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IN RE COPPER MOUNTAIN SECURITIES LITIGATION

March 30, 2004.

IN RE COPPER MOUNTAIN SECURITIES LITIGATION


The opinion of the court was delivered by: VAUGHN WALKER, District Judge

ORDER

It is well-known that the Private Securities Litigation Reform Act (PSLRA) and FRCP 9(b) impose a particularity requirement in the allegation of securities fraud. This is especially important in the case of a complaint alleging open market fraud or fraud on the market, such as the complaint at bar.

The starting point for the particularity analysis is not the allegedly false or misleading statements of the defendants, but the truth that emerges from the market. An open market trades on different points of view of an issuer's prospects. If all investors thought the same things, there would be no trading except that prompted by the need of investors to re-balance their portfolios among investment alternatives (i e, cash versus bonds, stocks versus cash, etc). what matters in an open market case is the total mix of Page 2 information in the market and whether that mix has been altered in some significant way to create a very widely, indeed essentially universal, but wrong view of the value of the security at issue. It is the "truth" that reveals the "error" of the market. The disclosure of this "truth" avulsively changes the price of the security. But disclosure of a market "error" does not make out a case of "fraud on the market." Starting with the "truth," the complaint must allege facts to show that the previously settled but false investor expectations can be laid at the feet of defendants. This may seem simple, although it is not easy to do. A complaint satisfying the particularity requirement does not require rococo. factual detail, but it does require specifics. So a plaintiff seeking to allege open market securities fraud does well to begin the analysis with the "truth," stack it up against what preceded it and then see if acts, omissions or statements of defendants can plausibly be said to be responsible for the "truth" not emerging earlier when plaintiffs traded their securities.

  Generally, open market fraud complaints fail to satisfy the required pleading standard in one of several different ways. Most often plaintiffs cannot identify a false statement of defendant that might account for causing a security issue's price to be distorted. Even if a statement that turns out to be false can be identified, it is usually so laden with cautionary language as to be unactionable as a practical matter. In the more common omissions case, plaintiff may be unable to find a ground upon which to allege that defendant knew the omitted fact Page 3 or had a duty to disclose it. This complaint illustrates these various shortcomings.

  Defendants Copper Mountain Networks, Inc. (CM), Richard Gilbert (Gilbert) and John Creelman (Creelman) move to dismiss plaintiff Quinn Barton's (Barton) consolidated class action complaint in this securities class action litigation. Doc # 85. The court finds that: (1) the allegations in Barton's complaint are not pled with the requisite degree of particularity; (2) the allegations in Barton's complaint are insufficient to support a strong inference of scienter; and (3) many of the statements upon which Barton premises liability are immunized under the PSLRA's safe harbor provision for forward-looking statements. Accordingly, the court GRANTS defendants' motion to dismiss the complaint.

  I

  The court discussed the procedural history of this case in great detail in its previous order dated February 10, 2004 (DOC # 131), and need not repeat that history here. The following facts come from plaintiffs' consolidated complaint (CC; Doc # 80). Plaintiff Barton is a CM stockholder who purchased 1000 shares of CM stock at $68 per share on August 18, 2000. CC at 3 ¶ 6, Attach A. Defendant CM is a supplier of high-speed Digital Supplier Line (DSL) products. CC at 4 ¶ 12. Defendant Gilbert is president and CEO of CM and has held such position since April 1998. Id. at 4 ¶ 9. Defendant Creelman was Page 4 CM's CFO during the class period, though he resigned this position in March 2001. Id. at 4 ¶ 10. Barton brings suit against the defendants on the basis of allegedly false statements made during the class period from April 19, 2000, to October 17, 2000. See id at 4 ¶ 8. During the class period, CM had approximately 51 million shares of stock outstanding, which traded at a price as high as $125 per share. Id at 4 ¶ 8, 20-21 ¶ 106. After the class period, the stock's value fell to less than $10 per share. Id. at 20 ¶ 105.

  At oral argument, Barton contended that the nubbin of his allegations against defendants regarding false or misleading statements is that, on several occasions during the class period, defendants had announced impressive revenue and earnings per share projections. But on October 17, 2000, defendants announced that CM's revenues and earnings would fall far short of those projections. See CC at 20 ¶ 103. Barton maintains that those revenue and earnings projections during the class period were false when made. Barton also contends that a number of other statements by defendants regarding CM's business prospects were misleading. Barton provides eight reasons why defendants' statements were false or misleading:
1. CM's relationship with Lucent was declining (CC at 12 ¶ 76, 14 ¶ 85 and 21 ¶ 107);
2. Lucent was planning to introduce a competing product — the Stinger — that would have a negative impact on CM's sales and revenue (Id at 14 ¶ 85, 15 ¶ 90);
3. NorthPoint had announced an intention to purchase DSL from Cisco. (Id at 13 ¶ 80, 15 ¶ 90);
4. CM's CLEC customers were not established (Id at 17 ¶ 96);
  5. CM was shipping goods to fewer customers (Id at 13 ¶ 80, 15 ¶ 85 and 21 ¶ 107); Page 5
 
6. CM's CLEC customers were losing market capitalization and informed CM that they would be scaling back orders (Id at 12 ¶¶ 72, 76, 13 ¶ 80, 86 ¶ 85, 15 ¶ 90, 19 ¶ 101, 21 ¶ 107);
7 Sales of DSLAM were declining (Id at 13 ¶ 80, 21 ¶ 107);
8. CM's profit margins were declining (Id at 21-22 ¶ 107).
  Defendants argue that Barton's CC fails to satisfy the heightened pleading standards required in a securities fraud action, based on three alleged defects: (1) Barton has failed to plead fraud with particularity (Mot Dism (Doc # 85) at 3:1-5); (2) Barton fails to set forth a factual basis giving rise to a strong inference of scienter as to any allegedly false statement (id at 3:6-10); (3) many of the allegedly false statements at issue were forward-looking projections or information providing the underlying bases for such projections and were accompanied by safe harbor warnings or protected by the "bespeaks caution" doctrine (id at 3:11-13).

  II

  As a preliminary matter, the court must consider whether to take judicial notice of certain documents attached either to defendants' request for judicial notice (RJN; Doc # 82), the declarations of William E Grauer (Grauer Decls I and II; Docs ## 83, 96) and the declaration of Tony Ramos (Ramos Decl; Doc # 84). Defendants contend that all the documents so attached are the proper subject of judicial notice pursuant to FRE 201.

  Exhibits H through K to the RJN are Form 3s and 4s Page 6 filed with the SEC regarding the stock sales of Gilbert and Creelman, while Exhibits A through G and L to the RJN are other SEC filings. Defendants contend that the court is authorized to take judicial notice of documents filed with the SEC. The court agrees that judicial notice of such documents is proper. See, e g, Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1276 (11th Cir 1999); Allison v. Brooktree Corp., 999 F. Supp. 1342, 1352 n3 (SD Cal 1998). This conclusion is bolstered by the fact that courts are specifically authorized, in connection with a motion to dismiss a securities fraud complaint, to consider documents and filings described in the complaint under the incorporation by reference doctrine. See, e g, Ronconi v. Larkin, 253 F.3d 423, 427 (9th Cir 2001); In re Silicon Graphics Sec Litig, 183 F.3d 970, 986 (9th Cir 1999). Thus, the court takes notice of all the documents attached to the RJN.

  Exhibits C through K to the Ramos Declaration are CM press releases. Such press releases contain "safe harbor" warnings regarding any forward-looking statements in the press releases. Judicial notice of these exhibits is proper for several reasons. First, the court is required to consider "any cautionary statement accompanying [a] forward-looking statement, which [is] not subject to material dispute, cited by the defendant." 15 U.S.C. § 78u-5(e). Second, the court may take judicial notice of information that was publicly available to reasonable investors at the time the defendant made the allegedly false statements. See In re The First Union Corp. Sec Litig, 128 F. Supp. 871, 883 (WDNC 2001). Third, such press Page 7 releases are proper to consider under the incorporation by reference doctrine. Silicon Graphics, 183 F.3d at 986. Exhibits A and B to the Ramos Declaration are transcripts of CM conference calls. Because the transcripts contain safe harbor warnings and because Barton relies on the conference calls in the CC, the transcripts are the proper subject of judicial notice as well. See § 78u-5(e); Silicon Graphics, 183 F.3d at 986. Accordingly, the court takes judicial notice of all the exhibits attached to the Ramos Declaration.

  Exhibits G to the Grauer Declaration I is a printout of CM's stock price for the duration of the class period. Information about the stock price of publicly traded companies the proper subject of judicial notice. Gaonino v. Citizens Utilities Co., 228 F.3d 154, 166 n8 (2d Cir 2000). Exhibit A to the Grauer Declaration I is a copy of the cover page in the first-filed securities fraud suit filed against CM. As it is a record in the court's own file, it is the proper subject of judicial notice. Exhibits E, F, and I to the Grauer Declaration I are a Lucent press release dated September 7, 1999, a Kaufman Bros' analyst report dated October 9, 2000, and an article published in Motleyfool.com dated October 12, 2000. All three documents are relied upon by Barton in his CC and are thus the proper subject of judicial notice. Silicon Graphics, 183 F.3d at 986. The court accordingly takes judicial notice of all the requested documents attached to the Grauer Declaration I.

  Exhibit C to the Grauer Declaration II is a Form 8-K filed by Rhythm with the SEC on August 15, 2001. Judicial Page 8 notice of this document is proper for the same reasons judicial notice of the other SEC filings is proper. Exhibit E to the Grauer Declaration II is a press release from Cisco. Systems dated May 8, 2000. Judicial notice of such a press release, as previously noted, is proper. Accordingly, the court takes judicial notice of Exhibits C and E to the Grauer Declaration II.

  Exhibit D to the Grauer Declaration II is a copy of a Form 4 filed with the SEC by CM. This same form is filed with the RJN as Exhibit I, and Barton disputes the accuracy of RJN Exhibit I in his opposition to defendants' motion, noting that the number of pages was possibly inaccurate. See Opp Mot Dism (Doc # 91) at 14:2 n1. Grauer attests that he obtained a second copy of this form based on Barton's concern and that the document contains the same number of pages as the original Exhibit I. See Grauer Decl II at 2 ¶ 5. Because Grauer has obtained the same form twice, the court accepts that the page number is correct; thus, judicial notice of Exhibit D is proper for the same reasons as it is proper for the other SEC filings.

  III

  A

  The court first considers the proper standard by which to judge the adequacy of a complaint in a securities fraud Page 9 action brought pursuant to Section 10(b) and Rule 10b-5.

  1

  FRCP 12(b)(6) motions to dismiss essentially "test whether a cognizable claim has been pleaded in the complaint." Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir 1988). FRCP 8(a), which states that plaintiff's pleadings must contain "a short and plain statement of the claim showing that the pleader is entitled to relief," provides the standard for judging whether such a cognizable claim exists. Lee v. City of Los Angeles, 250 F.3d 668, 679 (9th Cir. 2001). This standard is a liberal one that does not require plaintiff to set forth all the factual details of his claim; rather, all that the standard requires is that plaintiff give defendant fair notice of the claim and the grounds for making that claim. Leatherman v Tarrant County Narcotics Intell & Coord Unit, 507 U.S. 163, 168 (1993) (citing Conley v. Gibson, 355 U.S. 41, 47 (1957)). To this end, plaintiff's complaint should set forth "either direct or inferential allegations with respect to all the material elements of the claim". Wittstock v. Van Sile, Inc., 330 F.3d 899, 902 (6th Cir 2003).

  Under Rule 12(b)(6), a complaint "should not be dismissed for failure to state a claim unless it appears beyond doubt that plaintiff can prove no set of facts in support of [her] claim which would entitle [her] to relief." Hughes v. Rowe, 449 U.S. 5, 9 (1980) (citing Haines v. Kerner, 404 U.S. 519, Page 10 520 (1972)); see also Conley, 355 US at 45-46. All material allegations in the complaint must be taken as true and construed in the light most favorable to plaintiff. See Silicon Graphics, 183 F.3d at 980 n10. But "the court [is not] required to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir 2001) (citing Clegg v. Cult Awareness Network, 18 F.3d 752, 754-55 (9th Cir 1994)).

  Review of a FRCP 12(b)(6) motion to dismiss is generally limited to the contents of the complaint, and the court may not consider other documents outside the pleadings. Arpin v. Santa Clara Valley Transp Agency, 261 F.3d 912, 925 (9th Cir 2001). The court may, however, consider documents attached to the complaint. Parks School of Business. Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir 1995). If a plaintiff fails to attach to the complaint the documents on which the complaint is based, a defendant may attach such documents to its motion to dismiss for the purpose of showing that the documents do not support plaintiff's claim. In re Autodesk. Inc. Sec Litig. 132 F. Supp.2d 833, 837 (ND Cal 2000) (citing Branch v. Tunnel, 14 F.3d 449, 454 (9th Cir 1994)). This permits the court to consider the full text of a document that the plaintiff's complaint only partially quotes. Autodesk, 132 F. Supp.2d at 838 (citing In re Stac Electronics Sec Litig, 89 F.3d 1399, 1405 n4 (9th Cir. 1996), cert denied, 520 U.S. 1103 (1997)). Additionally, "[t]he court need not * * * accept as true allegations that contradict matters Page 11 properly subject to judicial notice * * *." Sprewell, 266 F.3d at 988 (citing Mullis v. United States Bankr Ct, 828 F.2d 1385, 1388 (9th Cir 1987)).

  2

  In a securities fraud action, a heightened standard of pleading applies. First, a case brought under Section 10(b) and Rule 10b-5 must meet the particularity requirements of FRCP 9(b). Stac Electronics, 89 F.3d at 1404; see also In re GlenFed Inc. Sec Litig, 42 F.3d 1541, 1545 (9th Cir 1994) (en banc). Rule 9(b) requires a plaintiff alleging fraud to "set forth what is false or misleading about [the] statement[] and why it is false." GledFed, 42 F.3d at 1548.

  Second, plaintiff's complaint must satisfy the requirements of the PSLRA. As defendants maintain, Congress in 1995 endeavored to address the problems posed by private securities litigation and attempted to limit the so-called "abuse and misuse" of such litigation so that financial and productivity losses would be minimized. See S Rep No 98, 104th Cong, 1st Sess at 5-9 (1995) (Grauer Decl I, Exh B). The result of Congress' reform efforts was the PSLRA, which imposes several stringent requirements on securities fraud pleadings. The complaint must: (1) "specify each statement alleged to have been misleading[and] the reason or reasons why the statement is misleading * * *" (15 U.S.C. § 78u-4(b)(1)); (2) with respect to any such allegations based upon information and belief, "state Page 12 with particularity all facts on which that belief is formed" (15 U.S.C. § 78u-4(b)(1)); and (3) "with respect to each act or omission * * * state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind" (15 U.S.C. § 17u-4(b)(2)).

  Even if plaintiff meets the three requirements, the PSLRA carves out a safe harbor from liability if the statements at issue were forward-looking and accompanied by meaningful risk warnings. 15 U.S.C. § 78u-5(c); see also Splash I, 2000 US Dist LEXIS 15369 at *16. An analogous doctrine (which predates the enactment of the PSLRA) is the "bespeaks caution" doctrine, which allows a court to rule as a matter of law that defendant's forward-looking statements contained enough cautionary language or risk disclosure to protect against liability. See, e g, Provenz v. Miller, 102 F.3d 1478, 1493 (9th Cir. 1996). If a defendant's statements are immunized under either doctrine, dismissal of the complaint is appropriate. See id; In re Splash Technology Holdings, Inc. Sec Litig, 2000 US Dist LEXIS 15369, *29 (ND Cal) (Splash I).

  B

  The court now turns to whether Barton's CC meets these stringent requirements. Page 13

  Defendants' first argument is that Barton has failed to satisfy the pleading with particularity requirement of Rule 9(b) and the PSLRA. As defendants note, requiring plaintiff to plead all details relating to his allegations of fraud "is the PSLRA's single most important weapon against pleading fraud by hindsight because it forces plaintiff[] to reveal whether [he] base[] [his] allegations on an inference of earlier knowledge drawn from later disclosures or from contemporaneous documents or other facts." In re The Vantive Corp. Sec Litig, 110 F. Supp.2d 1209, 1216 (ND Cal 2000).

  Under the PSLRA, a complaint must specifically allege: (1) each specific false statement; (2) the reasons on which plaintiff bases his belief that the statements were false when made; (3) all facts on which that belief is formed; and (4) specific facts that give rise to a strong inference that defendant acted with scienter, i e, that defendant acted intentionally or with deliberate recklessness. Ronconi, 253 F.3d at 429; § 17u-4(b)(1) & (2). Barton contends that he has satisfied these pleadings requirements because, for each statement, he has specified who made the statement, to whom the statement was made, the dates such statements were made and the reasons such statements were false. Opp Mot Dism at 10:15-11:2 (citing In re Verity, Inc. Sec Litig, 2000 US Dist LEXIS 11720, *7_*8 (ND Cal 2000)). Defendants contend that this is not enough. Page 14

  i

  First, defendants contend that the facts alleged are insufficient to show that defendants' statements were false. As noted above, Barton essentially offers eight reasons why CM's projections regarding its future revenue and potential for revenue growth were false:
1. CM's relationship with Lucent was declining (CC at 12 ¶ 76, 14 ¶ 85 and 21 ¶ 107);
2. Lucent was planning to introduce a competing product — the Stinger — that would have a negative impact on CM's sales and revenue (Id at 14 ¶ 85, 15 ¶ 90);
3. NorthPoint had announced an intention to purchase DSL from Cisco. (Id at 13 ¶ 80, 15 ¶ 90);
4. CM's CLEC customers were not established (Id at 17 ¶ 96);
5. CM was shipping goods to fewer customers (Id at 13 ¶ 80, 15 ¶ 85 and 21 ¶ 107);
6. CM's CLEC customers were losing market capitalization and informed CM that they would be scaling back orders (Id at 12 ¶¶ 72, 76, 13 ¶ 80, 86 ¶ 85, 15 ¶ 90, 19 ¶ 101, 21 ¶ 107);
7. Sales of DSLAM were declining (Id at 13 ¶ 80, 21 ¶ 107);
8. CM's profit margins were declining (Id at 21-22 ¶ 107).
  Defendants contend that the CC does not allege why these facts mask defendants' false, as opposed to merely wrong — that is, incorrect — projections of future events. Defendants contend that Barton does not identify: (1) when any particular customer informed CM that it would begin scaling back; (2) how much any particular customer reduced its orders from CM; (3) the dates when such reductions were announced or actually took place; (4) the amount of business represented by such notifications; (5) when CM began shipping to fewer customers; (6) the identities of the customers to whom CM no longer shipped Page 15 or to whom CM reduced shipments; or (7) when CM's revenues and margins began to decline. Mot Dism at 9:1-9. Defendants also allege that Barton's complaint lacks an explanation regarding why, if true, such facts would have made CM's revenue and growth projections false — in other words, Barton fails to allege any facts explaining why CM could not have achieved such revenue and growth in spite of reduced orders. Id at 9:10-13.

  The court agrees. In Silicon Graphics, the Ninth Circuit suggested that, to plead with sufficient particularity, it is not enough merely to assert the existence of information — rather, the crucial details of the information itself is required. "`Particularity' refers to `the quality or state of being particular,' i e, `dealing with or giving details; detailed; minute; circumstantial' * * * Thus, we read the statutory command that the plaintiff plead all the `facts' with `particularity' to mean that a plaintiff must provide a list of all relevant circumstances in great detail." 183 F.3d at 984, quoting Random House College Dictionary 473 (rev ed 1980). while Barton's allegations indicate that CM's business may have hit some sizeable bumps in the road, the allegations contain little to show that defendants knew of these bumps but did not disclose them. The court finds it difficult to infer that defendants' statements were false when made simply because the projections in those statements did not come completely true. For example, without sufficient detail regarding the amount of reductions in customer orders, it is not possible to know the scope of the impact of such reductions on ...


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