United States District Court, N.D. California
RETAIL WHOLESALE & DEPARTMENT STORE UNION LOCAL 338 RETIREMENT FUND, Plaintiff,
HEWLETT-PACKARD COMPANY, et al., Defendants
[Copyrighted Material Omitted]
For Cement & Concrete Workers District Council Pension Fund, Plaintiff: Ira M. Press, LEAD ATTORNEY, Sarah G. Lopez, LEAD ATTORNEY, PRO HAC VICE, Kirby McInerney LLP, New York, NY; Lionel Z. Glancy, Robert Vincent Prongay, LEAD ATTORNEYS, Glancy Binkow & Goldberg LLP, Los Angeles, CA; .
For Retail Wholesale & Department Store Union Local 338 Retirement Fund, Plaintiff: Ira M. Press, Mark Allen Strauss, LEAD ATTORNEYS, Thomas Elrod, PRO HAC VICE, Sarah G. Lopez, Kirby McInerney LLP, New York, NY; Robert Vincent Prongay, LEAD ATTORNEY, Lionel Z. Glancy, Glancy Binkow & Goldberg LLP, Los Angeles, CA.
For Hewlett-Packard Company, Defendant: Karen A. Pieslak Pohlmann, Marc J. Sonnenfeld, LEAD ATTORNEYS, PRO HAC VICE, Morgan Lewis and Bockius LLP, Philadelphia, PA; Elizabeth Allen Frohlich, Morgan, Lewis & Bockius LLP, San Francisco, CA; Jennifer Renee Bagosy, Morgan Lewis & Bockius LLP, Irvine, CA; Joseph Edward Floren, Attorney at Law, Morgan, Lewis & Bockius LLP, San Francisco, CA; Laura Elizabeth Hughes, PRO HAC VICE, Morgan Lewis and Bockius LLP, Philadelphia, PA.
For Mark A. Hurd, Defendant: Lawrence David Lewis, LEAD ATTORNEY, Dwight Ludden Armstrong, Keith Paul Bishop, Allen Matkins Leck Gamble Mallory & Natsis LLP, Irvine, CA; Amy Wintersheimer Findley, Allen Matkins Leck Gamble Mallory & Natsis LLP, San Diego, CA.
ORDER GRANTING MOTIONS TO DISMISS
JON S. TIGAR, United States District Judge.
The Court previously dismissed Plaintiff's securities fraud complaint against Defendants Hewlett Packard Co. (" HP" ) and its former Chairman, President, and CEO, Mark Hurd, for failure to state a claim under the pleading standards of the Private Securities Litigation Reform Act of 1995 (" PSLRA" ), 15 U.S.C. § 78u-4. ECF No. 63. Plaintiff then filed a Second Amended Complaint, which Defendants now move to dismiss. Because the Second Amended Complaint still fails to adequately allege materiality and falsity, the Court will grant Defendants' motions without leave to amend.
I. FACTUAL ALLEGATIONS
Lead Plaintiff Retail Wholesale & Department Store Union Local 338 Retirement Fund's Second Amended Complaint, ECF No. 65 (" SAC" ), alleges that HP and its former Chairman, President, and CEO Mark Hurd committed securities fraud in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § § 78j(b), 78t(a), and Rule 10b-5 promulgated thereunder by the Securities Exchange Commission, 17 C.F.R. § 240.10b-5. The SAC was filed on behalf of a class of shareholders who purchased HP stock between November 13, 2007, and August 6, 2010 (" the class period" ), and who held the shares as of August 6, 2010.
The gist of the SAC is that HP and Hurd made material misrepresentations when HP adopted its " Standards of Business Conduct" (" SBC" ) without disclosing that Hurd was violating the SBC by submitting false expense reports and making unwanted sexual advances on an HP contractor. Many of the specifics of these allegations are recited in the Court's prior order. ECF No. 63.
A. The 2006 Scandal
The SAC alleges that the events leading up to the current alleged misrepresentations began in 2006, when HP became embroiled in an ethics scandal. SAC ¶ 3. Several HP executives and board members were involved in an unethical investigation into potential information leaks at the company. Id. Not only were several executives and board members ousted as a result, but HP's then-Chairman and General Counsel were both prosecuted for their roles in the scandal. Id. ¶ 32.
Hurd had become CEO in 2005 but was not implicated in the scandal; instead, " he emerged with his reputation for integrity not only intact, but made all the stronger for it." Id. ¶ 32. Notwithstanding the scandal, HP's shares " remained buoyant" during the scandal because of the concurrent increase in the profitability of its main business and increased market share. Id. ¶ 33. Wall Street generally approved of Hurd's efforts " to reshape the management team, improve morale and cut costs," as well as his implementation of strategies that resulted in HP's increase in market share. Id. However, when Hurd was temporarily implicated in September 2006 as a potential target in the scandal, HP's stock price dropped 5.19 %. Id. ¶ 34.
B. HP's Reaction to the 2006 Scandal
The SAC alleges that in the wake of the scandal, HP took certain measures, including making statements and eventually promulgating
an updated SBC to restore shareholders' trust. " HP made its statements regarding the SBC for the specific purpose of reassuring investors of HP's compliance with ethical standards." Id. ¶ 46. Plaintiff alleges " [t]hese statements were false and misleading in that they implied that the obligation to adhere to HP's ethics standards applied to all employees, including Hurd, and that Hurd by endorsing these standards was in fact in compliance with them." Id. ¶ 49.
For example, the SAC alleges that in the wake of the scandal, HP's management sent a letter to employees emphasizing that " the board is fully confident in [Hurd's] commitment to the highest standards of governance," " [a]ny violations of our standards are unacceptable to Hewlett-Packard and we will take appropriate action," and " [b]e assured we will do what is needed to move through this and continue our work to build the world's leading information technology company." Id. ¶ 36. Hurd also made public statements that " [t]he company will work to put these matters behind us . . . to earn the trust and support of our . . . stockholders," and " our ethics policy  appl[ies] to all employees and all board members." Id. ¶ 37. Further, Hurd emphasized in front of the House Committee on Energy and Commerce that " HP is a company that has consistently earned recognition for our adherence to standards of ethics, privacy and corporate responsibility," and " I am responsible for the company, which means I am responsible for fixing it and leading it forward through this hard time." Id. ¶ 38.
HP also entered into an agreement settling claims that had been asserted by shareholders in derivative actions filed in response to the scandal. Id. ¶ 40. Under the terms of the settlement, HP agreed to appoint a Lead Independent Director who ensures compliance of the SBC and reports violations, appoint a Chief Ethics and Compliance Officer who reports violations, establish a compliance committee, enhance HP's ethics and training program, and clarify that the SBC applies to all personnel. Id. In addition, this Chief Ethics and Compliance Officer claimed that HP's new vision for ethics and compliance is a " competitive advantage" and set forth action items to rebuild HP's reputation. Id. ¶ 51. These items included revising the SBC and enhancing the HR process related to the SBC, including holding employees at all levels accountable. Id.
In 2008, HP published its updated SBC, which was available on the investor-relations portion of HP's website and incorporated in its 10-K annual reports and Schedule 14A proxy statements. Id. ¶ 41. The SBC opened with a message from Hurd, making clear that the SBC applied to all HP employees, up to and including the board members. Id. The SBC included the following statements, which Hurd is alleged to have violated: " use your good judgment, the Headline Test, and the supporting decision-making model to work through situations where the right course of action isn't clear" ; " report any alleged misconduct immediately" ; " cooperate with all internal investigations and audits" ; " tell the whole truth when responding to an investigation or audit" ; " [d]o not discriminate on the basis of race, color, religion, gender, sexual orientation, gender identity or expression, national origin, disability, age, covered veteran status, or any other characteristic protected by law" ; " do not behave in a disrespectful, hostile, violent, intimidating, threatening, or harassing manner" ; " encourage a harassment-free work environment" ; " [r]efuse to accept or ...