The opinion of the court was delivered by: Hamilton, District Judge.
ORDER GRANTING MOTION TO
Now before the court is the motion of defendants Howard A. Neckowitz,
Gail E. Granton, and Sandra D. Grey for an order dismissing the
consolidated amended complaint. Having read the parties' papers and
carefully considered their arguments and the relevant legal authority,
and good cause appearing, the court hereby GRANTS the motion for the
This is a proposed class action alleging violation of the federal
securities laws. Pacific Gateway Exchange, Inc. ("PGE"), which filed for
bankruptcy protection in December 2000, was a telecommunications company
providing long distance telephone service, and Internet and fiber optic
bandwidth services. Defendant Howard Neckowitz was Chairman, President,
and CEO of PGE until December 2000, defendant Sandra Gray was Chief
Financial Officer until March 2000, and defendant Gail Granton was
co-Chief Operations Officer until December 2000.
Plaintiffs, who purchased shares of stock in PGE, filed this action on
behalf of themselves and all other persons who bought PGE stock from May
14, 1999, to March 31, 2000 (the proposed class period). Plaintiffs
allege that during the class period, defendants issued false and
misleading statements regarding PGE's revenue recognition practices and
omitted to disclose that PGE had defaulted on a significant credit
facility until several months after the default began, in violation of
§ 10(b) of the 1934 Securities Exchange Act, 15 U.S.C. § 78j(b),
and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.
Plaintiffs also allege control person liability under § 20(a) of the
1934 Act, 15 U.S.C. § 78t(a).
Plaintiffs allege misstatements and material omissions in connection
with defendants' release of PGE's financial results for each of the four
quarters of 1999, in press releases and in reports filed with the SEC.
Plaintiffs claim that throughout this period, defendants recognized
revenue on bandwidth sales and swap agreements "up front," rather than
ratably over the life of the agreement, in violation of Generally
Accepted Accounting Principles ("GAAP"), and without making adequate
disclosure of the effect of such overstatement of revenues. Plaintiffs
also assert that defendants understated the expenses associated with the
company's fixed assets. In addition, plaintiffs allege that PGE failed to
disclose until March 2000 that it had been in default on its debt (the
credit facility) to Bank of America since before December 1999.
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, Inc. Sec. Litig.,
42 F.3d 1541, 1547-49 (9th Cir. 1994).
3. 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 ...