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In re Dot Hill Systems Corp. Securities Litigation

March 15, 2007


The opinion of the court was delivered by: Hon. Thomas J. Whelan United States District Judge


Plaintiffs commenced this securities class action against Defendants Dot Hill Systems Corporation ("Dot Hill" or the "Company") and four of its officers and directors alleging fraud under Sections 10(b) and 20(a) of the Securities Exchange Act. Plaintiffs filed the operative First Amended Consolidated Complaint (Complaint) on August 25, 2006. Defendants move to dismiss the Complaint under Federal Rule of Civil Procedure 12(b)(6). The court decides the motion on the papers submitted and without oral argument. S.D. Cal. Civ. L.R. 7.1(d)(1). Because Plaintiffs have failed to comply with the pleading standards of the Private Securities Litigation Reform Act of 1995 (PSLRA), the Court will GRANT the motion to dismiss the Complaint, with LEAVE TO AMEND.

I. Background

Plaintiffs represent a class of shareholders who purchased shares of Dot Hill between April 23, 2003, and April 27, 2006. Dot Hill provides data storage devices (essentially, hard disk drives) to clients. Sun Microsystems (Sun) was Dot Hill's largest customer, accounting for roughly 85% of their revenue. (Compl. at 3:6--7) In February of 2004, Dot Hill acquired Chaparral Network Storage, Inc. (Chaparral), to cut costs and thereby improve profit margins. The Complaint asserts that, during the class period, Dot Hill and four of its officers and directors made materially false and misleading statements about various aspects of Dot Hill's business. Plaintiff alleges that these misrepresentations artificially increased Dot Hill's stock price from $3 per share to more than $18. Dot Hill then sold $155 million in securities-including approximately $23 million that Defendants owned personally-in a September 2003 stock offering. After Dot Hill fully disclosed all material facts, the stock tumbled to $4.50 per share.

In support of their theory, Plaintiffs cite the "firsthand accounts" of 23 former Dot Hill employees (confidential witnesses or "CWs"). The statements bolster five general allegations:

(1) Dot Hill was aware-but purposefully concealed-that Sun was growing dissatisfied with Dot Hill products.

(2) Because of known internal problems within the company, Dot Hill was having little success attracting new customers.

(3) The integration of Chaparral controllers into Dot Hill products was, contrary to Defendants statements, not proceeding successfully.

(4) Dot Hill's "lean" business model was not efficient. Rather, it was the known cause for the inadequate internal operations that were causing "fleeting and illusory" profits. (Pls.' Mem. in Opp. at 2:2--5.)

(5) The accounting errors that Dot Hill revealed in February 2005 resulted from known inadequate accounting practices that Defendants refused to correct.

II. Legal Standards

Under Federal Rule 12(b)(6), the court may dismiss a cause of action for failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). A motion to dismiss under Rule 12(b)(6) tests the claim's sufficiency. See N. Star Int'l. v. Ariz. Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). In ruling on a motion to dismiss, the court assumes the truth of all factual allegations and construes them in the light most favorable to the plaintiff. Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th Cir. 2002). The court may dismiss if it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1482 (9th Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41, 45--46 (1957)).

A complaint alleging fraud must meet the particularity requirements of Federal Rule of Civil Procedure 9(b). A plaintiff must specifically identify the allegedly fraudulent statements or acts of fraud. Kaplan v. Rose, 49 F.3d 1363, 1370 (9th Cir. 1994). This requires the plaintiff to plead evidentiary facts including the dates, times, places, and persons associated with each misrepresentation or act of fraud. In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548--49 n.7 (9th Cir. 1994) (en banc)(superseded by statute on other grounds); Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir. 1993).

In a securities case, the complaint must also conform to the PSLRA. Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001). The PSLRA "altered the pre-Act pleading requirements in private securities fraud litigation by requiring that a complaint plead with particularity both falsity and scienter." Id. Accordingly, plaintiffs "must state specific facts indicating no less than a degree of recklessness that strongly suggests actual intent." In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 979 (9th Cir. 1999). The Court must dismiss under 12(b)(6) if the allegations are not ...

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