards

1. Motions to dismiss under Rule 12(b)(6)

A court should dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim only where it appears beyond doubt that plaintiff can prove no set of facts in support of the claim which would entitle the plaintiff to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Pillsbury, Madison & Sutro v. Lerner; 31 F.3d 924, 928 (9th Cir. 1994).

Review is limited to the contents of the complaint. Allarcom Pay Television, Ltd. v. General Instrument Corp., 69 F.3d 381, 385 (9th Cir. 1995). When matters outside the pleading are presented to and not excluded by the court, a Rule 12(b)(6) motion is to be treated as one for summary judgment, and all parties shall be given an opportunity to present all material made pertinent to such a motion by Rule 56. See Fed.R.Civ.P. 12(b). However, material that is properly presented to the court as part of the complaint may be considered as part of a motion to dismiss. See Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n. 19 (9th Cir. 1989). If a plaintiff fails to attach to the complaint the documents on which it is based, defendant may attach to a 12(b)(6) motion the documents referred to in the complaint to show that they do not support plaintiffs claim. See Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994), cert. denied, 512 U.S. 1219, 114 S.Ct. 2704, 129 L.Ed.2d 832 (1994). Thus, the court may consider the full text of a document the complaint quotes only in part. See In re Stac Electronics Securities Litigation, 89 F.3d 1399, 1405 n. 4 (9th Cir. 1996). cert. denied, 520 U.S. 1103, 117 S.Ct. 1105, 137 L.Ed.2d 308 (1997). The court's consideration of such documents does not convert the Rule 12(b)(6) motion into a motion for summary judgment. See Branch, 14 F.3d at 454.

Motions to dismiss for failure to state a claim are disfavored, see Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 249 (9th Cir. 1997), and 12(b)(6) dismissals are proper only in "extraordinary" cases. See United States v. City of Redwood City, 640 F.2d 963, 966 (9th Cir. 1981). In dismissing for failure to state a claim, "a district court should grant leave to amend even if no request to amend the pleadings was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts." Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995) (citations omitted).

2. Section 10(b) and Rule 10b-5

Section 10(b) of the Securities Exchange Act provides, in part, that it is unlawful "to use or employ in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, 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).

Rule 10b-5 makes it unlawful for any person to use interstate commerce

(a) To employ any device, scheme, or artifice to defraud.
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5.

In order to state a claim under section 10(b) and Rule 10b-5, the plaintiff must allege 1) a misrepresentation or omission 2) of material fact 3) made with scienter 4) on which the plaintiff justifiably relied 5) that proximately caused the alleged loss. See Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 1999). Generally, plaintiffs in federal court are required to give a short, plain statement of the claim sufficient to put the defendants on notice. Federal Rule of Civil Procedure 9(b) also requires, however, that in actions alleging fraud, "the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b).

3. Private Securities Litigation Reform Act

In 1995, Congress enacted the Private Securities Litigation Reform Act ("PSLRA"), adding additional pleading requirements for securities fraud actions. Under the PSLRA a complaint must "specify each statement alleged to have been false or misleading, [and] the reason or reasons why the statement is misleading." In addition, "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." See 15 U.S.C. § 78u-4(b)(1).

In order to adequately plead scienter under the PSLRA, the complaint "shall, with respect to each act or omission alleged to violate this chapter. state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). The requirement that the facts must give rise to a "strong inference . . . [of] the required state of mind" means that "the evidence must create a strong inference of, at a minimum, `deliberate recklessness.'" In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970, 977 (9th Cir. 1999). If the complaint does ...

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