United States District Court, N.D. California
December 28, 2005.
In re SIEBEL SYSTEMS, INC. SECURITIES LITIGATION. This Document Relates To: ALL ACTIONS.
The opinion of the court was delivered by: CHARLES BREYER, District Judge
MEMORANDUM AND ORDER
This is a PSLRA securities fraud class action. The Court
previously dismissed the complaint with leave to amend. Now
pending for decision before the Court is defendants' motion to
dismiss the Second Amended Complaint ("SAC"). After carefully
considering the allegations of the SAC and the parties'
arguments, and having had the benefit of oral argument, the Court
GRANTS defendants' motion to dismiss.
Siebel Systems ("Siebel") provides e Business application
software, primarily focused on the "customer relationship
management" industry. Siebel "was in the business of providing
customers with software technology enabling them to possess up to
the minute `real time' knowledge about their business,
particularly including their deal pipeline and customer
relationships." SAC ¶ 2. "From 1995 through 2000, Siebel was the fastest-growing company
in the history of the software business." Id. ¶ 3. During the
first quarter of 2001, however, an industry downturn caused
Siebel's stock price to plummet. Nonetheless, from April 2001 to
July 20101, Siebel's stock price recorded a 60 percent jump.
Id. ¶ 4. The stock then plummeted again, dropping 76 percent
from July 2001 to October 2001. Id.
Following this steep drop in the stock price, Siebel began
making a series of optimistic statements about Siebel's business,
and, in particular, about its new product, Siebel 7. On July 17,
2002, Siebel disclosed that its second quarter revenues fell by
more than 15 percent and that its earnings per share were
materially short of analysts' expectations. Id. ¶ 20. It also
disclosed that Siebel 7 was not doing as well as expected, and
that Siebel was laying off 15 percent of its workforce.
"Following these disclosures, [Siebel'] common stock dropped 21 %
on a huge volume of over 65 million shares." Id. ¶ 23.
This consolidated securities fraud action was filed a year and
a half after the July 2002 stock drop. The class period is
October 1, 2001 through July 2002. Unlike many PSLRA actions,
plaintiffs do not allege that defendants published false
financial results; instead, plaintiffs maintain that during the
post 9/11 period, defendants painted a falsely positive picture
of Siebel by making materially false statements about the
following: (1) customer satisfaction and loyalty with respect to
Siebel's products and services; (2) the new Siebel 7 product; and
(3) Siebel's 2002 business performance.
The Court dismissed the First Amended Complaint with leave to
amend. Now pending is defendants' motion to dismiss the Second
To state a claim under Section 10(b), plaintiffs must allege:
(1) a misstatement or omission (2) of material fact (3) made with
scienter (4) on which plaintiffs relied and (5) which proximately
caused their injury. See DSAM Global Value Fund v. Altris
Software, 288 F.3d 385, 388 (9th Cir. 2002). Plaintiffs' SAC
must also satisfy the pleading requirements of the PSLRA. "The PSLRA significantly altered pleading requirements in
private securities fraud litigation by requiring that a complaint
`plead with particularity both falsity and scienter.'" Gompper
v. Visx, Inc., 298 F.3d 893, 895 (9th Cir. 2002) (citation
omitted). "A securities fraud complaint must now `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, the
complaint shall state with particularity all facts on which that
belief is formed.'" Id. (quoting 15 U.S.C. 78u-4(b)(1)). To
plead scienter with particularity, "the complaint must `state
with particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind.'" Id.
(quoting 15 U.S.C. 78u-4(b)(2)). In determining whether a
plaintiff has sufficiently pled scienter, a court "must consider
`whether the total of plaintiffs' allegations, even though
individually lacking, are sufficient to create a strong inference
that the defendants acted with deliberate or conscious
recklessness." Nursing Home Pension Fund, Local 144 v. Oracle
Corp., 380 F.3d 1226, 1230 (9th Cir. 2004).
"On a motion to dismiss, the reviewing court must accept
plaintiff's allegations as true and construe them in the light
most favorable to the plaintiff." Gompper, 298 F.3d at 896.
Under the PSLRA, however, "the court ultimately reviews the
complaint in its entirety to determine whether the totality of
facts and inferences demonstrate a strong inference of scienter."
Id. "[W]hen determining whether plaintiffs have shown a strong
inference of scienter, the court must consider all reasonable
inferences to be drawn from the allegations, including inferences
unfavorable to the plaintiffs. District courts should consider
all the allegations in their entirety, together with any
reasonable inferences that can be drawn therefrom, in concluding
whether, on balance, the plaintiffs' complaint gives rise to the
requisite inference of scienter." Id. at 897.
The SAC is 295 paragraphs and 110 pages long. As a result of
the complaint's length, the Court has relied on plaintiffs'
Memorandum in Opposition to identify the relevant allegations.
See Keenan v. Allan, 91 F.3d 1275, 1278 (9th Cir. 1996)
(explaining that a district court may rely on parties and is not
required to "scour the record"). DISCUSSION
Defendants move to dismiss on the ground that plaintiffs have
not pleaded false statements with the required particularity and,
in any event, have not sufficiently pled scienter.
I. False Statements
A. Statements about Siebel 7
Plaintiffs allege that during the class period plaintiffs made
numerous false statements about its new Internet-based software,
Siebel 7. The product was launched in November 2001. Defendants
represented that Siebel 7: (1) sets the standard, ¶ 158; (2) was
a highly accurate sales forecasting tool, ¶ 204; (3) was
exceptionally deep in functionality, ¶ 113; and (4) offered a "a
clear and easy upgrade path" for customers, ¶ 77.
Plaintiffs also contend that defendants made false
representations as to the number of Siebel customers upgrading to
Siebel 7: defendants (1) falsely projected that 90 percent of its
customers would upgrade to Siebel 7 by December 2002, ¶¶ 77, 120;
(2) that Siebel 7 was showing rapid adoption and that its
adoption was then accelerating, ¶ 165; and (3) that Siebel 7 was
exceeding expectations, id.
Plaintiffs claim all of the above statements were false. Siebel
7 was riddled with defects, was not functional, and was not being
rapidly adopted by Siebel's customers; in fact, in July 2002,
Siebel announced that only 20 percent of its customers had
upgraded to Siebel 7, and that same month it also announced the
release of Siebel 7.5, which replaced Siebel 7 in September 2002.
1. Siebel 7 functionality
General expressions of optimism can be actionable under Rule
10b-5. See In re Apple Computer Sec. Litig., 886 F.2d 1109,
1113 (9th Cir. 1989). "A statement of optimism contains at least
three implicit factual assertions: (1) that the statement was
genuinely believed by the person making it; (2) that there was a
reasonable basis for the statement; or (3) that the speaker was
not aware of any undisclosed facts tending to seriously undermine
the accuracy of the statement. Such statements are actionable
under Rule 10b-5 to the extent that one of these implied factual assertions was inaccurate." In re Caere
Corporate Sec. Litig., 837 F.Supp. 1054, 1057-58 (N.D. Cal.
Nonetheless, "[i]n considering whether the market was misled by
a particular statement of optimism, courts should keep in mind
that [p]rofessional investors, and most amateur investors as
well, know how to devalue the optimism of corporate executives,
who have a personal stake in the future success of the company."
Id. at 1058 (internal quotation marks and citations omitted).
Thus, a statement of optimism may simply be too vague to be
actionable. In Caere Corp., for example, the court held that
statements which touted new products as "technological
advancements," called Caere a market leader in its field, and
quoted Caere's Chief Operating Officer as saying that Caere was
"well-positioned" for growth, were all too vague to be
Many of the challenged statements about Siebel 7 are simply too
vague to be actionable. Plaintiffs have not pled specific facts
that demonstrate that defendants' statement that Siebel 7 "sets
the standard" was false. Siebel 7 was the first web-based
software in this area; to brag that it "set the standard," even
if it was a low standard, is not false. Similarly, plaintiffs
have not alleged facts that show that the statement that Siebel 7
was not a highly accurate forecasting tool was false: highly
accurate compared to what? Similarly, that some customers were
having problems using the program because it was too slow or took
too many steps does not make the program a "highly inaccurate"
forecasting tool. "Exceptionally deep in functionality" is
similarly too vague to be actionable.
Even assuming, however, that plaintiffs have adequately alleged
that the above positive statements were false, plaintiffs have
not alleged facts which create a strong inference that defendants
knew Siebel 7 was a bad product when they were making positive
remarks about the software. See Plaintiffs' Opp. at 26-28.
While plaintiffs allege that Siebel itself (which was the first
company to upgrade to Siebel 7) was experiencing some problems
with the web-based upgrade, they do not allege any specific facts
that give rise to a strong inference that the defendants that
is the upper management knew there were problems of such magnitude that it
would make their positive statements false.
First, in paragraph 229, plaintiffs baldly claim that "Siebel's
development, testing, introduction, product launch and
performance were critical issues respecting which the Company's
executive management and the Individual Defendants in
particular regularly kept themselves informed." This paragraph
does not plead particular facts that suggest, let alone give rise
to a strong inference, that the individual defendants were in
fact aware that Siebel 7 was a disaster.
Second, that one Siebel official, Steve Mankoff, said in April
2003 at least a year after the challenged statements that
Siebel 7 was a "new product with kinks" does not support
scienter. SAC ¶ 161. That a new program has kinks does not make a
positive statement about the program false. If that were the
case, the federal securities laws would prevent software
companies from making any positive statements about new software.
Third, that Siebel launched Siebel 7.5 in September 2002 also
does not give rise to a strong inference that defendants knew
Siebel 7 was a bust at the time they were extolling its virtues.
While one can reasonably infer that Siebel 7.5 fixed some of the
problems with Siebel 7, such a fix does not mean that defendants'
statements that Siebel 7 "set the standard" and was "rich with
functionality" were false.
Plaintiffs' reliance on Judge Alsup's decision in In re
PeopleSoft, Inc., 2000 WL 1737936 (N.D. Cal. 2000), is
misplaced; PeopleSoft actually demonstrates the inadequacy of
plaintiffs' allegations. PeopleSoft had issued forecasts for
strong growth in 1999 over 1998 and had reported that a key new
product was performing well and succeeding in the marketplace. In
1999, however, PeopleSoft fired 800 employees and sacked
management, and 1999 revenue did not grow. The district court
ruled that plaintiff had pleaded facts sufficient to state a
claim that PeopleSoft's forecasts were knowingly false when made.
These facts included specific allegations that PeopleSoft's
products were "laced with abnormally large number of bugs." The
defects with PeopleSoft's products were so bad that major
customers were refusing to pay, and even banding together and
threatening to sue PeopleSoft. The defects were reported to management, and a major customer, Coca Cola,
refused to buy a product because of the product's defects.
PeopleSoft field representatives were telling management in loud
and "highly confrontational terms" that quotas and budgets could
not be met, and in response management fired the naysayers.
The facts alleged in the SAC here are no where near as specific
or compelling. There is not a single allegation that any
identified customer or even specific Siebel employee complained
to Siebel management about Siebel 7, let alone that a customer
complained that Siebel 7 had an "abnormally large number of
bugs." Instead, plaintiffs allege that certain "sources" former
Siebel employees report that Siebel 7 was "clunky." See,
e.g., ¶¶ 49-52. In another paragraph plaintiffs quote an unnamed
source who used to be work for a Siebel customer who actually
upgraded to Siebel 7. The source told plaintiffs' counsel that
Siebel 7 provided minor benefits at a high cost. Id. ¶ 53. But
none of these sources allege that they told Siebel management
that Siebel 7 was a bad product and that they were not going to
upgrade to Siebel 7. In other words, the allegations do not
suggest that Siebel management was aware that the problems with
Siebel 7 were more than would be expected with a new product.
2. Statements about the rate of adoption
Defendants also argue that their November 2001 statement that
they expected their current customers to upgrade to Siebel 7 at a
90 percent rate during the next six to nine months, and their
February 2002 statement confirming the 90 percent adoption rate
by December 2002, are forward looking statements protected under
the PSLRA's safe harbor. See 15 U.S.C. § 78u-5(c). Plaintiffs
respond that the safe harbor does not apply if the forward
looking statement was "made with actual knowledge . . . that the
statement was false or misleading." In other words, the issue is
whether plaintiffs have pled a strong inference of scienter.
Again, they have not.
First, there is absolutely no allegation that suggests that
defendants knew the November 2001 projection was false when made:
Siebel 7 had not even been released. Again, the allegation that
Siebel itself may have experienced some bugs with the new
program, such as the program "freezing," does not give rise to a strong inference that
Siebel management knew the 90 rate adoption rate was false.
Second, with respect to the projection made in February 2002,
plaintiffs' allegations are again insufficient. Plaintiffs rely
heavily on the fact that the actual adoption rate by June 2002
was only 20 percent to show that defendants knew in February that
they would not meet their 90 percent figure by December 2002.
That argument, however, assumes that the rate of adoption would
be equal throughout the year; perhaps Siebel was expecting that
most of the upgrades would occur in the latter-half of 2002.
There is simply no allegation that gives rise to a strong
inference that defendants knew by February 2002 that their 90
percent figure was inaccurate.
Third, the release of Siebel 7.5 itself does not support a
strong inference of scienter. Plaintiffs do not cite any case
that suggests that because a software company releases a new
improved version of a product that means the company's earlier
positive statements about the replaced product were false.
B. Customer satisfaction statements
On April 17, 2002, and in its March 29, 2002 Annual Report,
Siebel stated that it had the "highest customer satisfaction and
loyalty levels in the IT industry." Plaintiffs' Opp. at 41.
Siebel supported its statements by referring to "an independent
audit by SatMetrix Systems, Inc. completed in September 2001"
that showed that "ninety-six percent of Siebel Systems' customers
reported that they intend to purchase additional software from
the company." SAC ¶ 64.
Plaintiffs allege that defendants' statements about the survey
results (and thus its statements about customer satisfaction and
loyalty) were false and misleading. They do not contend that the
actual survey results showed something different from what
defendants' reported; instead, they argue that the survey was
purposefully biased and unreliable and therefore Siebel could not
have reasonably relied upon the survey results. This argument
tends to mix scienter with falsity the statements cannot be
false unless the allegations support an inference that defendants
purposefully biased the survey so that it would provide them with false positive results. The logical way to analyze this issue,
then, is through the scienter lens: have plaintiffs pleaded facts
that give rise to a strong inference that defendants
intentionally created a biased and skewed survey?
1. Plaintiffs' scienter allegations
First, plaintiffs cite to a June 2002 survey of a limited
number of Siebel customers conducted by an independent research
firm, Nucleus Research. SAC ¶¶ 63-76. According to Nucleus, "not
one of the customers interviewed had a positive comment about the
usability of Siebel." Id. ¶ 71. Many customers had other
negative comments. An August 2002 survey (again, performed nearly
a year after the SatMetrix survey) on 88 Siebel customers showed
Siebel performing poorly compared to its competitors. Id. ¶ 74.
Second, plaintiffs complain that (1) the surveys were not
anonymous; (2) Siebel told SatMetrix which persons to contact;
(3) Siebel helped formulate the questions; (4) Siebel owned part
of SatMetrix (and had one overlapping director); (5) the survey
questions had a tricky logic that virtually guaranteed positive
results; and (6) plaintiffs' own survey expert retained for this
litigation opines that the survey was not statistically valid.
Plaintiffs also complain that Siebel sent its customers a
letter asking for the customers' participation in the survey. The
Our goal is 100% customer satisfaction . . . we take
your feedback very seriously, it is the primary way
we determine where to invest, measure the success of
our business and compensate our colleagues. As a
small token of appreciation for completing this
survey, we will send a Siebel clock to all
respondents who complete the survey by Friday,
November 30, 2001.
SAC ¶ 128.
Third, some Siebel employees' compensation was dependent upon
customer satisfaction, and after Siebel identified negative
responses to the survey, its sales managers were required to call
the customer to "get to the bottom of it." SAC ¶ 144.
The above allegations do not demonstrate that defendants knew
the survey results were bogus. The surveys performed by third
parties several months after the SatMetrix survey do not give
rise to a strong inference that defendants knew their customer
satisfaction statements were false; the surveys merely show that others who performed
their own surveys asking different questions of perhaps different
people who work for some of Siebel's customers gave answers which
were not necessarily consistent with defendants' statement.
Plaintiffs do not cite any case in which such hindsight survey
results gave rise to a strong inference that a defendant knew a
statement was false when made.
Plaintiffs other allegations are trivial. The letter to
Siebel's customers gives rise to an inference that Siebel was
attempting to get as much participation in the survey as
possible, not that it was trying to skew the results. Similarly,
that Siebel would instruct its managers to respond to negative
comments by "getting to the bottom of it," and would compensate
its employees based, in part, on customer satisfaction, suggests
that customer satisfaction was important to Siebel and, in fact,
also suggests that defendants actually believed they had high
customer satisfaction. These allegations do not create a strong
inference that defendants intentionally created a biased and
The only specific allegation that comes close to suggesting
scienter is found in paragraph 138. Plaintiffs allege that Source
13, an employee of a former Siebel customer who actually
participated in the SatMetrix survey, provided a negative
response to the question of whether the customer was planning to
continue purchasing Siebel products. Source 13 says he
subsequently received an email from Siebel asking him to change
his response to "yes." When he refused, a Siebel salesperson
called Source 13's management and had the survey reassigned to
Source 13's manager. Source 13 claims his lost his job over this
incident. SAC ¶ 138.
If plaintiffs specifically alleged that Siebel management knew
that its salespersons were "strong arming" customers to change
their results, such allegation might support an inference of
scienter. Paragraph 138, however, describes only one incident,
and there is no allegation in paragraph 138 or elsewhere in the
SAC that suggests that anyone in Siebel management knew about
such tactics. Plaintiffs do not even identify the customer; thus,
the Court cannot infer that Mr. Siebel would have been aware of
this customer's response. Moreover, the allegations themselves do
not make any sense. Plaintiffs do not explain why the customer
would fire its employee for giving a truthful negative response.
Nor do they explain why the customer changed its response. They also do not explain why the customer
would care about its relationship with Siebel if Siebel's
products were so unsatisfactory.
In sum, plaintiffs' allegations taken individually or as a
whole do not give rise to a strong inference that defendants
knew the survey was hopelessly biased and faulty.
C. Revenue Statements
1. January 27, 2002 optimistic statements
In January 2002, Siebel announced that its revenue for the 4th
quarter 2001 ending December 31, 2001 increased 12 percent over
the third quarter 2001. Plaintiffs do not challenge this revenue
statement; instead, they contend that the following optimistic
statements made in connection with the revenue announcement were
false: (1) Siebel was looking "pretty healthy;" (2) its business
and momentum had regained steam; (3) its current performance was
a basis for optimism about 2002; (4) a shift in buying patterns
and business customers began in November and continued through
January 2002; (5) sales activity had improved and the pipeline of
potential deals had strengthened; and (6) Siebel was seeing a
return to more normal business processes and buying behavior.
Plaintiffs' Opp. at 36 (citing SAC ¶ 13).
Plaintiffs allege these statements were false because
defendants actually knew that business was not looking up and, in
fact, the pipeline of new deals was declining rather than
increasing. The lynchpin of plaintiffs' theory is their
allegation that in order to make it look like the new year was
starting stronger than it actually was, defendants delayed the
closing of at least $50 million worth of older deals from the
fourth quarter 2001 to the first quarter 2002. Plaintiffs do not
claim it was improper to recognize the revenue in the new
quarter; instead, they contend that defendants' deliberate delay
of the closings demonstrates that defendants knew Siebel's
business was slowing, not growing.
Many of the challenged statements are too vague to be
actionable. In the Court's order dismissing the First Amended
Complaint the Court explicitly stated that the statement that
Siebel was "pretty healthy" was too vague to be actionable; yet,
plaintiffs have included the statement again without adequately explaining how such a vague
statement can be actionable under the PSLRA. The same analysis
applies to the statement that Siebel's business had "regained
Even if plaintiffs had adequately alleged falsity, they have
not pled facts that give rise to a strong inference that these
optimistic statements were made with an intent to deceive the
Plaintiffs' revenue cushioning allegations are based entirely
on confidential sources. SAC ¶¶ 93-107. As one court in this
Circuit has explained:
Plaintiffs are not required to name witnesses. To
contribute meaningfully toward a "strong inference"
of scienter, however, allegations attributed to
unnamed sources must be accompanied by enough
particularized detail to support a reasonable
conviction in the informant's basis of knowledge.
Plaintiffs must plead with substantial specificity
how confidential witnesses came to learn of the
information they provide in the complaint. The Court
must be able to tell whether a confidential witness
is speaking from personal knowledge, or merely
regurgitating gossip and innuendo. The Court can look
to the level of the detail provided by the
confidential witnesses, the corroborative nature of
the other facts alleged (including from other
sources), the coherence and plausibility of the
allegations, the number of sources, the reliability
of the sources, and similar indicia.
In re Metawave Communications Corp., 298 F.Supp.2d 1056, 1068
(W.D. Wash. 2003) (internal quotation marks and citation
omitted); see also Oracle Corp., 380 F.3d at 1233 (stating
that "personal sources of information relied upon in a complaint
should be `described in the complaint with sufficient
particularity to support the probability that a person in the
position occupied by the source would possess the information
alleged'") (citation omitted).
Plaintiffs' confidential witness allegations do not give rise
to a strong inference that defendants engaged in revenue
cushioning to improve the first quarter. None of the anonymous
sources was in a position to possess personal knowledge of their
allegations. For example, plaintiffs allege that Source 8 a
former manager in Siebel's Financial Planning and Analysis Group
told plaintiffs' counsel that $50 million in deals was pushed
into the first quarter 2002; yet, Source 8 did not identify a
single deal or any specifics of any deal, or any other facts that suggest that Source 8's statement is anything
other than speculation. SAC ¶¶ 95-97.
Source 1 is a former Siebel Alliances Group Business manager
who was part of a "technical group supporting the sales force."
Source 1 claims that "any decision to push sales up form one
quarter to the next necessarily involved CEO Siebel and had to
occur on the last day of the quarter." SAC ¶ 98. The complaint is
utterly devoid of any facts that hint as to how Source 1 knew of
Siebel's alleged involvement; thus, Source 1's allegations do not
contribute to an inference of scienter.
The same analysis applies to Source 9. SAC ¶¶ 99-106. Source 9
was a former manager of sales operations for Siebel. His group
"tracked Siebel sales force inputs for sales opportunities,
leads, wins and also managed applications related to Siebel's SFA
tools, such as forecasting, sales reporting and analysis. Id. ¶
99. Source 9 claims that "at the direction of defendant Siebel,
Siebel's executive management `pushed out' certain deals that
were ready to be closed in 4Q'01." Id. ¶ 100. There are no
allegations, however, that suggest how he or she would know such
a fact. Moreover, while Source 9 actually identifies two deals
that were allegedly pushed back (General Motors and General
Electric), he does not identify any facts that suggest the
revenue should have been recorded in December, that is, that the
deals could have closed in December; instead, it appears that
Source 9's knowledge comes from the fact that his group assembled
large notebooks of data concerning the deals. Id. ¶ 100. Also,
Source 9 reports that he "recalls that in December 2001, Siebel
did have signed contracts" with General Electric and General
Motors, id. ¶ 101, but he does not explain what his
recollection is based upon. The allegations of the SAC, however,
make it clear that his recollection is not based upon his
personal involvement in those deals.
Source 4 was an independent consultant for Siebel during the
class period, but had not been a Siebel employee since 1999. SAC
¶ 107. Source 4 claims the General Electric deal was set to close
in December, but, again, there are no allegations as to how this
independent consultant in IT implementation would have any
personal knowledge of such fact; indeed, the remaining allegations reveal that Source 4's allegations are all
based on information Source 4 learned from other unnamed
individuals who may or may not have any first hand knowledge.
Finally, Source 10, a former credit department employee, claims
that on the last day of the fourth quarter 2001, Siebel
executives held a conference call to decide which deals to close
and which to hold. The complaint alleges that "Source 10 recalls
that defendant Goldman made the decision to delay shipment of
several orders until the following quarter." Id. ¶ 103. Again,
there is not a single allegation as to how Source 10 "recalls"
such information. The inference drawn from the SAC is that Source
10 was not a participant in the meeting (as Source 10 was a
credit department employee, not an executive).
In sum, the allegations of the SAC do not give rise to a strong
inference that defendants intentionally moved deals from the
fourth quarter 2001 to the first quarter 2002 so that they could
make it look like the first quarter was performing well.
Plaintiffs' allegations as to declining quotas and Siebel
"strong arming" its vendors to purchase Siebel products, SAC ¶¶
104-106, 108-109, also do not give rise to a strong inference
that defendants knew Siebel was not "pretty healthy" and had not
"regained steam." Again, the allegations lack specifics that give
rise to a strong inference of scienter: for example, Source 9 has
no first hand knowledge of his or her allegations. SAC ¶ 105
("Source 9 learned that in this meeting . . .") (emphasis
2. April 17, 2002 announcement
On April 17, 2002, Siebel announced the results for the first
quarter 2002 ending March 31, 2002. Siebel reported earnings per
share of $0.12. Plaintiffs do not challenge this reported
revenue; instead they challenge defendants' statements that (1)
Siebel had a very strong January, and that month was "unusually
strong;" (2) licensing revenue for the new quarter would be flat;
and (3) the pipeline of expected transactions for the second
quarter was larger than for the first quarter. Plaintiffs' Opp.
a. January was unusually strong Scienter with respect to the first statement depends on the
revenue cushioning allegations and, as is explained above, the
allegations are insufficient to support a strong inference of
scienter with respect to when revenue was recognized.
b. licensing revenue would be flat
The second statement, that licensing revenue for the new
quarter would be flat, is a projection protected by the safe
harbor provisions; thus, it is actionable only if plaintiffs
allege specific facts that give rise to a strong inference that
defendant knew the statement was false when made. See In re
Daou Systems, Inc., 411 F.3d 1006, 1021 (9th Cir. 2005). Again,
plaintiffs' scienter argument is premised on the alleged revenue
cushioning; as the allegations are insufficient to support a
strong inference of intentional revenue cushioning, the complaint
does not give rise to a strong inference that defendants knew
their "licensing revenues flat" projection was false.
Likewise, the allegations that sales quotas were reduced and
that by April 2002, revenues in the Western region were trailing
by 20 percent, do not mean that defendants knew that by the end
of June licensing revenues would decrease rather than be flat.
Similarly, while the allegation of reduced quotas for
salespersons, SAC ¶¶ 108-109, suggests that defendants were aware
that sales for 2002 were slow compared to 2001, that allegation
alone is not enough to give rise to a strong inference that
defendants knew that the second quarter would be worse than the
first. Indeed, the complaint alleges that in the last quarter of
2001 nearly 50 percent of the sales persons did not meet their
quotas, ¶ 108; yet, in that quarter Siebel beat analysts'
expectations and, according to plaintiffs, did so well that they
were able to push revenue from that quarter to the next quarter.
The "bartering" allegations also do not support an inference of
scienter. Plaintiffs allege that defendants were forcing Siebel's
vendors to buy Siebel products even if the vendor did not need
the products. SAC ¶¶ 109-110. Such allegations are, again, based
on accounts from persons without any first hand knowledge. There
are no allegations that persuasively suggest that Siebel was
"threatening" its customers to buy Siebel products that they did
not need. Moreover, Siebel's public filings disclosed when it had
engaged in transactions with existing customers. Request for Judicial Notice Exh. G-I. The
fact that Siebel engaged in such transactions does not suggest
that defendants knew that business was declining.
Plaintiffs are simply alleging fraud by hindsight; because the
second quarter revenues fell by 15 percent plaintiffs conclude
that defendants must have known in April that such a decline
would occur. The Court is not persuaded.
c. pipeline of expected transactions was larger
Plaintiffs appear to contend that defendants knew the statement
about the pipeline of deals was false because of (1) the revenue
cushioning; (2) the reduced sales quotas; and (3) Siebel
"bartering" deals from its vendors. As is explained above, none
of those allegations is specific enough to give rise to an
inference of scienter.
3. June 12, 2002 Statements
Eighteen days before the end of the second quarter, Siebel
Chief Financial Officer Goldman told analysts attending a Bear
Stearns Technology Conference that Siebel's second quarter showed
"little sign of improvement over" the first quarter, and that the
second quarter is "every bit as challenging." SAC ¶ 178.
Plaintiffs claim these statements which they claim implied
Siebel would do the same as it had done the quarter before were
false for several reasons.
Their primary argument is that on July 17, 2002 just one
month later Siebel reported that second quarter revenues were
not flat, but instead fell 15 percent from the previous quarter.
It also announced that only 20 percent of the company's customers
had migrated to Siebel 7, and that it intended to lay off
approximately 15 percent of Siebel's employees. Siebel also
slashed revenue forecasts for the remainder of 2002 by 25
percent. SAC ¶¶ 187-189. Plaintiffs contend that defendant
Goldman must have known about this dire financial situation on
June 12 when he reported that the second quarter showed little
improvement over the first. Indeed, in a conference call
following its earnings announcement, defendant Siebel admitted
that the "`last couple of months' had clearly indicated that the
second quarter IT environment was tougher than the first
quarter." Id. ¶ 192. Siebel also acknowledged that in
hindsight, "it is clear we should have" reduced headcount at the
end of the previous year. Id. This allegation, too, fails. First, plaintiffs have failed to
allege particular facts that show that Goldman's June 12
statement was false. Goldman did not report that Siebel was
predicting that revenues would be flat with the previous quarter;
instead, he reported that revenues showed "little sign of
improvement" over the first quarter. Such a response means that
revenues would not be not greater than the previous quarter; it
is not a representation that revenues would "be flat." "Little
sign of improvement" can include no improvement or even a
Second, plaintiffs have again failed to plead specific facts
which give rise to a strong inference that at the time Goldman
made the June 12 statement he knew that when the quarter ended 18
days later revenue would decline significantly from the previous
quarter. Siebel's July 17 announcement that it was laying off
employees does not give rise to such an inference; to the
contrary, it is reasonable to expect that after the quarter
closed and Siebel computed its final numbers it realized it had
to reduce its head count and set out to do so. Plaintiffs do not
plead any facts that suggest that on June 12 Siebel had to have
known it was going to lay off employees; indeed, plaintiffs
allege that Siebel reported that it should have performed lay off
earlier. Id. ¶ 192. This statement suggests that Siebel
management did not realize how poorly the company was
Nor do plaintiffs plead any facts that suggest defendant
Goldman had to have known that revenue would decline. It is
common knowledge that high tech companies complete many deals in
the last few days of a quarter in order to meet revenue
projections. Plaintiffs do not make any allegations that give
rise to a strong inference that on June 12 Goldman knew that by
the end of the quarter revenues would not be flat. That Siebel
had sophisticated software that allowed it to track sales,
revenue and similar information in real time is insufficient to
support a strong inference of scienter.
II. Stock sales
Plaintiffs argue in their Opposition that defendant Goldman's
(but not the other two individual defendants') sales of stock
give rise to a strong inference of scienter. Opposition at 28-29.
Goldman sold 33 percent of his holdings during the class period,
with most of those trades occurring the week following the announcement of the
fourth quarter results. SAC ¶ 251-52. None of the sales occurred
around the time of Goldman's June 12 statement.
While such sales might give rise to an inference that defendant
Goldman (but not the other defendants) had some material adverse
information, the complaint fails to allege with particularity
what that adverse information was. As previously explained, the
"revenue cushioning" allegations are all based on second, third
and fourth hand information and are therefore not persuasive.
Goldman's somewhat suspicious stock sales are simply insufficient
to overcome the SAC's pleading deficiencies. See In re Silicon
Graphics Inc. Securities Litig. 183 F.3d 970, 986-88 (9th Cir.
III. Totality of the allegations
Even when the Court considers the allegations of the SAC in
their totality, plaintiffs have not satisfied the PSLRA.
First, many of the statements, such as that Siebel is "pretty
healthy," are far too vague to be actionable.
Second, the complaint is devoid of allegations that give rise
to a strong inference that the individual defendants (1) knew
Siebel 7 had serious and unusual problems; (2) intentionally
pushed revenue into the first quarter of 2002 in order to make
the company's prospects look better; (3) believed Siebel's
customer satisfaction survey was a sham; or (4) knew in April
2002 that the second quarter was going to be materially worse
than the first. Plaintiffs do not have any sources with first
hand knowledge of what the individual defendants allegedly knew.
None of the sources were in a meeting with defendants or
personally overhead a conversation of any of the defendants, and
none of the sources reviewed any documents that specifically
contradict the statements at issue.
Third, plaintiffs' heavy reliance on Oracle Corp.,
380 F.3d 1226, is misplaced. There the court held that "[c]onsidered
separately, Plaintiffs' allegations may not create a strong
inference of scienter." Id. at 1234. It concluded, however,
that the totality of the allegations created a strong inference
that defendants had made a false forecast regarding the third
quarter. That totality included four factors. First, Larry
Ellison's highly suspicious sale of $900 million in stock, his first sale in five years. Id. at 1232.
Second, early in the quarter Oracle had lost or delayed a
number of large deals; thus, when it made its forecast it knew of
the lost/delayed deals. The complaint even included allegations
as to the amount of those lost deals. And the complaint alleged
that Ellison had acknowledged that he was involved in those
deals. Id. at 1231-32. Third, Oracle admitted that going into
the third quarter it knew it had bugs with one of its products
and that the dot-com segment was slowing down. Id. at 1232-33.
Fourth, and to the Ninth Circuit most importantly, there were
specific allegations that in the second quarter Oracle had
improperly recorded as revenue $230 million of overpayments from
customers. The improper revenue recognition allegations were
supported by witnesses who were in a position to know Oracle's
accounting practices and, "more importantly," were supported by
the debit memos themselves that showed that Oracle credited the
overpayments as revenue. Id. at 1233-34.
Here, in contrast, at most plaintiffs have alleged somewhat
suspicious stock sales by the CFO (and no other officers) as well
as that the Siebel 7 upgrade was experiencing bugs; the SAC
before the Court does not have any other specific allegations
similar to those made in Oracle. There are no allegations of
improper revenue recognition and there are no allegations as to
specific "deals" that were lost or delayed such that Siebel
should have known that its second quarter revenues would not be
This case presents the classic "fraud by hindsight." As
plaintiffs have been unable to meet the PSLRA's pleading standard
after twice amending their complaint, this action is DISMISSED
without leave to amend. IT IS SO ORDERED.
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