The opinion of the court was delivered by: PHYLLIS HAMILTON, District Judge.
ORDER RE MOTIONS TO DISMISS
Before the court are defendants' motions to dismiss the consolidated
shareholder derivative complaint pursuant to Federal Rule of Civil
Procedure 12(b)(6) for failure to state a claim, and alternative motions
to stay the action in favor of an action presently pending in the
Superior Court of California, County of Santa Clara. Having read the
parties' papers and carefully considered their arguments and the relevant
legal authority, and good cause appearing, the court hereby rules as
This is a shareholders' derivative action suit brought for the benefit
of nominal defendant Sagent Technology, Inc. ("Sagent") against certain
of Sagent's current and former directors and officers ("the individual
defendants"). Plaintiffs allege insider trading and accounting
irregularities, which they claim necessitated a restatement of revenues
for the period in which the stock sales occurred. Plaintiffs allege
violations of California Corporations Code § 25402 and common law
claims of breach of fiduciary duty and waste of corporate assets.
Jurisdiction is based on 28 U.S.C. § 1332, as plaintiffs and
defendants are alleged to be citizens of different states and the matter
in controversy exceeds $75,000.
Sagent, which was founded in 1995 and went public in April 1999,
creates and sells business software designed to help businesses collect,
analyze, understand, and act on customer and operational information.
Sagent's revenue is derived from license fees for software products and
fees for services relating to the software products, including
maintenance, consulting, training, technical support, and software and
data updates. Sagent sells its products both directly to customers and
indirectly through enterprise software vendors (who integrate Sagent's
products with their own applications) and resellers and distributors (who
sell Sagent's products to end-user customers). Sagent is a Delaware
corporation, with its principal executive offices in California.
Plaintiffs allege claims against thirteen of Sagent's current and
former officers and directors ("the individual defendants"):
Defendant Shanda Bahles ("Bahles") was a director of Sagent from
May 1995 until some time in 2001 or early 2002. Bahles sold 999,762
shares of Sagent common stock, for $15,011,663, between October 26,
1999, and November 3, 1999, and 309 shares of Sagent stock, for
$6,650,058, between January 24, 2000, and February 9, 2000.
Defendant John Zicker ("Zicker") has been a director of Sagent
since June 1995, and served as the company's Executive Vice President of
Technology and Chief Technology Officer from June 1995 to September
2000. Zicker sold 80,000 shares of Sagent common stock, for $1,385,950,
between October 26, 1999, and November 5, 1999.
Defendant Richard Shapero ("Shapero") was a director of Sagent
from May 1995 to September 2000. Shapero sold 34,172 shares of Sagent
common stock, for $587,080, on November 2, 1999.
Defendant Thomas M. Lounibos ("Lounibos") served as Sagent's
Executive Vice President of Sales and Marketing from 1998 to March 2000.
Plaintiffs allege that Lounibos sold 286,097 shares of Sagent common
stock, for $3,950,080, between October 25, 1999, and November 1, 1999,
and 31,000 shares, for $575,930, between February 18, 2000, and February
Defendant W. Virginia Walker ("Walker") served as Sagent's
Executive Vice President of Finance and Administration and Chief
Financial Officer from 1998 to May 2000. Walker sold 18,372 shares of
Sagent common stock, for $250,642, between October 26, 1999, and November
Defendant Kenneth C. Gardner ("Gardner") was a director of
Sagent from June 1995 to January 2002, serving as President and Chief
Executive Officer from June 1995 to August 2000, and Chairman of the
Board and Chief Technology Officer from August 2000 to January 2002.
Defendant Ben C. Barnes ("Barnes") was a director and served as
Sagent's President and Chief Executive Officer from August 2000 to July
Defendant Andre Boisvert ("Boisvert") has served as a director
since April 2001, Chairman of the Board since January 2002, and Chief
Executive Officer since July 2002.
Defendant Klaus S. Luft ("Luft") served as a director from April
1999 until late 2001 or early 2002.
Defendant Ali Jenab ("Jenab") has served as a director since
Defendant Keith Maib ("Maib") has served as a director since
Defendant Irving H. Lichtenwald ("Lichtenwald") has served as a
director since September 2001.
Defendant David Eliff ("Eliff") served as Sagent's Executive
Vice President of Finance and Administration and Chief Financial Officer
from May 2000 to November 2001.
The facts underlying the claims in this action are substantially
similar to those alleged in two securities fraud class actions filed in
the Northern District of California In re Sagent Technology,
Inc., Securities Litigation, case No. C-01-20081 JW, filed October 20,
2000 ("Sagent I"), and In re Sagent Technology, Inc., Securities
Litigation, case No. C-01-4637 PJH, filed November 30, 2001 ("Sagent
II"), both alleging claims under the 1934 Securities Exchange Act and the
Private Securities Litigation Reform Act.
In Sagent I, the plaintiffs alleged claims under §§ 10(b) and 20(a)
of the 1934 Act, and Rule 10b-5, against Sagent and other defendants,
including Bahles, Zicker, Shapero, Lounibos, Walker, Gardner, Luft, Maib,
Gardner, and Sagent's venture capitalists. Plaintiffs alleged that during
the period between October 21, 1999, and April 18, 2000, defendants
violated Generally Acceptable Accounting Principles ("GAAP")*fn1
by improperly recognizing millions of dollars of royalty revenue on
software licenses that did not meet the revenue recognition criteria set
forth in SOP 97-2,*fn2 and made misleading public statements regarding
various licensing agreements. Plaintiffs asserted that defendants
committed these violations in order to inflate the value of Sagent's
stock, until Bahles, Zicker, Shapero, Lounibos, and Walker were able to
sell at least $8 million of their own Sagent stock. Sagent I was
dismissed in April 2003, pursuant to the terms of a court-approved final
In Sagent II, plaintiffs alleged claims under §§ 10(b) and 20(a),
and Rule 10b-5, against Sagent, its current CEO, its former CFO, and one
of its former salesmen, based on Sagent's announcement in November 2001
that it had discovered that sales orders totaling $5 million had been
forged by the former salesman in 2001, and that it would be necessary to
restate the company's revenues for the first three quarters of 2001. The
proposed class period in Sagent II extended from May 11, 2001, to November
28, 2001. In September 2002, the court dismissed the claims against
Sagent, its CEO, and its former CFO, on the ground that plaintiffs had
failed to plead facts constituting strong evidence of deliberately
reckless or conscious misconduct, as required under In re Silicon
Graphics, Inc., Securities Litigation, 183 F.3d 970 (9th Cir. 1999). The
court granted leave to amend, but plaintiffs opted not to file an amended
complaint. Plaintiffs have filed a motion for default judgment against
the defendant salesman, who was indicted for fraud, pleaded guilty, and
was sentenced, and is presently in federal custody.
In the present action, plaintiffs seek recovery, on behalf of Sagent,
against Sagent's directors and former officers and directors for breaches
of fiduciary duty. As in Sagent I, plaintiffs assert that the individual
defendants caused Sagent to violate GAAP by improperly recognizing
revenue in the third and fourth quarters of 1999 and the first quarter of
2000 specifically, that defendants violated SOP 97-2 by
recognizing revenue on software licenses before the customization,
production, and delivery of the software had been completed.*fn3 As in
Sagent II, plaintiffs allege improper revenue recognition in connection
with the forged sales during the first three quarters of 2001.
Plaintiffs claim that the individual defendants, and in particular the
defendants who were members of Sagent's Audit Committee (Bahles,
Shapero, Boisvert, and Maib) failed to establish and maintain adequate
internal accounting controls and to ensure that the company's financial
statements were based on accurate information,
in violation of SEC rules, GAAP, and Sagent's publicly-filed Audit
Committee Charter. Plaintiffs also assert that the individual defendants
were aware that Sagent had improperly recognized revenue, and that they
caused Sagent to publicly disseminate inaccurate information regarding
the company's financial condition, so that the company's common stock
would trade at inflated prices.
Finally, plaintiffs allege that during the period between late October
1999 and late February 2000, Bahles, Zicker, Shapero, Lounibos, and
Walker ("the selling defendants") used nonpublic information regarding
Sagent's true financial condition to profit from the sale of large
amounts of Sagent stock, and that the individual defendants aided and
abetted the selling defendants' use of this nonpublic information to sell
their personal holdings of Sagent stock at inflated prices.*fn4
Plaintiffs assert five causes of action.*fn5 Against the selling
defendants, plaintiffs allege a claim of insider trading, in violation of
California Corporations Code § 25402, and a common law claim of
breach of fiduciary duty for insider trading. Against all the individual
defendants, plaintiffs allege a claim of breach of fiduciary duty for
disseminating misleading information to the public; a claim of breach of
fiduciary duty for failure to maintain accounting controls; and a claim
of waste of corporate assets.
Defendants now seek an order dismissing all causes of action for
failure to state a claim. Alternatively, they seek an order staying the
case pending resolution of a shareholder derivative suit based on
allegations similar to the allegations in this case, and which is
presently pending in the Superior Court of California, County of Santa
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 the
plaintiff can prove no set of facts in support of the claim which would
entitle the plaintiff to relief. 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. Gen. Instrument Corp.,
69 F.3d 381, 385 (9th Cir. 1995). 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). Conclusory
allegations of law and unwarranted inferences, however, are insufficient
to defeat a motion to dismiss. Associated Gen. Contractors v. Metro.
Water Dist. of So. Cal., 159 F.3d 1178, 1181 (9th Cir. 1998). In
dismissing for failure to state a claim, "a district court should ...