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November 2, 2005.

In re Verisign Corporation Securities Litigation.

The opinion of the court was delivered by: JAMES WARE, District Judge

Plaintiffs initiated this securities class action lawsuit on behalf of themselves and of a proposed class of persons and entities that acquired VeriSign Corporation's ("VeriSign") common stock, against VeriSign and four of its executives (collectively, the "Defendants"), for violations of sections 11 and 15 of the Securities Act of 1933 ("Securities Act"), 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Securities and Exchange Commission Rule 10b-5. Presently before this Court are Defendants' Motion for Judgment on the Pleadings, Motion to Strike, and Motion to Shorten the Class Period. The basis for these motions rests in the recent Supreme Court decision in Dura Pharms., Inc. v. Broudo, 125 S.Ct. 1627 (2005). The motions were noticed for hearing on September 26, 2005. The Court finds it appropriate to take the motions under submission for decision without a hearing, pursuant to Civil Local Rule 7.1(b). For the reasons set forth below, this Court GRANTS in Part and DENIES in Part Defendants' motion for judgment on the pleadings, and denies without prejudice the motions to strike and to shorten the class period.


  Plaintiffs, on behalf of themselves and a proposed class of persons and entities that purchased or acquired Verisign Corporation's stock, filed an action against Verisign Corporation and four of its officers and directors, for violations of the Securities Act, the Securities Exchange Act, and Rule 10b-5. VeriSign is a leader in providing Internet "trust services" — services that verify and authenticate information transmitted over the Internet. Such services enable consumers to safely transmit personal financial information (such as credit card numbers) over the Internet to complete commercial transactions.

  On March 7, 2000, VeriSign announced that it would issue $21 billion in new stock to acquire Network Solutions, Inc. ("Network Solutions") and turn it into a wholly-owned subsidiary. Network Solutions operated the official registry of Internet domain names, such that anyone who wanted to register a website under the .com, .net, or .org domains had to register through Network Solutions. Network Solutions charged each website listed on its registry at least $6 per year. Although some industry analysts supported this acquisition, others questioned whether VeriSign was paying too much. This skepticism allegedly placed pressure on VeriSign "to show that it was growing at a rate greater than could have been realized by either VeriSign or Network Solutions as a stand-alone company." Consolidated Second Amended Complaint at 2:3-5.

  Not long after VeriSign acquired Network Solutions, the Internet boom "went bust." VeriSign's business was hit and the demand for Internet "trust services" and for new Internet domain names declined. VeriSign's stock price fell from $196 per share (on the day it acquired Network Solutions) to $75 per share (on January 24, 2001, the day before the Class Period).

  Thereafter, Defendants allegedly employed "an assortment of schemes, artifices, and devices to mislead investors about both the amount and source of revenues earned by [VeriSign]." Consolidated Second Amended Complaint at 2:19-20. In particular, Plaintiffs allege that Defendants artificially inflated VeriSign's earnings — and stock price — via improper reporting and accounting practices. For example, Plaintiffs allege that Defendants inflated VeriSign's earnings by improperly reporting revenue generated from "round trip" transactions. "Round trip" transactions are transactions wherein VeriSign would invest cash in small, private, start-up businesses ("affiliates") that otherwise could not afford VeriSign's services. In exchange for VeriSign's investment, the affiliates would purchase VeriSign's products/services. VeriSign, in turn, would report these purchases as revenue. Plaintiffs also allege that Defendants artificially inflated VeriSign's earnings by improperly accounting for VeriSign's investments in affiliates. Consolidated Second Amended Complaint at 2,3. VeriSign used an accounting method known as the "cost method" to account for its investments in its affiliates. The "cost method" permitted VeriSign to report at least $12 million in revenues on its financial statements during the Class Period. Id. However, Plaintiffs allege that the "equity method" — not the "cost method" — was the proper method of accounting for VeriSign's investments in affiliates. Id. According to Plaintiffs, the "equity method" is proper when an investor exerts "significant influence" over its investments. Because Plaintiffs claim that VeriSign exerted "significant influence" over its affiliates, Plaintiffs claim that the "equity method" was proper. Id. The "equity method" would not have permitted VeriSign to report any of the revenues received from its affiliates. Plaintiffs allege even further that Defendants artificially inflated VeriSign's earnings by improperly encouraging VeriSign's sales force to engage in a process known as "scrubbing." Consolidated Second Amended Complaint at 4. "Scrubbing" is a method of double-counting: salespersons in one division would report their own sales and the sales of other salespersons in other departments, as if they were their own. Id.

  Plaintiffs claim that these practices and others led VeriSign to issue materially false and misleading statements about VeriSign's financial status. Defendants allegedly knew that its business was flagging, yet it continued to artificially inflate VeriSign's revenues. Plaintiffs contend that they relied upon these misrepresentations to their detriment.

  Currently before this Court is Defendants' Motion for Judgment on the Pleadings, Motion to Strike, and Motion to Shorten the Class Period. Defendants contend that Plaintiffs have not met their burden of adequately pleading loss causation, as set forth by the Supreme Court in the recent Dura Pharm Inc., decision. Dura Pharm., Inc. v. Broudo, 125 S.Ct. 1627 (U.S. 2005). III. STANDARDS

  In ruling on a motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c), the Court applies the same standard as ruling on a motion to dismiss pursuant to Rule 12(b)(6). See 5C CHARLES A. WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 1368 (2005). Under Rule 12(c), after the pleadings are closed, but within such time as not to delay the trial, any party may move for judgment on the pleadings. Fed.R.Civ.Pro. 12(c). In ruling on a motion to dismiss, the court must accept as true all allegations of material fact and must construe said allegations in the light most favorable to the non-moving party. Western Reserve Oil & Gas Co. v. New, 765 F.2d 1428, 1430 (9th Cir. 1985). Any existing ambiguities must be resolved in favor of the pleading. Walling v. Beverly Enters., 476 F.2d 393, 396 (9th Cir. 1973).

  A complaint may be dismissed as a matter of law for two reasons: (1) lack of a cognizable legal theory or (2) insufficient facts stated under a cognizable theory. Moran, supra at 893; 2A J. Moore, Moore's Federal Practice ¶ 12.08 at 2271 (2d ed. 1982); Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984). In order to grant a motion to dismiss, it must appear to a certainty that a plaintiff would not be entitled to relief under any set of facts which could be proved. Rothman v. Vedder Park Management, 912 F.2d 315, 316 (1990).


  A. Loss Causation Under Dura

  Section 10b of the Securities Exchange Act of 1934 forbids (1) the "use or employment" of any "deceptive device," (2) "in connection with the purchase or sale of any security," and (3) "in contravention of" Securities and Exchange Commission "rules and regulations." 15 U.S.C. § 78j(b). Rule 10b-5 forbids the making of any "untrue statement of material fact," or the omission of any material fact "necessary in order to make the statements made . . . not misleading." 17 C.F.R. § 240. 10b-5(b). Congress imposed additional statutory requirements on such a private action, when it passed into law, the Private Securities Litigation Reform Act (" PSLRA"). 15 U.S.C. § 78u-4(b) (1)-(2). Under the PSLRA, a plaintiff must (1) specify "each statement alleged to have been misleading and the reason why the statement is misleading," and (2) allege "facts giving rise to a strong inference that the Defendant acted with the required state of mind." Id. A plaintiff alleging fraud is also required to show loss causation, i.e., the plaintiff must prove that defendants' securities fraud caused economic loss. Id.

  The Supreme Court, in a recent decision, clarified this loss causation pleading and proof requirement for securities fraud cases. Dura Pharm., Inc. v. Broudo, 125 S.Ct. 1627 (U.S. 2005). Loss causation, as defined by the Supreme Court, is the "causal connection between the material misrepresentation and the loss." Id. at 1631. The Court, in Dura, held that a plaintiff could not satisfy loss causation merely by alleging (and later establishing) that the price of the securities on the date of the purchase was inflated because of misrepresentation. Id. at 1627. In Dura, plaintiffs were a class of individuals who purchased stock in Dura Pharmaceuticals on the public market during the class period. Plaintiffs alleged that the company made false statements concerning its profits and its prospects for future approval by the FDA of its products before and during the purchase period. Id. at 1630. However, on the last day of the purchase period, Dura Pharmaceuticals announced that its earnings would be lower than previously expected, principally due to slow drug sales. Id. The following day, the company's shares lost almost half their value, falling from $39 per share to $21 per share. Id. Subsequently, when Dura Pharmaceuticals announced that the FDA would not approve its products, the company's shares temporarily fell but almost fully recovered within one week. Id. With respect to economic loss, the complaint alleged that "[i]n reliance on the integrity of the market, [the plaintiffs] . . . paid artificially inflated prices for Dura securities" and the "plaintiffs suffered `damage[s]' thereby." Id. In reversing the Ninth Circuit's jurisprudence on loss causation, the Dura Court stated that "an inflated purchase price will not itself constitute or proximately cause the relevant economic loss" because the injury does not necessarily occur at the time of the purchase. Id. at 1631-32. For instance, where plaintiffs sold their stock immediately after purchasing it at an inflated price, before the truth was disclosed to the market, the plaintiffs may have suffered no economic loss at all. Id. at 1631. In concluding that plaintiffs did not adequately plead loss causation, the Supreme Court held that, in light of the numerous factors affecting share price an inflated purchase price might suggest that the misrepresentation "touches upon" a later economic loss, but could not be held to have "caused" the economic loss. Id. at 1632. Although the Supreme Court also noted that its holding did not affect the applicability of Fed.R.Civ.P. 8(a)(2) to loss causation (i.e., its holding did not create a heightened pleading standard for loss causation), the mere allegation that plaintiffs' class purchased their shares at an ...

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