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IN RE SECURE COMPUTING CORP. SECURITIES LIT.

August 21, 2001

IN RE SECURE COMPUTING CORPORATION SECURITIES LITIGATION.


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

  ORDER DENYING DEFENDANTS' MOTION TO DISMISS PLAINTIFFS' FIRST AMENDED COMPLAINT

In this class action for securities fraud, Plaintiffs allege that Defendants knowingly misrepresented to the investment community that Secure Computing Corporation was growing and increasing its earnings during the class period. Defendants move to dismiss Plaintiffs' first amended complaint (FAC) for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Plaintiffs oppose the motion. A hearing on the motion was held on February 9, 2001. Having considered the papers filed by the parties and oral argument on the motion, the Court DENIES Defendants' motion to dismiss (Docket No. 59).

BACKGROUND

Defendant Secure Computing Corporation designs, develops, markets and sells security products and services for computer networks. See FAC at 3. Individual Defendants Jeffrey H. Waxman, Timothy P. McGurran, Patrick Regester, Gary D. Taggart, Howard Smith and Christine Hughes were officers of Secure and members of its executive committee during the relevant time period. See id. at ¶¶ 19-20. The Court found in its June 14, 2000 Order granting dismissal of Plaintiffs' Corrected Consolidated Complaint (CCC) that for purposes of pleading all six individual Defendants qualified as controlling persons and that Plaintiffs had sufficiently plead, both on a theory of direct liability for their statements and on a "group published information" theory, the collective liability of the individual Defendants for the false statements of the company.

Plaintiffs are an uncertified class composed of all individuals who purchased or otherwise acquired Secure's common stock during the class period of November 10, 1998 through March 31, 1999. Plaintiffs contend that, motivated by a "highly unusual compensation scheme" that rewarded short-term increases in the company's stock price and through "hype and false financials," Defendants violated §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b-5. See FAC ¶ 2.

Plaintiffs allege that Defendants illegally caused the stock price to rise by improperly and prematurely recognizing revenue in violation of Generally Accepted Accounting Principles (GAAP) on an uncompleted contract with the National Security Agency (NSA), thereby overstating Secure's 4Q98 financial results, and by making other false representations through interviews, press releases, statements to analysts and investors, and an SEC filing that Secure was solid financially and that demand for Secure's products was high and growing. Plaintiffs allege that by elevating Secure's stock price above certain levels in the fourth quarter of 1998 (4Q98) and the first quarter of 1999 (1Q99), Defendants reaped large financial benefits, both through accelerated vesting of stock options and through sales of recently acquired shares. See FAC ¶ 6, 26.

Plaintiffs assert that, in reality, Secure's business was weakening by the 3Q98. See FAC ¶¶ 30, 45-46, 48-49, 53. Plaintiffs allege that Defendants knew Secure's business was weakening and misrepresented Secure's financial condition during the 4Q98 and 1Q99 in order to benefit not only from the sale of stock during those periods, but also from the increased vesting that would occur if certain stock prices were achieved. See FAC ¶¶ 26, 28, 118. Plaintiffs assert that these false and misleading statements caused Secure's stock to rise through the class period and then collapse when the true nature of Secure's financial status was publicly revealed. See FAC ¶¶ 12, 27, 87-90.

In an order issued on June 14, 2000, this Court dismissed Plaintiffs' CCC, with leave to amend. The Court found that Plaintiffs had failed to plead their allegations of false and misleading statements with the particularity required by the Private Securities Litigation Reform Act of 1995 (PSLRA), which amended the Securities Exchange Act of 1934, 15 U.S.C. § 78a-78111. The Court found that when pleading facts on information and belief Plaintiffs had failed to plead all relevant facts on which that belief was founded. The Court did not determine whether Plaintiffs had plead scienter with the requisite particularity because that element was not ripe for determination due to Plaintiffs' failure to plead their allegations of false and misleading statements with particularity.

Defendants now argue that: (1) the FAC fails to allege with particularity specific facts demonstrating that statements were false when made, (2) the FAC fails to allege with particularity specific facts giving rise to a "`strong inference' that statements were made with actual knowledge that they were false;" (3) the FAC fails to allege specific facts showing Defendants' liability for third-party statements; (4) the FAC fails to provide sufficient support for allegations made on information and belief; (5) certain statements are immune from liability under the PSLRA's "safe harbor" for forward-looking statements and the bespeaks caution doctrine; and (6) the FAC fails to allege any basis of liability for Messrs. Regester, Taggart, and Smith and Ms. Hughes. See Defendant's Motion at 1.

DISCUSSION

I. Legal Standard

A. Rule 12(b)(6)

A motion to dismiss for failure to state a claim will be denied unless it appears that the plaintiff can prove no set of facts which would entitle it to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Fidelity Fin. Corp. v. Federal Home Loan Bank of San Francisco, 792 F.2d 1432, 1435 (9th Cir. 1986). Dismissal of a complaint can be based on either the lack of a cognizable legal theory or the lack of sufficient facts alleged under a cognizable legal theory. See Balistreri v. Pacifica Police Dep't. 901 F.2d 696, 699 (9th Cir. 1988).

B. Securities Fraud

In 1995, Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA), Pub.L. No. 104-67, which amends the Securities Exchange Act of 1934, 15 U.S.C. § 78a-78111. Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful for any person to "use or employ, in connection with the purchase or sale of any security . . . 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); see also 17 C.F.R. ¶ 240.10b-5 (Rule 10b-5). To state a claim under § 10(b), a plaintiff must allege: "(1) a misrepresentation or omission of material fact, (2) reliance, (3) scienter, and (4) ...


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