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Tarapara v. K12 Inc.

United States District Court, N.D. California

August 30, 2017

BABULAL TARAPARA, et al., Plaintiffs,
K12 INC., et al., Defendants.


          PHYLLIS J. HAMILTON, United States District Judge

         Defendants' motion to dismiss the above-entitled action pursuant to Federal Rule of Civil Procedure for failure to state a claim came on for hearing before this court on April 19, 2017. Plaintiffs appeared by their counsel Kevin Ruf and Leanne Solish, and defendants appeared by their counsel Allen Makins, Marshall Wallace, Peter Wald, and Stephen Barry. Having read the parties' papers and carefully considered their arguments and the relevant legal authority, the court hereby GRANTS the motion.


         This is a proposed class action, alleging securities fraud in violation of § 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and control-person liability under § 20(a). Defendants are K12 Inc. ("K12"), Ronald J. Packard ("Packard"), Nathaniel ("Nate") A. Davis ("Davis"), James J. Rhyu ("Rhyu"), and Timothy L. Murray ("Murray"). Plaintiffs allege that they purchased shares of K12 stock during the proposed Class Period (October 10, 2013 to October 27, 2015). Consolidated Amended Class Action Complaint (“CAC”) ¶¶ 1, 23-24.

         Defendant K12 provides technology-based educational products and solutions to public school districts, public schools, virtual (i.e., on-line) charter schools, and families (for home schooling). CAC ¶¶ 25, 37. Defendant Packard was the Chief Executive Officer ("CEO") of K12 from 2000, when he founded the company, until December 31, 2013, when he resigned. CAC ¶ 26. He also served as the Executive Chairman of K12 from 2000 to 2007, and was a director from 2000 to June 13, 2014. CAC ¶ 26.

         Defendant Davis was Chairman and CEO of K12 from January 1, 2014, until he relinquished that position on February 8, 2016. CAC ¶ 28. He has also been a K12 director since July 2009, was named as Chairman in June 2012, and Executive Chairman in January 2013. CAC ¶ 28. After relinquishing his role as CEO, he returned to his Executive Chairman role in February 2016. CAC ¶ 28.

         Defendant Rhyu is a Certified Public Accountant, and has been Chief Financial Officer ("CFO") and Executive Vice President of K12 since June 2013. CAC ¶ 30.

         Defendant Murray joined K12 in April 2012 as its President and Chief Operating Officer ("COO"). CAC ¶ 32. He resigned from his position at ¶ 12 in September 2015, after which he continued to provide "transition services" for a period of up to six months pursuant to a consulting agreement. CAC ¶ 32.

         As reflected in its Fiscal Year (“FY”) 2014 Form 10-K, K12 operates through three "business segments" - (1) "Managed Public Schools, ” described as “turn-key management services sold to public schools on a contractual basis;" (2) "Institutional Sales, ” described as “educational products and services sold à la carte to school districts, public schools, and other educational institutional systems that K12 did not manage, such as its Fuel Education or 'FuelEd' services;" and (3) "International and Private Pay Schools, ” described as “private schools for which K12 charged tuition and made direct consumer sales." CAC ¶ 38.

         According to plaintiffs, the Managed Public Schools comprised the vast majority of K12's revenues during the proposed Class Period - approximately 85%. CAC ¶ 42. In a K12 Managed Public School, a local school board contracts with K12 to provide all aspects of school management, including creating and implementing the academic plan; monitoring academic achievement; recruiting and training teachers; marketing the program and enrolling students; recommending compensation for school personnel; implementing student support services; providing financial and regulatory support; and procuring curriculum, computers, and other required services and equipment. CAC ¶ 43.

         Funding for Managed Public Schools is provided by state governments, generally on a per-pupil basis. CAC ¶ 44. In the 2013-2014 school year, K12 operated Managed Public Schools in 33 states and the District of Columbia; in the 2014-2015 school year, K12 operated "Managed Public Schools" in 32 states and the District of Columbia. CAC ¶ 43.

         Plaintiffs allege that K12 encountered problems with operating its online schools - in particular, the Agora Cyber Charter School ("Agora"), the Tennessee Virtual Academy, the California Virtual Academies, and the Colorado Virtual Academy (which ended its relationship with K12 shortly before the start of the proposed Class Period).

         Agora, based in Pennsylvania, has a charter granted by the Pennsylvania Department of Education (“PDE”). See CAC ¶¶ 121, 126. Plaintiffs allege that Agora was K12's largest revenue-providing school both before and during the proposed Class Period. CAC ¶ 120. In K12's FY 2010, the Agora contract allegedly accounted for more than 10% of K12's revenues; in FY 2011 through FY 2015, Agora allegedly accounted for approximately 13-14% of K12's revenues; and in its Form 10-K for FY 2013 and FY 2014, K12 indicated that a change in its contract with Agora could adversely affect the Company's business, financial condition, and results of operation. CAC ¶ 120.

         In May 2006, Agora's founder signed a management contract with K12, pursuant to which K12 would receive 15% of Agora's qualified gross revenues in exchange for managing the school. CAC ¶ 122. In the spring of 2009, after receiving complaints from parents of Agora students, the PDE conducted an audit of Agora, and subsequently informed Agora that it would no longer pay any funds into the school's operating account, and further advised Agora that it had violated its charter and bylaws. CAC ¶ 123. In June 2009, the PDE issued a notice of revocation of Agora's charter. CAC ¶ 123.

         At some point litigation ensued between Agora's founder and the Agora Board (not entirely clear from the allegations in the CAC), and following that litigation, “it was agreed that a replacement Agora Board would be appointed.” CAC ¶ 124; see also CAC ¶¶ 123, 125. The new Board submitted a charter renewal application. CAC ¶ 135. K12 entered into a new management agreement with Agora on November 12, 2009, following the PDE's approval of the renewal application. See CAC ¶ 135.

         This agreement, which took effect on July 1, 2010, provided for automatic renewal on June 30, 2015 unless either party notified the other no later than 18 months prior to that date (or no later than January 1, 2014). See CAC ¶ 136; Exh. A to Declaration of Steven Barry in Support of Motion to Dismiss ("Barry Decl."), ¶ 5.1 (“This Agreement . . . will terminate on June 30, 2015 (“Initial Term”) unless sooner terminated under Section 12 of this Agreement.”); id. ¶ 5.2 (“Following the Initial Term, this Agreement will automatically extend for successive additional periods of three (3) year(s) . . ., unless (a) either party provides the other with written notice of non-renewal at least eighteen (18) months before the expiration of the then-current Initial Term or Renewal Term (as applicable); or (b) the Agreement is sooner terminated under Section 12.”).

         Three years before the notice deadline, the Agora Board sent K12 a “notice of non-renewal” dated June 28, 2012, advising that it was “invoking the notice clause [¶ 5.2]” and giving “Notice of Non-Renewal.” CAC ¶¶ 136-137; Exh. B to Barry Decl. K12 did not publicly report at that time that it had received the notice of non-renewal from Agora.[1] The parties allegedly continued to negotiate the terms of a future relationship, with the possibility that K12 would provide unbundled educational content and support services while Agora itself assumed management duties. See CAC ¶¶ 144-150.

         K12 used Scantron Performance Series® Tests (“Scantron tests”) to measure student learning and the performance of schools it managed, claiming that it was a common measuring tool for a student's academic growth in a school year across states. CAC ¶ 59. Math and reading tests were administered at the start and end of each school year “to provide a common measure of academic achievement across all K12-managed public schools, since testing varies from state to state.” CAC ¶¶ 59, 66. K12 also compared its aggregate results to the mean “gains” of Scantron's national norm group - approximately 600, 000 students. CAC ¶¶ 59-66. The results of the Scantron tests were reported to investors and the public in K12's “Academic Reports.” CAC ¶¶ 60-61, 65-67.

         In February 2013, K12 issued its first annual Academic Report, reporting results from the 2011-2012 school year. CAC ¶ 60. In a press release published on February 7, 2013, K12 announced the results of the 2013 Academic Report, calling the results for the 2011-2012 school year “solid, ” and highlighting K12's investment in improving academic outcomes, asserting that “[t]o date, K12 has invested more than $330 million in innovative curriculum, technology, learning systems, and teacher training and support[.]” CAC ¶ 61.

         On March 20, 2014, K12 released its 2014 Academic Report, highlighting academic results for the 2012-13 school year. In the accompanying press release, Davis stated “that by publishing this Academic Report K12 is continuing its commitment to accountability and transparency.” CAC ¶ 63. K12's Chief Academic Officer was quoted as stating that “the results of the Scantron tests and many of the state-adopted growth measure assessments show a more positive picture on student learning.” CAC ¶ 65.

         The 2014 Academic Report claimed that Scantron provided a more accurate measure of student progress and academic growth than state tests administered to all students. CAC ¶ 65. It also included an analysis of student performance on the Scantron tests in reading and mathematics, administered to students in grades 3-8 in the fall and spring of the 2012-13 school year, and indicated that in the 2012-13 school year, K12 Managed Public Schools achieved a 125% norm group gain in reading and a 102% norm group gain in mathematics across all grades. CAC ¶ 66.

         K12 noted that the percentage of participation in Scantron tests for both fall and spring administration was 86% for reading and 87% for mathematics. CAC ¶ 67. However, plaintiffs allege, the remaining 13-14% of students were more academically at-risk; and in addition, because results included only students who were present in both the fall and the following spring, it excluded the most mobile students, who, according to K12, generally performed worse academically. CAC ¶ 67.

         Plaintiffs claim that during a February 4, 2014 earnings call, Davis gave misleading answers to questions about Agora. CAC ¶¶ 203, 205. Davis was asked for a general update on state issues, including legislation, and for an update on “Pennsylvania.” CAC ¶ 203. Plaintiffs assert that there was an “issue” in Pennsylvania at that time, as the Agora Board had informed K12 in mid-2012 that it did not intend on renewing its contract with K12. CAC ¶ 203. However, instead of mentioning Agora, Davis discussed "Pennsylvania" legislation in general terms - i.e., stating that “[i]t's always difficult to predict what a legislature is going to do and what's going to happen. Of course the Pennsylvania legislation has some proposals in it that would affect us negatively. . . . So I can't handicap it and tell you that in fact it's going to happen or isn't going to happen.” See CAC ¶ 203.

         In April 2014, the National Collegiate Athletic Association ("NCAA"), which regulates eligibility to play in NCAA Division I or II sports in college, in part based on coursework to ensure that students are actually learning, announced that it would no longer be accepting coursework previously completed by prospective student-athletes at 24 K12-operated schools, including 14 schools in California, and also including Agora. CAC ¶ 151. Plaintiffs assert that K12's response was to blame the NCAA for changing its rules to require student-teacher interaction, while failing to provide any standard by which student-teacher interaction could be measured. CAC ¶ 152.

         In an earnings conference call on April 29, 2014, held to discuss K12's quarterly financial results, defendants were asked to “spend a minute on Pennsylvania as we move into the potential renewal on that contract.” CAC ¶ 205. Davis responded,

[W]e will file this year and next year in 2015, and then we will seek an approval for our Agora school. That approval is something we continue to work on. We negotiate a new service contract and then they will get a charter renewal process going in the state of Pennsylvania. . . .
We watch what others are doing as they go through the process and make sure that our service contracts will be compliant with everything that the state wants. I think we are a good partner for Agora, and I think they are happy with what we have done.

CAC ¶ 207. Davis did not mention that the Agora Board had informed K12 almost two years earlier that it intended not to renew the management contract. CAC ¶ 208.

         On June 24, 2014, the Agora Board issued a request for proposals (“RFP”) for online education services and materials, and invited vendors (including K12) to submit bids. CAC ¶ 147. Two days later, after the market closed on June 26, 2014, K12 issued a press release reporting the Agora RFP, noting that K12 was looking forward to “providing robust submissions for the provision of educational services, products, and curriculum.” CAC ¶ 154. K12 implied that the RFP process was necessary for the school's charter renewal. CAC ¶ 154 ("We are confident that this process will lead to an even stronger application to the PDE for the renewal of the school's charter.").

         This June 26, 2014, announcement "partially revealed that the Agora Board was considering different arrangements for the services and products required to run Agora for the 2015-2016 and later school years, and thus that there was a chance of K12 losing a significant amount of revenue in the future.” CAC ¶ 275. It appears that as of this date, K12 still had not fully disclosed to investors that Agora had sent the notice of non-renewal in June 2012. On June 27, 2014, K12's stock price fell approximately 5% to close at $24.32. CAC ¶ 274.

         On August 14, 2014, in a conference call with investors and Wall Street analysts, held to discuss K12's quarterly and fiscal year financial results for the year ended June 30, 2014, Davis responded to a request for an “update on Agora.” CAC ¶¶ 155-156. He stated that "Agora did have one Board meeting where they made some decisions and indicated a clear interest to be a self-managed organization." CAC ¶ 156. There is no indication, however, that he disclosed that Agora had advised K12 of its intention to terminate the management contract, or that it would no longer contract for management services from K12 or any other vendor.

         During the same conference call, Davis addressed an issue with the operation of the Tennessee Virtual Academy ("TNVA"), which had been established as a K12 partner school in 2011. CAC ¶¶ 90, 98, 155. Following the 2013-14 school year, purportedly based on the school's academic performance, Tennessee's education commissioner capped the number of students permitted to enroll at TNVA. CAC ¶¶ 96-97. During the conference call, Davis acknowledged that TNVA's 2013-14 state test scores “were low, ” but noted that students “who persisted in the school for two or more years performed at a reasonable level.” CAC ¶¶ 97-98, 155; Exh. D to Barry Decl. K12's stock price dropped 13% the same day, to close at $19.42. CAC ¶ 279.

         At its September 22, 2014, meeting, the Agora Board approved K12 as its online curriculum content provider through the 2017-2018 school year. CAC ¶ 149. At the October 6, 2014 meeting of the Agora Board, the Board President announced that Agora had completed the process to self-manage Agora Cyber Charter School, which it had begun "early in 2014[, ]" and that it had agreed to “simultaneously continue using K12 curriculum and begin the process of building our own and offering it to parents and students as an option.” CAC ¶ 150.

         Three days later, on October 9, 2014, K12 reported in a press release that the Agora Board had decided to "absorb the school's general administrative services and certain human resources functions as well as name vendors for select services which are currently provided by K12" but added that it had also reached a new three-year contract with K12 to provide "academic curriculum" for Agora starting in the 2015-2016 school year. CAC ¶ 157. K12 stated that, using FY 2014 enrollment volumes and reported financial results, it believed this new contract "would have delivered approximately 25% of the revenue and 50% of the internal financial contribution” - defining “internal contribution” as “revenue less direct costs for delivering the contracted services” - “when compared to K12's current contact with the Agora Board." CAC ¶ 157.

         Later that same day (October 9, 2014), in an earnings call, K12 provided student enrollment figures for FY 2015 after the October enrollment count date. CAC ¶ 157. Plaintiffs assert that rather than simply reporting student enrollments in managed schools as it had in previous years, K12 for the first time reported enrollments in Public School Programs, which included both managed and non-managed programs. CAC ¶ 158. Davis explained that the reduction in managed schools was due to a "new market dynamic" in which some schools decided to self-manage and also due to the recent Tennessee enrollment cap. CAC ¶ 159. Rhyu also acknowledged, however, that as a result of Agora switching from a managed to a non-managed program beginning in FY2016, "you are going to see, obviously, I think, a fairly significant decline in revenue." CAC ¶ 160. K12's stock price declined 7% that day, to close at $14.87. CAC ¶ 287.

         On October 30, 2014, K12 released its financial results for the quarter ending September 30, 2014. CAC ¶ 162. During an earnings call held that same day, K12 disclosed that it had a lower gross margin percentage compared to the percentage for the same quarter in the previous year. Rhyu explained that this decrease was due to K12 “continu[ing] to invest in teachers and academic programs” and that “some of the rate increases that contributed to our managed program revenue growth relate to programs where K12 incurs significant costs.” CAC ¶ 163. Nevertheless, Rhyu assured investors that K12's Nonmanaged Programs had higher margins than the Managed Programs, and as the “non-managed piece of the business grows faster than the managed piece” the impact of the higher margins may “become more material.” CAC ¶ 163.

         K12 published its Academic Report for the 2013-14 school year on May 4, 2015. CAC ¶ 68. An accompanying press release noted that K12-managed schools overall had outperformed the Scantron norm group's mean gain in both reading and math. CAC ¶¶ 69-70. K12 acknowledged a “disconnect” between “positive Scantron results and the scores on state tests[, ]” adding,

We hypothesize that the disconnect reflects how, in high school, the content expectations of the Scantron tests diverge from those of state tests. Scantron assesses a broad range of skills. In high school, however, whether states administer end-of-course exams or high school graduation tests, testing is more narrowly focused on the specific skills and knowledge articulated in each state's standards on topics in algebra, geometry, probability and statistics, etc.

CAC ¶ 71.

         On October 27, 2015, the last day of the proposed Class Period, the National Study of Online Charter Schools ("Online Charter School Study") published a comprehensive study of online charter schools operating in the United States, which included separate analyses by three independent research institutions - Mathematica Policy Research, the Center on Reinventing Public Education at the University of Washington ("CRPE"), and Stanford's Center for Research on Education Outcomes ("CREDO"). CAC ¶ 166.

         The CRPE study, see CAC ¶¶ 170-172, specifically mentioned K12. CRPE referred to K12's provision of curriculum to Agora with nearly 10, 000 students, noting that "a program that is lacking in quality may affect many thousands of students with one school and even more nationwide, especially if it is permitted to operate year after year with no accountability." CAC ¶ 172.

         CREDO published a press release, stating that the results in its report showed that "the majority of online charter students had far weaker academic growth in both math and reading compared to their traditional public school peers[, ]" which shortfall it equated to "a student losing 72 days of learning in reading and 180 days of learning in math, based on a 180-day school year." CAC ¶ 176.

         Also on October 27, 2015, K12 issued a press release, entitled “K12 Inc. Reports First Quarter Fiscal 2016 With Revenue of $221.2 Million, ” in which it reported disappointing financial results for its 1Q16. CAC ¶ 180. Among the highlights were “[r]evenues of $221.2 million, compared to $236.7 million in the first quarter of FY 2015.” K12 explained this decline as being "largely due to the Agora Cyber School shifting from a Managed to a Non-Managed program." CAC ¶ 180. K12 also reported an “[o]perating loss of $20.5 million, compared to an operating loss of $13.2 million in the first quarter of FY 2015[;]” and a "[n]et loss attributable to common stockholders of $12.8 million, compared to a net loss of $6.8 million in the first quarter of FY 2015[.]" CAC ¶ 180. K12's stock price fell $1.93 per share, or 15.8%, to close at $10.25 per share on October 27, 2015.

         Later that day, defendants held an earnings conference call to discuss the quarterly financial results. Davis asserted that "[e]xcluding the impact of the Agora transition from a managed to a non-managed program, revenue grew 3.9% from the first quarter of last year." CAC ¶ 181. Rhyu also discussed K12's financial results, as well as the underlying trends for K12's business, but did so "excluding the impact of Agora, " explaining that "[w]e believe this way of looking at our results provide you with a clearer picture of the underlying trends." CAC ¶ 181.

         After the market closed on October 27, 2015, K12 filed its Form 10-Q with the SEC for the quarter ending September 30, 2015. In that filing, K12 disclosed that it had received a subpoena from the Attorney General of the State of California (“California AG”), Bureau of Children's Justice, in connection with an investigation styled “In the Matter of the Investigation of: For-Profit Virtual Schools.” CAC ¶ 183.[2] Although the market did not immediately react to the disclosure of the subpoena - plaintiffs claim it was "buried" in K12's Form 10-Q, CAC ¶ 183 - plaintiffs assert that the Company's stock price slid a cumulative $0.54 per share, or 5.2%, over three days from a close of $10.25 per share on October 27, 2015 (the last day of the proposed Class Period), to a close of $9.71 per share on October 30, 2015.

         On July 8, 2016, the California AG filed a complaint asserting that K12 and 14 CAVA schools it operated had used deceptive advertising to mislead families about students' academic progress, parents' satisfaction with the program and their graduates' eligibility for University of California and the California State University admission. CAC ¶ 186. The parties also submitted a joint final judgment which was entered by the court that day. CAC ¶ 186. K12 agreed to pay $6 million to the AG to defray costs of the action and the investigation, and to expunge $160 million in balanced budget credits accrued by CAVA schools and characterized by the AG as "debt relief to the non-profit schools [K12] managed." CAC ¶ 186.

         K12 also agreed to take action to ensure the accuracy of its advertisements, to train teachers to prevent improper attendance claims, and to reform the way it contracted with CAVA schools. CAC ¶ 187. It further agreed to eliminate incentive compensation for its enrollment staff, to provide all students with functional computers, and to give families a subsidy of $20 a month to cover the cost of high-speed Internet access; and to seek approval for at least two courses that satisfied UC's lab science and visual and performing arts course requirements. CAC ¶ 188.

         Lastly, the judgment required K12 to include a corrected version of the Scantron results from school year 2013-2014 in its 2016 Annual Academic Report; to include a statement in the first quarterly earnings call following entry of the judgment correcting the prior statement regarding Scantron results made in the 1Q15 earnings call on October 30, 2014; and to remove the 2015 Annual Academic Report from its website, include the corrected 2013-2014 Scantron data in the 2016 Annual Academic Report, include a statement on the front of the 2016 Report highlighting the revision, and correct the "Academic Results" page on its website. CAC ¶ 190(a), (b), (d), (e).

         In an August 9, 2016, investor call, K12's then-CEO, Stuart Udell, stated that in aggregating student results, K12 had erroneously omitted students whose gains from the fall to spring examinations were statistically insignificant. CAC ¶¶ 193, 198-199. He further explained that when this error in the statistical methodology used to tally results for the 2013-2014 school year was corrected, K12 students' mean gains still exceeded the norm group's averages in both subjects, and outstripped the mean group's gains in every grade for math, and in all but two grades for reading. CAC ¶¶ 193, 198. K12's stock price did not meaningfully react to the report of the Scantron error, and plaintiffs do not allege that K12 made any corrective disclosures concerning this issue during the proposed Class Period.

         K12 released its 2016 Academic Report on November 16, 2016, in which it included the required statements and corrections. CAC ¶ 195-198. With regard to the results for reading and math, plaintiffs assert that the impact of the changes was significant. "Whereas K12 had reported in its 2015 Academic Report that in grades 3-10 for the 2013-2014 school year the Scantron reading percentage of norm group mean gain was 161%, the figure was revised down to 109%. Mathematics was similarly revised downward from 145% to 104%." CAC ¶ 199.

         In the CAC, plaintiffs allege that throughout the proposed Class Period, defendants made materially false and/or misleading statements and failed to disclose material adverse facts about K12's business, operations, and prospects, including that K12 was publishing misleading advertisements about students' academic progress, parent satisfaction, their eligibility for UC and CSU admission, class sizes, the individualized and flexible nature of K12's instruction, hidden costs, and the quality of the materials provided to students.

         These allegations are divided among three "general categories” of actionable statements (or omissions) made during the proposed Class Period. These include false and misleading statements and/or omissions regarding Agora, false and misleading statements and/or omissions regarding students' academic and Scantron test results, and false and misleading statements and/or omissions concerning the quality and effectiveness of K12's academic services and offerings. See CAC ¶ 201.

         Plaintiffs assert that the “truth” emerged at various points during the proposed Class Period, through (1) the June 26, 2014 announcement of Agora's RFP process, CAC ¶ 273; (2) the August 14, 2014 disclosure of the TNVA enrollment cap and Agora's interest in self-management, CAC ¶¶ 277-278; (3) K12's October 9, 2014 report confirming that Agora would assume responsibility for its own management, CAC ¶ 284; (4) Davis's suggestion on October 30, 2014 that regulators were “just beginning . . . to understand the dynamics of an online school program, ” CAC ¶ 291; and (5) the publication of the Online Charter School Study and K12's disclosure of the California AG's industry-wide inquiry on October 27, 2015, CAC ¶¶ 296, 306; see also CAC ¶ 18.

         Plaintiffs filed the present action on July 20, 2016, and filed the CAC on December 2, 2016. Defendants seek an order dismissing the claims asserted against them, for failure to state a claim.


         A. Legal Standards

         A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of the claims asserted in a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). A pleading must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). While a complaint does not need detailed factual allegations, "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.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

         A complaint “must contain sufficient factual matter . . . to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A claim is facially plausible when it “allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. “[F]actual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555.

         In considering whether the complaint states a claim, the court accepts as true all of the factual allegations contained in the complaint. Iqbal, 556 U.S. at 1949; see also Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). However, legal conclusions are "not entitled to the assumption of truth." Twombly, 550 U.S. at 555. Nor is the court required to “accept as true allegations that contradict matters properly subject to judicial notice or by exhibit” or “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (quotations and citations omitted).

         To state a claim for securities fraud under § 10(b) of the Securities Exchange Act of 1934, and Securities Exchange Commission Rule 10b-5 promulgated thereunder, a plaintiff must allege particularized facts showing (1) a material misrepresentation or omission of fact; (2) made with scienter; (3) a connection with the purchase or sale of a security; (4) reliance or “transaction causation;” (5) economic loss; and (6) loss causation (causal connection between the material misrepresentation and the loss). Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005); see also Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37-38 (2011).

         In addition, a complaint alleging claims under § 10(b) and Rule 10b-5 must satisfy the pleading requirements of both Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir. 2012). Under Rule 9(b), claims alleging fraud are subject to a heightened pleading requirement - that a party "state with particularity the circumstances constituting fraud or mistake." Fed.R.Civ.P. 9(b). And since 1995, all private securities fraud complaints are subject to the "more exacting pleading requirements" of the PSLRA, which require that both falsity and scienter be pled with particularity. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009).

         B. Defendants' Motion

         Defendants argue that the CAC fails to state a claim because it amounts to improper “puzzle pleading;” because it fails to allege an actionable misstatement or omission; because the allegations do not support a strong inference of scienter; because it fails to allege facts showing loss causation; and because it does not state a claim against the individual defendants under § 20(a).

         1. Improper “puzzle pleading”

         As an initial matter, defendants assert that the CAC amounts to "puzzle pleading, " which violates the requirement that the complaint contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2).

         In the securities fraud context, the term “puzzle pleading” refers to a pleading that requires the defendant(s) and the court to "match up" the allegedly false and misleading statements that form the basis of the plaintiff's claims with the reasons those statements are misleading. See, e.g., In re Cisco Sys. Inc. Sec. Litig., 2013 WL 1402788 at *5 (N.D. Cal. Mar. 29, 2013); see also In re Splash Tech. Holdings, Inc. Sec. Litig., 160 F.Supp.2d 1059, 1073 (N.D. Cal. 2001) (finding that structure of complaint rendered it “exceedingly difficult to discern precisely which statements are alleged to be misleading”).

         Here, defendants assert, the CAC block-quotes extensive passages from public statements, and then repeats for each passage a series of supposedly contrary "facts, " without specifying the portion of each statement alleged to be false, alleging why it is false, or alleging what contrary information the defendants had. Defendants do acknowledge that in certain sections of the CAC, plaintiffs have bolded portions of block quotes and appear to be limiting their objections to the specific statements in bold. However, they assert, these are "limited instances." In the court's experience, a securities fraud complaint that employs a true puzzle-style pleading format will recite lengthy statements attributed to the defendants, followed by a generalized list of reasons that the statements may have been false or misleading or a generalized list of omissions that were required to make the statements not misleading. Here, by contrast, ...

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