The opinion of the court was delivered by: Hamilton, United States District Judge
ORDER GRANTING MOTIONS TO DISMISS
Defendants' motions to dismiss the consolidated amended complaint came
on for hearing on May 30, 2001, before this court, the Honorable Phyllis
J. Hamilton presiding. Plaintiffs appeared by their counsel Reed R.
Kathrein, Shawn A. Williams, Edward M. Gersosian, and David Kessler; the
Harmonic, Inc., defendants appeared by their counsel Melvin R. Goldman
and Terri Garland; and the C-Cube Microsystems, Inc., defendants appeared
by their counsel Terry T. Johnson and Hanley Chew. Having read the
parties' papers and carefully considered their arguments and the relevant
legal authority, and good cause appearing, the court hereby GRANTS the
motions to dismiss for the following reasons.
This is a proposed class action alleging violation of the federal
securities laws. Defendant Harmonic, Inc., ("Harmonic") merged with the
DiviCom division of C-Cube Microsystems, Inc. ("C-Cube") on May 3, 2000.
The merger was approved by the shareholders of both corporations at
shareholders' meetings conducted in late April 2000. As part of the
merger, the shareholders of C-Cube's successor corporate entity received
shares of Harmonic common stock, issued pursuant to a March 23, 2000,
Registration Statement and Joint Proxy Statement/Prospectus filed with
the SEC on March 24, 2000.
On June 26, 2000, Harmonic announced that its results for the second
quarter of 2000 would be lower than anticipated. The price of Harmonic's
stock dropped significantly on June 27, 2000, and plaintiffs filed suit,
alleging that Harmonic and C-Cube had concealed or failed to disclose
material information about, or had made false statements about, the
companies' financial prospects.
The proposed class consists of all persons or entities who purchased or
acquired Harmonic securities during the class period (January 19, 2000,
to June 26, 2000), or who purchased or acquired C-Cube securities during
the subclass period (January 19, 2000, to May 3, 2000). The subclass
consists of all persons who acquired Harmonic shares pursuant to the
registration statement and prospectus for the May 2000 merger between
Harmonic and C-Cube.
Harmonic was founded in 1988 and went public in 1995. Harmonic provides
fiber optic systems for cable operators, and has also developed and
marketed digital video equipment. Historically, a significant portion of
Harmonic's sales have been to a relatively small group of customers, AT
& T being one of the largest.
C-Cube Microsystems, Inc., which manufactured and sold semi-conductors
and systems for digital video applications, was also founded in 1988.
Until May 2, 2000, C-Cube had two divisions — the semi-conductor
division, which manufactured and sold communication processors used in
digital video disc (DVD) players and other products, and the DiviCom
manufactured and sold products relating to the transmission of digital
video, audio, and data over satellite, wireless, and cable networks.
On October 27, 1999, Harmonic and C-Cube entered into an agreement to
merge C-Cube's DiviCom division with Harmonic. On December 9, 1999, the
parties amended and restated the merger agreement. The amended agreement
required all holders of vested options in C-Cube stock to exercise those
options before the close of the merger, and also provided that C-Cube
would spin off or sell its semi-conductor business before the merger.
On January 19, 2000, Harmonic announced its results for the quarter and
year ending December 31, 1999. Sales were up 134% from the fourth quarter
of 1998, and net income for 4Q99 was $.33 a share, compared with net
income of $.02 in 4Q98. (In the same announcement, Harmonic also
disclosed that sales to AT & T, one of its major customers, had
declined as a percentage of Harmonic's total sales during 4Q99, from the
percentage reported for 3Q99.) Anthony Ley, President and CEO, was quoted
as saying, "We are very pleased with our growth in sales and
profitability, and our continued development and roll-out of new systems."
The results announced by Harmonic exceeded the earnings per share
estimates, and various securities analysts subsequently issued "strong
The price of Harmonic's and C-Cube's stock, which had been rising
throughout the fall of 1999, continued to rise during the period after
January 19, 2000, hitting highs of slightly over $152 (Harmonic) and $102
(C-Cube) on March 6, 2000. Despite continued "strong buy" recommendations
from the analysts, however, the price of shares in the two companies
began to fall after reaching the March 6th high, following the general
trend of the NASDAQ, which reached its historic high at approximately the
same time, and subsequently declined.
On March 23, 2000, Harmonic filed a Form S-4 Registration Statement
("the Form S-4") with the SEC, which incorporated a Joint Proxy
Statement/Prospectus issued by Harmonic and C-Cube and dated March 24,
2000. The joint proxy and prospectus discussed the merger between
Harmonic and C-Cube, and stated that it was the unanimous recommendation
of the boards of directors of both Harmonic and C-Cube that the
shareholders of both corporations vote in favor of the merger at the
shareholders' meeting, which was scheduled for April 24, 2000.
On March 30, 2000, Harmonic filed its Form 10K for 1999 with the SEC.
On April 19, 2000, in a press release, Harmonic announced its results for
the first quarter of 2000, again reporting a decline in percentage of
sales to AT & T (from 4Q99 to 1Q00). On April 24, 2000, the
shareholders of Harmonic and C-Cube voted to approve the proposed
On May 15, 2000, Harmonic filed its Form 10-Q for the first quarter of
2000 with the SEC, reporting the fact (previously disclosed in the April
19th press release) that the AT & T portion of total sales had
declined since 4Q99. Harmonic's Form 10-Q also disclosed DiviCom's
results for the first quarter (even though DiviCom did not become part of
Harmonic until the second quarter). C-Cube filed a Form 10-Q for 1Q00 on
On May 16, 2000, the price of Harmonic's stock, which had been
generally falling since reaching its high of 152 3/8 on March 6, 2000,
dropped from 65 3/4 on May 16, to 38 on May 26. It recovered somewhat
after May 26th but, on June 26, 2000, before the second quarter had
ended, Harmonic announced that results for that quarter would be lower
than anticipated. The next day, June 27, 2000, the price of Harmonic's
stock fell to 22 11/16. The first complaints were filed in district court
on June 28th.
Defendants are Harmonic, C-Cube, and the following executive officers
and directors of the two corporations: Anthony Ley — President,
CEO, and Chairman of the Board of Harmonic; Robin N. Dickson — CFO
of Harmonic; Michael Yost — Vice President, Operations, Harmonic;
Kirk Flatow — an Officer of Harmonic; Moshe Nazarathy, Floyd
Kvamme, David Lane, Barry Lemieux, and Michel Vaillaud — Directors
of Harmonic; Alexandre Balkanski — President and CEO of old C-Cube
to 5/3/00, then a Director of new C-Cube; Tom Lookabaugh —
President of DiviCom Division of old C-Cube until May 3, 2000, then an
Officer of Harmonic; Fred Brown — Vice President, Worldwide Sales,
C-Cube (old and new); Richard Foreman — Chief Information Officer,
and Vice President, Information Technology, C-Cube (old and new); Donald
McKinney — Senior Vice President, Worldwide Sales, and a Director
of C-Cube (old and new); Umesh Padval — President of Semi-Conductor
Division of old C-Cube to May 3, 2000, then President, CEO, and a
Director of new C-Cube; Donald Valentine — Chairman of the Board
and a Director of C-Cube (old and new); Walt Walczykowski — Vice
President, Finance, and CFO of C-Cube (old and new); Baryn Futa — a
Director of old C-Cube until May 3, 2000, then a Director of Harmonic;
and Gregorio Reyes — a Director of C-Cube (old and new).
Plaintiffs allege 4 causes of action in the "[Corrected] Consolidated
Amended Complaint" (referred to herein as the "complaint"). The basis of
the complaint is that Harmonic and C-Cube publicly reported financial
results, discussed their plans to merge DiviCom with Harmonic, and made
optimistic statements about their expectations for Harmonic's future
prospects, and that these statements and comments — contained in
the Form S-4 (registration statement, prospectus, and proxy solicitation),
and in various SEC filings, press releases, and discussions with
analysts — were false and misleading because they failed to
disclose that AT & T was reducing its orders for Harmonic's
products and that DiviCom was suffering from declining sales to
its satellite customers.
The third cause of action is alleged by plaintiffs Knollenberg and
Glynn, on behalf of themselves and all subclass members who held Harmonic
or C-Cube common stock on April 24, 2000 (the date the shareholders voted
to approve the merger) and still held those shares on May 3, 2000 (the
date the merger became final). The third cause of action alleges false
and misleading statements and material omissions in the solicitation of
proxies, in violation of § 14(a) of the 1934 Securities Exchange Act,
15 U.S.C. § 78n(a), and Rule 14a-9 promulgated thereunder,
17 C.F.R. § 240.14a-9.
The fourth cause of action, alleging a violation of § 10(b) of the
1934 Act, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder,
17 C.F.R. § 240.10b-5, is alleged by all plaintiffs on behalf of
themselves and the entire class, who purchased shares of Harmonic between
January 19, 2000, and June 26, 2000, and alleges false statements and
material omissions throughout the class period. The fourth cause of
action also alleges controlling person liability, in violation of §
20(a) of the 1934 Act, 15 U.S.C. § 78t(a).
1. Motions to dismiss under Federal Rule of Civil Procedure 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). All allegations of material
fact are taken as true and construed in the light most favorable to the
nonmoving party. Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996).
Review is limited to the contents of the complaint. Allarcom Pay
Television, Ltd. v. Gen. 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 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).
2. Federal Rule of Civil Procedure 9(b)
Generally, plaintiffs in federal court are required to give a short,
plain statement of the claim sufficient to put the defendants on notice.
Fed.R.Civ.P. 8. In actions alleging fraud, however, "the circumstances
constituting fraud or mistake shall be stated with particularity."
Fed.R.Civ.P. 9(b). Under Rule 9(b), the complaint must allege specific
facts regarding the fraudulent activity, such as the time, date, place,
and content of the alleged fraudulent representation, how or why the
representation was false or misleading, and in some cases, the
identity of the person engaged in the fraud. See In re GlenFed Sec.
Litig., 42 F.3d 1541, 1547-49 (9th Cir. 1994).
3. Claims under the 1933 Act
Under § 11(a) of the 1933 Securities Act, any purchaser of a
security covered by a registration statement may sue based on material
omissions or misrepresentations in that statement. 15 U.S.C. § 77k(a).
Persons liable under § 11(a) are those who signed the registration
statement, directors of or partners in the issuer, professionals who
participated in the preparation of the registration statement, and
underwriters of the security. Id. In order to plead a § 11(a) claim,
a plaintiff must allege that the registration statement contained an
omission or misrepresentation, and that the omission or misrepresentation
was material — that is, that it would have misled a reasonable
investor about the nature of his or her investment. In re Stac
Electronics Sec. Litig., 89 F.3d 1399, 1403-04 (9th Cir. 1996), cert.
denied, 520 U.S. 1103, 117 S.Ct. 1105, 137 L.Ed.2d 308 (1997).
Section 12(a)(2) of the 1933 Act makes it unlawful for any person to
use any instrumentality of interstate commerce to offer or sell
securities by means of a prospectus or oral communication that includes
"an untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading."
15 U.S.C. § 771 (a)(2). To establish liability under § 12(a)(2),
plaintiffs must allege that the defendants actively solicited purchase of
the securities for "their own financial motives." In re Stratosphere
Corp. Sec. Litig., 1 F. Supp.2d 1096, 1120 (D.Nev. 1998) (citing Pinter
v. Dahl, 486 U.S. 622, 646-48, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988)).
Section 15(a) imposes joint and several liability upon every person who
controls any person liable under §§ 11 or 12. 15 U.S.C. § 77o.
Thus, violation of § 15 is predicated upon violation of § 11 or
§ 12. To state a claim for control person liability under § 15, a
plaintiff must allege that the individual defendants had the power to
control or influence the company, and that the individual defendants were
culpable participants in the company's alleged illegal activity. Durham
v. Kelly, 810 F.2d 1500, 1503 (9th Cir. 1987).
4. Claims under the 1934 Act
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 § 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.
Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 1999), cert. denied,
528 U.S. 1154, 120 S.Ct. 1158, 145 L.Ed.2d 1070 (2000). A presumption of
reliance is available to plaintiffs alleging violations of § 10(b)
based primarily on omissions of material fact, but not in cases alleging
significant misrepresentations in addition to omissions, or alleging only
misrepresentations. Id. at 1063-64.*fn4
Section 14(a) of the 1934 Act regulates the solicitation of proxies
with respect to any security registered under the Act. It shall be
unlawful for any person . . . in contravention of [SEC rules and
regulations] to solicit or to permit the use of his name to solicit any
proxy or consent or authorization in respect of any security" registered
pursuant to the Act. 15 U.S.C. § 78n(a). SEC Rule 14a-9, which was
promulgated under § 14, provides that
No solicitation subject to this regulation shall be
made by means of any proxy statement, form of
proxy, notice of meeting or other communication,
containing any statement, which, at the time and in
the light of the circumstances under which it is
made, is false or misleading with respect to any
material fact, or which omits to state any ...