The opinion of the court was delivered by: Napoleon A. Jones, Jr., United States District Judge
ORDER GRANTING MOTION TO DISMISS [Doc. No. 66]
ORDER DENYING MOTION TO MOTION TO STRIKE [Doc. No 71]
This matter comes before the court on defendants' motion to dismiss and defendants' motion to strike. For the reasons stated herein, defendants' motion to dismiss is granted, and the motion to strike is denied as moot.
Plaintiffs represent a class of all purchasers of common stock of JNI Corporation ("JNI") between July 13, 2000 and March 28, 2001 (the "class period"). First Am. Consolidated Compl. ("FACC") ¶ 1. Plaintiffs allege that JNI's officers and directors conspired to artificially inflate the price of JNI stock during the class period so they could sell off their personal holdings of JNI stock at inflated prices.
JNI designs and supplies Fibre Channel hardware and software products that connect computer sewers and data storage devices to form storage area networks ("SANs"). Id. ¶ 2. Fibre Channel technology improves data communication speeds, connectivity, distance between connections, reliability and accessibility. Id. ¶ 2. JNI markets a broad range of Fibre Channel host bus adapters and software products that facilitate advanced SAN device integration and management. Id.
JNI had its initial public offering ("IPO") in October 1999, at which time its stock was priced at $19 per share. Id. ¶ 32. Following the IPO, sixty percent of JNI's stock was held by a parent company called Jaymark, Inc. ("Jaymark"). Id. Defendant Eric P. Wenaas was CEO and President of Jaymark. Id. ¶ 23(e).
By summer of 2000, JNI's stock was trading for about $25 per share, down from a prior range of $80-$100 per share. Id. ¶¶ 3, 32. Around this time, plaintiffs allege defendants "devised a scheme to artificially inflate JNI's stock price and distribute their shares in a Secondary Offering." Id. ¶¶ 3, 29. On July 24, 2000, Jaymark reorganized and distributed all its JNI stock to Jaymark's shareholders, including defendants Wenaas, Terry M. Flanagan, Thomas K. Gregory, Charles McKnett, and John Stiska. Id. ¶¶ 3, 37. Pursuant to lock-up agreements, defendants were limited in the amount of JNI stock they could sell for 180-360 days following Jaymark's reorganization, except in the case of a public offering. Id. ¶¶ 3, 32, 37. In the weeks prior to Jaymark's reorganization, plaintiffs claim defendants made false and misleading statements in the form of press releases and statements to analysts. Id. ¶¶ 33-36, 39.
On October 19, 2000, JNI issued its Secondary Offering at the price of $74 per share. Id. ¶ 45. The Secondary Offering provided net proceeds of $69 million to JNI and $245 million to Jaymark's shareholders, including $32 million to the individual defendants. Id. ¶ 4. Around the time of the Secondary Offering, plaintiffs claim defendants made a number of false and misleading statements designed to inflate the price of JNI stock. Id. ¶ 3. These statements were made: (1) during a roadshow in early October 2000, prior to the offering; (2) in a press release dated October 16, 2000, in which defendants announced JNI's results for third quarter 2000; (3) during a conference call with analysts and investors on October 16, 2000; and (4) in JNI's prospectus issued on October 20, 2000 in connection with the offering. Id. ¶¶ 3-4, 11, 41-42, 44. As a result of defendants' allegedly false and misleading statements, a number of analysts issued extremely favorable reports on JNI and raised their earning estimates for JNI for the upcoming quarter and fiscal year. Id. ¶ 11. JNI's stock price peaked at $126 per share on November 6, 2000. Id. ¶¶ 16, 51.
After the Secondary Offering and throughout the remainder of the class period, plaintiffs claim defendants continued to make false and misleading statements about JNI's performance and prospects. In November 2000, after unfavorable reports about JNI appeared in the media and JNI's stock's dropped to $63 per share, JNI made statements in a press release and during a conference call which plaintiffs claim were false or misleading. Id. ¶¶ 12, 53-60. On December 11, 2000, JNI announced a lower-than-expected range of growth for fourth quarter 2000, causing JNI's stock to drop to $34-3/4 per share. Id. ¶ 13. Plaintiffs claim this announcement was misleading because JNI failed to disclose that results for fiscal year 2001 would also be "significantly lower" than expected. Id. ¶ 14. On January 24, 2001, JNI reported its fourth quarter 2000 revenues and lowered its projections for fiscal year 2001, causing JNI's stock price to drop further to $20.06 per share. Id. ¶ 15. Plaintiffs claim this announcement was misleading because defendants projected a strong second half for fiscal year 2001 and used accounting manipulations to inflate the reported results. Id. Finally, on March 28, 2001, JNI revised its forecast for first quarter 2001 downward and announced that revenues and earnings per share for fiscal year 2001 would be less than projected. Id. ¶¶ 16, 74. Following this announcement, JNI's stock dropped to $7-3/8 per share, and was still trading at less than $10 per share at the time the complaint was filed. Id. ¶ 16.
In April 2001, six nearly-identical securities fraud actions were filed in this district against JNI and its officers and directors. Defendants answered and moved to dismiss each of the six complaints. In an order dated July 10, 2001, this court removed defendants' motions to dismiss from calendar while plaintiffs' motions to consolidate and appoint lead plaintiffs were pending. See Order of July 10, 2001, Doc. No. 36. The court subsequently consolidated the six related actions, appointed lead plaintiffs, and ordered lead plaintiffs to file an amended consolidated complaint. See Order of Feb. 8, 2002, Doc. No. 53; Order of Feb. 21, 2002, Doc. No. 61.
On March 25, 2002 plaintiffs filed the FACC. Named as defendants are JNI; former President and Chief Executive Officer Terry Flanagan; Chief Financial Officer Gloria Purdy; Chief Operating Officer Thomas Gregory; Chief Technology Officer Charles McKnett; JNI Chairman and Jaymark CEO Eric Wenaas; and JNI director John Stiska. Id. ¶¶ 22-23. The FACC alleges five claims for relief: (1) violation of § 10(b) of the Securities Exchange Act of 1934 ("1934 Act") and Rule 10b-5 against all defendants; (2) violation of § 20(a) of the 1934 Act against Flanagan, Purdy and Wenaas; (3) violation of § 11 of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77k, against JNI, Flanagan, Purdy, Wenaas, and Stiska; (4) violation of § 12(a)(2) of the 1933 Act against all defendants; and (5) violation of § 15 of the 1933 act against Wenaas, Flanagan and Purdy.
On April 29, 2002, defendants filed the present motion to dismiss the FACC for failure to meet the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA). Alternatively, defendants moved to strike the FACC, on the grounds that it asserts unauthorized claims by an unauthorized group of lead plaintiffs.
A motion to dismiss for failure to state a claim tests the legal sufficiency of the complaint. See Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). In ruling on a motion to dismiss, the court must take the complaint's allegations as true and draw all reasonable inferences in plaintiffs' favor. See id. Dismissal is appropriate only if there is no cognizable legal theory or if the complaint fails to allege sufficient facts to support a cognizable legal theory. See id.
Complaints in securities fraud actions, however, are subject to heightened pleading standards under Federal Rule of Civil Procedure 9(b) and the PSLRA. Failure to meet these heightened pleading requirements is cause for dismissal of the complaint. See 15 U.S.C. § 78u-4 (b)(3)(A). Under Rule 9(b), a complaint alleging fraud must state the circumstances constituting the fraud "with particularity." Fed.R.Civ.P. 9(b). This means the complaint must specify the time, place, and content of any false or misleading statements and explain why the statements were false or misleading when made. See Anderson v. Clow (In re Stac Elec. Sec. Litig.), 89 F.3d 1399, 1404 (9th Cir. 1996).
The PSLRA augments Rule 9(b), requiring a securities fraud complaint to "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, [to] state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1); see Desaigoudar v. Meyercord, 223 F.3d 1020, 1022-23 (9th Cir. 2000) (discussing combined requirements of Rule 9(b) and PSLRA); In re Autodesk, Inc. Sec. Litig., 132 F. Supp.2d 883, 839 (N.D. Cal. 2000) (same). Further, where scienter is an element of the claim, the PSLRA requires the complaint to "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). This means that the complaint must allege specific and detailed facts which raise a strong inference that the defendant acted intentionally or with deliberate recklessness. See In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 974-75 (9th Cir. 1999). The court reviews the entire complaint to determine whether the totality of facts and inferences, including inferences unfavorable to the plaintiffs, raise a strong inference of scienter. See Gompper v. VISX Inc., 298 F.3d 893, 896-97 (9th Cir. 2002).
A. Alleged False and Misleading Statements
Plaintiffs allege that sometime in summer of 2000, defendants devised their scheme to artificially inflate JNI's stock and sell their personal holdings at inflated prices in a public offering. Plaintiffs purport to identify several false or misleading statements defendants made in July 2000 in furtherance of this scheme. First, plaintiffs allege that on July 12, 2000, "JNI announced a certification agreement with Compaq, an OEM [original equipment manufacturer], to supply JNI's products to customers." FACC ¶ 33. Second, plaintiffs block quote three paragraphs of a July 17, 2000 press release in which JNI reported "record" results for second quarter 2000 and announced long-term agreements with several OEMs. See id. ¶ 34. Third, plaintiffs block quote two reports from analysts, dated July 18, 2000, which were allegedly based on information provided by defendants Purdy and Flanagan. See id. ¶¶ 35-36. Certain sections of the quoted reports are boldfaced, apparently reflecting plaintiffs' belief that those sections are false or misleading.
Plaintiffs claim these statements were false for two reasons. First, "[a]ccording to former JNI employees, Sun employees were informing JNI employees in the summer of 2000 that demand for JNI's Sun-based products would be declining." Id. ¶ 39(a). Second, "JNI was not making the transition from Sun-based products to PCI products" because "it was having difficulty developing PCI products that would be accepted by the market." Id. ¶ 39(b).
These allegations, however, do not establish that any of the identified statements are false or misleading. Regarding the first statement, none of the facts alleged by plaintiffs contradict JNI's representation that it entered into a certification agreement with Compaq. Moreover, plaintiffs' description of the July 12, 2000 announcement is inadequate under Rule 9(b) and the PSLRA because plaintiffs do not specify where, by whom, or under what circumstances it was made.
As to the remaining statements, the court is left to speculate which portions of the block-quoted passages are alleged to be false or misleading. See Autodesk, 132 F. Supp.2d at 841-42 (criticizing plaintiffs' pleading technique of providing a long list of allegedly false statements, followed by a long list of reasons the statements are false, leaving the court to "match the statements up with the reasons they are false or misleading"). With respect to the July 17, 2000 press release, the court assumes plaintiffs take issue with defendant Flanagan's representations that there was "continued strong demand" for JNI's products and that JNI "dominated" the market. The press release quotes defendant Flanagan as saying that the second quarter results reflect "continued strong demand for [JNI's] Unix and PC suite of products"; that JNI's host bus adapters ("HBAs") "continue to dominate in the Fibre Channel storage area network sector at the high-end of the market"; and that JNI's sales of PCI-based HBAs "validate our position as a dominant supplier in the Solaris and Unix market." Id. ¶ 34.
However, none of the "true facts" alleged by plaintiffs in ¶ 39 demonstrates that this press release was false or misleading. Even if Sun employees were informing JNI employees that demand for JNI's Sun-based products would be declining, plaintiffs do not specify the severity or time frame of the alleged decline. A slight to moderate decline might not necessarily undermine JNI's "dominant" position in the market or the "continued strong demand" for its products. The complaint does not "describe, chart or graph" the alleged decline in demand. See Ronconi v. Larkin, 253 F.3d 423, 431 (9th Cir. 2001). Moreover, the complaint does not allege facts demonstrating that defendants knew of the Sun employees' predictions on the date of the press release,*fn1 or that the predictions of these unidentified Sun employees were so reliable that they should have been credited by the defendants.
Furthermore, plaintiffs' allegation that "JNI was not making the transition from Sun-based products to PCI products" is too vague to demonstrate that the press release was false. The complaint does not explain what it means to "make the transition" to PCI products, nor does it set forth facts corroborating the allegation that JNI "was having difficulty developing PCI products that would be accepted by the market." Cf. Ronconi, 253 F.3d at 434 (general allegations of "problems" and "difficulties" were insufficient to show that defendants' representations of increasing revenue were false). Specifically, plaintiffs do not indicate what about JNI's PCI products made them unacceptable to the market or explain why these vague "difficulties" with the PCI products rendered defendants' statements false.
Finally, regarding the analyst reports, plaintiffs' allegations establish neither the falsity of the reports nor the defendants' liability for those reports. The majority of the block-quoted passages merely report historical facts, such as JNI's past rates of sequential growth, that are not contradicted by plaintiffs' alleged "true facts." See FACC ¶¶ 35-36. Moreover, it is clear from the wording of the highlighted statements that the predictions and estimates are those of the analysts, not the defendants. See, e.g., id. ¶ 35 ("We are raising our revenue and earnings outlook owing to our optimism in JNI . . .") (emphasis added).
An insider defendant can be liable for analysts' reports if the defendant either (1) makes false or misleading statements to analysts "with the intent that the analysts communicate those statements to the market," Cooper v. Pickett, 137 F.3d 616, 624 (9th Cir. 1998); or (2) puts his or her imprimatur on the analysts' statements, Rosenbaum v. Syntex Corp. (In re Syntex Corp. Sec. Litig.), 95 F.3d 922 (9th Cir. 1996). Plaintiffs argue that defendants are liable under the first theory. However, even under the first theory, plaintiffs' allegations fall short of the PSLRA's requirements. Plaintiffs do not identify the substance of the false or misleading statements or plead any corroborating details indicating how, when, and under what circumstances the statements were communicated to the analysts. Cf. In re Secure Computing Corp. Sec. Litig., 184 F. Supp.2d 980, 990 (N.D. Cal. 2001) (plaintiffs adequately pled liability for analyst report under Cooper theory by identifying defendant's false statement to ...