Appeal from the United States District Court for the Northern District of California Vaughn R. Walker, Chief District Judge, Presiding D.C. No. 3:07-cv-02128-VRW.
The opinion of the court was delivered by: McKEOWN, Circuit Judge
Argued and Submitted February 11, 2010 -- San Francisco, California
Before: David R. Thompson and M. Margaret McKeown, Circuit Judges, and Thomas S. Zilly, Senior District Judge.*fn1
Gunawan Onie and other plaintiffs (the "investors") appeal the dismissal of their securities fraud class action against Cutera, Inc., its chief executive officer, Kevin Connors, and its chief financial officer, Robert J. Santilli (collectively "Cutera"), under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934. In this fraud-on-the-market suit, the investors claim that Cutera provided false and misleading revenue projections and failed to disclose material information about the shortcomings of Cutera's sales staff.
We conclude that Cutera's alleged incomplete disclosures about its sales force are not material omissions made in violation of the securities laws, and that Cutera's earnings projections fall within the statutory safe harbor for forward-looking projections under the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-5. We therefore affirm the district court's dismissal of the suit under Federal Rule of Civil Procedure 12(b)(6).
Cutera sells lasers and other light-based aesthetic systems to medical professionals for use in cosmetic procedures, primarily through its direct sales force. In 2005, Cutera expanded its senior sales force and by 2006 met with considerable success, increasing its revenue 44%, "primarily [due] to increased sales and marketing efforts and [its] higher concentration of direct sales employees in the United States." In late 2005, Cutera also embarked on an aggressive sales force expansion plan to market a lower-priced laser (the "Solera Opus") through junior sales representatives. The expansion was complete by May 2006 and Cutera projected it would take two quarters for the junior sales representatives to reach target productivity. In a January 31, 2007 conference call with analysts reporting results from the third quarter of 2006, Connors attributed growth to the success of the senior sales force but stated that Cutera was "looking to improve upon the sales productivity" of the junior sales team.
The junior sales force failed to move the Solera Opus, and Cutera abandoned the program. By the end of March 2007, only two junior representatives remained in their original roles, while the rest had transferred to other positions within Cutera or left the company.
The investors purchased Cutera stock between January 31, 2007 and May 7, 2007 (the "class period"). In a January 31, 2007 press release and conference call, Cutera disclosed that it "didn't get the productivity [it was] looking for" from the junior sales staff, and that it had "since made modifications to the [alignment] of the sales organization." Cutera nonetheless projected first quarter and year end revenues in 2007 of $26 million and $126 million respectively, a growth of 25% over the previous year. Cutera's stock value jumped from $28.62 to $33.38 the next day.
Cutera's stock price stayed above $32 throughout February and March 2007, peaking on April 4, 2007 at $38.39 a share.
On April 5, 2007, Cutera revised revenue projections for the first quarter of 2007 down from $26 million to $23 million, stating the shortfall "was due primarily to lower than expected productivity levels of [the] recent sales expansion." That same day, Cutera's stock price dropped more than 30% to $26.67. The stock price hovered between $24.83 and $30.06 between April 5 and May 7, 2007, when Cutera reported final first quarter revenues of $23.3 million, laying the shortfall at the feet of "the unsuccessful implementation of [the] junior sales program, unusually high sales employee turnover, and disappointing results" from certain national accounts. By the close of business May 8, 2007, Cutera shares closed at $23.40, a loss of $5.33 per share or more than 18% off the previous day's price.
The investors allege that on January 31, 2007, Cutera did not adequately disclose the poor performance of the junior sales force, leading to artificially inflated stock prices, and thus failing to provide investors with information material to whether they should purchase Cutera stock. This claim rests on the charge that Cutera knew about the significant shortcomings of the junior sales program before the beginning of the class period. As a result, the investors claim that in April and May 2007, when Cutera more fully disclosed the problems with its sales staff and associated shortfalls in earning projections, the stock price fell, causing a loss to investors.
The district court granted Cutera's motion to dismiss the complaint, finding no material difference between Cutera's January 31, 2007 disclosures and later disclosures in spring 2007 and concluding that the alleged failure to fully disclose information about the junior sales staff did not sufficiently allege a violation of securities laws. The district court further held that allegations about Cutera's misleading earnings projections fell within the PSLRA's safe harbor for forward-looking statements. The district court dismissed the complaint without prejudice to allow the investors to amend the complaint to "allege-with the particularity contemplated by the [PSLRA]-that the factors which accounted for Cutera's deviation from the January earnings projection were not warned against in the cautionary statements that accompanied the January protections." The investors eschewed the amendment option and instead filed an appeal.
We review de novo the district court's dismissal of the complaint for failure to state a claim under Rule 12(b)(6). In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). While a well-pleaded complaint may proceed even if we conclude that "actual proof of those facts [alleged] is improbable, and that a recovery is very remote and unlikely," Gilead, 536 F.3d at 1057 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)), a complaint "is properly dismissed if it fails to plead enough facts to state a claim to relief that is plausible on its face." Id. at 1055 (quoting Twombly, 550 U.S. at 570) (internal citations and quotation marks omitted).
The PSLRA imposes a heightened pleading standard in securities litigation and requires that "the 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. § 78u-4(b)(1)(B). Plaintiffs must allege with particularity both "the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant's intention 'to deceive, manipulate, or defraud.' " Tellabs, Inc. v Makor Issues & Rights, Ltd, 551 U.S. 308, 313 (2007) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 (1976)); see also 15 U.S.C. § 78u-4(b)(2). To surmount a motion to dismiss, the investors must thus plead facts sufficient to plausibly articulate "with particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b).
Forward-looking statements like the earnings projections are further insulated from liability. Earnings projections iden- tified as forward-looking statements and accompanied by adequate cautionary language fall within the PSLRA safe harbor, 15 U.S.C. § 78u-5(c)(1)(A)(i), as do other forward-looking statements not identified and not accompanied by cautionary language, unless they were "made with ...