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In re UTStarcom

March 27, 2009

IN RE UTSTARCOM, INC. SECURITIES LITIGATION


The opinion of the court was delivered by: James Ware, United States District Judge.

ORDER DENYING DEFENDANTS' MOTIONS TO DISMISS; GRANTING DEFENDANTS' MOTIONS TO STRIKE; DENYING MOTIONS TO INTERVENE AND TO STRIKE AS MOOT

I. INTRODUCTION

This is a putative securities fraud class action brought on behalf of investors who acquired UTStarcom, Inc. á("UTStarcomá" or "USTI" or "Company") securities between February 21, 2003 and October 12, 2007 (the "Class Period"), against UTStarcom áand certain of its officers and directors, *fn1 as well as Softbank Corporation á("SBC"), Softbank America, Inc. ("SBA"), and Softbank Holdings, Inc. á("SBH") *fn2 (collectively, "Defendants"). In their Fourth Amended Complaint, Plaintiffs allege Defendants, inter alia, violated §§ 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934 ("the Exchange Act").

Presently before the Court are various motions brought by Defendants *fn3 and a Third Party *fn4 to this action. The Court conducted a hearing on January 16, 2009. Based on the papers submitted to date and oral argument, the Court DENIES Defendants' Motions to Dismiss, GRANTS Defendants' Motions to Strike, DENIES Third-Party's Motions to Intervene and to Strike as moot.

II. BACKGROUND

The factual and procedural background in this action was detailed extensively in the Court's July 24, 2008 Order Overruling Defendants' Objections to Plaintiffs' Fourth Amended Complaint. (hereafter, "July 24 Order," Docket Item No. 242.) The Court reviews the procedural history relevant to the current motions.

In the July 24 Order, the Court overruled Defendants' objections to the structure of the Fourth Amended Complaint. *fn5 (July 24 Order at 5.) The Court found that the Complaint adequately followed the Court's structural directions and was within the Court's stated page limit. *fn6 In addition, the Court overruled Defendants' objections to allegations of stock option backdating contained in the Complaint, on the ground that the Court had not previously prohibited amendment to allege backdating. (Id. at 6.) The Court instead invited Defendants to bring a motion to strike those allegations.

On September 5, 2008, the Court denied Defendants' motion to relate this action with Rudolph v. UTStarcom, Inc.,á No. C 07-4578 SI, which is a stock option backdating case against Defendants, currently pending before Judge Illstoná in the Northern District of California. *fn7 (Docket Item No. 256.)

Presently before the Court are Defendants' Motions to Dismiss, Defendants' Motions to Strike, Third-Party's Motion to Intervene and to Strike.

III. STANDARDS

A. Motion to Dismiss

Pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed against a defendant for failure to state a claim upon which relief may be granted against that defendant. Dismissal may be based on either the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990); Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533- 534 (9th Cir. 1984). For purposes of evaluating a motion to dismiss, the court "must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the nonmoving party." Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). Any existing ambiguities must be resolved in favor of the pleading. Walling v. Beverly Enters., 476 F.2d 393, 396 (9th Cir. 1973).

However, mere conclusions couched in factual allegations are not sufficient to state a cause of action. Papasan v. Allain, 478 U.S. 265, 286, 106 S. Ct. 2932, 92 L. Ed. 2d 209 (1986); see also McGlinchy v. Shell Chem. Co., 845 F.2d 802, 810 (9th Cir. 1988). The complaint must plead "enough facts to state a claim for relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). Courts may dismiss a case without leave to amend if the plaintiff is unable to cure the defect by amendment. Lopez v. Smith, 203 F.3d 1122, 1129 (9th Cir. 2000).

Claims brought under Section 10(b) of the Exchange Act and Rule 10b-5 must meet the particularity requirements of Federal Rule of Civil Procedure 9(b). In re Daou Sys., Inc. Sec. Litig., 411 F.3d 1006, 1014 (9th Cir. 2005). Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b).

Moreover, claims brought under Section 10(b) and Rule 10b-5 must also meet the stringent pleading standards of the Private Securities Litigation Reform Act of 1995. *fn8 The PSLRA amends the Exchange Act to require that a private securities fraud litigation complaint "plead with particularity both falsity and scienter." In re Daou, 411 F.3d at 1014. Specifically, a complaint alleging securities fraud must "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." 15 U.S.C. § 78u-4(b)(1); In re Vantive Corp. Secs. Litig., 283 F.3d 1079, 1085 (9th Cir. 2002).

To plead a violation of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, a plaintiff must allege that (1) defendants made a material misrepresentation or omission; (2) the misrepresentation was in connection with the purchase or sale of a security; (3) the misrepresentation caused plaintiff's loss; (4) plaintiff relied on the misrepresentation or omission; (5) defendants acted with scienter; and (6) plaintiff suffered damages. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S. Ct. 1627, 161 L. Ed. 2d 577 (2005). Each of these elements must be pleaded as to each defendant. Id.

B. Motion to Strike

Pursuant to Federal Rule of Civil Procedure 12(f), "the court may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." The Ninth Circuit has held that "[t]he function of a 12(f) motion to strike is to avoid the expenditure of time and money that must arise from litigating spurious issues by dispensing with those issues prior to trial." Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 1993) rev'd on other grounds, Fogerty v. Fantasy, Inc., 510 U.S. 517, 114 S. Ct. 1023, 127 L. Ed. 2d 455 (1994).

However, "[m]otions to strike are generally regarded with disfavor because of the limited importance of pleading in federal practice, and because they are often used as a delaying tactic." Neilson v. Union Bank of Cal., N.A., 290 F. Supp. 2d 1101, 1152 (C.D. Cal. 2003); See, e.g., Cal. Dep't of Toxic Substances Control v. Alco Pac., Inc., 217 F. Supp. 2d 1028 (C.D. Cal. 2002). Accordingly, such motions should be denied unless the matter has no logical connection to the controversy at issue and may prejudice one or more of the parties to the suit. SEC v. Sands, 902 F. Supp. 1149, 1166 (C.D. Cal. 1995); LeDuc v. Kentucky Central Life Ins. Co., 814 F. Supp. 820, 820 (N.D. Cal. 1992). When considering a motion to strike, the court "must view the pleading in a light most favorable to the pleading party." In re 2TheMart.com, Inc. Sec. Litig., 114 F. Supp. 2d 955, 965 (C.D. Cal. 2000).

IV. DISCUSSION

A. UTStarcom áDefendants' Motion to Dismiss

UTStarcom áDefendants move to dismiss the Complaint on the grounds that, inter alia, (1) certain allegedly fraudulent statements were not false when made; (2) the Complaint fails to plead a strong inference of scienter; and (3) the Complaint does not adequately allege loss causation. The Court addresses each contention in turn.

1. Falsity of Defendants' Statements

Defendants contend that allegedly fraudulent statements made by Defendants Lu and Sophie relating to the strength of UTStarcom's áChina and international business were not false when made. (USTI Motion to Dismiss at 8.) Defendants assert that Plaintiffs' Complaint does not cite to any contemporaneous documents or facts to show that Defendants' statements were false at the time they were made. (Id.) Plaintiffs contend that Defendants' statements about the strength of UTStarcom's áinternational business were false when made because Defendants knew at the time they made the statements that there was no reasonable basis for their optimistic financial projections. *fn9

The PSLRA has "exacting requirements for pleading falsity." Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1070 (9th Cir. 2008). A complaint "shall 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." 15 U.S.C. ยง 78u-4(b)(1). "A litany of alleged false statements, ...


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