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IN RE SALESFORCE.COM SECURITIES LITIGATION

December 22, 2005.

In re: SALESFORCE.COM SECURITIES LITIGATION.


The opinion of the court was delivered by: JEFFREY WHITE, District Judge

ORDER GRANTING MOTION TO DISMISS

Now before the Court is the motion filed by Defendants salesforce.com, inc. (the "Company"), Marc R. Benioff and Steve Cakebread (collectively, "Defendants") to dismiss the Corrected and Superseding First Amended Class Action Complaint (the "Complaint"). Having carefully reviewed the parties' papers and considered their arguments and the relevant legal authority, and good cause appearing, the Court hereby GRANTS Defendants' motion to dismiss without leave to amend.

BACKGROUND

  In this federal securities class action, Plaintiff Chuo Zhu, representing a purported class of purchasers of the common stock of the Company between June 23, 2004 and July 21, 2004, alleges that the Company's failure to disclose an internal earnings forecast for fiscal year 2005 (ending January 31, 2005), developed prior to the start of the fiscal year and predicting diluted earnings per share ("EPS") of breakeven 3 cents, constitutes a violation of the Securities Exchange Act of 1934. Founded in 1999, the Company provides on-demand, web-based information management, or customer relationship management ("CRM") solutions, to companies of all sizes on a subscription basis. (Complaint at ¶¶ 2, 35.) The Company went public in a highly publicized initial public offering ("IPO") on June 23, 2004. (Id. at ¶¶ 6, 57.)

  In advance of the IPO, the Company filed with the SEC a Form S-1 Registration Statement and amendments which disclosed the estimated diluted earnings per share by fiscal year. (See Complaint at ¶ 60; Main Decl., Ex. A at 23, F-4, F-12.) The Registration Statement also disclosed that fiscal year 2004 earnings benefitted from an extraordinary, non-recurring item, the abandonment of office lease space in San Francisco. (See Declaration of Claudia N. Main ("Main Decl."), Ex. A at 27.) When that non-recurring item is excluded from the calculation, fiscal year 2004 earnings would have been 1 cent.

  The IPO price of the Company's stock was $11.00. (See Complaint at ¶ 57.) After the passage of nearly one month, on July 20, 2004, the stock price was $16.06. (See id. at ¶ 15.) On July 21, 2004, Defendant Cakebread provided securities analysts with internal guidance of the fiscal years 2005 for the first time. The internal guidance indicated that the Company had predicted a fiscal 2005 net income of breakeven to 3 cents a share and revenue of $160 to $165 million. (See id. at ¶¶ 10, 78, 80, 81.) Cakebread also indicated that the Company had been using the guidance internally since February 1, 2004. (See id. at ¶¶ 10, 79, 81.) The next day, the Company's stock price closed at $11.42, reflecting a 29% decline from the previous days' closing price of $16.06. (See id. at ¶¶ 15, 83.)

  On February 17, 2005, the Company announced its actual results for fiscal year 2005. The revenues for the year were $176 million, 84% higher than fiscal year 2004 revenues. (See Main Decl., Exs. B, C at 19, 51.) Diluted earnings per share were 7 cents, or 75% higher than the fiscal year 2004 diluted earnings. (See id.)

  The Court will address other specific facts relevant to this motion as they are pertinent to the analysis. ANALYSIS

  Rule 10b-5 makes it unlawful for any person to use interstate commerce:
(a) To employ any device, scheme, or artifice to defraud;
(b) To make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or;
(c) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.

  To plead a claim under section 10(b) and Rule 10b-5, a plaintiff must allege (1) a misrepresentation or omission, (2) of material fact, (3) made with scienter, (4) on which the plaintiff justifiably relied, (5) that proximately caused the alleged loss. Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 1999). Additionally, as in all actions alleging fraud, Plaintiff must state with particularity the circumstances constituting fraud. Greebel v. FTP Software, Inc., 194 F.3d 185, 193 (9th Cir. 1999); Fed.R.Civ.P. 9(b).

  Plaintiff also claims that individual defendants, Chief Executive Officer Marc R. Benioff and Chief Financial Officer Steve Cakebread, are liable pursuant to Section 20(a) of the Securities Exchange Act, which provides for derivative liability for those who control others found to be primarily liable under the provisions of that act. In re Ramp Networks, Inc. Sec. Lit., 201 F. Supp. 2d 1051, 1063 (N.D. Cal. 2002). Where a plaintiff asserts a Section 20(a) claim based on an underlying violation of section 10(b), the pleading requirements for both violations are the same. Id.

  A. Applicable Pleading Standards.

  1. Rule 12(b)(6).

  A motion to dismiss is proper under Rule 12(b)(6) where the pleadings fail to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). A motion to dismiss should not be granted unless it appears beyond a doubt that a plaintiff can show no set of facts supporting his or her claim. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also De La ...


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