Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_03-cv-05138/USCOURTS-cand-3_03-cv-05138-3/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 28:1331 Fed. Question: Securities Violation

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

IN RE PORTAL SOFTWARE, INC

SECURITIES LITIGATION.

 /

No C-03-5138 VRW

ORDER

Plaintiffs John Romeo and Pipefitters Local 522 & 633

Pension Trust Fund (“Pipefitters”) sue under the Securities Act of

1933 (the “‘33 Act”) and the Securities Exchange Act of 1934 (the

“‘34 Act”) on behalf of investors who purchased securities of

Portal Software, Inc, between May 20, 2003, and November 13, 2003,

inclusive (the “class period”). Plaintiffs allege that defendants

Portal, John E Little, Howard A Bain III and Arthur C Patterson

violated generally accepted accounting principles (GAAP) by

artificially inflating the price of Portal’s stock and making false

and misleading statements on which plaintiffs relied, thereby

incurring substantial financial losses from purchasing Portal stock

at fraudulently inflated prices.

On August 10, 2005, the court dismissed plaintiffs’ third

consolidated amended complaint (TCAC (Doc #111)) because plaintiffs

did not plead with the particularity required by FRCP 9(b) and the

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Private Securities Litigation Reform Act (PSLRA), an amendment to

the ‘34 Act. Doc #133 (Order) at 3. The court also concluded that

plaintiffs’ allegations did not support a strong inference of

scienter and that defendants’ forward-looking statements were

protected by a safe harbor provision in the PSLRA. Id. Finally,

the court determined that plaintiffs’ ‘33 Act claims sounded in

fraud and hence failed along with plaintiffs’ ‘34 Act claims. Id. 

The court granted plaintiffs leave to amend to fix these pleading

deficiencies. Id at 34.

After plaintiffs filed a fourth consolidated amended

complaint (Doc #135 (FCAC)), defendants moved to dismiss (Doc #138

(Mot Dis)), once again alleging that plaintiffs did not plead with

sufficient particularity to satisfy FRCP 9(b) and the PSLRA. In

opposition, plaintiffs contend that their claims under sections 11,

12(a)(2) and 15 of the ‘33 Act do not sound in fraud and that the

FCAC states sufficiently particularized claims under sections 10(b)

and 20(a) of the ‘34 Act. Doc #144 (Opp).

The court heard argument on these motions on March 23,

2006. For the reasons discussed below, the court DENIES

defendants’ motion to dismiss plaintiffs’ claims under sections 11,

12(a)(2) and 15 of the ‘33 Act and GRANTS defendants’ motion to

dismiss plaintiffs’ claims under sections 10(b) and 20(a) of the

‘34 Act.

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I

The factual and procedural history is derived from the

FCAC and is presumed to be true for purposes of this motion. 

Gompper v VISX, Inc, 298 F3d 893, 895 (9th Cir 2002). Portal

provides billing and subscriber management solutions to its clients

primarily through its “Infranet” software, for which Portal charges

companies “license fees.” FCAC ¶ 68. Portal also charges

customers “service fees” for system implementation, consulting,

maintenance and training. Id. Following the “dot-com” market

crash of 2001, Portal lost many of its dot-com startup customers

and incurred financial losses that wiped out more than 96% of its

equity. Id ¶ 69.

Portal subsequently began to market its Infranet product

to more established and sophisticated business customers, including

telecommunications providers. Id. Portal’s new clients required

greater software customization than had the dot-com startups, which

in turn affected how Portal could recognize license fee revenues. 

Id. Plaintiffs contend that under GAAP, a software provider cannot

recognize licensing revenues for software that requires

customization for a client until a substantial portion of the

modification has been completed. Id ¶¶ 4, 44(e), 69. Although

Portal historically could recognize revenue when it delivered its

Infranet product to its dot-com clients, the greater customization

required by Portal’s new, more established clients required the

company to defer recognizing revenue from many of its contracts

until customization was complete. Id ¶ 153. Plaintiffs allege

that during the class period, Portal began to manipulate its

license fees to recognize more revenue “up-front.” Id ¶¶ 70-71.

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4

On September 12, 2003, Portal completed a secondary

offering to the public at a price of $13.25 per share, thereby

generating $60 million in net proceeds. Id ¶ 9. On November 13,

2003, defendants announced that due to contract delays, revenue

recognition deferrals and service execution issues, Portal expected

net losses of $0.36 to $0.40 per share for the third quarter of

fiscal year (FY) 2004. Id ¶ 10. These losses contrasted with the

$0.04 net profits per share that Portal had previously projected

for the quarter. Id. After this announcement, Portal’s common

share price plummeted more than 42.5% to $8.77 in after-hours

trading. Id ¶ 113. Plaintiffs allege, “Defendants’ inaccurate

statements and omissions proximately caused damages to Plaintiffs

and other members of the Class who purchased the Company’s shares

at artificially inflated prices, and suffered loss * * * as the

truth began to be publicly revealed about the Company’s previously

undisclosed adverse business and financial condition,” causing

share prices to fall. Id ¶ 13.

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II

Plaintiffs brought claims under sections 11, 12(a)(2) and

15 of the ‘33 Act, alleging that Portal made negligent

overstatements in connection with its September 12, 2003, secondary

public offering. Id ¶¶ 16-64. The court examines in turn

defendants’ motion to dismiss these claims.

A

As with the claims in the TCAC, defendants contend

plaintiffs’ instant section 11 claim does not satisfy the

particularity requirement of FRCP 9(b). Mot Dis at 17-19. 

According to defendants, FRCP 9(b) applies here because “the core

allegations underpinning plaintiffs’ ‘34 Act [section 10] and ‘33

Act [sections 11 and 12] claims remain the same” as in the TCAC. 

Id at 3.

FRCP 9(b) only applies to allegations sounding in fraud

or mistake; a section 11 claim based on a negligent or innocent

misstatement or omission does not require particularized pleading. 

See In re Stac Electronics Securities Litigation, 89 F3d 1399, 1405

n3 (9th Cir 1996). As described below, plaintiffs’ present section

11 claim sounds in negligence not in fraud; hence, the claim need

not meet FRCP 9(b)’s heightened pleading standard.

Plaintiffs explicitly state that their section 11 claim

“does not contain any allegations sounding in fraud * * * [and that

plaintiffs] do not claim that Defendants committed intentional or

reckless misconduct or that Defendants acted with scienter or

fraudulent intent.” FCAC ¶ 32. This disclaimer is borne out by

the factual allegations supporting plaintiffs’ instant section 11

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claim, which unlike its predecessor in the TCAC, does not allege

that defendants committed fraud or recklessly and deliberately made

false or misleading statements to the investing public. Compare

TCAC ¶¶ 40-153 with FCAC ¶¶ 16-52. Plaintiffs no longer allege

that defendants actively concealed material information, compare

TCAC ¶ 19 with FCAC ¶ 31, or participated in a fraudulent scheme. 

And rather than allege that Portal’s license revenues “were

materially overstated due to Defendants’ artificial manipulation”

(TCAC ¶ 64(a)), plaintiffs now allege that these same license

revenues were “negligently overstated” (FCAC ¶ 44(e)). 

Accordingly, plaintiffs have successfully amended their section 11

claim such that it does not sound in fraud.

Moreover, plaintiffs’ allegations of fraud in their

section 10 claim have no impact on their section 11 claim. 

FRCP 8(e)(2) permits plaintiffs to “set forth two or more

statements of a claim * * * alternately or hypothetically, either

in one count * * * or in separate counts.” Hence, contrary to

defendants’ contention, plaintiffs can allege that defendants

committed fraud for purposes of the section 10 claim while relying

on a negligence theory for the section 11 claim.

Defendants further suggest that plaintiffs have not even

met the more lenient pleading standard of FRCP 8. Mot Dis at 19

n11. But FRCP 8(a) only requires “a short and plain statement of

the claim showing that the pleader is entitled to relief,” which

plaintiffs have provided. Section 11 creates a private remedy for

a purchaser of a security if “any part of the registration

statement * * * contained an untrue statement of a material fact or

omitted to state a material fact required to be stated therein or

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necessary to make the statement therein not misleading.” 15 USC §

77k(a). Paragraphs 35 through 43 of the FCAC highlight specific

statements defendants made in Portal’s registration statement and

paragraph 44 alleges facts indicating that these statements were

inaccurate.

Defendants also allege that plaintiffs’ section 11 claim

fails “to plead the requisite loss causation element.” Mot Dis at

3. But defendants’ argument belies the plain language of that

provision: “[I]f the defendant proves that any portion or all of

such damages represents other than the depreciation in value * * *

resulting from such part of the registration statement, with

respect to which his liability is asserted, * * * such portion of

or all such damages shall not be recoverable.” 15 USC § 77k(e)

(emphasis added). Accordingly, the statute provides that loss

causation is an affirmative defense on which “[t]he defendant has

the burden of proof * * *.” In re Worlds of Wonder Securities

Litigation, 35 F3d 1407, 1422 (9th Cir 1994). And because the

complaint on its face does not foreclose the possibility that

defendants caused plaintiffs’ losses, a failure to plead loss

causation cannot sink plaintiffs’ claims on the present motion to

dismiss. Contrast In re DNAP Securities Litigation, 2000 WL

1358619, at *3 (ND Cal 2000) (“Although loss causation is an

affirmative defense, * * * in this case it is evident on the face

of the complaint [that loss causation cannot be established] and

thus may be raised on a motion to dismiss * * *.”).

Accordingly, the court DENIES defendants’ motion to

dismiss plaintiffs’ section 11 claim.

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B

Turning to plaintiffs’ claim under section 12(a)(2), that

provision “imposes civil liability on a person who offers or sells

securities by means of a prospectus or oral communication

containing material misrepresentations or omissions.” Moore v

Kayport Package Express, Inc, 885 F2d 531, 535 (9th Cir 1989); 15

USC § 77l(a)(2). Plaintiffs must allege facts indicating that

defendants actually sold or otherwise solicited the purchase of the

securities at issue here and hence were “sellers” within the

meaning of section 12. See id at 535-36 (noting that the section

12(a)(1) analysis of “seller” in Pinter v Dahl, 486 US 622, 639-53

(1988), applies to section 12(a)(2)).

Plaintiffs have alleged the individual defendants were

“sellers and offerors and/or solicitors of purchasers of the shares

offered pursuant to the Prospectus.” FCAC ¶ 55. A mere assertion

that defendants are solicitors or sellers is a legal conclusion and

therefore insufficient to withstand a motion to dismiss. See, e g,

Shaw v Digital Equipment Corp, 82 F3d 1194, 1216 (1st Cir 1996)

(superceded in part by PSLRA); In re Westinghouse Securities

Litigation, 90 F3d 696, 717 (3d Cir 1996) (Alito, J). But here,

plaintiffs have pled sufficient facts to demonstrate defendants’

seller status for purposes of the present motion. For example,

plaintiffs allege defendants issued “materially false and

misleading written statements to the investing public” and

defendants’ solicitation activity “included participating in, and

signing, the preparation of the false and misleading Prospectus.” 

FCAC ¶¶ 49, 56. Moreover, the court agrees “whether an individual

is a seller under section 12 is a question of fact, not properly

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decided on a motion to dismiss.” In re Stratosphere Corp

Securities Litigation, 1 F Supp 2d 1096 (D Nev 1998). Hence,

plaintiffs’ allegations of defendants’ seller status are adequate

to survive the present motion.

Defendants also attack the section 12(a)(2) claim by

arguing, as they did with the section 11 claim, that plaintiffs

failed adequately to allege fraud and causation. But “fraud is not

a necessary element of a claim under section 12[a](2) * * *.” In

re Westinghouse, 90 F3d at 717. Because the section 12(a)(2) claim

alleges the same facts as the section 11 claim and specifically

disclaims any allegation of fraud or intentional or reckless

misconduct, FCAC ¶¶ 53-60, the section 12(a)(2) claim need not meet

any heightened pleading standards and satisfies FRCP 8’s

requirements. Moreover, as with the section 11 claim, “[c]ausation

* * * is not a necessary element of a prima facie case under

section 12 of the Securities Act.” In re Daou Systems, Inc,

Securities Litigation, 411 F3d 1006, 1029 (9th Cir 2005). Hence,

any failure to plead “loss causation” is not fatal to the section

12(a)(2) claim.

Accordingly, the court DENIES defendants’ motion to

dismiss plaintiffs’ section 12(a)(2) claim.

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C

Turning to plaintiffs’ section 15 claim, defendants

contend that “controlling person” liability under that section is

conditioned on liability under either sections 11 or 12. Mot Dis

at 20 n12; 15 USC § 77o. Because the court has determined that

plaintiffs’ claims under sections 11 and 12 are sufficient to

survive the instant motion to dismiss, this argument is moot.

Defendants also object in passing to the section 15 claim

against individual defendant Patterson, arguing plaintiffs have not

pled sufficient facts to indicate that Patterson was a “controlling

person.” Mot Dis at 20 n12. Plaintiffs have alleged that

Patterson was a director of Portal and that his signature appears

on the registration statement at issue. FCAC ¶¶ 23, 34. While a

director is not liable merely by virtue of his position, “[i]t is

not uncommon for control ‘to rest with a group of persons, such as

the members of the corporation’s management.’” Arthur Children's

Trust v Keim, 994 F2d 1390, 1396 (9th Cir 1993) (quoting 4 Loss &

Seligman, Securities Regulation 1722 (1990)). In any event,

determining whether Patterson is a controlling person is a highly

factual question that should not be decided on the instant motion

to dismiss. Compare id (“[T]he determination of who is a

controlling person for purposes of liability under [a different

securities provision, 15 USC § 78t,] is an intensely factual

question.”).

Accordingly, the court DENIES defendants’ motion to

dismiss plaintiffs’ section 15 claim.

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III

Plaintiffs also assert claims under sections 10(b) and

20(a) of the ‘34 Act, contending that Portal prematurely recognized

revenue in violation of GAAP. Plaintiffs contend that Portal

disseminated false and misleading statements to the investing

public, both during and after the class period, via SEC filings and

press releases. FCAC ¶¶ 90-197. To support these allegations,

plaintiffs rely in part on information from five unnamed former

Portal employees: (1) a controller; (2) a senior business analyst;

(3) an accounts receivable and revenue assurance assistant; (4) a

senior marketing manager and (5) a vice-president of services. Id

¶¶ 69-85, 99, 124, 150-162.

The court now examines in turn defendants’ motion to

dismiss plaintiffs’ claims under sections 10(b) and 20(a).

A

Section 10(b) of the ‘34 Act and SEC Rule 10b-5,

promulgated thereunder, make it unlawful for any person, in

connection with the purchase or sale of any security, (1) to engage

in fraud, (2) to make an untrue statement regarding a material fact

or (3) to make a misleading statement by omitting a material fact. 

15 USC § 78j(b); 17 CFR § 240.10b-5. Consequently, the elements of

a Rule 10b-5 claim are: (1) a material misrepresentation or

omission of fact, (2) scienter, (3) a connection with the purchase

or sale of a security, (4) transaction and loss causation and (5)

economic loss. See Dura Pharmaceuticals, Inc v Broudo, 125 SCt

1627, 1631 (2005).

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Claims brought under section 10(b) and Rule 10b-5 must

first meet the particularity requirements of FRCP 9(b). In re

Stac, 89 F3d at 1404. FRCP 9(b) requires a plaintiff alleging

fraud to “set forth what is false or misleading about [the]

statement, and why it is false.” In re GlenFed, Inc, Securities

Litigation, 42 F3d 1541, 1548 (9th Cir 1994) (superceded by the

PSLRA on other grounds).

Second, a complaint must satisfy the more stringent

requirements imposed on securities fraud pleadings by the PSLRA. 

Specifically, the PSLRA requires that a complaint: (1) “specify

each statement alleged to have been misleading [and] the reason or

reasons why the statement is misleading” (15 USC § 78u4(b)(1)); (2) for any such allegations based on information and

belief, “state with particularity all facts on which that belief is

formed” (15 USC § 78u-4(b)(1)) and (3) “with respect to each act or

omission * * * state with particularity facts giving rise to a

strong inference that the defendant acted with the required state

of mind” (15 USC § 17u-4(b)(2)). The required state of mind, or

scienter, is met when the complaint alleges “that the defendants

made the false or misleading statements either intentionally or

with deliberate recklessness.” In re Daou, 411 F3d at 1015 (citing

In re Silicon Graphics, Inc, Securities Litigation, 183 F3d 970,

974 (9th Cir 1999)). In securities cases, falsity and scienter

“are generally strongly inferred from the same set of facts and the

two requirements may be combined into a unitary inquiry under the

PSLRA.” In re Vantive Corp, Securities Litigation, 283 F3d 1079,

1091 (9th Cir 2002) (internal citations omitted).

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To demonstrate falsity and scienter, plaintiffs rely on

testimony from several confidential witnesses, all former Portal

employees. Confidential sources can be used to satisfy the PSLRA’s

heightened pleading requirements only if the complaint describes

the sources “with sufficient particularity to support the

probability that a person in the position occupied by the source

would possess the information alleged.” Nursing Home Pension Fund,

Local 144 v Oracle Corp, 380 F3d 1226, 1233 (9th Cir 2004) (quoting

Novak v Kasaks, 216 F3d 300, 314 (2d Cir 2000)). The unnamed

sources must provide information that is adequately corroborated by

other facts. In re Silicon Graphics, 183 F3d at 985.

The Ninth Circuit has recently adopted the First

Circuit’s “suggested criteria for assessing reliability of

confidential witnesses.” In re Daou, 411 F3d at 1015. These

criteria include “the level of detail provided by the confidential

sources, the corroborative nature of the other facts alleged

(including from other sources), the coherence and plausibility of

the allegations, the number of sources, the reliability of the

sources, and similar indicia.” In re Cabletron Sys, Inc, 311 F3d

11, 29-30 (1st Cir 2002). Moreover, when a complaint relies on

unnamed employees, courts generally look for specific descriptions

of the employee’s relevant duties and responsibilities to evaluate

the reliability of their information. See, e g, In re Daou, 411

F3d at 1016 (finding that confidential witnesses were described

with a “large degree of specificity” where the complaint provided

the witnesses’ job descriptions and responsibilities and identified

for some of the witnesses the executive to whom the witness

reported); see also In re Northpoint Communications Group, Inc,

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Securities Litigation, 221 F Supp 2d 1090, 1097 (ND Cal 2002)

(holding that a second amended complaint cured some specificity

problems of the original complaint where it set out, in addition to

job titles and tenures of confidential witnesses, their

responsibilities at the company).

The PSLRA also carves out a safe harbor from liability if

the allegedly false or misleading statements were forward-looking

and accompanied by meaningful “cautionary statements.” 15 USC §

78u-5©); see also In re Splash Technology Holdings, Inc Securities

Litigation, 2000 WL 1727377, at *5 (ND Cal 2000). An analogous

doctrine that predates the PSLRA’s enactment is the “bespeaks

caution” doctrine, which allows a court to rule as a matter of law

that defendant’s forward-looking statements contained enough

cautionary language or risk disclosure to protect against

liability. See, e g, Provenz v Miller, 102 F3d 1478, 1493 (9th Cir

1996). If a defendant’s statements are immunized under either

doctrine, dismissal of the complaint is appropriate. See id; In re

Splash, 2000 WL 1727377, at *5-6.

B

Plaintiffs contend that on four separate occasions

defendants made a total of seventeen false statements, each of

which allegedly supports their claims under sections 10(b) and

20(a). These statements include: (1) two false statements in a

May 20, 2003, press release; (2) seven false statements in a June

16, 2003, form 10-Q filing with the SEC for the first quarter of FY

2004 (1Q04); (3) one false statement in an August 19, 2003, press

release and (4) seven false statements in a September 12, 2003,

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form 10-Q filing with the SEC for the second quarter of FY 2004

(2Q04).

1

May 20, 2003, and August 19, 2003, press releases

Plaintiffs allege that on May 20, 2003, Portal issued a

press release falsely reporting that Portal’s revenue for the first

quarter of FY 2004 was $32.1 million, with a net loss of $2.0

million. FCAC ¶ 90. Portal issued the press release under the

headline, “Third Consecutive Quarter of Revenue and Business

Growth.” Id. Plaintiffs contend that the May 20 press release

included a false statement from defendant Little, who said,

“[Portal is] the only company in [its] market reporting increasing

revenues and quarter-to-quarter product license growth.” Id. 

Plaintiffs also assert that the May 20 press release falsely stated

that Portal expected 10-12% growth, a “return to pro forma

profitability” and “positive cash flow operations within the

current fiscal year.” Id ¶ 91.

On August 19, 2003, Portal issued another press release,

which plaintiffs contend falsely reported that Portal’s revenue for

the second quarter of FY 2004 was $33.2 million, with a net loss of

$2.5 million. Id ¶ 101. Portal issued this press release under

the headline, “Fourth Consecutive Quarter of Revenue and Business

Growth.” Id.

Plaintiffs rely on substantially the same allegations in

contending that the two press releases included false statements

and that defendants acted with scienter in making these statements. 

Accordingly, the court considers the statements in these press

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releases together in determining whether plaintiffs’ allegations

satisfy the PSLRA’s pleading requirements for falsity and scienter.

a

In contending that the press releases include false

statements that defendants made with scienter, plaintiffs rely on

the testimony of a former controller employed by Portal from April

1997 to June 2002. Id ¶ 69. The controller alleges that during

the class period (May 20, 2003, to November 13, 2003, inclusive),

Portal prematurely recognized license revenues prior to delivering

software to customers. Id ¶¶ 71, 99(a).

Plaintiffs’ TCAC included substantially the same

testimony from the former controller. TCAC ¶ 43. In dismissing

that complaint, the court found that the controller lacked inherent

indicia of reliability because his employment with Portal

terminated before the class period even began. Order at 19. 

Moreover, the controller’s testimony was especially unreliable

because his entire account of the allegedly fraudulent activity

during the class period was based on second-hand reports from

unnamed Portal insiders. TCAC ¶ 43.

The only change in the FCAC as compared to the TCAC is

that the controller now expresses “confidence” in his sources’

“accuracy” and believes they are “in a position to know [Portal’s

accounting practices].” FCAC ¶ 71. But the controller does not

provide the particularized detail necessary to convince the court

that his sources are reliable. Because the controller is a

confidential source who relies on other confidential sources for

his information, the controller’s “allegations attributed to

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unnamed sources must be accompanied by enough particularized detail

to support a reasonable conviction in the informant’s basis of

knowledge.” See In re Northpoint, 221 F Supp 2d at 1097. And as

previously explained, “plaintiffs must describe the job title, job

description, duties, and dates of employment for the controller’s

sources before this information can be deemed reliable.” Order at

19. Plaintiffs’ failure to provide this information in the FCAC

renders the controller’s testimony unreliable.

b

Plaintiffs also rely on the testimony of a former senior

business analyst employed by Portal from May 2001 through July

2003. FCAC ¶ 72. Plaintiffs contend Portal could not legitimately

recognize revenue for partial performance on certain contracts

before demonstrating vendor specific objective evidence (VSOE). 

According to the witness, defendant Bain personally instructed him

to fabricate studies demonstrating the necessary VSOE, so that the

results for financial analyses of six contracts were prematurely

recognized, I e, “cooked.” Id ¶¶ 75-76. The senior business

analyst identifies one customer by name for whom he created false

revenue recognition studies (“Columbia [sic] Mobile”), states that

he was “required to perform analyses that matched management’s

predetermined results for work performed in * * * Greece, Italy,

Columbia [sic] and Spain in connection with at least six of

Portal’s major contracts” and opines that Portal booked $5.0

million in revenue from these contracts. Id ¶¶ 76, 162.

//

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Based on his personal involvement in fraudulent activity

at the behest of Bain, the court concludes, as it did when

evaluating the TCAC, that the senior business analyst’s allegations

potentially support a claim under the ‘34 Act. Moreover, the court

finds the specificity of the analyst’s account provides a certain

degree of reliability.

Nonetheless, as with the TCAC, the analyst’s testimony

again fails to indicate how the alleged manipulations affected the

public statements made by Portal. “[T]he plaintiff must show with

particularity how the [improper revenue] adjustments affected the

company’s financial statements and whether they were material in

light of the company’s overall financial position.” In re Daou,

411 F3d at 1018. Here, such particularity is lacking. For

example, while the analyst asserts that on “six to ten” contracts

worth “approximately $5 million” he “prepared falsified employee

billing rates,” neither the analyst nor plaintiffs state how much

of this $5 million was improperly recognized. The FCAC does not

even state whether the allegedly manipulated billing rates led to

any increase in recognized revenue. Accordingly, the confidential

business analyst’s testimony is insufficient to demonstrate falsity

and scienter under the pleading requirements of the PSLRA.

c

Plaintiffs also rely on the testimony of an accounts

receivable and revenue assurance assistant employed by Portal

“until early 2004.” FCAC ¶ 77. This witness was “responsible for

billing, contract review, and reconciling accounts receivable with

the general ledger” and apparently has at least twelve years

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experience working with revenue recognition. Id. The witness

asserts Portal engaged in improper, accelerated recognition of

revenue, identifying one customer by name (“Onstar”). Id. As with

the TCAC, the court is satisfied that the unnamed witness’s account

in the FCAC self-identifies the witness’s duties and basis for

knowledge and bears sufficient indicia of reliability.

Nonetheless, in its previous order dismissing the TCAC,

the court discounted this witness’s testimony because, “[a]lthough

the accounts receivable assistant allegedly reclassified improperly

booked revenues, [he did] not indicate how much revenue was

reclassified or how this affected Portal’s financial statements.” 

Order at 22. Plaintiffs have not remedied this lack of

particularity in the FCAC. See In re Daou, 411 F3d at 1018. 

Accordingly, the court again finds this witness’s testimony to be

insufficiently particularized to support a claim under section

10(b).

d

Plaintiffs also rely on the testimony of a former vicepresident of services, who was employed throughout the class

period. FCAC ¶ 79. The former vice-president describes three

instances of allegedly fraudulent activity.

First, the vice-president asserts (as paraphrased by

plaintiffs) that “Portal had represented that revenues associated

with Portal’s work for Vodaphone Japan was [sic] ‘in the bucket’

when, in fact, the ‘contract was no where [sic] close to being

signed.’” Id ¶ 79. The vice-president began working directly on

the Vodaphone Japan contract near the start of the class period and

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apparently reported early on to Portal’s senior management that

several contract issues could not be resolved by the end of FY

2004. Id ¶ 80. Plaintiffs assert that “Portal nonetheless

recognized revenue associated with this unsigned contract.” Id ¶

80.

This testimony is insufficient to satisfy the PSLRA’s

pleading requirements. Plaintiffs have not identified any

particular revenue that was associated with the Vodaphone Japan

contract and was improperly recognized during the class period. 

Hence, plaintiffs have not tied the alleged fraud to the

purportedly false public statements made by Portal.

Next, the former vice-president asserts that Portal

“pretended” that $2.0 million in revenue for a contract with Enabil

Solutions would be recordable in the third quarter of FY 2004, even

though required milestones had not been met. Id ¶ 81. Defendants

apparently acknowledged this information at an October 2003 meeting

attended by the witness. Id ¶ 81.

This testimony also is insufficient. As a preliminary

matter, neither plaintiffs nor the vice-president have explained

precisely what is meant by “pretending” that certain revenue would

be recordable at a given time. More importantly, the vicepresident only learned about the alleged fraud on Enabil Solutions

at an October 2003 meeting, which occurred after Portal had made

its allegedly false statements in its press releases and 10-Q

filings with the SEC. Hence, the vice-president’s testimony has no

bearing on whether defendants acted with scienter when those

statements were made.

//

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Finally, the former vice-president states that Portal

sold software with “product problems” to Colombia Mobile,

necessitating further expenditures by Portal to “fix the problem.” 

Id ¶ 87. This witness therefore asserts that Portal’s revenue

projections were “pipe dreams” and “unrealistic.” Id ¶ 88.

As with the Vodaphone Japan contract, the FCAC does not

indicate how these alleged problems with Colombia Mobile affected

Portal’s financial earnings statements. And the former vicepresident’s seemingly off-the-cuff remarks that Portal’s revenue

projections were “pipe dreams” and “unrealistic” are not

sufficiently particularized to support a claim of fraud under

section 10(b).

Accordingly, because the facts provided by the former

vice-president are not tied to any particular allegedly fraudulent

statement, these facts are insufficient to meet the heightened

pleading requirements of the PSLRA.

e

Plaintiffs also contend Portal’s form 10-Q for the third

quarter of FY 2004 presented a “percentage-of-completion”

accounting method that “differed” from the previous quarter. 

Instead of calculating percentage-of-completion based on hours,

plaintiffs allege the statement indicates Portal began calculating

whether a project was complete based on costs. Id ¶¶ 121-22. But

again, plaintiffs do not tie this information to any particular

allegedly false statement. And plaintiffs never “link the decline

in share price to any purported improper revenue recognition.” In

re Daou, 411 F3d at 1026. Rather, plaintiffs appear to mention

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these points merely to create an aura of fraud, which is an

unfortunate technique that plagues plaintiffs’ entire FCAC. The

PSLRA mandates greater particularity than what plaintiffs have

provided here.

f

As noted above, defendants’ May 20, 2003, press release

claimed that Portal expected 10-12% growth, a “return to pro forma

profitability” and “positive cash flow operations within the

current fiscal year.” Id ¶ 91. Contending that these predictions

were fraudulent, plaintiffs proffer the testimony of a senior

marketing manager, employed by Portal during the first two months

of the class period. Id ¶ 83. The marketing manager states that

portions of Portal’s billing software were being rendered obsolete

by Customer Relationship Management (CRM) applications sold by

vendors like SAP and Siebel. Id. Moreover, Portal’s Infranet

product was having difficulty interfacing with these CRM

applications, resulting in unexpected costs and delays for Portal. 

Id ¶ 86. Plaintiffs allege that the allegedly false statements

belied the true state of Portal’s financial health, including these

technical difficulties and the declining demand for Portal’s

product during the class period.

As a “senior marketing manager,” this employee plausibly

has knowledge of the market for Portal’s product and could

conceivably provide evidence of the “shrinking market and role for

billing software applications.” Id ¶ 84. In addition, the

employee identifies two vendors, SAP and Siebel, that offered

products that “displaced the role previously provided” by aspects

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of Portal’s billing software. Id ¶ 83.

But that is all this witness provides. The employee

fails to identify any of “Portal’s large telecommunications

customers,” id, for whom customer service applications were no

longer required as part of Portal’s billing software. And although

the marketing manager alleges Portal was spending too much time and

money due to “excessive bugs and/or interface problems with other

applications,” id ¶ 86, these allegations fail to identify any

specific problems, customers, contracts or dates. “Without any

corroborating facts, it is impossible to conclude that such

allegations rest on more than hind-sight speculation.” In re

Vantive, 283 F3d at 1089.

Moreover, the statements challenged here concern “future

economic performance” and “projection[s] of revenues” and therefore

were forward-looking statements under the PSLRA. 15 USC §

78u-5(I); In re Copper Mountain Securities Litigation, 311 F Supp

2d 857, 880 (ND Cal 2004). As described below, these

forward-looking statements were accompanied by cautionary language

that was sufficiently specific and meaningful to warn investors of

the risks that actually materialized.

First, defendants’ May 20 and August 19 press releases

each included “safe harbor” warnings regarding forward-looking

statements and noted that their predictions were subject to

uncertainties and risk. Doc #106, Exs H, I. These press releases

specified a number of factors that could affect the projections,

including the migration to “larger, multi-year deals, which * * *

may dampen near-term growth * * * and add[] to the volatility of

license revenues,” (id, Ex H) and the possibility that Portal’s

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“customers will continue to constrain their capital spending due to

their on-going soft market outlook for an extended period of time,”

(id, Ex I).

In addition to those warnings, the press releases

referred investors to a form 10-K for additional warnings. Doc

#106, Exs H, I (“These and other factors are described in detail in

our Annual Report on Form 10-K for the fiscal year ended January

31, 2003 * * *.”). Hence, the information in the form 10-K was

incorporated into the “total mix of information in the document”

available to reasonable investors, even though the form 10-K did

not actually accompany the press releases. In re Copper Mountain,

311 F Supp 2d at 876 (citing Fecht v The Price Co, 70 F3d 1078,

1082 (9th Cir 1995)). The form 10-K contained several pages of

detailed and explicit warnings regarding Portal’s dependence on a

few large customers, the risks associated with long implementation

periods and the numerous variables that could adversely affect

revenue recognition for any quarter. Doc #106, Ex C. Also, the

form 10-K warned that Portal would begin offering “products and

services for a ‘bundled’ price, such that a separate price would

not be identified for the product and service components. Such a

change may significantly delay the timing of our revenue

recognition.” Id at 33. Because these warnings hew to the actual

deficiencies that caused Portal’s earnings shortfall —— “contract

delays and revenue recognition deferrals” with existing large

customers —— they provided sufficiently specific and material

warnings to immunize defendants’ forward-looking statements. See

In re Copper Mountain, 311 F Supp 2d at 882.

//

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Plaintiffs nonetheless assert defendants are liable for

their forward-looking statements because they knew the statements

were false and misleading when made. FCAC ¶ 193. This argument,

however, ignores that the relevant statutory language provides that

a person generally shall not be liable for a forward-looking

statement “identified [as such and] accompanied by meaningful

cautionary statements identifying important factors that could

cause actual results to differ materially from those in the

forward-looking statement; or * * * the plaintiff fails to prove

that the forward-looking statement[,] * * * if made by a business

entity;[,] was * * * false or misleading.” 15 USC § 78u-5(c)

(emphasis added). Because the statute is disjunctively phrased,

“if a statement is accompanied by meaningful cautionary language,

the defendants’ state of mind is irrelevant.” Harris v Ivax Corp,

182 F3d 799, 803 (11th Cir 1999) (internal punctuation omitted);

see also In re SeeBeyond Technologies Corp Securities Litigation,

266 F Supp 2d 1150, 1163-67 (CD Cal 2003) (plain statutory language

is disjunctive). Accordingly, because the forward looking

statements at issue were accompanied by meaningful cautionary

language, these forward-looking statements are within the statutory

safe harbor.

CONCLUSION

Plaintiffs have strenuously argued that the court should

apply a so-called “totality” standard in assessing their section

10(b) claims. See Oracle, 380 F3d at 1230 (court must consider

“the total of plaintiffs’ allegations” in assessing claims of

scienter) (quoting No 84 Employer-Teamster Joint Council Pension

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Trust Fund v America West Holding Corp, 320 F3d 920, 938 (9th Cir

2003)). But as discussed above, plaintiffs have not set forth any

allegations that are sufficiently particularized to demonstrate the

May 20, 2003, and August 19, 2003, press releases contained

materially false statements or to raise a strong inference that

defendants acted with scienter when making those statements. 

Accordingly, even if plaintiffs’ allegations are taken

collectively, plaintiffs have failed to state a claim under section

10(b) and Rule 10b-5 regarding statements in the press releases.

2

June 16, 2003, and September 12, 2003, form 10-Q reports

Plaintiffs also allege that Portal’s form 10-Q quarterly

reports filed during the class period contained materially false

statements that support plaintiffs’ section 10 claims. On or about

June 16, 2003, Portal filed with the SEC its form 10-Q quarterly

report for the period ended May 2, 2003 (the “1Q 2004 10-Q”). FCAC

¶ 93. On or about September 12, 2003, Portal filed with the SEC

its form 10-Q quarterly report for the period ended August 1, 2003

(the “2Q 2004 10-Q”). Id ¶ 104. The court now examines the

allegations that plaintiffs contend demonstrate that the form 10-Q

filings contained false information and that defendants acted with

scienter.

//

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a

As a preliminary matter, the court notes the 1Q 2004 10-Q

and the 2Q 2004 10-Q apparently repeated the same allegedly false

financial information that was provided in the May 20, 2003, and

August 19, 2003, press releases, respectively. Id ¶¶ 93, 104. As

discussed in section III(B)(1), supra, plaintiffs did not provide

sufficiently particularized allegations to demonstrate falsity and

scienter regarding the statements in the press releases. Hence,

these same allegations are also insufficient to demonstrate falsity

and scienter for corresponding statements in the form 10-Q reports.

b

Plaintiffs allege that Portal’s 1Q 2004 10-Q and 2Q 2004

10-Q falsely stated that, pursuant to SOP 97-2, “Portal uses the

residual method to recognize revenue when a license agreement

includes one or more elements to be delivered at a future date and

vendor specific objective evidence of the fair value (‘VSOE’) of

all undelivered elements exists.” Id ¶¶ 94, 105.

Beginning with Portal’s 1Q 2004 10-Q, plaintiffs rely on

the same former senior business analyst’s testimony that the court

already addressed in connection with defendants’ press releases. 

See supra III(B)(1)(b); FCAC ¶¶ 72-76. Because the court already

found this witness’s account to be unreliable and plaintiffs point

to no other specific allegations of falsity and scienter, this

fraud claim fails.

//

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Turning to Portal’s 2Q 2004 10-Q, plaintiffs point to a

conversation that defendants Bain and Little conducted with

financial analysts during a November 13, 2003, conference call,

which occurred on the same day that Portal’s 3Q04 financial results

were announced and the class period ended. Id ¶¶ 112, 136. In

that conference, Little stated that while service revenue could

generally be recognized on an “ongoing basis,” revenue on license

contracts “may not be recognizable” until customer acceptance is

secured. Id ¶ 136. When questioned further whether licence

contract revenue was accounted for based on milestones or project

completion, Little stated that “[d]ifferent projects are done in

different ways.” Id.

Plaintiffs fail to explain how Little’s statements in the

conference call demonstrate that Portal’s 2Q 2004 10-Q contained

false information or that defendants acted with scienter when

submitting the 2Q 2004 10-Q. There is no necessary inconsistency

between Portal’s description of its “residual method” of accounting

in the 2Q 2004 10-Q and Little’s subsequent statement that some

license revenue “may” not be recognizable until Portal had secured

customer acceptance. For example, the allegedly false statements

in the 2Q 2004 10-Q apply only to license agreements that include

(1) “one or more elements to be delivered at a future date” and (2)

VSOE “of all undelivered elements.” But neither of these aspects

of license revenue recognition was mentioned during the phone

conference relied on by plaintiffs, suggesting that Little might

have been referring to other types of license agreements. 

Accordingly, plaintiffs have not sufficiently pled a section 10(b)

claim for this allegedly false statement.

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c

Plaintiffs also allege that Portal’s 1Q 2004 10-Q

contained the following false statement: “If a services agreement

includes milestones, Portal does not recognize revenue until

customer acceptance has occurred.” Id ¶ 95. Plaintiffs allege

that Portal’s 2Q 2004 10-Q contained essentially the same false

statement: “If a services agreement includes milestones, Portal

does not recognize revenue until customer acceptance of the

milestone has occurred.” Id ¶ 106. Plaintiffs contend that in

reality, Portal would recognize revenue prior to customer

acceptance of milestones.

To demonstrate falsity and scienter, plaintiffs rely on

the testimony of the former vice-president of services. The court

has already rejected this testimony, see supra III(B)(1)(d), which

is not sufficiently particularized or tethered to an allegedly

false statement.

Plaintiffs also rely on Portal’s fiscal 2004 form 10-K,

filed April 14, 2004, which stated that revenue reporting for the

fourth quarter of FY 2004 (and therefore, the net revenue reported

for FY 2004) would exclude previously reported revenue of $700,000. 

FCAC ¶ 126. Apparently this exclusion of revenue was due to a

customer’s failure to accept contractual milestones. Id. But

these allegations speak to Portal’s activities after the class

period had ended on November 13, 2003. A public filing by

defendants indicating that revenue would be restated for a period

after the class period had ended neither demonstrates that revenue

statements made by defendants during the class period were false

nor raises a strong inference that defendants acted with scienter

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when making those statements. Accordingly, these kinds of

allegations do not bear on the allegedly false statements at issue

here.

d

Plaintiffs further contend that Portal’s 1Q 2004 10-Q

falsely stated that “both the license revenues and services

revenues are recognized under the percentage-of-completion contract

method in accordance with the provisions of SOP 81-1[.] * * * The

Company estimates the percentage-of-completion on contracts

utilizing hours incurred to date as a percentage of the total

estimated hours at project completion.” Id ¶ 96. Plaintiffs

assert that Portal’s 2Q 2004 10-Q contained the following

substantially similar statement: “Portal follows the percentageof-completion method where reasonably dependable estimates of

progress toward completion of a contract can be made. The Company

estimates the percentage-of-completion on contracts utilizing hours

incurred to date as a percentage of the total estimated hours at

project completion, subject to meeting agreed milestones. In the

event that a milestone has not been reached, the associated cost is

deferred and revenue is not recognized until the milestone has been

accepted by the customer.” Id ¶ 107.

Once again, plaintiffs rely on the November 13, 2003,

conference call in which defendants Bain and Little talked with

securities analysts. See supra III(B)(2)(b); FCAC ¶ 136. And once

again, plaintiffs fail to explain how defendants’ statements during

this conference demonstrate that Portal’s description in its form

10-Qs of the SOP 81-1 accounting method or of the percentage of

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completion accounting method was false. Plaintiffs summarily point

to Portal’s disclosure in its FY 2004 SEC filings that “[t]o date,

Portal has had no contracts accounted for under SOP 81-1.” Id ¶

137. But this statement means nothing unless plaintiffs

particularly allege that Portal did in fact have some contracts

that should have been accounted for under SOP 81-1. Accordingly,

these statements do not support a claim under section 10(b).

e

Plaintiffs also point to Portal’s statements to the SEC

in late 2005 in which Portal claims to be “currently evaluating”

whether accounting deficiencies “could have impacted its quarterly

financial statements in Fiscal 2004.” Doc #146 (Request for

Judicial Notice) at 3 (form 8-K). Based on this statement,

plaintiffs ask the court to infer that “Portal acknowledged

accounting errors during the Class Period.” Id. But no such

inference is warranted. Even if Portal had made accounting errors

affecting its quarterly financial statements, which is not clear

based on the language on which plaintiffs rely, plaintiffs have not

created a strong inference that defendants acted with scienter when

making those statements. The court cannot make this inferential

leap without further particularized allegations.

//

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f

Finally, plaintiffs contend that Portal’s 1Q 2004 10-Q

and 2Q 2004 10-Q each contained three separate false statements

relating to Bain’s and Little’s certifications of the information

contained in the 10-Q’s and of the general soundness of Portal’s

business. First, the form 10-Q’s included the following language,

as required by the Sarbanes-Oxley Act: “[T]he Company’s

management, including its chief executive officer and chief

financial officer, has evaluated the effectiveness of the Company’s

disclosure controls and procedures. * * * Based on that

evaluation, the Company’s chief executive officer and chief

financial officer concluded that the Company’s disclosure controls

and procedures were effective * * * to ensure that information

required to be disclosed * * * is recorded, processed, summarized

and reported * * *.” FCAC ¶ 140. Second, the form 10-Qs each

stated that they do “not contain any untrue statement of a material

fact or omit to state a material fact necessary to make the

statements made, in light of the circumstances under which such

statements were made, not misleading with respect to the period

covered by this quarterly report” and that the “financial

information” included in each form 10-Q “fairly present[s] in all

material respects the financial condition, results of operations

and cash flows” of Portal for the reported quarter. Id ¶ 141. 

Finally, the form 10-Qs both stated: “The information contained in

the Report fairly presents, in all material respects, the financial

condition and result of operations of the Company.” Id ¶ 142.

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United States District Court

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Plaintiffs allege that each of these certifications was

false when made because defendants were aware or recklessly

disregarded that Portal’s financial statements were not created in

accordance with GAAP and that Portal’s internal controls were

ineffective. Id ¶ 143. To support this allegation, plaintiffs at

oral argument noted a September 2, 2004, conference call in which

Little stated to securities analysts that some work had been

performed on an existing contract with Vodaphone Japan without

first obtaining signed customer approval of the extra cost. 

Plaintiffs allege that defendants’ failure to disclose earlier that

it was performing work before obtaining customer signatures, as

required by GAAP, made the three contested certifications false

when made. Id ¶ 147. But the FCAC makes clear that this

conversation addresses only “results for the quarter ended July 31,

2004;” indeed, plaintiffs present this phone conversation as

evidence that “Portal’s internal control deficiencies existed even

well after the end of the class period.” Id ¶ 144 (emphasis

added). Hence, it does not appear that this allegation bears on

the allegedly fraudulent statements that Portal made earlier and

that form the basis of plaintiffs’ claims. And in any event,

plaintiffs again have failed to allege with particularity how these

allegedly fraudulent acts affected Portal’s bottom line or

specifically caused any decline in stock price. Accordingly, the

allegedly fraudulent certifications do not form a basis for a

section 10(b) claim.

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United States District Court

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CONCLUSION

As with the press releases, plaintiffs have not put forth

sufficiently particularized allegations, even when viewed in

combination, to demonstrate that Portal’s 1Q 2004 10-Q and 2Q 2004

10-Q contained materially false statements and that defendants

acted with scienter when making those statements. Accordingly,

plaintiffs have failed to state a claim under section 10(b) and

Rule 10b-5 regarding statements in the 10-Q reports.

Because plaintiffs have not stated a claim under section

10(b) for any of the allegedly fraudulent statements, the court

GRANTS defendants’ motion to dismiss on plaintiffs’ section 10(b)

claim.

C

Section 20(a) provides for “controlling person”

liability. 15 USC § 78t. To establish such liability, plaintiffs

must first demonstrate a “primary” violation under section 10(b). 

In re Copper Mountain, 311 F Supp 2d at 883. “[I]n the absence of

a viable claim under Section 10(b), any remaining Section 20(a)

claims must be dismissed.” Id. Because plaintiffs have failed to

state a claim under section 10(b), plaintiffs have “no basis upon

which to premise a Section 20(a) claim.” Id. Accordingly, the

court GRANTS defendants’ motion to dismiss plaintiffs’ section

20(a) claim.

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Case 3:03-cv-05138-VRW Document 155 Filed 08/17/06 Page 34 of 35
United States District Court

For the Northern District of California

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IV

In sum, the court DENIES defendants’ motion to dismiss

plaintiffs’ claims under sections 11, 12(a)(2) and 15 of the ‘33

Act and GRANTS defendants’ motion to dismiss plaintiffs’ claims

under sections 10(b)and 20(a) of the ‘34 Act. Because plaintiffs

have amended their claims four times but still have not satisfied

the PSLRA’s heightened pleading requirements, plaintiffs’ claims

under the ‘34 Act are hereby DISMISSED with prejudice. The parties

are instructed to appear before the court to discuss what issues,

if any, remain in this litigation on October 3, 2006, at 9:00 AM.

IT IS SO ORDERED.

 

 VAUGHN R WALKER

 United States District Chief Judge

Case 3:03-cv-05138-VRW Document 155 Filed 08/17/06 Page 35 of 35