Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_11-cv-05697/USCOURTS-cand-4_11-cv-05697-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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United States District Court 

Northern District of California 

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

HAROLD GREENBERG, on behalf of himself 

and all others similarly situated, 

 Plaintiffs, 

 vs. 

COOPER COMPANIES, INC. et al., 

 Defendants. 

Case No.: 11-CV-05697 YGR

ORDER GRANTING MOTION TO DISMISS 

WITH LEAVE TO AMEND

Plaintiffs, who are shareholders of Defendant Cooper Companies, Inc. (“Cooper”), bring this 

securities fraud class action against Cooper, its Chief Executive Officer Robert S. Weiss (“CEO 

Weiss”), and its former Chief Financial Officer Eugene J. Midlock (“CFO Midlock”) (collectively 

“Defendants”) for allegedly making false and misleading statements in connection with the recall of 

defective contact lenses in order to manipulate Cooper’s stock price. Plaintiffs’ Consolidated Class 

Action Amended Complaint (Dkt. No. 43 (“CAC”)) alleges two claims: (1) Securities Fraud Under 

Section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b); and (2) Control-Person 

Liability Under Section 20(b) of the Securities and Exchange Act, 15 U.S.C. § 78t(a). 

Defendants have filed a Motion to Dismiss on the grounds that the CAC fails to meet the 

pleading requirement for a securities fraud lawsuit imposed by the Private Securities Litigation 

Reform Act of 1995 (“PSLRA”). The Court heard oral argument on August 7, 2012. 

Having carefully considered the papers submitted, the CAC, and the argument of counsel, for 

the reasons set forth below, the Court hereby GRANTS the Motion to Dismiss WITH LEAVE TO 

AMEND. 

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I. BACKGROUND 

In this securities fraud class action, Plaintiffs allege that between March 4, 2011, and 

November 15, 2011 (“Class Period”), Defendants artificially inflated Cooper’s stock price by 

concealing and downplaying design flaws with its “Avaira” contact lenses resulting in serious injury 

to consumers, which ultimately led to multiple product recalls. 

Cooper is a global medical products company that serves the specialty healthcare market 

through its two business units, CooperVision, Inc. (“CooperVision”) and CooperSurgical, Inc. 

(CAC ¶¶ 3, 16.) CooperVision is the third largest manufacturer of soft contact lenses in the world, 

with approximately 17% of the global market share, which provides 84% of Cooper’s revenue. (Id.) 

CooperSurgical markets diagnostic products, surgical instruments, and accessories for the women’s 

healthcare market. (Id.) Cooper’s common stock is traded under the symbol “COO” on the New 

York Stock Exchange. (Id. ¶ 16.) 

The contact lens market has two major product categories: spherical lenses, which correct 

near and farsightedness; and toric lenses, which address more complex visual issues including 

astigmatism. (Id. ¶ 3; Declaration of Stacey M. Sprenkel (“Sprenkel Dec.”), Dkt. No. 47, ¶ 12, Ex. 

11 at 5.) Contact lenses are sold with recommended replacement schedules, often referred to as 

“modalities,” which include single-use, two-week, and monthly. (Id.) CooperVision produces both 

a two-week silicone hydrogel lens brand called Avaira and a monthly silicone hydrogel lens brand 

called Biofinity. At issue in this lawsuit is Cooper’s Avaira product line. The CAC alleges as 

follows: 

1. Avaira Toric Rollout. 

 On March 3, 2011, CFO Midlock announced that Cooper would be rolling out the 

toric version of its Avaira lens product line (“Avaira Toric”) nationwide. (CAC ¶ 33.) The sphere 

version of the Avaira product line (“Avaira Sphere”) had been on the market since 2008. When 

Cooper designed and developed the Avaira Toric and the Avaira Sphere lenses at its Pleasanton, 

California facility, the facility was not certified, registered or otherwise approved by state or federal 

regulatory agencies to develop medical products. (Id. ¶ 5.) This lack of certification allowed Cooper 

to circumvent quality control requirements in the design of the Avaira Toric and Avaira Sphere 

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lenses. (Id.) As a result, both Avaira lens types contained unsafe amounts of silicone oil residue. 

(Id. ¶ 48.) These unsafe amounts of silicone oil residue resulted in a high incidence of hazy vision, 

and eye pain reported by consumers of Cooper contact lenses, which, in turn, led to the recall of both 

Avaira lens types. (Id.) 

Beginning in February or March of 2011, Cooper received a significant number of 

complaints about its Avaira lenses from consumers in Japan. (Id. ¶¶ 23, 38.) These complaints 

consisted of eye irritation and blurry vision. By June or July 2011, the number of complaints grew 

to over 200, with the majority of those complaints coming from U.S. consumers. (Id. ¶¶ 27, 39.) 

Also by June or July 2011, CooperVision had launched an internal investigation into these 

complaints. (Id. ¶ 27.) 

According to the CAC, Defendants concealed the growing number of complaints of injury 

caused by the Avaira product line, and deliberately misled investors by publicly touting the “good 

design and good material” of the Avaira lenses and “high quality” of all of Cooper’s silicone 

products and the Avaira Toric rollout was “going to do well.” (Id. ¶¶ 34, 42.) Defendants also 

articulated the two-fold importance of the Avaira Toric lens to Cooper. (Id. ¶ 35.) As a two-week 

lens, the Avaira Toric sat in a “sweet spot”—the biggest part of the U.S. contact lens market and an 

area with only one other major competitor, Johnson & Johnson. (Id.) In addition, past experience 

had shown that rolling out a toric version of a brand would have a “halo” effect on sales of the sphere 

version of that same brand, not only opening up the toric market, but also propelling overall sales 

across the brand. (Id. ¶¶ 36-37.) Cooper’s quarterly filings with the Securities and Exchange 

Commission (“SEC”) communicated this same optimism. (Id. ¶ 42 (“we have high quality silicone 

hydrogel lens products”); ¶ 49 (“Overall, we remain optimistic about the long-term prospects for the 

worldwide contact lens ... markets”).) 

2. Avaira Toric Recall on August 19, 2011. 

 On August 19, 2011, Cooper announced a “voluntary recall on limited lots of Avaira 

Toric contact lenses.” (Id. ¶ 53.) Cooper announced that a limited recall resulted from the 

unintended presence of a residue on certain lenses. (Id.) The press release indicated that “[t]he 

residue was identified after investigating a small number of complaints of temporary hazy vision.” 

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(Id.) In the press release Cooper emphasized that “[t]his recall is limited solely to specific lots of 

Avaira Toric, and no other Cooper Vision product is involved in this recall.” (Id.) The press release 

further stated that the “manufacturing issue” causing the problem “ha[d] been identified and a 

resolution [wa]s in progress.” (Id.) 

After the first recall, Cooper allegedly continued to conceal and misrepresent the scope of the 

problems with its Avaira lenses. Two weeks after the recall, during an August 31, 2011 conference 

call CEO Weiss stated that “[a]side from the voluntary limited recall of Avaira Toric, all of 

[Cooper’s] silicone hydrogels are performing well ... [including] Avaira Sphere.” (Id. ¶ 58.) CEO 

Weiss further indicated that the recall’s impact had already been “built into [Cooper’s] guidance” 

and represented that the recall is “not a material event.” (Id. ¶ 59.) Thereafter Cooper filed its third 

quarter Form 10-Q with the SEC, which reiterated that only the Avaira Toric contact lens was 

recalled, the recall was based on a small number of complaints, and Defendants once again stated 

that “[o]verall, we remain optimistic about the long-term prospects for the worldwide contact lens.” 

(Id. ¶ 62 (alteration in original).) 

3. Drop in Stock Price and Second Recall on November 15, 2011. 

 On October 11, 2011, MSNBC.com published an article describing the serious 

complications wearers were having with the Avaira Toric lenses and described Cooper’s “limited 

recall” as a “stealth recall” that left many consumers, and investors, unaware of the severity of the 

safety problems. After the MSNBC article appeared, Cooper’s stock price traded on high volume 

and dropped 8.2%, or $6.44 per share. (Id. ¶ 67.) 

On or about October 14, 2011, prompted by reports of problems associated with the Avaira 

Toric lens, the U.S. Food and Drug Administration (“FDA”) posted a Class I warning, calling for 

Cooper to issue a full notice to the public of the reasons for the recall of 778,301 of its Avaira Toric 

lenses. (Id. ¶ 7.) The FDA’s action was prompted by its receipt of approximately 40 reports of 

problems with the Avaira Toric lenses. (Id.) 

On November 15, 2011, Cooper expanded its recall to the Avaira Sphere lenses, recalling 

nearly five million Avaira Sphere lenses that had already shipped. As with the August 2011 recall, 

Cooper attributed the recall to the presence of silicone oil residue on the lenses. Cooper also 

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disclosed that it had reserved more than $23 million for recall-related liabilities. (Id. ¶ 8.) 

As a consequence of its revelations about the true quality of its products, the price of 

Cooper’s common stock fell from a closing price of $64.95 per share on November 14, 2011, the 

day prior to the disclosure of the expanded recall, to a close of $56.64 per share on November 15, 

2011, the day of the announcement, on extremely heavy trading volume. (Id. ¶ 9.) This represented 

a loss of $8.34 per share, or nearly 13% of share value. (Id.) 

II. DISCUSSION 

Defendants move for dismissal on the grounds that the CAC fails to identify any statements 

that were false or misleading and fails to allege facts that suggest either named defendant was aware 

of defects in the Avaira lenses when they made the allegedly false and misleading statements. 

Defendants further argue that because they did not make any false or misleading statements, the drop 

in Cooper’s share price was the result of disappointing news, not because information was disclosed 

to the market that corrected earlier false or misleading statements.1

A. LEGAL STANDARD

To withstand a motion to dismiss for failure to state a claim under Rule 12(b)(6), Plaintiffs 

must allege sufficient details to give the defendants fair notice of the nature of the claim and the 

grounds upon which it rests. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 554 (2007). On a 

motion to dismiss a Section 10(b) action for failure to state claim on which relief can be granted, a 

court must consider the complaint in its entirety, as well as other sources that courts ordinarily 

examine when ruling on such motions, in particular, documents incorporated by reference into the 

 

1

 The Court notes that some of the Defendants’ arguments ignore numerous allegations in the CAC. For 

instance, despite allegations that there were over 200 complaints ranging from hazy vision, eye irritation, 

redness, and abrasions to torn corneas, Defendants argue that the CAC “does not describe the nature or 

number of the complaints.” (Mot. 1, 6, 7, 9.) Additionally, Defendants argue that the allegations that the lack 

of regulatory oversight and quality assurance standards at Cooper’s Pleasanton facility “does not show any 

connection between certification and silicone oil residue” (see id. at 2), which ignores allegations that this lack 

of regulatory oversight and quality assurance standards allowed Cooper to design a contact lens for 

manufacture after very limited testing on how defined amounts of silicone oil would affect the human eye and 

without defined specifications for the amount of silicone oil in the Avaira lenses Similarly, Defendants 

characterize allegations that Cooper needed to certify its Pleasanton facility to design medical products as 

“conclusory” and appear to argue that without more evidentiary facts, it is implausible to allege that the chief 

executive or chief financial officer of a company that designs and manufactures medical products would be 

aware that its main design facility was not registered to design medical products. (Id. at 2, 7.) 

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complaint, and matters of which a court may take judicial notice.2 Tellabs, Inc. v. Makor Issues & 

Rights, Ltd., 551 U.S. 308, 322 (2007). Additionally, because this is an action for securities fraud, 

“the circumstances constituting fraud or mistake shall be stated with particularity.” Fed. R. Civ. P. 

9(b). 

B. COUNT I: SECTION 10(b) 

Section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b), makes it unlawful for 

any person to “use or employ, in connection with the purchase or sale of any security ... any 

manipulative or deceptive device or contrivance in contravention of such rules and regulations as the 

Commission may prescribe as necessary or appropriate in the public interest or for the protection of 

investors.” 15 U.S.C. § 78j(b). SEC Rule 10b-5 implements this provision by making it unlawful 

to, among other things, “make any untrue statement of a material fact or to omit to state a material 

fact necessary in order to make the statements made, in the light of the circumstances under which 

they were made, not misleading.” 17 C.F.R. § 240.10b-5(b). 

In 1995, Congress enacted the PSLRA as a check against abusive litigation3

 by private 

parties. Tellabs, supra, 551 U.S. at 313. Heightened pleading is one of the control measures 

Congress included to advance “the PSLRA’s twin goals: to curb frivolous, lawyer-driven litigation, 

while preserving investors’ ability to recover on meritorious claims.” Id. at 322. Under the 

PSLRA’s heightened pleading requirement, to state a Section 10(b) claim, Plaintiffs must allege 

facts sufficient to establish (i) that the defendant made a material misrepresentation or omission of 

fact; (ii) that the misrepresentation was made with scienter; (iii) a connection between the 

 

2

 When ruling on a motion to dismiss, a court may consider documents whose contents are incorporated by 

reference in a complaint or upon which a complaint necessarily relies when authenticity is not contested, and 

matters subject to judicial notice. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999), 

abrogated by statute on other grounds as recognized in S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 784 

(9th Cir. 2008); Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001). The Court takes judicial notice 

of the exhibits attached to the Sprenkel Declaration. The Court takes judicial notice of the fact that certain 

documents were publicly-filed and the fact that certain statements were made in those documents on the dates 

specified, but not the truth of the statements contained therein. 

3

 Members of the House and Senate “observed that plaintiffs routinely were filing lawsuits ‘against issuers of 

securities and others whenever there [was] a significant change in an issuer’s stock price, without regard to any 

underlying culpability of the issuer, and with only faint hope that the discovery process might lead eventually 

to some plausible cause of action[.]’” In re Silicon Graphics, supra, 183 F.3d at 978 (quoting H.R. Conf. Rep. 

104–369, at 31 (1995), reprinted in 1995 U.S.C.C.A.N. 730) (alterations in original). 

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misrepresentation or omission and the purchase or sale of a security; (iv) reliance on the 

misrepresentation or omission; (v) loss causation; and (vi) economic loss. Metzler Inc. GMBH v. 

Corinthian Colleges, Inc., 540 F.3d 1049, 1061 (9th Cir. 2008). The parties contest whether the 

CAC adequately pleads the (1) scienter, (2) material misstatement, and (3) loss causation elements. 

Because scienter is central to the allegations of securities fraud, the Court will address that element 

first. 

1. SCIENTER. 

 Scienter is “a mental state embracing intent to deceive, manipulate, or defraud.” See 

Tellabs, supra, 551 U.S. at 319. Under the PSLRA, the 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-4(b)(2) compare with Fed. R. Civ. P. 9(b) (“Malice, intent, knowledge, and other 

conditions of a person’s mind may be alleged generally”). The required state of mind is “that the 

defendants made false or misleading statements either intentionally or with deliberate recklessness.” 

Zucco, supra, 552 F.3d at 991. 

In ruling on a motion to dismiss for failure to plead a strong inference of scienter, the Court 

must not consider the factual allegations in isolation, but instead, the Court must determine whether, 

taken collectively, all the facts alleged give rise to a strong inference of scienter. Tellabs, supra, 551 

U.S. at 322-23, 326 (“the court’s job is not to scrutinize each allegation in isolation but to assess all 

the allegations holistically”); S. Ferry, supra, 542 F.3d at 784 (“The Supreme Court’s reasoning in 

Tellabs permits a series of less precise allegations to be read together to meet the PSLRA 

requirement”). “When conducting this holistic review, however, [a court] must also ‘take into 

account plausible opposing inferences’ that could weigh against a finding of scienter.” Zucco, supra, 

552 F.3d at 1006 (quoting Tellabs, supra, 551 U.S. at 323). To satisfy the scienter requirement, a 

plaintiff “must plead facts rendering an inference of scienter at least as likely as any plausible 

opposing inference.” Tellabs, supra, 551 U.S. at 328 (emphasis in original). 

Plaintiffs argue that they have sufficiently pled an inference of scienter based on: (a) the 

individual Defendants’ roles within the company, also known as the “core operations inference”; (b) 

statements by confidential witnesses; and (c) the individual Defendants’ suspicious stock sales. The 

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Court considers all relevant factors both independently (subsections a, b, and c) and make a final 

determination based upon a “holistic review” of the allegations (subsection d). 

a) Core operations inference. 

 Allegations of scienter based on the defendants’ roles within the company, i.e., 

the “core operations inference,” may support scienter either independently or in combination with 

other allegations. See S. Ferry, supra, 542 F.3d at 784-86. As a general matter, “corporate 

management’s general awareness of the day-to-day workings of the company’s business does not 

establish scienter—at least absent some additional allegation of specific information conveyed to 

management and related to the fraud.” See Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 

F.3d 1049, 1068 (9th Cir. 2008) (emphasis supplied). Thus, unless the core operations inference is 

particularly strong, the inference will not independently support a finding of scienter. Circumstances 

in which the “core operations inference” will independently suffice are: (1) when the nature of the 

relevant facts is of such prominence that it would be “absurd” to suggest that management was 

unaware of the matter; or (2) when the complaint provides detailed and specific allegations about 

management’s exposure to factual information within the company. See Zucco, supra, 552 F.3d at 

1000-01. 

Plaintiffs argue that the core operations inference independently supports a finding of 

scienter. Specifically, Plaintiffs recite the following sequence of events: 

[Cooper] (1) experienced declining sales in its older contact lenses and worried 

competitors’ silicone hydrogel models posed a risk to its business; (2) entered the 

silicone hydrogel market late and worked to catch up despite limited manufacturing 

capacity; (3) eschewed state and federal oversight in designing its newest silicone 

hydrogel lenses, the Avaira line, at home in its Pleasanton headquarters4

; (4) received 

hundreds of complaints about the Avaira lenses between February/March 2011 and 

June/July 2011, whose severity it tracked via a graphical “Pareto analysis” 5; (5) 

 

4

 The CAC implies that the design problems with the Avaira product line were caused by the alleged fact that 

the Pleasanton facility was not registered, approved, and/or certified to develop medical products. (CAC ¶¶ 5, 

26-29, 32, 40-41, 48, 54, 61, 105.) However, the CAC never specifically indicates that Cooper “eschewed” 

state and federal oversight in designing the Avaira product line. 

5

 The CAC alleges that during one meeting that took place in February or March of 2011, CooperVision’s 

Engineering Director Samuel Puig made a graphical representation, known as a Pareto Analysis to “rank” the 

severity of complaints from Japan. (CAC ¶ 23.) The CAC then alleges that by June or July 2011, Cooper had 

received over 200 complaints, mostly from the United States. (Id. ¶¶ 27, 39, 54.) However, there is no 

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launched an internal investigation into these complaints at some point during or 

before June/July 2011; (6) completed the internal investigation, determined that a 

design/manufacturing problem, consisting of excess silicone oil residue, caused the 

problems; (7) initiated a recall of specified Avaira Toric lots; (8) announced the 

creation of a $14 million reserve to cover recall-related costs; (9) worked with the 

FDA to develop new quality standards for both the Avaira Toric and Avaira Sphere 

lenses, neither of which had previously had design specifications for silicone oil 

included in their bill of material; (10) expanded the August 19, 2011 recall to 

encompass Avaira Sphere lenses; and (11) increased the recall-loss reserve to $23 

million. 

(Pl’s Opp’n 18-19.) Plaintiffs argue that based on this sequence of events, “[i]t strains credulity past 

the breaking point to suggest Defendants were unaware any of this was going on.” (Id. at 19.) Facts 

numbered (1), (2), (8), and (9), however, are not pled in the CAC. 

Plaintiffs allege that Defendants must have known about the problems regarding the Avaira 

Toric lenses because there were more than 200 customer complaints about hazy vision, eye irritation, 

and redness between February and July 2011. In Berson v. Applied Signal Technology, Inc., the 

Ninth Circuit permitted a securities plaintiff to rely solely on the core operations inference where the 

defendants allegedly failed to disclose “stop-work orders” from the company’s largest customers 

even though those orders had “a devastating effect on the corporation’s revenue.” 527 F.3d 982, 987 

(9th Cir. 2008). There, the first stop-work “halted between $10 and $15 million of work on the 

company’s largest contract with one of its most important customers.” Id. at 988 n. 5. Plaintiffs 

contend, without elaboration, that Berson involved “analogous and perhaps even less salient facts” 

and a smaller monetary loss to the company. (Pl.’s Opp’n 19.) While Cooper set aside a $23 million 

reserve fund for the recall, the Avaira product line accounted for approximately 1% of Cooper’s 

revenue. (See Sprenkel Dec., Ex. 6.) Thus, unlike Berson, where the stop-work orders were 

devastating to the company, the present allegations, taken collectively, do not compel a strong 

inference that the customer complaints about the Avaira Toric lenses so greatly impacted Cooper’s 

bottom line at the time that it would be absurd to suggest the Defendants were unaware that the 

contact lenses were defective. 

 

indication that a Pareto chart was used in June or July 2011 to track the complaints or that this information was 

conveyed to upper management. 

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At best, the CAC raises a weak inference that prior to the August 19, 2011 recall, the 

individual Defendants knew or should have known about problems associated with the Avaira Toric 

lenses. For example, Plaintiffs claim that senior management was required to “stay apprised of 

quality issues and complaints” under the ISO 9000 and 13458 certification mandate.6 (CAC ¶ 25.) 

The requirement that senior management “stay apprised” of quality control matters does not by itself 

indicate that the named Defendants actually were aware of the quality control problems alleged in 

the CAC so as to support the necessary inference of scienter. Along these same lines, Plaintiffs 

imply that CEO Weiss, and perhaps CFO Midlock, knew of these problems because CooperVision 

President John Weber (“Weber”) was aware of these quality issues, and Weber “reported directly to 

Defendant Weiss.” (Id.) Plaintiffs do not allege that Weber and CEO Weiss (or CFO Midlock) ever 

discussed the quality of the Avaira Toric lenses. 

Furthermore, and notwithstanding Plaintiffs’ contention that there was a lack of regulatory 

oversight at the Pleasanton facility, Plaintiffs argue that the core operations inference is particularly 

strong here due to the heavily regulated nature of the medical products industry. In support, 

Plaintiffs rely upon the First Circuit’s decision in Mississippi Public Employees’ Retirement System 

v. Boston Scientific Corp., 523 F.3d 75 (1st Cir. 2008). In Boston Scientific a manufacturer of 

coronary stents allegedly knew of serious problems with its stents, but downplayed reports of patient 

deaths by claiming the cause was the doctors’ own unfamiliarity with the product. The First Circuit 

found allegations that the defendant was planning a change in the manufacturing process to remedy 

the problem while at the same time telling the public that the problem was doctor unfamiliarity, was 

sufficient to support a strong inference that the defendants knew the problem was not doctor 

unfamiliarity but a design defect, which it had already determined how to fix. The court rejected the 

argument that these allegations were simply fraud by hindsight (i.e., because a bad outcome 

occurred, defendant’s past optimism must have been fraud). The First Circuit noted that the 

company claimed it had been monitoring and investigating the problem, and given that it was in a 

 

6

 Plaintiffs do not identify the meaning or significance of either ISO certification. ISO is a non-governmental 

organization that develops international standards related to quality management systems to ensure products 

and services are safe, reliable and of good quality. ISO certification is a written assurance by an independent 

body that a product, service or system meets specific requirements. See www.iso.org/iso/home.htm 

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highly regulated industry, it was fair to infer that the company not only monitors reports of patient 

injuries but also looks for prompt solutions to such problems. 

In In re Daou Systems, Inc., the Ninth Circuit held that specific and particular accusations 

created a strong inference of scienter where the plaintiffs alleged that executives monitored the data 

that was the subject of the allegedly false statements. 411 F.3d 1006, 1022-23 (9th Cir. 2005). 

There, plaintiffs relied on “specific admissions from top executives that that they [were] involved in 

every detail of the company and that they monitored portions of the company’s database.” Id.; see 

also Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1231 (9th Cir. 2004) 

(finding a strong inference of scienter where CEO was quoted as saying: “All of our information is 

on one database. We know exactly how much we have sold in the last hour around the world,” 

which was considered a specific and detailed statement about defendants’ actual knowledge). 

Here, Cooper launched an internal investigation into reports of problems with the Avaira 

Toric lens in June or July 2011. Then, in August and September 2011, Defendants publicly 

disclosed that Cooper investigated complaints about the Avaira Toric lens, Defendants announced 

the results of that investigation, and initiated a limited recall of Avaira Toric lenses. Less than two 

months later, MSNBC.com would characterize this as a “stealth” recall that downplayed the injuries 

suffered by consumers. This raises the questions of what the Defendants knew about problems 

associated with the Avaira Toric lens and when they learned about these problems. 

Once Cooper initiated a recall of Avaira Toric lenses, the core operations inference of 

scienter begins to strengthen. However, Plaintiffs speculate, but do not allege specific facts about 

Defendants’ knowledge of and exposure to the problems regarding the Avaira lenses prior to the 

first recall on August 19, 2011. Moreover, Plaintiffs never allege that Cooper was aware of the more 

severe problems associated with its Avaira Toric lenses, such as torn corneas, prior to the October 

11, 2011 MSNBC.com article. Further, Plaintiffs fail to allege that prior to the November 15, 2011 

recall of the Avaira Sphere lens that Defendants knew there were defects with its Avaira Sphere 

lenses, or that the Defendants had any reason to suspect that the Avaira Sphere lenses might contain 

the same defects as its Avaira Toric lenses. Accordingly, because Plaintiffs fail to allege “detailed 

and specific allegations” of Defendants’ knowledge of problems with the Avaira brand of contact 

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lenses, Plaintiffs’ allegation based on Defendants’ roles in the company is insufficient, independent 

of other allegations, to give rise to a strong inference of scienter. 

b) Confidential witness as sources of information. 

 Plaintiffs next rely upon statements of confidential witnesses to support their 

allegations of scienter. A complaint relying on statements from confidential witnesses satisfies the 

PSLRA’s pleading requirements if: (1) it “provide[s] an adequate basis for determining that the 

witnesses in question have personal knowledge of the events they report”; and (2) the confidential 

witnesses’ statements are “themselves indicative of scienter.” Zucco, supra, 552 F.3d at 995; see In 

re Silicon Graphics, supra, 183 F.3d at 985 (“It is not sufficient for a plaintiff’s pleadings to set forth 

a belief that certain unspecified sources will reveal, after appropriate discovery, facts that will 

validate her claim.”). 

Here, the statements from Plaintiffs’ three confidential witnesses are based on personal 

knowledge. All three confidential witnesses (“CW1,” “CW2,” and “CW3,”7

 respectively) worked at 

the Pleasanton facility and state that the Pleasanton facility was not certified to design or 

manufacture medical products, and that the Research and Development Group at the Pleasanton 

facility resisted efforts to impose quality assurance standards. CW1 also explained how this lack of 

regulatory oversight and quality assurance standards directly led to the problems with excess 

silicone oil residue on the Avaira lenses. Additionally, according to CW1, Cooper first received 

reports of problems with the Avaira Toric lenses as early as February or March 2011.8

 (CAC ¶ 21.) 

These problems included “hazy vision, stinging, eye irritation, redness, and abrasions” (id. ¶ 23), but 

 

7

 CW3 stopped working at CooperVision in January 2009, over two years prior any of the alleged false or 

misleading disclosures, so his statements, for example, that “management did not fully understand or respect 

the importance of the design control process,” add very little to the scienter analysis with respect to conduct 

that occurred in 2011. (CAC ¶¶ 31-32.) 

8

 According to CW1, these adverse reports came from consumers in Japan. Defendants argue that CW1 is 

unreliable (and should therefore be discredited) because at the time of the alleged complaints Avaira lens had 

not even been sold in Japan. In support Defendants cite to transcripts of conference calls with investors where 

the named Defendants stated that CooperVision had no presence in Japan. Plaintiffs claim the named 

Defendants made material misrepresentations and omissions during those conference calls in order to 

manipulate the stock market, so the argument that the Court must accept as true any of the statements made by 

the named Defendants during the course of one of those conference calls simply ignores the underlying basis 

for this lawsuit. 

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not complaints of severe eye problems like torn corneas and other problems that required emergency 

room treatment as reported by MSNBC.com. According to CW2, the number of adverse reports 

increased to over 200 by early June or July 2011. (Id. ¶¶ 27, 39.) 

CW1 provided information from which to infer that problems associated with the Avaira 

lenses may have been conveyed to the Defendants. CEO Weiss may have been aware of these 

problems prior to the recall because CooperVision President John Weber, who “reported directly to 

Defendant Weiss,” (i) attended quarterly senior management meetings “where quality issues were 

also discussed”; and (ii) Weber “was informed about the quality problems.” (Id. ¶ 25.) CW1 also 

stated that ISO certification requires that senior management “stay apprised of quality issues and 

complaints.” (Id.) 

Defendants argue that CW2, a Senior Global Quality Assurance Manager, first learned of the 

“200 complaints related to the Avaira lenses” in June or July 2011. (Id. ¶¶ 26-27, 31.) Defendants 

note that the allegation that CW2, whose job was to monitor quality issues, was not aware of these 

complaints until June or July 2011, renders it less likely that either named Defendant would have been 

aware of the complaints prior to that time. However, the CAC also alleges that CW2 learned of these 

quality control issues from his supervisor, who, according to CW1, was aware of these issues as early 

as February 2011. 

The opinions of Plaintiffs’ confidential witnesses are not sufficiently fact based to infer that 

specific information about adverse reports was conveyed to the Defendants. Accordingly, the 

information disclosed by Plaintiffs’ confidential witnesses does not independently suffice to support 

a strong inference of scienter. 

c) Stock sales. 

 Finally, Plaintiffs allege that at the same time that Cooper’s executives were 

touting the quality of the Avaira lenses, they were selling off their own shares of Cooper stock, 

pocketing over $14.2 million dollars in illicit benefits. (CAC ¶ 9.) “Insider stock sales are not 

inherently suspicious.” In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1092 (9th Cir. 2002). Rather, 

to support an inference of scienter, Plaintiffs “must allege ‘unusual’ or ‘suspicious’ stock sales.” 

Ronconi v. Larkin, 253 F.3d at 435; see Zucco, supra, 552 F.3d at 1005 (“‘unusual’ or ‘suspicious’ 

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stock sales by corporate insiders may constitute circumstantial evidence of scienter.”); Metzler, 

supra, 540 F.3d at 1066-67 (sales that are “‘dramatically out of line with prior trading practices at 

times calculated to maximize the personal benefit from undisclosed inside information.’”) (quoting In 

re Silicon Graphics, supra, 183 F.3d at 986). Relevant factors that are used to consider whether 

stock sales were “unusual” or “suspicious” include: (1) the amount and percentage of shares sold; (2) 

whether the sales were consistent with the defendant’s trading history; and (3) the timing of the sales. 

See Metzler, supra, 540 F.3d at 1067. 

Plaintiffs argue that the Defendants’ stock sales were not consistent with their prior trading 

history and that the timing of all of their sales took place before the October 2011 MSNBC.com 

article that caused the first drop in share price. On June 11, 2011, CEO Weiss sold 83,104 shares of 

stock worth more than $6 million. (CAC ¶¶ 17, 87(a).) CEO Weiss had last sold shares in 

September 2008, nearly three years earlier. (Id.) On April 13, 2011, June 6, 2011, and September 8, 

2011, CFO Midlock sold a total of 110,928 shares of stock worth more than $8.1 million. (Id. ¶¶ 18, 

87(b).) CFO Midlock, who had worked at Cooper since 2007, had no prior trading history. (Id.) As 

of October 13, 2010, a total of 46.5 million shares of Cooper’s common stock were outstanding. (Id.

¶ 75.) 

Defendants argue that the sales were not “unusual” or “suspicious.”9 They provide 

explanations for the timing of the Defendants’ stock sales in the Class Period. CEO Weiss sold 

83,104 shares of Cooper stock, which accounted for 14% of his total holdings of Cooper stock, to 

fund the exercise of 108,000 shares of expiring stock options. (See Sprenkel Dec., Ex. 33.) CFO 

Midlock’s stock sales were done in advance of his December 2011 retirement.10 Defendants argue 

 

9

 Defendants also argue that CEO Weiss―but not CFO Midlock, who was retiring―was interested in the long 

term success of Cooper, which makes his alleged participation in share price manipulation to maximize short 

term gains irrational. They proffer no evidentiary support for this factual assertion or legal authority to 

support dismissal of the lawsuit on this basis. 

10 Defendants’ apparent position is that for a securities fraud plaintiff to plead that a defendant’s stock trades 

were unusual, a plaintiff cannot rely upon the defendant’s trading history, but instead must provide 

particularized details of how a company’s stock plan would have permitted the defendant to make stock trades 

at a different time. For example, although Defendants do not argue that Cooper’s stock plan would have 

prevented CFO Midlock from selling his shares earlier, they argue that the CAC “does not plead facts showing 

that such a sale would have been within Cooper’s guidelines, which set out minimum stock ownership levels 

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that CEO Weiss’s lone sale of stock in June and CFO Midlock’s sales of stock in April and June (but 

not September) are not “unusual” or “suspicious” because the sales occurred prior to the time that 

CW2, the Senior Quality Assurance Manager, learned of the complaints regarding the Avaira Toric 

lenses, it is unlikely that Defendants’ sales were made with knowledge of these complaints. 

Without more, the Court does not find that Defendants’ sale of Cooper stock was sufficiently 

unusual or suspicious so as to support independently a strong inference of scienter. 

d) Holistic Review 

 The Court must consider the allegations holistically and determine whether, 

taken collectively, all the facts alleged give rise to a strong inference of scienter during the Class 

Period itself, here, March 4, 2011 through November 15, 2011. Tellabs, supra, 551 U.S. at 322-23, 

326. “When conducting this holistic review, however, [a court] must also ‘take into account plausible 

opposing inferences’ that could weigh against a finding of scienter.” Zucco, supra, 552 F.3d at 1006 

(quoting Tellabs, supra, 551 U.S. at 323). Scrutinized in isolation, the inference of scienter is weak 

but considered holistically, these allegations raise the question of what Defendants knew and when.11

In August and September 2011, the Defendants represented that Cooper investigated a small 

number of minor complaints regarding the Avaira Toric lenses, the problem had been identified, and 

a resolution was in process. By announcing that Cooper conducted an investigation into complaints 

and that the Defendant had identified the source of the problem, it is fair to infer that Cooper 

actually investigated the complaints and that the Defendants knew or should have known about the 

 

for senior executives.” (Mot. 22.) Defendants do not cite any legal authority to support such a pleading 

requirement. 

11 Plaintiffs have raised a number of new facts in the Opposition brief that they did not allege in the CAC. 

These new facts include: Cooper experienced declining sales in its older contact lenses and was worried that 

competitors’ silicone hydrogel models posed a risk to its business (Opp’n 1); Cooper acknowledged that its 

future in the contact lens market hinged on its ability to successfully develop and sell silicone-based products 

(id.); during the Class Period, silicone lenses accounted for the bulk of Cooper’s growth while sales for the 

older more conventional lenses consistently declined (id. at 1-2); the day after the MSNBC.com report, 

Defendants issued a press release and Form 8-Q downplaying the recall (id. at 6); Cooper “announced the 

creation of a $14 million reserve to cover recall-related costs” (from which Plaintiffs argue it “would seem 

impossible for a multi-million dollar reserve to be set aside without Defendants’ knowledge”) (id. at 18-19); 

named Defendants “knew from their consumer complaints and internal investigation that the Avaira Sphere 

lenses had the same excess residue problem and many lots needed to be pulled from the market” (id. at 12-13). 

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number of complaints that Cooper had received (over 200 by June or July 2011) and the nature of 

those complaints (hazy vision, stinging, eye irritation, redness, and abrasions). 

On or about October 11, 2011, approximately seven weeks after the August 19, 2011 recall, 

MSNBC.com posted an article exposing Cooper’s alleged “stealth recall,” reporting that there were 

hundreds of complaints ranging from minor to more severe problems like torn corneas. Based upon 

this news, Cooper’s stock price dropped 8.2%. All of the Defendants’ insider stock sales occurred 

prior to the MSNBC.com article. While weak circumstantial evidence of scienter, the timing of the 

insider sales is suspicious. 

These facts do raise an inference that as early as August 19, 2011, Defendants were aware of 

problems with the Avaira Toric lenses but downplayed those problems, which kept the stock price 

artificially inflated until October 11, 2011, when the MSNBC.com article was posted. However, 

according to the confidential witnesses themselves, Cooper only received complaints of hazy vision, 

stinging, eye irritation, redness, and abrasions, not complaints of severe eye problems like torn 

corneas and other problems that required emergency room treatment as reported by MSNBC.com. 

There are no allegations that the Defendants were necessarily aware of these more severe problems 

prior to the MSNBC.com report on October 11, 2011. Furthermore, in the CAC, Plaintiffs do not 

allege facts from which to infer that the Defendants knew that (i) the August 19, 2011 recall of 

Avaira Toric lenses would later be expanded to include Avaira Sphere lenses; or (ii) the 

circumstances of its recall announced on November 15, 2011. 

Based upon the foregoing, the Court finds that, when viewed holistically, the CAC fails to 

allege facts that support a strong inference of scienter for the Class Period of March 4, 2011 to 

November 15, 2011. 

2. MATERIAL MISSTATEMENT. 

 When a plaintiff’s claim is based on a misrepresentation or omission, “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); Metzler, supra, 540 F.3d at 1061 (“vague allegations of 

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deception unaccompanied by a particularized explanation stating why the defendant’s alleged 

statements or omissions are deceitful” fails to state a claim). 

Absent a duty to disclose, an omission, even with respect to information that a reasonable 

investor might find material, is not misleading. See Basic, supra, 485 U.S. at 239 n.17. Companies 

can control the information they disclose by controlling what they say to the market. Once 

information is conveyed to the market, disclosure is required when necessary “to make ... statements 

made, in light of the circumstances under which they were made, not misleading.” Matrixx 

Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1321 (2011) (quoting 17 C.F.R. § 240.10b-5(b)). 

“[A]ssessing the materiality of adverse event reports is a ‘fact-specific’ inquiry that requires 

consideration of the source, content, and context of the reports.” Id. (internal citations omitted). 

For an omission to be actionable under the securities laws, it must be misleading as to a 

material fact. Brody v. Transitional Hospitals Corp., 280 F.3d 997, 1006 (9th Cir. 2002). Under the 

“total mix” standard of Basic Inc. v. Levinson, an omission is material if there is “‘a substantial 

likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor 

as having significantly altered the ‘total mix’ of information made available.’” 485 U.S. 224, 231-32 

(1988) (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). “[I]n other words 

it must affirmatively create an impression of a state of affairs that differs in a material way from the 

one that actually exists.” Brody, supra, 280 F.3d at 1006. 

The Complaint challenges fifteen statements made by Defendants on eight occasions 

between March 3, 2011 and September 2, 2011. In essence, Plaintiffs’ theory is that any positive 

statement by Cooper during the Class Period was misleading if it did not disclose that Cooper had 

received hundreds of complaints from customers wearing its contact lenses who were experiencing 

blurry, hazy vision and torn corneas. In contrast, Defendants argue that none of their representations 

were false or misleading, and that they were under no duty to disclose any of the allegedly omitted 

information. 

If a company has received a large number of complaints of problems with its contact lenses, 

including complaints of torn corneas and other problems that require emergency room treatment, it 

may be misleading to omit that information when disclosing an investigation into “a small number 

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of complaints of temporary hazy vision.” Likewise, stating that a recall is limited to certain lots of 

toric contact lenses may be misleading if the speaker knows that the recall will not be so limited. 

That Cooper’s share price dropped 8.2% and 13.1% when this information became public 

demonstrates that investors considered this information to be material. Depending on what the 

Defendants knew and when they knew, certain statements that proved to be wrong in hindsight may 

have been material misrepresentations and/or omissions. However, some of these statements may 

fall within the PSLRA’s safe harbor provision. 

The PSLRA provides “a safe harbor12 for forward-looking statements identified as such, 

which are accompanied by meaningful cautionary statements.” Employers Teamsters Local Nos. 

175 and 505 Pension Trust Fund v. Clorox Co., 353 F.3d 1125, 1132 (9th Cir. 2004). “A ‘forwardlooking statement’ is any statement regarding (1) financial projections, (2) plans and objectives of 

management for future operations, (3) future economic performance, or (4) the assumptions 

‘underlying or related to’ any of these issues.” No. 84 Employer-Teamster Joint Council Pension 

Trust Fund v. America West Holding Corp., 320 F.3d 920, 936 (9th Cir. 2003). “[I]f a forwardlooking statement is identified as such and accompanied by meaningful cautionary statements, then 

the state of mind of the individual making the statement is irrelevant, and the statement is not 

actionable regardless of the plaintiff’s showing of scienter.” In re Cutera Sec. Litig., 610 F.3d 1103, 

 

12 The safe harbor provision states in relevant part that: 

a person ... shall not be liable with respect to any forward-looking statement, whether written or 

oral, if and to the extent that— 

(A) the forward-looking statement is— 

(i) identified as a forward-looking statement, and is accompanied by meaningful cautionary 

statements identifying important factors that could cause actual results to differ materially 

from those in the forward-looking statement; or 

(ii) immaterial; or 

(B) the plaintiff fails to prove that the forward-looking statement— 

(i) if made by a natural person, was made with actual knowledge by that person that the 

statement was false or misleading; or 

(ii) if made by a business entity; was— 

(I) made by or with the approval of an executive officer of that entity; and 

(II) made or approved by such officer with actual knowledge by that officer that the 

statement was false or misleading. 

15 U.S.C. § 78u-5(c)(1). The safe harbor provision of the PSLRA also provides that “the court shall consider 

any statement cited in the complaint and any cautionary statement accompanying ... forward-looking 

statement[s], which are not subject to material dispute, cited by the defendant.” Id. § 78u-5(e). 

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1112 (9th Cir. 2010). Alternatively, if a forward-looking statement is not identified as such or is 

unaccompanied by meaningful cautionary statements, then the statement is actionable only if the 

plaintiffs allege that the forward-looking statement “was made with actual knowledge by that person 

that the statement was false or misleading.” 15 U.S.C. § 78u-5(c)(1)(B); see Provenz v. Miller, 102 

F.3d 1478, 1487 (9th Cir. 1996). The safe-harbor provision does not apply to a description of past or 

present events. Id. at 936-37. 

Here, the parties dispute whether eleven of the fifteen challenged statements were identified 

as forward-looking statements and were accompanied by meaningful cautionary language. At the 

beginning of each conference call and in each SEC Form 10-Q filing the Defendants included 

cautionary language of “forward-looking statements” that “may be incorrect or imprecise and are 

subject to risks and uncertainties,” including the possibility of “major disruption in the operations of 

our manufacturing facilities ... due to technological problems ... and [c]ompliance costs and 

potential liability in connection with U.S. and foreign healthcare regulations, including product 

recalls ....” Plaintiffs contend that the Defendants failed to provide “meaningful cautionary 

statements,”13 and also that many of the statements are not forward looking. 

Some of the statements identified by Defendants are forward looking. For example, during a 

March 3, 2011 conference call, CFO Midlock stated that Cooper would “be rolling out Avaira Toric 

imminently,” and that “we would expect to continue to gain [market] share,” while CEO Weiss 

added that the Avaira lens was “going to do well.” Additionally, Cooper’s September 2, 2011 Form 

10-Q filing with the SEC includes a prediction that Avaira Toric “inventory will return to normal 

levels by December 1, 2011” falls under the PSLRA’s safe harbor provision. An ancillary 

prediction that “inventory will return to normal levels by December 1, 2011” does not bring the 

entirety of the following statement under the PSLRA’s safe harbor provision, as Defendants argue: 

In August 2011, CooperVision initiated a voluntary recall on limited lots of Avaira 

 

13 This cautionary language in the Form 10-Q is not materially different from the cautionary language held 

sufficient by the Ninth Circuit in In re Cutera, supra, 610 F.3d at 1112 (defendant properly identified 

statements as forward-looking by beginning an analyst call with a notice that “these prepared remarks contain 

forward-looking statements concerning future financial performance and guidance, that ‘management may 

make additional forward-looking statements in response to [ ] questions,’ and that factors like Cutera’s ‘ability 

to continue increasing sales performance worldwide’ could cause variance in the results”). 

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Toric contact lenses. This recall is limited solely to specific lots of Avaira Toric, and 

no other CooperVision product is involved in this recall. The recall was initiated 

because of the unintended presence of a residue on certain lenses. The residue was 

identified after investigating a small number of complaints of temporary hazy vision. 

The manufacturing issue has been identified and a resolution is in process. We 

anticipate inventory will return to normal levels by December 1, 2011. 

(CAC ¶ 62 (italicized portion referenced above).) 

The PSLRA’s safe harbor provision applies only to forward looking statements and simply 

because part of a statement contains a prediction does not place the entire statement under the 

PSLRA’s safe harbor provision. Accordingly, Defendants have not persuaded the Court that all of 

the statements identified by Plaintiffs actually fall under the PSLRA’s safe harbor provision. Based 

on the foregoing analysis, the Court will not dismiss the CAC on this basis. 

Consistent with the finding on scienter above, because Plaintiffs have not adequately pled that 

the prior disclosures were knowingly false when made, Plaintiffs have failed to allege this second 

material misrepresentation or omission element. 

3. LOSS CAUSATION

 Loss causation refers to the causal connection between the material misrepresentation 

or other fraudulent activity and the loss. See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 

342 (2005) (inflated purchase price will not itself constitute or proximately cause the relevant 

economic loss). To plead loss causation, Plaintiffs must allege three elements: (1) a 

misrepresentation or omission inflated the share price; (2) a corrective disclosure14 revealed the 

statement was fraudulent; and (3) as a result of the disclosure, share price fell.15 See Wozniak v. 

Align Tech., Inc., 850 F. Supp. 2d 1029, 1046 (N.D. Cal. 2012) (citing Dura, supra, 544 U.S. at 342). 

 

14 A corrective disclosure is disclosure to the market of information that corrects prior misstatements. See 

Alaska Elec. Pension Fund v. Flowserve Corp., 572 F.3d 221, 229 (5th Cir. 2009); In re REMEC Inc. Sec. 

Litig., 702 F. Supp. 2d 1202, 1266-67 (S.D. Cal. 2010) (“A ‘corrective disclosure’ is a disclosure that reveals 

the fraud, or at least some aspect of the fraud, to the market.’”) (quoting Teamsters Local 617 Pension & 

Funds v. Apollo Group, Inc., 633 F. Supp. 2d 763, 818 (D.Ariz. 2009)) (citations omitted). 

15 Defendants also dispute the truth of the allegations that the recalls impacted the stock price by arguing that 

Cooper met its fourth quarter financial guidance. This is a factual dispute and not a pleading issue; even if 

Cooper met its fourth quarter guidance for the period ending December 31, 2011, it does not prove there is no 

relationship between the announcement of a product recall on November 14, 2011 and a 13% drop in share 

price on November 15, 2011. 

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On October 11, 2011, the day after the MSNBC.com post, Cooper’s share price dropped 

8.2%, or $6.44 per share. On November 15, 2011, the day after Cooper announced the expansion of 

the recall to include the Avaira Sphere lenses, its share price dropped $8.34, which represented over 

13% of its value. Defendants argue that these statements do not constitute corrective disclosures as 

required to establish loss causation because neither revealed that any of Defendants’ prior statements 

were false or inaccurate. However, Defendants’ argument is premised on an assumption that, as a 

matter of law, none of their statements were false or misleading and none was made with the 

requisite scienter. To the extent that the earlier statements were made with knowledge of falsity, then 

the MSNBC.com post and the press release announcing an expanded recall were corrective 

disclosures of false or misleading information. 

Consistent with the finding on scienter above, because Plaintiffs have not adequately satisfied 

the scienter element to show that the prior disclosures were knowingly false when made, Plaintiffs 

have failed to allege that a misrepresentation or omission inflated share price. As such, Plaintiffs 

have not alleged loss causation. 

Based on the foregoing analysis, the Court GRANTS the Motion to Dismiss Count I of the 

Consolidated Amended Class-Action Complaint WITH LEAVE TO AMEND. 

C. COUNT II: CONTROL-PERSON LIABILITY UNDER SECTION 20(B) 

Section 20(a) allows recovery against persons who exercise direct or indirect control over 

entities that violate Section 10(b). Zucco, supra, 552 F.3d at 990. Specifically, Section 20(a) 

provides: 

Every person who, directly or indirectly, controls any person liable under any 

provision of this chapter or of any rule or regulation thereunder shall also be liable 

jointly and severally with and to the same extent as such controlled person to any 

person to whom such controlled person is liable, unless the controlling person acted in 

good faith and did not directly or indirectly induce the act or acts constituting the 

violation or cause of action. 

15 U.S.C. § 78t(a). Thus, to state a claim for control-person liability under Section 20(b), plaintiffs 

must allege (1) “a primary violation of federal securities law” and (2) that “the defendant exercised 

actual power or control over the primary violator.” Zucco, supra, 552 F.3d at 990 (quoting No. 84 

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28

United States District Court 

Northern District of California 

Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 945 

(9th Cir. 2003). 

Defendants argue that all claims for control-person liability under Section 20(a) of the 

Exchange Act should be dismissed on the ground that Plaintiffs have failed to plead a primary 

violation of Section 10(b). Based on the determination that Plaintiffs have failed to plead a primary 

violation, it follows then that they have failed to state a claim for control-person liability, as well. 

Therefore, the Motion to Dismiss Count II is GRANTED WITH LEAVE TO AMEND. 

III. CONCLUSION 

For the reasons set forth above, the Motion to Dismiss the Consolidated Amended ClassAction Complaint is GRANTED. 

Plaintiffs’ Consolidated Amended Class-Action Complaint (Dkt. No. 43) is DISMISSED WITH 

LEAVE TO AMEND. 

Plaintiffs shall file a Second Consolidated Amended Complaint by no later than February 4, 

2013. Defendants’ response(s) shall be due 30 days thereafter. 

This Order Terminates Docket Number 46. 

IT IS SO ORDERED. 

Date: January 7, 2013 __________________________________ 

 YVONNE GONZALEZ ROGERS

UNITED STATES DISTRICT COURT JUDGE

Case 4:11-cv-05697-YGR Document 67 Filed 01/07/13 Page 22 of 22