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City of Royal Oak Retirement System, et al v. Juniper Networks


May 17, 2013


The opinion of the court was delivered by: Lucy H. Koh United States District Judge

United States District Court


For the Northern District of California

Defendants Juniper Networks, Inc. ("Juniper" or "the Company"), Kevin R. Johnson ("Johnson"), Robyn M. Denholm ("Denholm"), and Scott G. Kriens ("Kriens") (collectively, 21 "Defendants") move to dismiss Plaintiffs' second amended complaint pursuant to Rules 12(b)(6) 22 and 9(b) of the Federal Rules of Civil Procedure. See Mot. to Dismiss, ECF No. 91. The motion 23 has been fully briefed. See Opp'n., ECF No. 99; Reply, ECF No. 100. The Court found the motion 24 to be appropriate for disposition without oral argument pursuant to Civil Local Rule 7-1(b) and 25 vacated the hearing that had been set for May 16, 2013. Order Vacating Hr'g, ECF No. 104. For 26 the reasons explained below, the Court GRANTS the motion as to all defendants without leave to 27 amend and DISMISSES the action with prejudice. 28

4 against Defendants on August 15, 2011. Compl., ECF No. 1. Several entities sought appointment 5 as lead plaintiff and approval of lead counsel. The Court appointed the City of Omaha Police and 6

Scott䧊 LLP as lead counsel. Order, ECF No. 42. Plaintiffs filed an amended complaint on 8

On July 23, 2012, the Court issued an order that inter alia granted Defendants' motions to

10 dismiss the amended complaint with leave to amend ("July 23 Order"). July 23 Order, ECF No. 84.

The thirty-two page order explained in detail how the amended complaint was deficient. Id. The

order expressly advised Plaintiffs that "[f]ailure to cure the deficiencies identified herein will result 13 in dismissal with prejudice." Id. at 32. 14

Plaintiffs filed the operative second amended complaint ("SAC") on August 20, 2012,

15 asserting claims on behalf of persons who purchased or otherwise acquired Jupiter's common stock 16 between July 20, 2010 and July 26, 2011, inclusive (the "Class Period"). SAC, ECF No. 87. 17

1934 ("Exchange Act") and Rule 10b-5 of the Securities and Exchange Commission ("SEC"); (2) 19 controlling person liability under § 20(a) of the Exchange Act; and (3) insider trading under § 20A 20 of the Exchange Act. Id. 21

Juniper designs and sells communications networking equipment to larger global service

23 providers, enterprises, and public sector organizations. SAC ¶ 3, ECF No. 87. "Juniper's primary 24 product and service offerings are its core routers and switches that allow customers to move voice, 25 video, and data traffic across their networks, as well as its security products and software that enable 26 the secure and efficient operation of data networks." Id. All Juniper hardware systems, including 27 routing, switching, and security devices, use Juniper's proprietary JUNOS network operating 28 system. Id. ¶ 6. The biggest competitor of the JUNOS operating system is the IOS operating


A. Procedural History

The City of Royal Oak Retirement System filed this putative securities fraud class action

Fire Retirement System and the City of Bristol Pension Fund as lead plaintiffs and appointed 7

February 13, 2012. Am'd Compl., ECF No. 47. 9

United States District Court For the Northern District of California

Plaintiffs assert three claims: (1) securities fraud under § 10(b) of the Securities Exchange Act of 18

B. Factual Allegations

system of Cisco Systems, Inc. ("Cisco"). Id. ¶ 7. 2

Johnson was the company's president, chief executive officer ("CEO"), and director. Id. ¶ 27. 4

Johnson, Denholm, and Kriens held key positions at Juniper during the Class Period.

Denholm was the company's chief financial officer ("CFO") as well as an executive vice president. 5

On February 23, 2010, prior to the start of the Class Period, Juniper hosted an analyst day

7 conference during which it disclosed a long-term business plan calling for a 20% growth in 8 revenue and a 25% operating margin over the next three to five years. Id. ¶ 30. On July 20, 2010, 9 the first day of the Class Period, Juniper issued a press release announcing its preliminary 2Q10 10 financial results, which were filed the same date on a Form 8-K. Id. ¶ 61. Juniper reported a 24%

increase in revenue on a year-over-year basis and a non-GAAP*fn1 operating margin of 23.9%. Id.

Juniper attributed its financial results to skillful execution of its business plan and increased demand 13 for its products, and expressed bullish future expectations through a number of comments, for 14 example, that it was "well on track to delivering profitable growth in 2010 and making progress 15 against [its] long-term revenue growth objective while expanding operating margins." Id. ¶ 68; see 16 also ¶¶ 61, 69-71. 17

Throughout the Class Period, Juniper continued to report that it "was still on track to meet its

18 long-term business plan of 20% revenue growth and 25% operating margins." Id. ¶ 95. Juniper 19 also continued to make bullish statements such as the following: "[O]ur demand indicators are 20 strong, our portfolio is robust and we are focused on executing against the market opportunity ahead 21 of us." Id. ¶ 95; see also ¶¶ 88, 96-99, 103, 111, 119-23, 129, 137, 140, 142. Juniper's stock price 22 rose during the Class Period, from $26.60 per share the day before the start of the Class Period to a 23 high of $44.46 per share on March 8, 2011. Id. ¶¶ 73, 139. On March 3, 2011, when the stock price 24 was at its peak, Juniper conducted a $1 Billion Debt IPO. Id. ¶ 138. 25

"Defendants knew but failed to disclose, the Company's business fundamentals did not support 27

Id. ¶ 28. Kriens was the chairman of the board of directors. Id. ¶ 26. 6

United States District Court For the Northern District of California

Plaintiffs allege that Juniper's long-term projections were false and misleading because

these lofty revenue and operating margin targets." SAC ¶ 34, ECF No. 87. According to Plaintiffs, 2

Juniper was experiencing "slumping sales and intense pricing pressures," as well as problems with 3 its proprietary JUNOS operating system. Id. Moreover, Juniper did not have the sales force 4 necessary to grow its network business (routers and switches) at the projected levels. Id. 5

Defendants did not adequately disclose the impact of the company's adoption of new revenue 7 recognition rules issued by the Financial Accounting Standards Board ("FASB"). Under the old 8 rules, when Juniper sold hardware or software that included an ongoing obligation to provide 9 service or maintenance ("multiple-element arrangements" or "multiple-deliverable arrangements"), 10

obligation was satisfied. Id. ¶¶ 51-53. Under the new rules -- Accounting Standards Update

("ASU") 2009-13 and ASU 2009-14 -- Juniper had discretion to determine the value of the 13 undelivered portion of the ongoing obligation and was required to defer revenue recognition only 14 with respect to that undelivered portion. Id. ¶ 54. Once Juniper adopted the new rules, there was an 15 initial period in which it recognized more of its revenue up-front on current period sales while it 16 continued to recognize deferred revenue on past-period sales. Id. Plaintiffs allege that as a result of 17 this temporary bump in revenue, Juniper's financials gave the appearance that the company was 18 meeting its long-term growth targets when in fact Juniper's actual revenue growth was trending 19 down. Id. ¶ 55. For example, Plaintiffs allege that while Juniper reported revenue growth of 24.4%, 20

22.9%, and 26.4% in 2Q10, 3Q10, and 4Q10, respectively, Juniper's "actual" revenue growth was 21 only 17.7%, 16.8%, and 14.8%, respectively. Id. Plaintiffs allege that during this same period, 22

Juniper's much larger competitor, Cisco, reported less robust revenue growth and suffered a decline 23 in its stock price. Id. ¶ 9. While the purpose of the juxtaposition of the two companies' financials is 24 not entirely clear, Plaintiffs may wish the Court to infer that the market assumed that Juniper was 25 picking up customers from Cisco. 26

27 recognition rules. Id. ¶ 59. However, Plaintiffs assert that the disclosures were not sufficiently 28 detailed and comprehensive to inform the market that a significant portion of Juniper's apparent

Plaintiffs also allege that Juniper's financial reporting was false or misleading because

Juniper was required to defer recognition of a significant portion of the total sales price until such

United States District Court For the Northern District of California

Plaintiffs acknowledge that Juniper publicly disclosed its adoption of the new revenue

growth trend actually was attributable to the change in revenue recognition practices. Id. ¶¶ 59-60. 2

On June 1, 2011, Juniper disclosed that growth in certain segments of its business was

3 slowing, and that 1Q11 had started "kind of on the weak side." Id. ¶ 153. Juniper's stock declined 4 several dollars per share on this news. Id. ¶ 155. On July 25, 2011, Juniper announced "a major 5 management reshuffling." Id. ¶ 159. On July 26, 2011, the last day of the Class Period, Juniper 6 issued a press release reporting a year-over-year revenue increase of 15%, which was lower than its 7 previous guidance of a year-over year revenue increase of between 16% and 21%. Id. ¶ 160. 8

21.6%; these figures were significantly off previous guidance. Id. Juniper lowered guidance for 10

19% and 21%. Id. On this news, Juniper's stock fell nearly 21% to $24.66 per share. Id. ¶ 171.

Juniper also reported non-GAAP gross margin of 65.6% and non-GAAP operating margin of 9

3Q11 and FY11, projecting revenue growth between 12% and 14% and operating margins between

15 sufficiency of the plaintiff's claims. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). When 16 determining whether a claim has been stated, the court accepts as true all well-pled factual 17 allegations and construes them in the light most favorable to the plaintiff. Reese v. BP Exploration 18

(Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). However, the court need not "accept as true 19 allegations that contradict matters properly subject to judicial notice or by exhibit" or "allegations 20 that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." In re 21

Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (internal quotation marks and citations 22 omitted). While a complaint need not contain detailed factual allegations, it "must contain sufficient 23 factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. 24

Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A 25 claim is facially plausible when it "allows the court to draw the reasonable inference that the 26 defendant is liable for the misconduct alleged." Id. 27

In addition to the pleading standards discussed above, a plaintiff asserting a private securities

United States District Court For the Northern District of California


A. Federal Rule of Civil Procedure 12(b)(6)

A motion to dismiss brought under Federal Rule of Civil Procedure 12(b)(6) tests the legal

B. Federal Rule of Civil Procedure 9(b) and the PSLRA

fraud action must meet the heightened pleading requirements imposed by Federal Rule of Civil 2

Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). In re 3

VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir. 2012). Rule 9(b) requires a plaintiff 4 to "state with particularity the circumstances constituting fraud. . . ." Fed. R. Civ. P. 9(b); see also 5

In re VeriFone Holdings, 704 F.3d at 701. The PSLRA requires that "the complaint shall specify 6 each statement alleged to have been misleading, [and] the reason or reasons why the statement is 7 misleading. . . ." 15 U.S.C. § 78u--4(b)(1)(B). The PSLRA further requires that the complaint "state 8 with particularity facts giving rise to a strong inference that the defendant acted with the required 9 state of mind." 15 U.S.C. § 78u--4(b)(2)(A). "To satisfy the requisite state of mind element, a 10 complaint must allege that the defendant[ ] made false or misleading statements either intentionally

or with deliberate recklessness." In re VeriFone Holdings, 704 F.3d at 701 (internal quotation

marks and citation omitted) (alteration in original). The scienter allegations must give rise not only 13 to a plausible inference of scienter, but to an inference of scienter that is "cogent and at least as 14 compelling as any opposing inference of nonfraudulent intent." Tellabs, Inc. v. Makor Issues & 15

Rights, Ltd., 551 U.S. 308, 314 (2007). 16

19 connection with the purchase or sale of any security . . . any manipulative or deceptive device or 20 contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 21

78j(b). Rule 10b-5 further provides that it is unlawful "[t]o make any untrue statement of a material 22 fact or to omit to state a material fact necessary in order to make the statements made, in the light of 23 the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b). The 24 elements of a claim under § 10(b) and Rule 10b-5 are: "(1) a material misrepresentation or omission 25 by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the 26 purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic 27 loss; and (6) loss causation." Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1317 (2011) 28

United States District Court For the Northern District of California


A. Section 10(b) of the Exchange Act and Rule 10b-5

Under Section 10(b) of the Exchange Act, it is unlawful for any person to "use or employ, in

(quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008)).

3 margin of 25% were false or misleading because Defendants knew that those projections were not 4 realistic in light of Juniper's slowing sales, pricing pressure from competitors, problems with the 5

July 23 Order, the Court concluded that Defendants' projections are protected under the PSLRA's 7

1. Misrepresentations Re Long-Term Growth Projections

Plaintiffs assert that Defendants'*fn2 projections of revenue growth of 20% and operating

JUNOS operating system, and the lack of an adequate sales force. SAC ¶ 34, ECF No. 87. In its 6

"safe harbor" provision, which provides in relevant part that a defendant may not be held liable for a 8 statement that is "identified as a forward-looking statement, and is accompanied by meaningful 9 cautionary statements identifying important factors that could cause actual results to differ 10 materially from those in the forward-looking statement." 15 U.S.C. § 78u-5(c)(1)(A)(i); July 23

Order at 17-20, ECF No. 84. To the extent that any of the statements are not forward-looking -- for

example, statements that "Verizon and AT&T are strong partners," and that Juniper has "strong 13 demand metrics and good momentum" -- the Court held that the statements are vague, generalized 14 assertions of corporate optimism that are not actionable. July 23 Order at 20-21; see also In re 15

Impac Mortg. Holdings, Inc. Sec. Litig., 554 F. Supp. 2d 1083, 1096 (C.D. Cal. 2008) ("vague, 16 generalized assertions of corporate optimism or statements of 'mere puffing' are not actionable 17 material misrepresentations under federal securities laws"). Finally, the Court determined that even 18 if Juniper's projections and related statements are not protected, Plaintiffs have failed to show that 19 the statements are false or misleading. July 23 Order at 21-23. 20

21 respect to safe harbor and corporate optimism. Plaintiffs concede as much, stating in their 22 opposition that: "Plaintiffs have realleged their claims that Defendants' revenue projections were 23 false and misleading. Plaintiffs respectfully disagree with the Court's conclusion that these 24

United States District Court For the Northern District of California

Plaintiffs have not added any new allegations in response to the Court's determinations with

statements were protected by adequate cautionary language, and wish to preserve these claims in the 2 event that an appeal becomes necessary." Opp'n at 18, ECF No. 99. 3

Juniper's revenue projections are not false and misleading. See SAC ¶¶ 48-50, ECF No. 87. Those 5 paragraphs are based upon information received from a new confidential witness, CW6.*fn3 CW6 is a 6 sales finance manager who worked at Juniper from September 2005 until May 2012. Id. ¶ 48. CW6 7 was responsible for managing Jupiter's annual operating expenditure budget for the Americas and 8 conducting monthly meetings with each division vice president in the Americas. Id. Plaintiffs 9 allege that CW6 "confirmed that throughout the Class Period, the Company's touted goal of 20% 10 year-over-year revenue was not a realistic objective and was only achieved during FY10 as a result

of the accounting rules change." Id. CW6 also "confirmed that during the Class Period, Juniper's

business was adversely affected by a variety of factors including software problems relating to the 13

Plaintiffs have added three new paragraphs in response to the Court's determination that

United States District Court

JUNOS operating system and its incompatibility with the SRX product suite, slumping sales due to 14 delayed release dates for major routing and switching products, and lower than expected sales force 15 headcount." Id. ¶ 49. CW6 opined that Juniper's use of the new accounting rules provided it with 16

"a cheap way" to meet its announced revenue targets notwithstanding the company's ongoing 17 problems. Id. ¶ 50. 18

Court concluded that Plaintiffs had not shown that the problems rendered the company's projections 20 unattainable. See July 23 Order at 5-6, 21-23, ECF No. 84. CW6 opines that the problems made the 21 company's forecasts unrealistic. However, CW6 managed Juniper's operating expenses; the SAC 22 does not indicate that CW6 played any role in Juniper's revenue forecasting or had any experience 23 that would render CW6's opinion particularly reliable. The SAC does allege that "CW6 utilized . . . 24 the Siebel system, which tracked financial forecasts and enabled users to conduct budget-to-actual 25 variance analysis." SAC ¶ 48, ECF No. 87. It is unclear what import may be attributed to the fact 26 that CW6 "utilized" the Siebel system. To the extent that Plaintiffs mean to allege that CW6 had 27

For the Northern District of California

The problems identified by CW6 were described in detail in the amended complaint; the

access to Juniper's internal financial forecasts, the Court notes the absence of any allegation that 2 those forecasts showed that Juniper would not or could not meet its long-term projections. 3

4 targets appears to be pure speculation. Plaintiffs insist that although Juniper reported revenue 5 growth of 24.4%, 22.9%, and 26.4% in 2Q10, 3Q10, and 4Q10, respectively, Juniper's actual 6 revenue growth was only 17.7%, 16.8%, and 14.8%, respectively. SAC ¶ 55, ECF No. 87. 7

Finally, CW6's statement that Juniper took "a cheap way" to meet its announced revenue

However, Plaintiffs do not suggest that the revenue recognized by Defendants under ASU 2009-13 8 and ASU 2009-14 was not real or legitimate. Even accepting Plaintiffs' "actual" revenue growth 9 figures, it is not as though Juniper was nowhere near its target -- the fact that Juniper had "actual" 10 revenue growth of 17.7% and 16.8% in 2Q10 and 3Q10 does not suggest that Defendants knew all

along that revenue growth of 20% was impossible. To the contrary, the figures suggest that Juniper

was within striking distance of its 20% target, but ultimately was not able to meet its goal. 13

United States District Court

Plaintiffs' allegations simply do not give rise to a reasonable inference that Juniper's projections 14 were false and misleading. 15

In addition to asserting that Juniper's long term projections were false and misleading,

Plaintiffs assert that Juniper's reported revenues were false and misleading because Defendants did 18 not adequately disclose the impact of the company's adoption of ASU 2009-13 and ASU 2009-14. 19

SAC ¶ 51, ECF No. 87. In its July 23 Order, the Court discussed at length the FASB disclosure 20 requirements for companies in the transition period between old revenue recognition rules and new 21 rules ASU 2009-13 and ASU 2009-14. July 23 Order at 7, ECF No. 84. The Court noted that 22

10-K for FY10.*fn4 Id. at 9. The Court concluded that those Forms disclosed the effect of Juniper's

For the Northern District of California

2. Failure to Disclose Effect of New Accounting Rules

Juniper in fact did disclose its adoption of ASU 2009-13 and ASU 2009-14 in its Forms 10-Q and 23

adoption of the new rules in conformity with Example 1*fn5 of the FASB disclosure guidelines. Id. at 2

24. With respect to Plaintiffs' argument that Defendants "should have made a more fulsome 3 disclosure as set forth in Example 3*fn6 of the FASB guidelines," the Court noted that "it is well 4 established that the PSLRA does not impose a duty of completeness." Id. The Supreme Court has 5 made clear that "§ 10(b) and Rule 10b-5(b) do not create an affirmative duty to disclose any and all 6 material information." Matrixx, 131 S. Ct. at 1321. Applying these standards to the allegations set 7 forth in the amended complaint, the Court concluded that "Plaintiffs have . . . failed to plead facts 8 showing that Defendants had an affirmative duty to provide further disclosures beyond what was 9 already included in Juniper's SEC filings." July 23 Order at 24-25, ECF No. 84. 10

have attached as an exhibit to the SAC. See Harden Decl., SAC Ex. A, ECF No. 87-1. Harden is

the managing partner of the Litigation and Forensic Accounting Services Group of Hemming 13

Plaintiffs rely upon the declaration of their expert, Stuart H. Harden ("Harden"), which they

United States District Court

Morse, LLP. Id. ¶ 2. He has more than thirty years of experience in public accounting, id., and is a 14 member of the Emerging Issues Task Force of the FASB, id. ¶ 3. Harden offers his opinion that 15

Juniper "has not disclosed information during the Class Period that enables users of its financial 16 statements to understand the effect of the change in accounting principles resulting from Juniper's 17 early adoption of Accounting Standards Update ("ASU") No. 2009-13 . . . and ASU No. 2009-14." 18

Defendants' prior motions to dismiss the amended complaint. The Court granted Defendants' 22

For the Northern District of California

Id. ¶ 4. He provides his reasoning in the following sixteen paragraphs of his declaration. Id. ¶¶ 5-19

Plaintiffs previously submitted Harden's declaration in support of their opposition to

motion to strike the declaration, citing United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2002), 2 for the well settled proposition that a district court normally may not consider evidence outside the 3 pleadings when addressing a motion to dismiss under Rule 12(b)(6). See July 23 Order at 15, ECF 4

No. 84. Now the Court must determine whether Plaintiffs' attachment of the Harden declaration as 5 an exhibit to their SAC alters its prior conclusion that the declaration may not be considered in the 6 context of a motion to dismiss. 7

8 all purposes." Fed. R. Civ. P. 10(c). A "written instrument" within the meaning of Rule 10(c) is "a 9 document evidencing legal rights or duties or giving formal expression to a legal act or agreement, 10 such as a deed, will, bond, lease, insurance policy or security agreement." DeMarco v. Depotech

Corp., 149 F. Supp. 2d 1212, 1220 (S.D. Cal. 2001) (internal quotation marks and citation omitted).

"The documents that satisfy this definition consist largely of documentary evidence, specifically, 13 contracts, notes, and other writings on which a party's action or defense is based." Id. (internal 14 quotation marks and citation omitted). The Ninth Circuit has held that "[a]ffidavits and declarations 15

F.3d at 908. Most district courts within the circuit have concluded that it is inappropriate to 17 consider an expert affidavit on a motion to dismiss under Rule 12(b)(6), whether or not the affidavit 18 is attached to the complaint. See, e.g., DeMarco, 149 F. Supp. 2d at 1222 (questioning "whether 19 any good reason exists for a plaintiff to attach an expert affidavit as an exhibit to a complaint"); 20

16, 2009) ("the practice of attaching to a complaint the kind of exhibits at issue here needlessly 22 complicates challenges to the sufficiency of pleadings"). One district court has reached the opposite 23 conclusion, holding that "there exists no inflexible rule governing the sort of written instrument that 24 may be attached to a pleading." The Mannkind Sec. Actions, 835 F. Supp. 2d 797, 821 (C.D. Cal. 25

This Court is constrained by the Ninth Circuit's ruling in Ritchie and, in any event, agrees

27 with the district courts that have held that expert affidavits are not appropriate exhibits to 28 complaints. This Court finds particularly persuasive the DeMarco court's observation that "[t]he

"A copy of a written instrument that is an exhibit to a pleading is a part of the pleading for

United States District Court For the Northern District of California

. . . are not allowed as pleading exhibits unless they form the basis of the complaint." Ritchie, 342 16

Montgomery v. Buege, Case No. CIV 08-385 WBS KJM, 2009 WL 1034518, at *4 (E.D. Cal. Apr. 21 2011). 26

inclusion of such an affidavit in no way relieves a plaintiff of its burden to comply with the Reform 2

Act and the applicable provisions of the Federal Rules of Civil Procedure." DeMarco, 149 F. Supp. 3

2d at 1221. "Because the Court must generally assume the truth of all material factual allegations in 4 a complaint, averments in an expert affidavit carry no additional probative weight merely because 5 they appear within an affidavit rather than numbered paragraphs of the complaint." Id. at 1222. 6

12(b)(6) motion. 8

9 into the SAC itself Harden's opinions as to why Juniper's disclosures regarding its transition to 10

106-108, 116-18, 132-34, 191, ECF No. 87, with Harden Decl. ¶¶ 18-20, ECF No. 87-1. The Court

has considered all of the facts alleged in the SAC. However, Harden's "opinions cannot substitute 13 for facts under the PSLRA." Fin. Acquisition Partners L.P. v. Blackwell, 440 F.3d 278, 286 (5th 14

*4 n.6 (W.D. Wash. 2009). 16

17 regarding its adoption of ASU 2009-13 and ASU 2009-14 were so deficient as to render Juniper's 18 financials false and misleading. Juniper's Form 10-Q for the period ending March 31, 2010, the 19 first quarter in which revenue was recognized under the new rules, expressly disclosed that: 20

"Certain Revenue Arrangements That Include Software Elements" ("ASU 2009-14") on a prospective basis as of the beginning of fiscal 2010 for new and materially

modified arrangements originating after December 31, 2009.

Form 10-Q for period ending 3/31/2010 at 37, ECF No. 93-3. The Form stated that for transactions 24 initiated prior to the first quarter of 2010, revenue would be recognized under the old rules, and 25 described how revenue for multiple-element transactions is recognized under the old rules. Id. The 26

Under the new standards we allocate the total arrangement consideration to each separable element of an arrangement based on the relative selling price of each

element. Arrangement consideration allocated to undelivered elements is deferred until delivery.

Accordingly, the Court declines to consider the Harden declaration in the context of the present Rule 7

In addition to attaching the Harden declaration as an exhibit to the SAC, Plaintiffs copied

ASU 2009-13 and ASU 2009-14 were inadequate. Compare SAC ¶¶ 15-17, 65-67, 81-83, 92-94,

United States District Court For the Northern District of California

Cir. 2006); see also In re Jones Soda Co. Sec. Litig., Case No. C07-1366RSL, 2009 WL 330163, at 15

None of the new facts alleged in the SAC are sufficient to show that Juniper's disclosures

We adopted Accounting Standards Update ("ASU") No. 2009-13 "Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13") and ASU No. 2009-14,

Form distinguished the old rules from the new rules, explaining that:

Id. The Form also provides much more detailed descriptions of the manner in which the new rules 2 are applied. Id. Finally, and of particular note here, the Form disclosed that: 3

As a result of the adoption of ASU 2009-13 and ASU 2009-14, net revenues for the first quarter of 2010 were approximately $25 million higher than the net revenues

that would have been recorded under the previous accounting rules. The increase in revenues was due to recognition of revenue for products booked and shipped during

the first quarter of 2010, which contained deliverables for which we were unable to demonstrate fair value pursuant to the previous standards. We cannot reasonably

estimate the effect of adopting these standards on future financial periods as the impact will vary depending on the nature and volume of new or materially modified

arrangements in any given period.

Id. (emphasis added). 9

Juniper's subsequent Forms 10-Q and 10-K contained similar disclosures. Each of the

Forms explained the specific criteria used by the company in recognizing revenue, and each

expressly disclosed how much additional revenue had been recognized under ASU 2009-13 and

ASU 2009-14 than would have been recognized under the old rules. See Form 10-Q for period 13 ending 6/30/2010 at 7 ("As a result of the adoption of ASU 2009-13 and ASU 2009-14, net 14 revenues for the three and six months ended June 30, 2010 were approximately $53 million and $78 15 million higher than the net revenues that would have been recorded under the previous accounting 16 rules."), ECF No. 93-4; Form 10-Q for period ending 9/30/2010 at 6 ("As a result of the adoption of 17

2010, were approximately $50 million and $128 million higher, respectively, than the net revenues 19 that would have been recorded under the previous accounting rules."), ECF No. 94; Form 10-K for 20 period ending 12/31/2010 at 32-33 ("As a result of the adoption of ASU 2009-13 and ASU 2009-14, 21 net revenue for the year ended December 31, 2010, was approximately $237 million higher than the 22 net revenue that would have been recorded under the previous accounting rules."). 23

The Court again concludes that these disclosures comply with FASB guidelines. The

24 disclosures were sufficient to inform the market that Juniper had transitioned to the new accounting 25 rules effective January 1, 2010, and that Juniper was recognizing millions of dollars more in net 26 revenue on a quarterly and yearly basis under the new accounting rules than it would have been able 27 to recognize under the old accounting rules. Plaintiffs' new allegations in essence boil down to 28 argument that Juniper had an obligation to spell out the effects of transitioning to ASU 2009-13 and

United States District Court For the Northern District of California

ASU 2009-13 and ASU 2009-14, net revenues for the three and nine months ended September 30, 18

ASU 2009-14 in more detail. For example, Plaintiffs allege that Defendants should have disclosed 2 the amount of deferred revenue recognized under the old accounting rules, see SAC ¶ 191(b); 3 provided a breakdown of revenue deferred under the old and new accounting rules, see SAC ¶ 4

191(c); and disclosed the impact of the new accounting rules on "operating margins, net income or 5 earnings per share," see SAC ¶ 191(a). Plaintiffs have failed to show that Juniper had an obligation 6 to provide this information, that disclosure of the information would have significantly altered the 7

438, 449 (1976), or any other basis for concluding that Juniper's financial statements were false and 9 misleading absent this additional information.*fn7 10

To state a claim for securities fraud, a complaint must "state with particularity facts giving

rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-13

"total mix" of information available to investors, see TSC Indus., Inc. v. Northway, Inc., 426 U.S. 8

3. Scienter

United States District Court

4(b)(2)(A). In the Ninth Circuit, "the complaint must allege that the defendants made false or 14 misleading statements either intentionally or with deliberate recklessness." In re Daou Sys., Inc., 15

411 F.3d 1006, 1015 (9th Cir. 2005). Because Plaintiffs have failed to allege any actionable false or 16 misleading statements, they necessarily have failed to allege that Defendants made such statements 17 intentionally or recklessly. Plaintiffs agree that "[t]his is the type of case where, as the Ninth Circuit 18 observed, falsity and scienter merge." Opp'n at 18 (citing In re Daou, 411 F.3d at 1015). However, 19 for the sake of completeness, the Court briefly addresses Plaintiffs' scienter allegations. 20

In its July 23 Order, the Court concluded that Plaintiffs had failed to allege sufficient facts to

21 create a strong inference of scienter under either a core operations theory or a financial motive and 22 opportunity theory. See July 23 Order at 25-30, ECF No. 84. The SAC adds only a few new 23 allegations that are even conceivably relevant to the scienter inquiry: the three new paragraphs based 24

For the Northern District of California

upon information received from CW6, discussed above, and an allegation that open market sales by 2 insiders increased in 1Q11 as compared to 2009 and 2010. See SAC ¶¶ 20, 48-50. The SAC does 3 not allege that CW6 had any contact with the individual defendants; thus, CW6 offers "little, if any, 4 reliable basis from which to infer scienter." Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 5

No. 10-CV-03451-LHK, 2012 WL 1868874, at *20 (N.D. Cal. May 22, 2012). At most, the 6 allegations regarding CW6 might give rise to an inference that CW6 believed that Juniper's revenue 7 growth projection of 20% was unrealistic, and that because CW6 formed this belief, Juniper's 8 officials must have formed the same belief. The allegation that insider sales increased in 1Q11 does 9 not identify the "insiders." If the sales were by non-defendants, they are irrelevant to show motive 10 on the part of the individual defendants. See Wozniak v. Align Tech., Inc., No. C-09-3671, 2011 WL

2269418, at *14 (N.D. Cal. June 8, 2011) ("Sales by insiders not named as defendants, however, are

irrelevant to the determination of the named defendant's scienter."). The addition of these 13 allegations is insufficient to alter the Court's prior conclusion that Plaintiffs have failed to allege 14 facts showing scienter. 15

Section 20(a) provides that "[e]very person who, directly or indirectly, controls any person

17 liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable 18 jointly and severally with and to the same extent as such controlled person." A plaintiff suing under 19

§ 20(a) must demonstrate: (1) "a primary violation of federal securities laws" and (2) "that the 20 defendant exercised actual power or control over the primary violator." Howard v. Everex Sys., 21

Section 20A creates liability for "[a]ny person who violates any provision of this chapter or

23 the rules or regulations thereunder by purchasing or selling a security while in possession of 24 material, nonpublic information." 15 U.S.C. § 78t-1. A plaintiff suing under § 20A must show an 25 independent violation of the securities laws. Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1035 26

Because Plaintiffs have failed to state a claim for a primary violation of the securities laws,

Plaintiffs likewise have failed to state a claim for violation of §§ 20(a) or 20A of the Exchange Act.

United States District Court For the Northern District of California

B. Sections 20(a) and 20A

Inc., 228 F.3d 1057, 1065 (9th Cir. 2000). 22

n.15 (9th Cir. 2002). 27


The Ninth Circuit has held that leave to amend should be granted with "extreme liberality."

Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003). When considering 4 whether to grant leave to amend, a district court should consider several factors: undue delay, bad 5 faith, or dilatory motive; repeated failure to cure deficiencies by amendments previously allowed; 6 undue prejudice to the opposing party; and futility of amendment. Foman v. Davis, 371 U.S. 178, 7

182 (1962); Eminence Capital, 316 F.3d at 1052. There is no evidence of undue delay or bad faith 8 on the part of Plaintiffs or of prejudice to Defendants if leave to amend were granted. However, the 9

Court's July 23 Order set forth the deficiencies in the amended complaint in great detail, and 10

Plaintiffs were unable to cure those deficiencies when granted leave to amend. Based upon the new


allegations in the SAC, it does not appear that Plaintiffs would be able to state a viable claim even if

United States District Court For the Northern District of California

they were afforded another opportunity to amend. The Court's July 23 Order informed Plaintiffs 13 that the action would be dismissed with prejudice if the deficiencies identified therein were not 14 cured by the SAC. Accordingly, the motion is GRANTED WITHOUT LEAVE TO AMEND, and 15 the action is DISMISSED WITH PREJUDICE. The Court vacates the July 17, 2013 Case 16

Management Conference. The Clerk shall close the file. 17


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