The opinion of the court was delivered by: Hamilton, United States District Judge
ORDER RE MOTION TO DISMISS
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
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
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.
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
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
(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
(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.
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 ...