United States District Court, N.D. California
THOMAS J. PRIMO; and EVAN POWELL, individually and on behalf of all others similarly situated, Plaintiffs,
PACIFIC BIOSCIENCES OF CALIFORNIA, INC.; HUGH C. MARTIN; SUSAN K. BARNES; BRIAN B. DOW; WILLIAM ERICSON; BROOK BYERS; MICHAEL HUNKAPILLER; RANDALL LIVINGSTON; SUSAN SIEGEL; DAVID SINGER; J.P. MORGAN SECURITIES LLC; MORGAN STANLEY & CO., INC.; DEUTSCHE BANK SECURITIES, INC.; and PIPER JAFFRAY & CO., Defendants
[Copyrighted Material Omitted]
For Thomas J. Primo, individually and on behalf of all others similarly situated, Evan Powell, individually and on behalf of all others similarly situated, Plaintiffs: Robert S. Green, LEAD ATTORNEY, Green & Noblin, P.C., Larkspur, CA; James Robert Noblin, Green and Noblin, P.C., Long Beach, CA; Timothy J. MacFall, PRO HAC VICE, Garden City, NY.
For Pacific Biosciences of California Inc, Hugh C. Martin, Susan K. Barnes, Brian B. Dow, William Ericson, Brook Byers, Michael Hunkapiller, Randall Livingston, Susan Siegel, David Singer, Defendants: Catherine Eugenia Moreno, Nina F. Locker, Wilson Sonsini Goodrich and Rosati, Palo Alto, CA.
For J.P. Morgan Securities LLC, Morgan Stanley & Co. Inc., Deutsche Bank Securities Inc.,, Piper Jaffray & Co., Defendants: Simona Gurevich Strauss, LEAD ATTORNEY, Simpson Thacher & Bartlett LLP, Palo Alto, CA; Bruce D. Angiolillo, PRO HAC VICE, Jonathan K. Youngwood, PRO HAC VICE, Simpson Thacher and Bartlett, New York, NY.
CLAUDIA WILKEN, United States District Judge.
ORDER GRANTING MOTIONS TO DISMISS (Docket Nos. 56 and 61)
Lead Plaintiff Thomas J. Primo and Plaintiff Evan Powell (collectively, Plaintiffs) assert claims on behalf of a putative class and subclass, for various violations of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Rules promulgated thereunder, against Defendants Pacific Biosciences of California, Inc. (PacBio); Hugh C. Martin, Susan K. Barnes and Brian B. Dow (collectively, the Officer Defendants); William Ericson, Brook Byers, Michael Hunkapiller, Randall Livingston, Susan Siegel and David Singer (collectively, with Martin, the Director Defendants); and J.P. Morgan Securities LLC, Morgan Stanley & Co., Deutsche Bank Securities Inc., Piper Jaffray & Co. (collectively, the Underwriter Defendants). Together, PacBio, the Officer Defendants and the Director Defendants are referred to as the PacBio Defendants. The PacBio Defendants and the Underwriter Defendants move to dismiss Plaintiffs' First Amended Complaint (1AC) in its entirety. Plaintiffs oppose the motions. Having considered the papers filed by the parties and their arguments at the hearing, the Court GRANTS both motions to dismiss, with leave to amend.
The following facts are alleged in Plaintiffs' 1AC.
Plaintiffs bring this putative class action suit against PacBio, nine of its officers and directors and four underwriting firms, on behalf of themselves and all persons or entities that purchased PacBio common
stock between October 27, 2010, the day of PacBio's initial public offering (IPO), and September 20, 2011. 1AC ¶ 1. Powell also brings claims on behalf of a subclass of all persons or entities that purchased PacBio common stock pursuant or traceable to PacBio's IPO.
PacBio, a biotechnology company formed in 2000, develops, manufactures and markets technology for genetic analysis. 1AC ¶ ¶ 14, 39. In the offering materials prepared for its IPO, including the Prospectus and Registration Statements, PacBio explained that its initial focus was on the DNA sequencing market and that it had developed a " third generation" sequencing system called the PacBio RS, which addressed various limitations of earlier DNA sequencing methods. Id. at ¶ 39. " Combining recent advances in nanofabrication, biochemistry, molecular biology, surface chemistry and optics, [PacBio] created a technology platform called single molecule, real-time, or SMRT, technology." Id. PacBio represented that its " SMRT technology has the potential to advance scientific understanding by providing a window into biological processes that has not previously been open."
Plaintiffs allege that the RS system " was supposed to be able to produce a complete, high quality human genome in a very short period of time," which could be utilized for, among other things, cancer research and diagnostics. Id. at ¶ 2. PacBio explained in its offering materials, " In order to understand the limitations of current DNA sequencing technologies, it is important to understand the sequencing process," which " consists of three phrases" : " sample preparation, physical sequencing and re-assembly." Id. at ¶ 41. In the first phase, sample preparation, the target genome is broken into multiple small fragments, which may be amplified into multiple copies. Id. In the second phase, physical sequencing, " the individual bases in each fragment are identified in order, creating individual reads." Id. " The number of individual bases identified continuously" in a read is referred to as " readlength." Id. In the final, re-assembly phase, the overlapping reads are aligned and the original genome is assembled into a continuous sequence. Id. " The longer the readlength the easier it is to reassemble the genome." Id. The ability to use the assembled information is also dependent on " the accuracy of the assembled sequence."
The offering materials explain that first generation sequencing technology had " relatively long readlengths" but was " limited by the small amounts of data that can be processed per unit of time, referred to as throughput." Id. Second generation methods achieved higher throughput but used processes that introduced errors and resulted in short readlength. Id. The offering materials proclaimed that the PacBio RS system " addresses many of the limitations of the first and second generation technologies, including short read lengths, limited flexibility, long time to result, lower throughput" and other issues. Id. at ¶ 42.
On October 27, 2010, the company conducted its IPO, raising $230 million by selling shares at a price of sixteen dollars per share. Id. at ¶ 38. Prior to its IPO, PacBio had obtained funding primarily through investments from venture capital firms and small government grants. Id. at ¶ 37.
Plaintiffs allege that, in the offering materials and after the IPO, Defendants made various misleading statements or failed to disclose material information regarding the performance of the PacBio RS system, which caused the PacBio common stock to be artificially inflated throughout the class period. Id. at ¶ ¶ 4-5.
On August 4, 2011, after the close of trading, Defendants issued a press release and held an earnings call, in which Plaintiffs contend Defendants disclosed some of the limitations of the RS system. Id. at ¶ ¶ 120-125. The following day, on August 5, 2011, JP Morgan downgraded PacBio's rating because the company had lowered its projection of sales. Id. at ¶ 126.
Plaintiffs allege that the press release, earnings call and JP Morgan report " shocked the market." Id. at ¶ 127. Shares of PacBio had closed at $9.90 per share on August 4, 2011, and fell to $6.50 per share by the close of trading on Friday, August 5, 2011 and to $5.60 per share by the close of trading on Monday, August 8, 2011.
On September 20, 2011, PacBio announced that it would reduce its workforce by twenty-eight percent, with the reductions affecting most its operations and research and development functions. Id. at ¶ 130. PacBio's stock had closed at $5.56 per share on September 20, 2011 and fell to $4.25 per share by the close of trading the following day. Id. at ¶ 133.
Plaintiffs have attached to their 1AC a certification from Primo attesting that he purchased 1,500 shares of PacBio stock on July 7, 2011. Plaintiffs separately filed a certification from Powell attesting that he purchased fifty shares of PacBio stock on November 17, 2010, one hundred shares on May 2, 2011 and two hundred shares on August 5, 2011. Docket No. 26.
Plaintiff Powell asserts the following claims on behalf of himself and the putative subclass: (1) against all Defendants for violation of § 11 of the Securities Act, 1AC ¶ ¶ 58-65; (2) against PacBio, the Officer Defendants and the Underwriter Defendants for violation of § 12(a)(2) of the Securities Act, id. at ¶ ¶ 66-72; and (3) against the Officer Defendants and the Director Defendants for violation of § 15 of the Securities Act, id. at ¶ ¶ 73-75.
Both Plaintiffs assert the following claims on behalf of themselves and the putative class: (1) against PacBio and the Officer Defendants, for violation of § 10(b) of the Exchange Act and Rule 10b-5, id. at ¶ ¶ 154-64; and (2) against the Officer Defendants, violation of § 20(a) the Exchange Act, id. at ¶ ¶ 165-68.
A complaint must contain a " short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a). On a motion under Rule 12(b)(6) for failure to state a claim, dismissal is appropriate only when the complaint does not give the defendant fair notice of a legally cognizable claim and the grounds on which it rests. Bell A. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). " Factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true." In re Rigel Pharms., Inc. Secs. Litig., 697 F.3d 869, at *13 (9th Cir.) (citing Twombly, 550 U.S. at 555). In considering whether the complaint is sufficient to state a claim, the court will take all material allegations as true and construe them in the light most favorable to the plaintiff. NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). However, this principle is inapplicable to legal conclusions; " threadbare recitals of the elements of a cause of action, supported by mere conclusory statements," are not taken as true. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 555).
" In addition to the pleading requirements of Rule 8, there are more demanding pleading requirements for certain causes of action, especially securities
Rigel, 697 F.3d 869, at *13-14. Further, Rule 9(b) provides, " In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). The allegations must be " specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong." Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). Statements of the time, place and nature of the alleged fraudulent activities are sufficient, Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987), provided the plaintiff sets forth " what is false or misleading about a statement, and why it is false." In re GlenFed, Inc., Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994). Scienter may be averred generally, simply by saying that it existed. See id. at 1547; Fed.R.Civ.P. 9(b) (" Malice, intent, knowledge, and other condition of mind of a person may be averred generally" ). As to matters peculiarly within the opposing party's knowledge, pleadings based on information and belief may satisfy Rule 9(b) if they also state the facts on which the belief is founded. Wool, 818 F.2d at 1439.
When granting a motion to dismiss, the court is generally required to grant the plaintiff leave to amend, even if no request to amend the pleading was made, unless amendment would be futile. Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911 F.2d 242, 246-47 (9th Cir. 1990). In determining whether amendment would be futile, the court examines whether the complaint could be amended to cure the defect requiring dismissal " without contradicting any of the allegations of [the] original complaint." Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th Cir. 1990).
Defendants contend that the 1AC constitutes an impermissible " puzzle pleading" and should be dismissed in its entirety for that reason. Defendants also argue that Plaintiffs have failed adequately to plead a § 11 claim because they have not plead facts that show that the registration statement contained any material omissions or misrepresentations. Similarly, Defendants seek to dismiss Plaintiffs' § 12(a)(2) claim because they have not alleged any false or misleading statement in the prospectus. They further argue that Plaintiffs lack standing to bring a § 12(a)(2) claim. PacBio Defendants also maintain that the § 12(a)(2) claim should be dismissed against PacBio and the Officer Defendants because they were not " sellers" of the securities. PacBio Defendants seek dismissal of the claim under § 10(b) and Rule 10b-5, arguing that none of the challenged statements or omissions are actionable and that Plaintiffs fail to plead scienter sufficiently. Finally, PacBio Defendants move to dismiss the § 15(a) and § 20(a) claims because Plaintiffs have not adequately alleged the primary violations under the Exchange Act or Securities Act and have not alleged properly that the Officer and Director Defendants were " controlling persons."
I. Puzzle pleading
In a " puzzle pleading," the " plaintiffs have left it up to defendants and the court to try to figure out exactly what the misleading statements are, and to match the statements up with the reasons they are false or misleading." In re Autodesk, Inc. Sec. Litig., 132 F.Supp.2d 833, 841 (N.D. Cal. 2000).
" In the context of securities class action complaints, courts have repeatedly lamented plaintiffs' counsels' tendency to place 'the burden  on the reader to sort out
the statements and match them with the corresponding adverse facts to solve the " puzzle" of interpreting Plaintiffs' claims.'" Wenger v. Lumisys, Inc., 2 F.Supp.2d 1231, 1244 (N.D. Cal. 1998) (quoting In re Oak Tech. Sec. Litig., at *5 (N.D. Cal.) (formatting in original)). Courts recognize that such " 'puzzle-style' complaints are an 'unwelcome and wholly unnecessary strain on defendants and the court system.'" Id. (quoting GlenFed, 42 F.3d at 1544);
see also Shuster v. Symmetricon, Inc., at *9 (N.D. Cal.) (" The Complaint as it now stands is a rambling set of allegations which is almost impossible to effectively review . . . Plaintiff sets forth lengthy quotes from various releases by defendants' officers and a securities analyst but does not make clear what portion of each quote constitutes a false presentation" ); In re Conner Peripherals, Inc., 1996 WL 193811, at *1 (N.D. Cal.) (" The complaint as written requires the court to excavate for actionable claims . . . Judicial resources are too scarce and worthy cases too pressing for a court to spend its time rooting around in bloated complaints by experienced lawyers for a handful of actionable allegations." ).
Courts in this district have held that puzzle pleadings fail " to set forth a 'short and plain' statement of their claims in violation of Rule 8(a)," to " make each allegation 'simple, concise and direct'" in violation of Rule 8 and to fulfill the more exacting pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA) for violations of the Exchange Act. In re Splash Tech. Holdings, Inc. Secs. Litig., 160 F.Supp.2d 1059, 1075 (N.D. Cal. 2001); Wenger, 2 F.Supp.2d at 1244.
Like the pleadings found to be lacking in many of the above cases, Plaintiffs' 1AC contains lengthy quotes and recitations of the contents of the offering materials and public comments made by Defendants. In the allegations common to all of their claims, Plaintiffs present a list of alleged omissions or misstatements but fail to connect these to any particular statements made in the offering materials. See 1AC ¶ 51. In the allegations specific to their Exchange Act claims, Plaintiffs make some attempt to connect the alleged omissions to particular statements but continue to do so in a general manner that requires the reader to guess what particular statements they mean or how those statements were rendered false and misleading. See, e.g., 1AC ¶ 85 (" The failure to state in the Prospectus that the Company expected to 'have lots of bugs' with the PacBio RS, that the 'performance envelope' needed to be validated, and that systems were unstable and needed to be incrementally increased demonstrated that the statements describing the PacBio RS in the prospectus [were] materially false and misleading." ).
Plaintiffs argue that their 1AC is sufficient because Defendants are able to " discern which omissions or misrepresentations form the basis of their claims" well enough to draft a motion to dismiss. Opp. at 9. However, that Defendants were able to argue that the pleading was inadequate does not establish that it provided them with sufficient notice of the claims against them. Defendants are not required to guess at the basis of Plaintiffs' claims. Instead, Plaintiffs have the burden to present at least a " short and plain statement" of their claims. Moreover, in their papers, Defendants did not evidence a clear understanding of the statements that Plaintiffs challenge.
Because Plaintiffs have failed to set forth a " short and plain statement" of their claims in violation of Rule 8(a), to make their allegations " simple, concise and direct" in violation of Rule 8(d) or to fulfill
the requirements of the PSLRA for their Exchange Act claims, the Court GRANTS Defendants' motion to dismiss the 1AC in its entirety.
II. Claim against all Defendants for violation of § 11 of the Securities Act
A. Legal standard
" Section 11 creates a private remedy for any purchaser of a security if any part of the registration statement, 'when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.'" In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1403 (9th Cir. 1996) (quoting 15 U.S.C. § 77k(a)). " 'The plaintiff in a § 11 claim must demonstrate (1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment.'" Id. at 1403-04 (quoting Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir. 1994)). " 'No scienter is required for liability under § 11; defendants will be liable for innocent or negligent material misstatements or omissions.'" Id. at 1404 (quoting Kaplan, 49 F.3d at 1371). For an omission to be material and actionable, " there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." Id. at 1408 (internal quotation marks and citations omitted); see also Basic Inc. v. Levinson, 485 U.S. 224, 231, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (an " omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important" in making a decision); No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 934 (9th Cir. 2003) (same).
Defendants contend that Plaintiffs' § 11 claim and other claims under the Securities Act sound in fraud and therefore are subject to Rule 9(b)'s heightened pleading standards. See Rubke v. Capitol Bancorp, Ltd., 551 F.3d 1156, 1161 (9th Cir. 2009); In re Daou Sys., Inc., 411 F.3d 1006, 1027 (9th Cir. 2005); Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-1104 (9th Cir. 2003). Plaintiffs respond that they have " carefully distinguished their Securities Act claims from those under the Exchange Act and Rule 10b-5, which requires allegations of fraud and scienter," that they have " expressly disclaim[ed] any allegation of fraud for those claims" and that their " Section 11 claim was not dependent on the fraud allegations relevant to their Section 10(b) claims." Opp. at 11-12.
" To ascertain whether a complaint 'sounds in fraud,'" a court " must normally determine, after a close examination of the language and structure of the complaint, whether the complaint 'allege[s] a unified course of fraudulent conduct' and 'rel[ies] entirely on that course of conduct as the basis of a claim.'" Rubke, 551 F.3d at 1161 (quoting Vess, 317 F.3d at 1103-04) (formatting in original). A plaintiff " may choose not to allege a unified course of fraudulent conduct in support of a claim, but rather to allege some fraudulent and some non-fraudulent conduct." Vess, 317 F.3d at 1104. " In such cases, only the allegations of fraud are subject to Rule 9(b)'s heightened pleading requirements." Id.
Here, Plaintiffs have made conscious efforts to separate their Securities Act claims from the fraud allegations in their Exchange Act claims; the facts that are related to the Securities Act claims are incorporated into the Exchange Act claims, but the reverse is not true. The 1AC's
causes of action under § § 11, 12(a)(2) and 15 of the Securities Act expressly disclaim any allegations that " allege fraud, scienter or the intent of the defendants to defraud Plaintiff Powell or members of the subclass." 1AC ¶ ¶ 58, 66, 73. Although there are allegations in the 1AC that some of Defendants' conduct in violation of the Exchange Act was fraudulent, Plaintiffs are permitted to plead their claims in the alternative in this manner. Fed.R.Civ.P. 8 (d)(2), (3).
Accordingly, because Plaintiffs' claims under the Securities Act do not sound in fraud, they are not required to meet the particularity pleading standards in Rule 9(b).
B. Misrepresentation or omission of a material fact
Defendants contend that Plaintiffs have not plead facts sufficient to show that the registration statement contained any false statements of material fact or omitted material facts necessary to make the statements in the statement not misleading.
In the 1AC, Plaintiffs allege that the offering materials, including the registration statement and prospectus, contained the following " untrue statements of material fact and/or omitted material facts" :
(1) omitted that PacBio's human gene sequencing technology in fact did not have a 99.99% accuracy rate or misstated that it did have a 99.99% accuracy rate;
(2) misstated that the PacBio RS system would not require upgrades and/or replacement of instrument hardware;
(3) misstated that there were plans to further develop applications for the PacBio RS system, as these applications could ...