The opinion of the court was delivered by: Marilyn L. Huff, District Judge
ORDER GRANTING WITHOUT PREJUDICE KPMG'S AND THE UNDERWRITER DEFENDANTS' MOTION TO DISMISS AND DENYING Consolidated Proceedings WITHOUT PREJUDICE KPMG'S MOTION TO FILE UNDER SEAL [Doc. Nos. 82, 88, 100]
On July 17, 2006, plaintiffs Richard, Jana, David, John and Lauren Westlund, and Massachusetts State Guaranteed Annuity Fund ("Plaintiffs") filed a consolidated complaint in the above-captioned suit. (Doc. No. 58.) On December 5, 2006, defendant KPMG filed a motion to dismiss Plaintiffs' claims for violations of Section 10(b) of the Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933. (Doc. No. 82.) KPMG filed a motion requesting the Court take judicial notice of certain documents with their motion to dismiss. (Doc. No. 83.) Also on December 5, 2006, defendants CIBC World Markets Corp., Thomas Weisel Partners LLC, and William Blair & Co. LLC (collectively the "Underwriter Defendants") filed a motion to dismiss Plaintiffs' claim alleging a violation of Section 11 of the Securities Act. (Doc. No. 85.)
On December 6, 2006, KPMG filed a corrected motion to dismiss. (Doc. No. 88.) On January 26, 2007, Plaintiffs filed an opposition to KPMG's motion to dismiss (Doc. No. 96.), and an opposition to the Underwriter Defendants' motion to dismiss. (Doc. No. 97.) On February 26, 2007, KPMG filed a reply. (Doc. Nos. 106, 107.) Also on February 26, 2007, the Underwriter Defendants filed a reply. (Doc. No. 109.)
On February 13, 2007, KPMG filed an ex parte application seeking permission to filed certain documents under seal. (Doc. No. 100.) On February 14, 2007, Plaintiffs filed a response in opposition to KPMG's application. (Doc. No. 102.) On February 14, 2007, the Court entered a scheduling order regarding KPMG's application and requested clarification from KPMG as to whether it was seeking in camera review of the documents. (Doc. No. 103.) On February 20, 2007, KPMG clarified that it was requesting an in camera review of the documents. (Doc. No. 104.) Plaintiffs filed a second opposition to KPMG's application on March 2, 2007. (Doc. No. 113.) KPMG filed a reply in support of its application on March 9, 2007. (Doc. No. 115.)
The Court held a hearing on these motions on March 19, 2007. Attorneys Andrew N. Friedman and Daniel S. Drosman represented Plaintiffs, attorneys Timothy Scott Vick and Gwyn Quillen represented KPMG, and attorney Thomas A. Nolan represented the Underwriter Defendants at the hearing. For the following reasons, the Court GRANTS WITHOUT PREJUDICE KPMG's motion to dismiss Plaintiffs' Section 10(b) and Section 11 claims. The Court GRANTS WITHOUT PREJUDICE the Underwriter Defendants' motion to dismiss Plaintiffs' Section 11 claim consistent with this order. The Court DENIES WITHOUT PREJUDICE KPMG's motion to file certain documents under seal.
For purposes of resolving this motion to dismiss, the Court accepts all well pleaded facts alleged in the consolidated complaint as true. See Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th Cir. 2002). This factual summary is taken in the light most favorable to Plaintiffs. See Number 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Corp., 320 F.3d 920, 925 n.2, 931 (9th Cir. 2003). Where appropriate, the Court has also considered documents attached to and incorporated into the complaint and has taken judicial notice of certain facts.
Plaintiffs bring this securities class action on behalf of the purchasers of SeraCare Life Sciences, Inc.'s ("SeraCare") securities between May 14, 2003 and March 23, 2006. (Consol. Compl. ¶ 1.) SeraCare is a California corporation engaged in the manufacture and marketing of biological products for diagnostic, therapeutic, drug discovery and research concerns. (Id. ¶ 19.) The Underwriter Defendants are integrated financial services institutions that provide commercial and banking services and acted as underwriters to SeraCare's secondary public offering in May 2005 ("Secondary Offering"), which allowed SeraCare to collect $39 million in proceeds. (Id. ¶¶ 6, 34-37.) KPMG was SeraCare's auditor and outside accountant from 2002 until August 2005. (Id. ¶¶ 38, 233.) KPMG audited SeraCare's financial statements from 2002-2004, evaluated SeraCare's 10-Q for the period ending June 30, 2005, was working on SeraCare's third quarter 2005 financial statements, provided accounting and auditing services in connection with the Secondary Offering, and provided tax, consulting and acquisition services to SeraCare. (Id. ¶¶38, 233-235.) KPMG also met regularly with members of SeraCare's Audit Committee in 2003 (id. ¶244), and consented to be named as an expert in the registration statement for the Secondary Offering, in which KPMG stated that it audited SeraCare's 2003 and 2004 financial documents. (Id. ¶¶ 152, 253.)
SeraCare's 2003 and 2004 Form 10-K annual reports filed with the SEC included KPMG's unqualified audit reports on SeraCare's annual financial statements for the fiscal years ending September 30, 2003 and September 30, 2004. (Id. ¶¶ 38, 93, 115, 251-52.) In the course of KPMG's audits, it examined SeraCare's financial statements, evaluated its internal controls, and assessed the overall quality of its accounting and financial reporting procedures. (Id. ¶ 62.) KPMG's unqualified opinions included in SeraCare's 2003 and 2004 Form 10-K reports stated that it examined SeraCare's September 30, 2002, September 30, 2003, and September 30, 2004 balance sheets, and the related statements of operations and income, stockholders' equity, and cash flows, and in KPMG's opinion those financial statements fairly presented SeraCare's financial position, as of September 30, 2002, 2003, and 2004, in all material respects. (See id. ¶¶ 251-252.) KPMG represented that it performed its audits in accordance with generally accepted auditing standards ("GAAS") and the SeraCare's financial statements satisfied generally accepted accounting principles ("GAAP"). (Id.)
On May 25, 2005, SeraCare filed its Prospectus and Registration Statement ("Registration Statement") pursuant to its Secondary Offering of 3.5 million shares of stock. (Id. ¶ 145.) The Registration Statement also contained a statement from KPMG indicating that they had audited SeraCare's September 30, 2003, and September 30, 2004 balance sheets, and the related statements of operations, stockholders' equity, and cash flows for each of the years for the three year period ending September 30, 2004, and that those statements fairly presented the financial position of SeraCare in all material respects, in conformity with GAAP. (See id. ¶ 253.)
In August 2005, SeraCare fired KPMG and hired Mayer Hoffman McCann P.C. ("MHM") to replace KPMG. (Id. ¶233.) Approximately four months later, MHM reported concerns regarding its uncompleted audit of SeraCare's balance sheet as of September 30, 2005, and the related statements of income, stockholders' equity, and cash flows for the year then ended. (Id. ¶¶ 64, 243, Ex. 7.)
On December 14, 2005, SeraCare announced that it could not timely file its SEC Form 10-K. (Id. ¶¶68, 132.) On December 20, 2005, SeraCare publicly announced MHM's findings and concerns regarding SeraCare's accounting for and valuation of inventory, MHM's perception that certain board members were exerting undue influence on SeraCare's financial reporting process and on the audit process, and the timeliness, quality and completeness of SeraCare's implementation and testing of its internal control over financial reporting. (Id. ¶¶ 71, 134.) Also on December 20, 2005, SeraCare's stock price fell from $19.20 to $10.04. (Id. ¶ 72.)
On March 15, 2006, SeraCare terminated its Chairman of the Board of Directors, Chief Executive Officer, Secretary, Chief Financial Officer, and ordered the first three individuals to resign from the Board of Directors. (Id. ¶¶ 76, 142.) SeraCare also issued a statement on March 15, 2006, announcing that the 10-Q reports for the quarters ended December 31, 2004 and March 31, 2005 should no longer be relied upon, and that it expected to restate one or more of those financial statements. (Id. ¶¶ 75, 141.) SeraCare admitted that there were material weaknesses in its internal control over financial reporting. (Id.) SeraCare filed for bankruptcy on March 23, 2006. (Id. ¶ 144.)
Plaintiffs allege two claims against KPMG, a claim for an alleged violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and a claim for an alleged violation of Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k. The sole claim brought against the Underwriter Defendants is a claim under Section 11 of the 1933 Securities Act.
I. Requests for Judicial Notice
Before addressing the merits of the motions to dismiss, the Court must resolve the requests for judicial notice. KPMG requests the Court take judicial notice of:
(1) Accounting Research Bulletin 43, Chapter 4, inventory pricing ("ARB 43"); (2) the existence of statements made in SeraCare's April 7, 2006 bankruptcy court Supplemental Brief Supporting Motion for Use of Cash Collateral; and (3) the existence of statements made in the Declaration of Cathryn Low in Support of SeraCare's Motion Order Authorizing Use of Cash Collateral in association with SearCare's bankruptcy proceedings. (KPMG LLP's Req. Judicial Notice Supp. Mot. Dismiss, at 1-3.) KPMG states it is not asking the Court to take judicial notice of the truth of the matters asserted in association with SeraCare's bankruptcy proceedings, only their existence. KPMG also requests the Court take judicial notice of statements made in SeraCare's June 30, 2005 Form 10-Q. (KPMG LLP's Supplemental Req. Judicial Notice Supp. Mot. Dismiss, at 1-2.) Plaintiffs did not object to the Court taking judicial notice of these documents
When determining a motion to dismiss for failure to state a claim for relief pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court cannot consider matters outside the complaint except for authenticated documents that have been incorporated into the complaint and facts that are subject to judicial notice. See Lee v. City of Los Angeles, 250 F.3d 668, 689-90 (9th Cir. 2001). Judicial notice may be taken of facts not subject to reasonable dispute in that they are "generally known" in the community or "capable of accurate and ready determination by reference to sources whose accuracy cannot be reasonably questioned." See Fed. R. Evid. 201(b). Federal courts may take judicial notice of other courts' proceedings, within the federal judiciary and without, if the proceedings directly relate to the matters before the court. See U.S. ex rel. Robinson Rancheria Citizens Council v. Borneo, Inc., 971 F.2d 244, 248 (9th Cir. 1992). Accordingly, the Court takes judicial notice of the existence of statements made in SeraCare's April 7, 2006 bankruptcy court Supplemental Brief Supporting Motion for Use of Cash Collateral and the existence of statements made in the Declaration of Cathryn Low in Support of SeraCare's Motion Order Authorizing Use of Cash Collateral.
Furthermore, the content of ARB 43 is not subject to reasonable dispute in that it is capable of accurate and ready determination by reference to sources whose accuracy cannot be reasonably questioned. Accordingly, the Court takes judicial notice of ARB 43. Finally, the "incorporation by reference" doctrine permits district courts to consider, in connection with a motion to dismiss, documents whose contents are alleged in the complaint and whose authenticity no party questions, but which are not physically attached to plaintiff's pleading. See In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970, 986 (9th Cir. 1999); see also Branch v. Tunnell, 14 F3d 449, 454 (9th Cir. 1994) (holding that documents not physically attached to the complaint may nonetheless be considered by the court on a 12(b)(6) motion to dismiss if the complaint refers to such documents, the documents are "central" to plaintiff's claim, and no party questions the authenticity of the copy attached to the 12(b)(6) motion). The contents of SeraCare's June 30, 2005 10-Q are referred to in the consolidated complaint, and no party has questioned the authenticity of the 10-Q. Accordingly, the Court takes judicial notice of SeraCare's June 30, 2005 10-Q.
KPMG and the Underwriter Defendants have moved to dismiss Plaintiffs' claims against them pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted. A motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) tests the legal sufficiency of the claims in the complaint. See Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Rule 12(b)(6) permits dismissal of a claim either where that claim lacks a cognizable legal theory, or where insufficient facts are alleged to support plaintiff's theory. See Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1990). In considering the sufficiency of a complaint under Rule 12(b)(6), courts cannot grant a motion to dismiss "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. (citing Conley, 355 U.S. at 45-46). Dismissal is proper, however, if a complaint is vague, conclusory, and fails to set forth any material facts in support of the allegation. See North Star Intern. v. Arizona Corp. Com'n, 720 F.2d 578, 583 (9th Cir. 1983).
In resolving a Rule 12(b)(6) motion, including a motion brought against a claim for securities fraud, the court must construe the complaint in the light most favorable to the plaintiff, accept all well-pleaded factual allegations as true, and determine whether plaintiff can prove any set of facts to support a claim that would merit relief. See Gompper, 298 F.3d at 896. If a complaint is found to fail to state a claim, the court should grant leave to amend unless it determines that the pleading could not possibly be cured by the allegation of other facts. See Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1108 (9th Cir. 2003).
A. Plaintiffs' Section 10(b) Claim Against KPMG
Plaintiffs' first claim alleges that KPMG violated Section 10(b) of the Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, by making false and misleading statements and failing to dislcose material adverse facts regarding SeraCare's financial status which caused purported class members to purchase SeraCare's stock at inflated prices, causing them damages. Section 10(b) of the Exchange Act makes it unlawful "for any person . . . [t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe[.]" In re Daou Systems, Inc., 411 F.3d 1006, 1014 (9th Cir. 2005). "SEC Rule 10b-5, promulgated under the authority of section 10(b), in turn, provides: It shall be unlawful for any person . . .
(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a 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 which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." Id. (citing 17 C.F.R. § 240.10b-5). Therefore, the elements of a Rule 10b-5 claim are: (1) a material misrepresentation or ...