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Bains v. Moores

March 20, 2009

ROBERT REESE BAINS III ET AL., PLAINTIFFS AND APPELLANTS,
v.
JOHN J. MOORES ET AL., DEFENDANTS AND RESPONDENTS.



APPEAL from a judgment of the Superior Court of San Diego County, Jeffrey B. Barton, Judge. Affirmed. (Super. Ct. No. GIC806212).

The opinion of the court was delivered by: Aaron, J.

CERTIFIED FOR PUBLICATION

I. INTRODUCTION

In February 2003, Robert Reese Bains III and a group of former Peregrine Systems, Inc. (Peregrine) shareholders (collectively plaintiffs) filed this action against former Peregrine directors John J. Moores, Charles E. Noell III, and Christopher A. Cole (collectively defendants), as well as several former Peregrine employees, Peregrine's former outside accounting firm, and two of Peregrine's former business partners.*fn1 In their complaint, plaintiffs alleged that they had been induced to hold Peregrine stock from May 1997 through 2002 by Peregrine's false, fraudulent and misleading financial reports.*fn2 Plaintiffs alleged that Peregrine engaged in various fraudulent accounting practices that led to the improper recognition of revenue in Peregrine's financial statements, for the purpose of increasing Peregrine's stock price. Plaintiffs further alleged that in May 2002, after the initial public disclosure of the improper practices, Peregrine's stock price fell dramatically, causing plaintiffs to suffer damages. Plaintiffs averred that in February 2003, Peregrine issued restated financial statements for fiscal years 2000 and 2001, and for the first three quarters of 2002, and that the financial statements reduced by $509 million previously reported revenue in the amount of $1.34 billion. Of the $509 million, $259 million was deducted for non-substantiated transactions. Plaintiffs' complaint contained various fraud and fraud related causes of action.

Defendants filed motions for summary judgment in which they contended that plaintiffs could not prevail on any of their fraud or fraud related causes of action because there was no evidence from which a reasonable trier of fact could conclude that defendants participated in, or knew about, any of the fraudulent accounting practices.*fn3 Plaintiffs filed a motion to stay the proceedings on the ground that they needed to obtain additional discovery from witnesses who had previously invoked their Fifth Amendment rights and refused to provide substantive testimony in this case. The trial court denied plaintiffs' motion for a stay, and granted defendants' motions for summary judgment.

On appeal, plaintiffs claim that the trial court erred in granting judgment for defendants as a matter of law on the fraud and fraud related causes of action. Specifically, plaintiffs claim that the trial court erred in concluding that plaintiffs failed to identify evidence from which a jury could find that defendants knew that Peregrine's financial reports contained false information. Plaintiffs also contend that there are triable issues of material fact with respect to whether defendants are liable on these causes of action pursuant to the group published information doctrine.*fn4 Plaintiffs further claim that the trial court erred in sustaining Noell's and Moores's demurrers*fn5 to plaintiffs' claim that they were liable for various California statutory securities law violations pursuant to Corporations Code section 25504.*fn6 Finally, plaintiffs contend that the trial court erred in denying their motion to stay the proceedings. We reject all of plaintiffs' claims and affirm the judgment.

II. FACTUAL AND PROCEDURAL BACKGROUND

In February 2003, plaintiffs filed their original complaint in this action. In November 2004, the trial court sustained Noell's and Moores's demurrers to plaintiffs' section 25504 claim.

In December 2005, plaintiffs filed a fourth amended complaint premised on the allegations of financial accounting fraud summarized in part I., ante. Among other causes of action, plaintiffs' claims included market manipulation (§§ 25400, subd. (d), 25500) (First Cause of Action), control person liability (§ 25504) (Fourth Cause of Action),*fn7 fraud and deceit by active concealment (Fifth Cause of Action), fraud and deceit based on omissions and misrepresentations (Sixth Cause of Action), negligent misrepresentations (Seventh Cause of Action), aiding and abetting fraud and deceit (Ninth Cause of Action), aiding and abetting breach of fiduciary duty (Tenth Cause of Action), and common law conspiracy (Twelfth Cause of Action).

In March 2006, Cole filed a motion for summary judgment. In his motion, Cole argued that the court should grant summary adjudication as to plaintiffs' fraud and fraud related causes of action because he had not been a participant in the use of improper revenue recognition practices at Peregrine, and was not aware of such practices until the board of directors conducted an internal investigation that led to the discovery of the practices in April-May 2002. Cole further argued that any statements he made, on which plaintiffs may have relied, were based on credible assurances Cole had received from Peregrine management and auditors that the matters stated were true. Finally, Cole maintained that he could not be held liable pursuant to the group published information doctrine.

In June 2007, Noell and Moores filed a joint motion for summary judgment. Noell and Moores argued that plaintiffs' fraud and fraud related causes of action failed because plaintiffs could not demonstrate either that Noell or Moores knew of the financial statement fraud at Peregrine, or that they had reason to believe that Peregrine's financial statements contained false information.

In August 2007, plaintiffs filed a combined opposition to defendants' motions for summary judgment. Plaintiffs also filed a motion to stay the proceedings and a request to continue the summary judgment hearing on the ground that they had been unable to obtain necessary discovery due to related pending or threatened criminal proceedings. In September 2007, after hearing oral argument, the trial court denied plaintiffs' motion to stay the proceedings and their request to continue the summary judgment proceedings.

In December 2007, after hearing oral argument, the trial court entered an order granting defendants' motions for summary judgment. In its order, the court reviewed the material allegations in the fourth amended complaint, and noted that plaintiffs alleged that "defendants engaged in a fraudulent financial scheme... to inflate Peregrine's stock price." The court continued, summarizing plaintiffs' claims as follows: "Plaintiffs contend that the heart of the fraud was the recording of hundreds of millions of dollars of revenue despite non-binding arrangements with customers, in violation of General Accepting Accounting Principles ('GAAP') and Peregrine's revenue recognition policy.

Moores... Noell... and Cole directed deceptive practices to artificially inflate Peregrine's revenue resulting in increased stock value in order to sell their own stock at overstated prices. (FAC [Fourth Amended Complaint] ¶ 15). Beginning in 1999, defendants*fn8 engaged in improper revenue recognition, especially in connection with software sales to resellers known as 'channel partners' and directed the employees and agents to engage in deceptive sales and accounting practices to create the illusion of growth, including secretly adding material sale contingencies and side agreements to what on their face appeared to be binding contacts. (FAC ¶¶ 16, 18.)"

In reviewing the evidence presented on these issues, the trial court concluded, "[Moores, Noell, and Cole] have met their burden of proof to show they had no actual knowledge of the financial fraud committed by the employees and officers of Peregrine. Plaintiffs have failed to raise a material fact that defendants, as outside directors, should be held liable for fraud." (Original formatting omitted.) Specifically, the trial court observed that plaintiffs' fraud and fraud related causes of action required proof that defendants had made statements that they knew to be false, or that defendants had made statements with reckless disregard for their truth or falsity. The court observed that defendants had presented direct evidence that they did not know about the fraud committed by Peregrine employees at the time they signed various financial statements. Defendants also presented evidence that they had relied on the recommendations of Peregrine's in-house counsel, outside counsel, and outside accounting firm, in signing these statements. With respect to plaintiffs' evidence, the court concluded, "Plaintiffs have not raised a triable issue of fact that defendants intended to defraud or that they, as outside directors, had knowledge of the fraud [sufficient] to raise a duty to disclose the true facts to plaintiffs."*fn9

The trial court subsequently entered judgment in favor of defendants. Plaintiffs timely appeal from the judgment.*fn10

III. DISCUSSION

A. The trial court did not err in concluding that plaintiffs failed to identify evidence from which a jury could find that defendants knew about the fraud at Peregrine

Plaintiffs claim that the trial court erred in concluding that there was no evidence from which a reasonable fact finder could find that defendants knew about the fraud committed at Peregrine. We disagree.

1. The Scope of Plaintiffs' Claim on Appeal

Plaintiffs' claim pertaining to defendants' knowledge of ongoing fraud at Peregrine is captioned, "THE TRIAL COURT ERRED AS A MATTER OF LAW IN DETERMINING WHAT CONSTITUTES EVIDENCE OF KNOWLEDGE." Plaintiffs' opening brief makes clear that this claim is intended to encompass, at a minimum, the fraud causes of action that plaintiffs allege in their fourth amended complaint, namely fraud and deceit by active concealment (Fifth Cause of Action) and fraud and deceit based on omissions and misrepresentations (Sixth Cause of Action). However, plaintiffs' opening brief is not clear as to whether this claim is also directed at their causes of action for market manipulation (§ 25400, subd. (d) (First Cause of Action), aiding and abetting fraud and deceit (Ninth Cause of Action), aiding and abetting breach of fiduciary duty (Tenth Cause of Action), and common law conspiracy (Twelfth Cause of Action).

Cole contends that plaintiffs have forfeited all appellate contentions with respect to the First, Ninth, Tenth, and Twelfth Causes of Action by failing to address these claims in their opening brief. Noell and Moores similarly contend that plaintiffs have forfeited any claims pertaining to the Ninth, Tenth, and Twelfth Cause of Action. Plaintiffs maintain in their reply brief that, "[A] ruling by this Court that Plaintiffs put forth sufficient evidence to raise an issue of fact on scienter,*fn11 would cause reversal of the First, Fifth, Sixth, Seventh,*fn12 Ninth, Tenth, and Twelfth causes of action."

We conclude below (see pt. III.A.3, post) that plaintiffs have failed to identify evidence that raises a genuine issue of fact regarding defendants' knowledge of the fraud at Peregrine. Plaintiffs thus are not entitled to reversal of the trial court's grant of judgment as a matter of law on any fraud or fraud related cause of action. Accordingly, we need not consider whether plaintiffs have forfeited their appellate claims as to the First, Ninth, Tenth, and Twelfth Causes of Action.

In a separate claim in their opening brief, plaintiffs contend that the trial court erred in granting judgment as a matter of law in favor of defendants on plaintiffs' negligent misrepresentation claim (Seventh Cause of Action). Plaintiffs note, "'The elements of negligent misrepresentation are similar to intentional fraud except for the requirement of scienter; in a claim for negligent misrepresentation, the plaintiff need not allege that the defendant made an intentionally false statement, but simply one as to which he or she lacked any reasonable ground for believing the statement to be true.'

[Citations.]" (Quoting Charnay v. Cobert (2006) 145 Cal.App.4th 170, 184-185.)

Plaintiffs provide no analysis in their brief as to how the evidence in the record demonstrates the existence of a triable issue of fact on the question whether defendants made false statements without having any reasonable ground for believing the statements to be true. In light of our rejection of plaintiffs' contention with regard to the scienter element of their fraud and other fraud related causes of action (see pt. III.A.3, post), and plaintiffs' failure to provide any distinct analysis regarding the intent element of their negligent misrepresentation claim, we reject plaintiffs' claim that the trial court erred in granting summary judgment in favor of defendants on this claim.

2. Standard of Review

A moving party is entitled to summary judgment when the party establishes that it is entitled to the entry of judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).) A defendant may make this showing by establishing that the plaintiff cannot establish one or more elements of all of his causes of action, or that the defendant has a complete defense to each cause of action. (Towns v. Davidson (2007) 147 Cal.App.4th 461, 466.)

In reviewing a trial court's ruling on a motion for summary judgment, the reviewing court makes "'an independent assessment of the correctness of the trial court's ruling, applying the same legal standard as the trial court in determining whether there are any genuine issues of material fact or whether the moving party is entitled to judgment as a matter of law. [Citations.]'" (Trop v. Sony Pictures Entertainment Inc. (2005) 129 Cal.App.4th 1133, 1143, quoting Iverson v. Muroc Unified School Dist. (1995) 32 Cal.App.4th 218, 222-223.)

"On review of a summary judgment, the appellant has the burden of showing error, even if he did not bear the burden in the trial court. [Citation.]....'[D]e novo review does not obligate us to cull the record for the benefit of the appellant in order to attempt to uncover the requisite triable issues. As with an appeal from any judgment, it is the appellant's responsibility to affirmatively demonstrate error and, therefore, to point out the triable issues the appellant claims are present by citation to the record and any supporting authority. In other words, review is limited to issues which have been adequately raised and briefed.' [Citation.]" (Claudio v. Regents of University of California (2005) 134 Cal.App.4th 224, 230.)

3. None of the Evidence to Which Plaintiffs Refer in the Argument Portion of Their Opening Brief on Appeal Raises a Genuine Issue of Material Fact as to Defendants' Knowledge of the Fraud at Peregrine

"To avoid summary adjudication of [their] fraud claim, [plaintiffs were] required to produce evidence of (1) a misrepresentation, (2) knowledge of falsity (or 'scienter'), (3) intent to defraud, i.e., to induce reliance; (4) justifiable reliance, and (5) resulting damage. [Citation.]" (Unterberger, supra, 162 Cal.App.4th at p. 423, italics added.)

In the argument portion of their opening brief, plaintiffs identify four categories of evidence that they contend demonstrate a triable issue of fact with respect to defendants' knowledge of the fraud at Peregrine: (1) defendants' sales of Peregrine stock; (2) inconsistencies between information presented to Peregrine's board and Peregrine's public disclosures; (3) evidence of purported red flags identified by plaintiffs' expert; and (4) Moores's receipt of an e-mail from a Peregrine employee concerning "channel stuffing."*fn13

We address each category of evidence, and plaintiffs' arguments pertaining to such evidence, below.*fn14

a. Defendants' Sales of Peregrine Stock

Plaintiffs contend that defendants' sales of Peregrine stock raise a genuine issue of material fact as to defendants' knowledge of the fraud at Peregrine.

(i) Case Law

In Zucco Partners, LLC v. Digimarc Corp. (9th Cir. 2009) 552 F.3d 981, 1005 (Zucco Partners), the United States Court of Appeals for the Ninth Circuit described how stock sales by a corporate insider may constitute evidence of the insider's scienter for purposes of establishing a violation of federal securities law:

"As we have previously articulated, '[a]lthough "unusual" or "suspicious" stock sales by corporate insiders may constitute circumstantial evidence of scienter, insider trading is suspicious only when it is "dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside information." ' [Citations.] Among three factors that must be considered to determine whether stock sales raise a strong inference of deliberate recklessness are: '(1) the amount and percentage of shares sold by insiders; (2) the timing of the sales; and (3) whether the sales were consistent with the insider's prior trading history.' [Citation.]"

In concluding that the district court had not erred in dismissing plaintiffs' complaint for failing to plead facts sufficient to support an inference of scienter, the Zucco Partners court stated:

"As the district court correctly noted, the [complaint] 'fail[s] to provide any information on the trading history of [two of the company's officers] for purposes of comparison to the stock sales at issue.' [Citation.] For individual defendants' stock sales to raise an inference of scienter, plaintiffs must provide a 'meaningful trading history' for purposes of comparison to the stock sales within the class period. [Citation.] Even if the defendant's trading history is simply not available, for reasons beyond a plaintiff's control, the plaintiff is not excused from pleading the relevant history. [In re Vantive Corp. Sec. Litig. (9th Cir. 2002) 283 F.3d 1079, 1095] (noting that "[b]ecause [the defendant] joined Vantive four months into the class period, he has no relevant trading history," and thus finding that "[b]ecause [the defendant] had no trading history, we cannot conclude that his trades were out of line with his past practice"); [Ronconi v. Larkin (9th Cir. 2001) 253 F.3d 423, 435-436]; [In re Silicon Graphics Inc. Securities Litigation (9th Cir. 1999) 183 F.3d 970, 987-988] (rejecting an inference of scienter when a defendant sold over 75.3 percent of his stock holdings during the class period, because the defendant was 'legally forbidden to trade' for a long period before the class period and thus had no meaningful trading history).... Thus, since there is no allegation within the [complaint] that [the officers'] stock sales, though significant, are inconsistent with their usual trading patterns, no inference of scienter can be gleaned from Zucco's stock sale assertions." (Zucco Partners, supra, 552 F.3d at pp. 1005-1006; see also In re Daou Systems, Inc. (9th Cir. 2005) 411 F.3d 1006, 1022-1023 ["At a minimum... 'the trading must be in a context where defendants have incentives to withhold material, non-public information, and it must be unusual, well beyond the normal patterns of trading by those defendants'"].)

While the Zucco court concluded that one could not reasonably infer scienter from the defendants' stock sales in that case, plaintiffs in this case note that inKaplan v. Rose (9th Cir. 1994) 49 F.3d 1363, 1379-1380 (Kaplan), the Ninth Circuit concluded that defendants' stock sales were sufficient to create a genuine issue of material fact as to their scienter on the plaintiff's securities fraud claims. The defendants in Kaplan ─ the president and the CEO of a company ─ sold a large percentage of their stock in the company (one-fourth and two-thirds of their holdings, respectively), as soon as legally possible after the company's public offering in June 1988. (Id. at p. 1379.) In August 1989, just before the release of important clinical test results pertaining to the company's medical device product, the president sold the remainder of his stock. (Id. at pp. 1368, 1379.) The Ninth Circuit concluded that evidence of these sales was sufficient to raise a genuine issue of material fact regarding defendants' scienter, noting that the sales "were not consistent with earlier [trading] patterns," and that the sales were "in large amounts and at sensitive times." (Id. at pp. 1379-1380.)

Plaintiffs also cite Provenz v. Miller (9th Cir. 1996) 102 F.3d 1478 (Provenz), in which the Ninth Circuit held that the district court had erred in concluding that two corporate officers' sale of the corporation's stock did not support a finding of scienter. The Provenz court summarized the evidence on this issue as follows:

"The district court incorrectly concluded that the sales of stock by Miller and Boesenberg did not support a finding of scienter. There is evidence that Miller, [the corporation's] chairman and CEO, and Boesenberg, [the corporation's] president, traded their stock in large amounts at sensitive times. Miller sold about 20% of his stock for $1,340,000. Boesenberg sold about 90,000 shares during the class period ─ almost six times more stock than he had sold during the twelve months preceding the class period ─ for $1,479,650. Both Miller and Boesenberg sold their stock shortly after the April 25, 1991 conference call but before the $4 million loss and the restructuring charge were disclosed to the public." (Id. at p. 1491.)

(ii) Application

(a) For Purposes of This Decision, we Assume That Suspicious Stock Sales May Raise an Inference of Scienter Under California Law

Plaintiffs have not cited, and we are not aware of, any California authority in which a court has concluded that suspicious stock sales by members of a corporation's board of directors may constitute circumstantial evidence of the directors' scienter for purposes of establishing a fraud or fraud related cause of action under California law. Nevertheless, we will assume that for purposes of proving fraud under California law, "'unusual trading or trading at suspicious times or in suspicious amounts by corporate insiders... [is] probative of scienter' [citation]" (In re Daou Systems, Inc., supra, 411 F.3d at p. 1022), and we will apply the factors that the federal courts have used to determine whether a defendant's stock sales may be considered suspicious for purposes of violations of federal securities law, as described in the federal authorities cited in part III.A.3.a.(i), ante.*fn15

(b) Plaintiffs Contend in Their Opening Brief That Defendants' February 2000 Stock Sales Were Suspicious

A plaintiff who seeks to prove scienter through evidence of suspicious insider trading must specifically identify those stock sales that the plaintiff contends are suspicious. In their opening brief, plaintiffs appear to contend that defendants' sales of Peregrine stock in February 2000 were suspicious. For example, plaintiffs state, "Within days of meeting with the CEO and the auditor who instructed that Peregrine change its ways of recognizing revenue [in January 2000], Moores, Noell, and Cole sold an unprecedented amount of stock, in excess of $200 million. [Citation]. These facts show suspicious insider trading sufficient to create an inference of scienter." Plaintiffs similarly contend, "[D]efendants sold off large sums of stock nine months into continuous bad reports," and maintain that defendants received the first such report in April 1999.*fn16 Plaintiffs' contention in their opening brief that, "The discovery referee also found the inside[r] trades occurring in February 2000 were suspicious," lends further support to our conclusion that plaintiffs' argument is directed at defendants' February 2000 stock sales.*fn17 (Italics added.) We therefore consider the evidence that plaintiffs cite in their brief in support of their contentionthat defendants' February 2000 stock sales were suspicious.*fn18

(c) Plaintiffs have Failed to Demonstrate That Defendants' Stock Sales in February 2000 Were Sufficiently Suspicious to Raise a Genuine Issue Of ...


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