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Special Situations Fund III QP, L.P. v. Marrone Bio Innovations, Inc.

United States District Court, E.D. California

March 20, 2017

MARRONE BIO INNOVATIONS, INC., et al., Defendants.



         Plaintiffs in this consolidated class action charge Defendant Marrone Bio Innovations, Inc. (“Marrone Bio”); certain of its officers and directors; and its public auditor, Ernst & Young (“EY”), with violating federal securities laws. According to Plaintiffs, they were defrauded of millions of investment dollars based on the financial reporting fraud of Marrone Bio and Defendant Hector Absi, its Chief Operating Officer and head of sales. Plaintiffs reached a settlement with Marrone Bio and its officers and directors, and final judgment was entered as to that settlement on September 27, 2016. EY now moves to dismiss the claims against it pursuant to Federal Rule of Civil Procedure 12(b)(6). ECF No. 84. That motion is DENIED.[1]


         Marrone Bio is a biotech company that provides pest management and plant health products. After completing an initial public offering in August 2013, the company's stock was traded on the NASDAQ under the ticker symbol “MBII.” At the end of 2013, Marrone Bio filed its 10-K, reporting that its revenues had doubled over the prior year. The company continued to report strong results in the first quarter of 2014, and in June 2014 it undertook a Secondary Offering of 4.575 million shares of common stock at a price of $9.50 per share. That offering was conducted pursuant to a Registration Statement that was filed with the Securities and Exchange Commission (“SEC”), which it declared effective on June 5, 2014. Lead Plaintiffs purchased 140, 000 shares directly out of the Secondary Offering.

         On September 3, 2014, Marrone Bio issued a press release, which was also filed with the SEC, revealing that Marrone's Audit Committee had discovered documents calling into question the recognition of certain material revenue in the fourth quarter of 2013. Following that discovery, the Audit Committee conducted an internal investigation, determining that the financials reported for 2013 and the first half of 2014 should not have been relied upon by investors. This revelation purportedly meant that the Registration Statement under which shares had been sold was materially false. Marrone Bio shares thereafter fell in value by at least $2.85 per share. Relevant to the instant motion, Lead Plaintiffs suffered losses in excess of $3 million as a result of this decrease in the value of Marrone Bio's stock.

         Various parties brought suit against Marrone Bio as a result of the Audit Committee's revelation, and the Court consolidated the resultant cases pending in the Eastern District of California. Mem. & Order, ECF No. 18, at 8. The SEC and United States Department of Justice (“DOJ”) have also filed suits in connection with this fraud. Pls.' Mot. to Am. Compl., ECF No. 58, at 1. The SEC brought suit against Marrone Bio and Absi for securities violations, while the DOJ indicted Absi on sixteen counts, including counts of securities fraud. Id. Plaintiffs were granted leave to amend their complaint in part because documents filed in connection with the SEC's and DOJ's suits provided additional bases for Plaintiffs' allegations. Mem. & Order, ECF No. 74, at 2.

         Relevant to the instant motion, EY provided an audit opinion as part of the Registration Statement filed in connection with the Secondary Offering. That audit opinion stated, in part: “In our opinion, the financial statements [in the Registration Statement] present fairly, in all material respects, the consolidated financial position of Marrone Bio Innovations, Inc. . . . in conformity with U.S. generally accepted accounting principles.” EY's Req. for Judicial Notice (“RJN”), Ex. C, ECF No. 85-3, at 8. Plaintiffs allege that the audit report renders EY liable for any material misstatements of fact contained in the financial statements EY audited, pursuant to § 11 of the Securities Act of 1933. EY, however, contends that the allegations in the Third Amended Complaint (“TAC”), ECF No. 76, are insufficient to set out a claim against it under that section.


         On a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), all allegations of material fact must be accepted as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Rule 8(a)(2) “requires only ‘a short and plain statement of the claim showing that the pleader is entitled to relief' in order to ‘give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). A complaint attacked by a Rule 12(b)(6) motion to dismiss does not require detailed factual allegations. However, “a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. (citation omitted). A court is not required to accept as true a “legal conclusion couched as a factual allegation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). “Factual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555 (citing 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1216 (3d ed. 2004) (stating that the pleading must contain something more than “a statement of facts that merely creates a suspicion [of] a legally cognizable right of action”)).

         Furthermore, “Rule 8(a)(2) . . . requires a showing, rather than a blanket assertion, of entitlement to relief.” Id. at 555 n.3 (citation omitted). Thus, “[w]ithout some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirements of providing not only ‘fair notice' of the nature of the claim, but also ‘grounds' on which the claim rests.” Id. (citing Wright & Miller, supra, at 94-95). A pleading must contain “only enough facts to state a claim to relief that is plausible on its face.” Id. at 570. If the “plaintiffs . . . have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed.” Id. However, “[a] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and ‘that a recovery is very remote and unlikely.'” Id. at 556 (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)).

         A court granting a motion to dismiss a complaint must then decide whether to grant leave to amend. Leave to amend should be “freely given” where there is no “undue delay, bad faith or dilatory motive on the part of the movant, . . . undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of the amendment . . . .” Foman v. Davis, 371 U.S. 178, 182 (1962); Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (listing the Foman factors as those to be considered when deciding whether to grant leave to amend). Not all of these factors merit equal weight. Rather, “the consideration of prejudice to the opposing party . . . carries the greatest weight.” Id. (citing DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 185 (9th Cir. 1987)). Dismissal without leave to amend is proper only if it is clear that “the complaint could not be saved by any amendment.” Intri-Plex Techs. v. Crest Grp., Inc., 499 F.3d 1048, 1056 (9th Cir. 2007) (citing In re Daou Sys., Inc., 411 F.3d 1006, 1013 (9th Cir. 2005); Ascon Props., Inc. v. Mobil Oil Co., 866 F.2d 1149, 1160 (9th Cir. 1989) (“Leave need not be granted where the amendment of the complaint . . . constitutes an exercise in futility . . . .”)).


         EY seeks to dismiss the § 11 claim against it on three bases: (1) lack of statutory standing, (2) lack of liability for material misstatements in the financial statements it audited, and (3) negative causation. The Court addresses each in turn.

         A. Standing under § 11 of the Securities Act of 1933

         Under § 11 of the Securities Act of 1933, codified at 15 U.S.C. § 77k, any person who purchases a security issued under a materially false or misleading registration statement has standing to sue. For standing to attach, “the person must have purchased a security issued under that, rather than some other, registration statement.” Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1080 (9th Cir. 1999). When a materially false or misleading registration statement was issued in connection with a secondary offering, Plaintiffs “need to prove that the shares they purchased came from the pool of shares issued in the secondary offering, rather than from the pool of previously issued shares.” In re Century Aluminum Co. Sec. Litig., 729 F.3d 1104, 1106 (9th Cir. 2013). One method for Plaintiffs to meet this requirement is to allege “that they purchased their shares directly in the secondary offering itself.” Id. Plaintiffs have alleged exactly that. See TAC, ¶¶ 25-26 (alleging that Lead Plaintiffs “purchased MBII securities . . . in the secondary offering”); id., Ex. A (stating that Lead Plaintiffs “directly purchased” 140, 000 shares in the secondary offering).

         Nonetheless, EY contends that Lead Plaintiffs' allegations are insufficient to establish standing under § 11 because those allegations are consistent with three distinct possibilities: Lead Plaintiffs purchased their shares: (1) from dealers that held stock originating from the Secondary Offering and the Initial Public Offering (“IPO”); (2) from underwriters that held stock originating from the Secondary offering and the IPO; and (3) from underwriters that held only stock originating from the Secondary Offering.[3] EY's Mem. of P & A in Supp. of Mot. to Dismiss (“MTD”), ECF No. 84-1, at 9. EY contends that Lead Plaintiffs could only have standing under the third possibility. Relying on Century Aluminum, EY claims it “is merely possible rather than plausible” that Lead Plaintiffs bought stock issued under the relevant registration statement, and accordingly, that their allegations are insufficient to establish § 11 standing. Id. at 10 (quoting Century Aluminum, 729 F.3d at 1108).

         EY, however, misapplies Century Aluminum, which addressed the purchase of shares on the open market. None of the plaintiffs in that case alleged that they purchased the relevant shares directly from the secondary offering. Century Aluminum, 729 F.3d at 1106 (“Plaintiffs are not arguing here . . . that they bought directly in the secondary offering; they concede that they purchased in the aftermarket.”). Moreover, Lead Plaintiffs' allegations go even further because they also allege that they purchased their shares on the date of the Secondary Offering at the offering price. EY's possible alternative origins of Lead Plaintiffs' stock thus do not demonstrate that the allegations fail to meet the plausibility standards of Twombly and Iqbal. Instead, they are more properly characterized as attempts to negate the factual allegations set out in the TAC. Of course, such attempts are inappropriate at the pleading stage since the Court must accept all factual allegations as true when analyzing a motion to dismiss. See Cahill, 80 F.3d at 337-38.

         The Court notes that EY also cites Thomas v. Magnachip Semiconductor Corp., 167 F.Supp.3d 1029 (N.D. Cal. 2016), and claims it stands for the proposition that it is insufficient to allege merely that one purchased the shares in question on the date of the public offering at the offering price. EY's Reply, ECF No. 89, at 2. Not only does that case not bind this Court, but there the “Plaintiffs d[id] not argue or allege that they purchased their shares directly from defendants.” Magnachip, 167 F.Supp.3d at 1055. To the contrary, they alleged only that they acquired the stock “pursuant and/or traceable to” the registration statement in question. Id. As Lead Plaintiffs here have alleged a direct purchase in the Secondary Offering, Magnachip's analysis (just like Century Aluminum's) is of limited value.

         Magnachip does state that allegations of purchasing shares on the date of the offering at the offer price “were rejected by the Ninth Circuit” in Century Aluminum. 167 F.Supp.3d at 1055. However, this Court is not convinced that Magnachip's reading of Century Aluminum is wholly correct. Century Aluminum did not address allegations that shares were purchased at the offering price. See 729 F.3d at 1106 (“[N]one of the plaintiffs bought shares at the offering price of $4.50 per share.”). Instead, Century Aluminum only addressed “allegations regarding the dates on which and the prices at which” the shares were purchased, “as well as allegations concerning the trading volume of Century Aluminum stock on certain dates.” 729 F.3d at 1108. Contrary to Magnachip, this Court finds that alleging the shares were purchased on the date of the offering at the offer price bolsters the allegation that Lead Plaintiffs purchased their shares directly in the Secondary Offering.

         Accordingly, Plaintiffs' allegations are sufficient to establish § 11 standing. See In re CytRx Corp. Sec. Litig., No. CV 14-1956-GHK (PJWx), 2015 WL 5031232, at *15 (C.D. Cal. July 13, 2015) (finding allegations that plaintiffs “purchased shares during the offering period at the secondary offering price” sufficient to survive a motion to dismiss for lack of statutory standing).

         B. Material Misstatements in the Registration Statement

         As stated above, § 11 of the Securities Act of 1933 establishes a cause of action for those who purchase securities issued under a materially false or misleading registration statement. Plaintiffs allege that Marrone Bio's Chief Operating Officer and head of sales Hector Absi orchestrated a fraudulent practice of improperly recognizing revenue to inflate the value of Marrone Bio. TAC, ¶¶ 181, 223. Marrone Bio gave some of its distributors “inventory protection” rights such as the ability to pay Marrone Bio only after the distributor sold the product to an end user. Id. ¶ 181. According to Plaintiffs, the revenue associated with products provided to the distributors under such terms should not have been recognized until the specified contingencies were met (e.g., after the product was sold to an end user and the distributor paid for the product Marrone Bio provided). Pls.' Opp'n to MTD, ECF No. 88, at 4. Because of this scheme, the financial statements issued in connection with Marrone Bio's Secondary Offering were allegedly materially false. Plaintiffs allege that EY is liable for these errors because EY “certified” the financial statements. TAC, ¶ 201. They also allege that EY's opinion on the financial statements were “materially false and misleading.” Id. ¶ 203. Finally, Plaintiffs allege that EY's “statement that it completed its audit . . . in accordance with [Public Company Accounting Oversight Board (‘]PCAOB[')] standards was materially false and misleading.” Id. ¶ 204.

         Under § 11, accountants are liable for errors in “any part of the registration statement” that they “prepared or certified.” 15 U.S.C. § 77k(a)(4). Liability can also attach to erroneous opinions under certain circumstances. The Supreme Court set out the framework for analyzing opinions in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (2015). Under Omnicare, liability can attach to opinions when (1) the speaker did not honestly hold the stated opinion when he or she said it, (2) the opinion contains “embedded statements of fact” that are untrue, or (3) there are “particular (and material) facts going to the basis for the issuer's opinion . . . whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.” Id. at 1326-27, 1332.

         EY contends that it did not certify the financial statements at issue and so is not liable under § 11 for material errors in those statements. Instead, EY maintains that it can only be held liable for materially false or misleading statements made in the audit report itself. Furthermore, EY describes its statements in the audit report as opinions, ...

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