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Rok v. Identiv, Inc.

United States District Court, N.D. California

August 10, 2016

LIKAR ROK, Plaintiff,



         Now pending are Defendants’ Motion to Strike and three Motions to Dismiss. As explained below, the Court DENIES the Motion to Strike and GRANTS the Motions to Dismiss with leave to amend.


         This matter is a proposed securities fraud class action against Defendants Identiv, Identiv’s Chief Executive Officer Jason Hart, and Identiv’s Chief Financial Officer Brian Nelson (collectively “Defendants”). Lead Plaintiff Thomas Cunningham brings the case on behalf of all persons who purchased Identiv’s common stock between November 13, 2013, through November 30, 2015 (the “Class Period”). Cunningham filed an amended complaint alleging that the Defendants made “materially false and misleading statements and omissions with scienter” with regards to numerous public statements about Identiv’s executive compensation and internal financial controls, in violation of Securities Exchange Act Section 10(b) and SEC Rule 10b-5. See Amended Compl. (dkt. 34) (“Complaint”) ¶¶ 132-36. Cunningham also alleges that Hart and Nelson are liable for Identiv’s fraudulent conduct as “controlling persons” of the company under Section 20(a) of the same act. See id. ¶ 142.

         Defendants now collectively and individually move to dismiss the complaint, arguing that Cunningham has failed to meet his heightened pleading burden to assert with particularity specific facts showing any actionable material misrepresentations or omissions, a strong inference of scienter as to those statements, and loss causation. See Identiv Mot. (dkt. 39) (“Motion”) at 1-2; Hart Mot. (dkt. 40) at 1; Nelson Mot. (dkt. 41) at 1-2.[1]


         Identiv seeks to strike certain paragraphs and sentences in the complaint that rely on a separate state court complaint, Ruggiero v. Identiv, Inc., No. HG15764795 (Cal. Super. Ct. Alameda County., filed Apr. 2, 2015) (hereafter “Ruggiero complaint”) as a violation of Federal Rule of Civil Procedure 11(b). See Mot. at i, 10 n.11. Under Rule 11, “we do not require complaints to be verified, ” because “[a]s the litigation progresses, and each party learns more about its case and that of its opponents, some allegations fall by the wayside.” PAE Gov’t Serv., Inc. v. MPRI, Inc., 514 F.3d 856, 859 (9th Cir. 2007). Rule 11 “deals specifically with bad faith conduct.” See id. Cunningham asserts that his counsel “conduct[ed] an investigation of all the allegations in the Complaint, ” which also “contains numerous corroborating factual sources for its allegations” independent of the Ruggiero complaint. See Opp’n (dkt. 45) at 32. The complaint confirms that Cunningham premises his “information and belief” on his counsel’s “independent investigation” of “Identiv’s public filings with the SEC, ” “public reports, ” “economic analysis of securities movements, ” “transcripts of Identiv’s investor’s calls, ” “interviews with former employees and other potential witnesses, ” and “other publically available material.” See compl. ¶ 2. There is no indication that Cunningham’s counsel acted in bad faith by referencing the Ruggiero complaint. See PAE Gov’t Serv., 514 F.3d at 859. Keeping with the proposition that “[c]ourts generally disfavor motions to strike because striking is such a drastic remedy, ” see Freeman v. ABC Legal Serv., Inc., 877 F.Supp.2d 919, 923 (N.D. Cal. 2012) (citing Stanbury Law Firm v. IRS, 221 F.3d 1059, 1063 (8th Cir. 2000)), the Court hereby DENIES Defendants’ motion to strike the challenged sections.


         Securities fraud claims must meet the heightened pleading standards of Rule 9(b), requiring that “a party must state with particularity the circumstances constituting fraud or mistake, ” Fed.R.Civ.P. 9(b), and of the Private Securities Litigation Reform Act: “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) (2010); Tellabs, 551 U.S. at 321. Courts are to dismiss any complaint that does not meet these requirements. See 15 U.S.C. § 78u-4(b)(3)(A).

         Plaintiffs alleging securities fraud under Securities Exchange Act Section 10(b), 15 U.S.C. § 78j(b) (2010), and associated SEC Rule 10b-5, 17 C.F.R. § 240.10b-5(b), must plead the following elements: (1) a material misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance on the misrepresentation; (5) economic loss; and (6) loss causation (a causal connection between the material misrepresentation and the economic loss). See Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005); Loos v. Immersion Corp., 762 F.3d 880, 886-87 (9th Cir. 2014).

         The Court concludes that Cunningham failed to adequately plead (A) material misrepresentations as to the internal controls statements, [2] (B) a strong inference of scienter as to all misrepresentations, and (C) loss causation.

         A. Material Misrepresentations

         Section 10(b) and Rule 10b-5(b) “do not create an affirmative duty to disclose any and all material information.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011). These rules “prohibit only misleading and untrue statements, not statements that are incomplete.” In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 880 n.8 (9th Cir. 2012). Cunningham first alleges that the 2013 Form 10-K and the 2013 and 2014 Forms 10-Q-issued prior to Identiv’s supposed remediation of the internal controls material weakness as announced in its 2014 10-K-are misleading because they “failed to disclose the existence of . . . the weakness related to the Company’s ‘entity level controls.’” See Compl. ¶ 87.[3] He alleges that although Identiv disclosed the internal controls material weakness, see, e.g., id. ¶ 34, that weakness was separate from the undisclosed entity level controls weakness that BDO identified and notified the Board of in 2015, see Compl. ¶¶ 13, 91, 112, 115. Yet the complaint does not allege with particularity that the latter material weakness was present simultaneously and distinct from the former weakness, see id. ¶ 91. Identiv affirmatively disclosed the presence of the internal controls material weakness. See e.g., ¶¶ 77, 81, 83, 85, 89. Even if a second entity level controls weakness existed in 2013 and/or 2014 (one that BDO did not establish until a year later), Identiv did not have an “affirmative duty” to disclose it during those years. See Matrixx, 563 U.S. at 44.

         Second, Cunningham contends that Identiv misrepresented that it had remediated the internal controls weakness. See Compl. ¶¶ 91, 94, 97, 100; Opp’n at 22-23. Conversely, Identiv argues that the 2015 internal controls weakness was “distinct” from the previous one, albeit “described with similar terminology.” See Mot. at 14, 16. Cunningham so far has failed to “state with particularity the circumstances, ” see Fed.R.Civ.P. 9(b), showing that the entity level controls weakness existed simultaneously with the internal controls weakness in 2013 and 2014 . He also failed to “state with particularity all facts” forming the basis of ...

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