Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_05-cv-02335/USCOURTS-casd-3_05-cv-02335-1/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

SOUTHERN DISTRICT OF CALIFORNIA

In re: SERACARE LIFE SCIENCES,

INC. 

SECURITIES LITIGATION,

CASE NO. 05-CV-2335-H

(CAB)

ORDER GRANTING

WITHOUT PREJUDICE

KPMG’S AND THE

UNDERWRITER

DEFENDANTS’ MOTION TO

DISMISS AND DENYING

WITHOUT PREJUDICE

KPMG’S MOTION TO FILE

UNDER SEAL

[Doc. Nos. 82, 88, 100]

Consolidated Proceedings

On July 17, 2006, plaintiffs Richard, Jana, David, John and Lauren Westlund,

and Massachusetts State Guaranteed Annuity Fund (“Plaintiffs”) filed a consolidated

complaint in the above-captioned suit. (Doc. No. 58.) On December 5, 2006, defendant

KPMG filed a motion to dismiss Plaintiffs’ claims for violations of Section 10(b) of the

Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933. (Doc.

No. 82.) KPMG filed a motion requesting the Court take judicial notice of certain

documents with their motion to dismiss. (Doc. No. 83.) Also on December 5, 2006,

defendants CIBC World Markets Corp., Thomas Weisel Partners LLC, and William

Blair & Co. LLC (collectively the “Underwriter Defendants”) filed a motion to dismiss

Plaintiffs’ claim alleging a violation of Section 11 of the Securities Act. (Doc. No. 85.)

Case 3:05-cv-02335-JLS-CAB Document 122 Filed 03/19/07 Page 1 of 26
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On December 6, 2006, KPMG filed a corrected motion to dismiss. (Doc. No. 88.) On

January 26, 2007, Plaintiffs filed an opposition to KPMG’s motion to dismiss (Doc. No.

96.), and an opposition to the Underwriter Defendants’ motion to dismiss. (Doc. No.

97.) On February 26, 2007, KPMG filed a reply. (Doc. Nos. 106, 107.) Also on

February 26, 2007, the Underwriter Defendants filed a reply. (Doc. No. 109.)

On February 13, 2007, KPMG filed an ex parte application seeking permission

to filed certain documents under seal. (Doc. No. 100.) On February 14, 2007, Plaintiffs

filed a response in opposition to KPMG’s application. (Doc. No. 102.) On February

14, 2007, the Court entered a scheduling order regarding KPMG’s application and

requested clarification from KPMG as to whether it was seeking in camera review of

the documents. (Doc. No. 103.) On February 20, 2007, KPMG clarified that it was

requesting an in camera review of the documents. (Doc. No. 104.) Plaintiffs filed a

second opposition to KPMG’s application on March 2, 2007. (Doc. No. 113.) KPMG

filed a reply in support of its application on March 9, 2007. (Doc. No. 115.) 

The Court held a hearing on these motions on March 19, 2007. Attorneys

Andrew N. Friedman and Daniel S. Drosman represented Plaintiffs, attorneys Timothy

Scott Vick and Gwyn Quillen represented KPMG, and attorney Thomas A. Nolan

represented the Underwriter Defendants at the hearing. For the following reasons, the

Court GRANTS WITHOUT PREJUDICE KPMG’s motion to dismiss Plaintiffs’

Section 10(b) and Section 11 claims. The Court GRANTS WITHOUT PREJUDICE

the Underwriter Defendants’ motion to dismiss Plaintiffs’ Section 11 claim consistent

with this order. The Court DENIES WITHOUT PREJUDICE KPMG’s motion to file

certain documents under seal.

Background

For purposes of resolving this motion to dismiss, the Court accepts all well

pleaded facts alleged in the consolidated complaint as true. See Gompper v. VISX, Inc.,

298 F.3d 893, 895 (9th Cir. 2002). This factual summary is taken in the light most

favorable to Plaintiffs. See Number 84 Employer-Teamster Joint Council Pension Trust

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Fund v. America West Holding Corp., 320 F.3d 920, 925 n.2, 931 (9th Cir. 2003).

Where appropriate, the Court has also considered documents attached to and

incorporated into the complaint and has taken judicial notice of certain facts.

Plaintiffs bring this securities class action on behalf of the purchasers of SeraCare

Life Sciences, Inc.’s (“SeraCare”) securities between May 14, 2003 and March 23,

2006. (Consol. Compl. ¶ 1.) SeraCare is a California corporation engaged in the

manufacture and marketing of biological products for diagnostic, therapeutic, drug

discovery and research concerns. (Id. ¶ 19.) The Underwriter Defendants are integrated

financial services institutions that provide commercial and banking services and acted

as underwriters to SeraCare’s secondary public offering in May 2005 (“Secondary

Offering”), which allowed SeraCare to collect $39 million in proceeds. (Id. ¶¶ 6, 34-

37.) KPMG was SeraCare’s auditor and outside accountant from 2002 until August

2005. (Id. ¶¶ 38, 233.) KPMG audited SeraCare’s financial statements from 2002-2004,

evaluated SeraCare’s 10-Q for the period ending June 30, 2005, was working on

SeraCare’s third quarter 2005 financial statements, provided accounting and auditing

services in connection with the Secondary Offering, and provided tax, consulting and

acquisition services to SeraCare. (Id. ¶¶38, 233-235.) KPMG also met regularly with

members of SeraCare’s Audit Committee in 2003 (id. ¶244), and consented to be named

as an expert in the registration statement for the Secondary Offering, in which KPMG

stated that it audited SeraCare’s 2003 and 2004 financial documents. (Id. ¶¶ 152, 253.)

SeraCare’s 2003 and 2004 Form 10-K annual reports filed with the SEC included

KPMG’s unqualified audit reports on SeraCare’s annual financial statements for the

fiscal years ending September 30, 2003 and September 30, 2004. (Id. ¶¶ 38, 93, 115,

251-52.) In the course of KPMG’s audits, it examined SeraCare’s financial statements,

evaluated its internal controls, and assessed the overall quality of its accounting and

financial reporting procedures. (Id. ¶ 62.) KPMG’s unqualified opinions included in

SeraCare’s 2003 and 2004 Form 10-K reports stated that it examined SeraCare’s

September 30, 2002, September 30, 2003, and September 30, 2004 balance sheets, and

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the related statements of operations and income, stockholders’ equity, and cash flows,

and in KPMG’s opinion those financial statements fairly presented SeraCare’s financial

position, as of September 30, 2002, 2003, and 2004, in all material respects. (See id.

¶¶ 251-252.) KPMG represented that it performed its audits in accordance with

generally accepted auditing standards (“GAAS”) and the SeraCare’s financial

statements satisfied generally accepted accounting principles (“GAAP”). (Id.) 

On May 25, 2005, SeraCare filed its Prospectus and Registration Statement

(“Registration Statement”) pursuant to its Secondary Offering of 3.5 million shares of

stock. (Id. ¶ 145.) The Registration Statement also contained a statement from KPMG

indicating that they had audited SeraCare’s September 30, 2003, and September 30,

2004 balance sheets, and the related statements of operations, stockholders’ equity, and

cash flows for each of the years for the three year period ending September 30, 2004,

and that those statements fairly presented the financial position of SeraCare in all

material respects, in conformity with GAAP. (See id. ¶ 253.) 

In August 2005, SeraCare fired KPMG and hired Mayer Hoffman McCann P.C.

(“MHM”) to replace KPMG. (Id. ¶233.) Approximately four months later, MHM

reported concerns regarding its uncompleted audit of SeraCare’s balance sheet as of

September 30, 2005, and the related statements of income, stockholders’ equity, and

cash flows for the year then ended. (Id. ¶¶ 64, 243, Ex. 7.) 

On December 14, 2005, SeraCare announced that it could not timely file its SEC

Form 10-K. (Id. ¶¶68, 132.) On December 20, 2005, SeraCare publicly announced

MHM’s findings and concerns regarding SeraCare’s accounting for and valuation of

inventory, MHM’s perception that certain board members were exerting undue

influence on SeraCare’s financial reporting process and on the audit process, and the

timeliness, quality and completeness of SeraCare’s implementation and testing of its

internal control over financial reporting. (Id. ¶¶ 71, 134.) Also on December 20, 2005,

SeraCare’s stock price fell from $19.20 to $10.04. (Id. ¶ 72.) 

On March 15, 2006, SeraCare terminated its Chairman of the Board of Directors,

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Chief Executive Officer, Secretary, Chief Financial Officer, and ordered the first three

individuals to resign from the Board of Directors. (Id. ¶¶ 76, 142.) SeraCare also issued

a statement on March 15, 2006, announcing that the 10-Q reports for the quarters ended

December 31, 2004 and March 31, 2005 should no longer be relied upon, and that it

expected to restate one or more of those financial statements. (Id. ¶¶ 75, 141.)

SeraCare admitted that there were material weaknesses in its internal control over

financial reporting. (Id.) SeraCare filed for bankruptcy on March 23, 2006. (Id. ¶

144.)

Plaintiffs allege two claims against KPMG, a claim for an alleged violation of

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and a claim

for an alleged violation of Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k.

The sole claim brought against the Underwriter Defendants is a claim under Section 11

of the 1933 Securities Act.

Discussion

I. Requests for Judicial Notice

Before addressing the merits of the motions to dismiss, the Court must resolve

the requests for judicial notice. KPMG requests the Court take judicial notice of:

(1) Accounting Research Bulletin 43, Chapter 4, inventory pricing (“ARB 43"); (2) the

existence of statements made in SeraCare’s April 7, 2006 bankruptcy court

Supplemental Brief Supporting Motion for Use of Cash Collateral; and (3) the existence

of statements made in the Declaration of Cathryn Low in Support of SeraCare’s Motion

Order Authorizing Use of Cash Collateral in association with SearCare’s bankruptcy

proceedings. (KPMG LLP’s Req. Judicial Notice Supp. Mot. Dismiss, at 1-3.) KPMG

states it is not asking the Court to take judicial notice of the truth of the matters asserted

in association with SeraCare’s bankruptcy proceedings, only their existence. KPMG

also requests the Court take judicial notice of statements made in SeraCare’s June 30,

2005 Form 10-Q. (KPMG LLP’s Supplemental Req. Judicial Notice Supp. Mot.

Dismiss, at 1-2.) Plaintiffs did not object to the Court taking judicial notice of these

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documents 

When determining a motion to dismiss for failure to state a claim for relief

pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court cannot

consider matters outside the complaint except for authenticated documents that have

been incorporated into the complaint and facts that are subject to judicial notice. See

Lee v. City of Los Angeles, 250 F.3d 668, 689-90 (9th Cir. 2001). Judicial notice may

be taken of facts not subject to reasonable dispute in that they are “generally known”

in the community or “capable of accurate and ready determination by reference to

sources whose accuracy cannot be reasonably questioned.” See Fed. R. Evid. 201(b).

Federal courts may take judicial notice of other courts’ proceedings, within the federal

judiciary and without, if the proceedings directly relate to the matters before the court.

See U.S. ex rel. Robinson Rancheria Citizens Council v. Borneo, Inc., 971 F.2d 244,

248 (9th Cir. 1992). Accordingly, the Court takes judicial notice of the existence of

statements made in SeraCare’s April 7, 2006 bankruptcy court Supplemental Brief

Supporting Motion for Use of Cash Collateral and the existence of statements made in

the Declaration of Cathryn Low in Support of SeraCare’s Motion Order Authorizing

Use of Cash Collateral.

Furthermore, the content of ARB 43 is not subject to reasonable dispute in that

it is capable of accurate and ready determination by reference to sources whose

accuracy cannot be reasonably questioned. Accordingly, the Court takes judicial notice

of ARB 43. Finally, the “incorporation by reference” doctrine permits district courts

to consider, in connection with a motion to dismiss, documents whose contents are

alleged in the complaint and whose authenticity no party questions, but which are not

physically attached to plaintiff’s pleading. See In re Silicon Graphics Inc. Securities

Litigation, 183 F.3d 970, 986 (9th Cir. 1999); see also Branch v. Tunnell, 14 F3d 449,

454 (9th Cir. 1994) (holding that documents not physically attached to the complaint

may nonetheless be considered by the court on a 12(b)(6) motion to dismiss if the

complaint refers to such documents, the documents are “central” to plaintiff’s claim,

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and no party questions the authenticity of the copy attached to the 12(b)(6) motion).

The contents of SeraCare’s June 30, 2005 10-Q are referred to in the consolidated

complaint, and no party has questioned the authenticity of the 10-Q. Accordingly, the

Court takes judicial notice of SeraCare’s June 30, 2005 10-Q.

II. Motion to Dismiss

KPMG and the Underwriter Defendants have moved to dismiss Plaintiffs’ claims

against them pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for

failure to state a claim upon which relief can be granted. A motion to dismiss for failure

to state a claim pursuant to Rule 12(b)(6) tests the legal sufficiency of the claims in the

complaint. See Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Rule 12(b)(6) permits

dismissal of a claim either where that claim lacks a cognizable legal theory, or where

insufficient facts are alleged to support plaintiff’s theory. See Balistreri v. Pacifica

Police Dept., 901 F.2d 696, 699 (9th Cir. 1990). In considering the sufficiency of a

complaint under Rule 12(b)(6), courts cannot grant a motion to dismiss “unless it

appears beyond doubt that the plaintiff can prove no set of facts in support of his claim

which would entitle him to relief.” Id. (citing Conley, 355 U.S. at 45-46). Dismissal

is proper, however, if a complaint is vague, conclusory, and fails to set forth any

material facts in support of the allegation. See North Star Intern. v. Arizona Corp.

Com'n, 720 F.2d 578, 583 (9th Cir. 1983). 

In resolving a Rule 12(b)(6) motion, including a motion brought against a claim

for securities fraud, the court must construe the complaint in the light most favorable

to the plaintiff, accept all well-pleaded factual allegations as true, and determine

whether plaintiff can prove any set of facts to support a claim that would merit relief.

See Gompper, 298 F.3d at 896. If a complaint is found to fail to state a claim, the court

should grant leave to amend unless it determines that the pleading could not possibly

be cured by the allegation of other facts. See Vess v. Ciba-Geigy Corp. USA, 317 F.3d

1097, 1108 (9th Cir. 2003).

/ / /

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A. Plaintiffs’ Section 10(b) Claim Against KPMG

Plaintiffs’ first claim alleges that KPMG violated Section 10(b) of the Exchange

Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, by making false and misleading

statements and failing to dislcose material adverse facts regarding SeraCare’s financial

status which caused purported class members to purchase SeraCare’s stock at inflated

prices, causing them damages. Section 10(b) of the Exchange Act makes it unlawful

“for any person . . . [t]o 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[.]” In re Daou Systems,

Inc., 411 F.3d 1006, 1014 (9th Cir. 2005). “SEC Rule 10b-5, promulgated under the

authority of section 10(b), in turn, provides: It shall be unlawful for any person . . .

(a) To employ any device, scheme, or artifice to defraud, (b) To 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 light of the circumstances under which they were made, not

misleading, or (c) To engage in any act, practice, or course of business which operates

or would operate as a fraud or deceit upon any person, in connection with the purchase

or sale of any security.” Id. (citing 17 C.F.R. § 240.10b-5). Therefore, 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 id.

Claims brought under Rule 10b-5 and Section 10(b) must meet the particularity

requirements of Federal Rule of Civil Procedure 9(b). See id. Rule 9(b) states that “[i]n

all averments of fraud or mistake, the circumstances constituting fraud or mistake shall

be stated with particularity. Malice, intent, knowledge, and other condition of mind of

a person may be averred generally.”

Additionally, the Private Securities Litigation Reform Act (“PSLRA”), enacted

in 1995, amended the 1934 Securities Exchange Act to require that a complaint in a

private securities fraud suit must plead falsity and scienter with particularity. See id.;

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see also Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1230

(9th Cir.2004). “A securities fraud complaint must now ‘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.’” 

Daou Systems, Inc., 411 F.3d at 1014 (citing 15 U.S.C. § 78u-4(b)(1)). Further, the

complaint must “state with particularity facts giving rise to a strong inference that the

defendant acted with the required state of mind.” Id. (citing 15 U.S.C. § 78u-4(b)(2)).

“The stricter standard for pleading scienter naturally results in a stricter standard for

pleading falsity, because ‘falsity and scienter in private securities fraud cases are

generally strongly inferred from the same set of facts,’ and the two requirements may

be combined into a unitary inquiry under the PSLRA.” Id. (citing In re Vantive Corp.

Sec. Litig., 283 F.3d 1079, 1091 (9th Cir.2002)). Therefore, the complaint alleging a

violation of Section 10(b) and Rule 10b-5 must allege that the defendants made false

or misleading statements either intentionally or with deliberate recklessness. See id. at

1014-15 (citing Silicon Graphics, 183 F.3d at 974).

1. Material Misrepresentations or Omissions

Plaintiffs allege that KPMG made three categories of misstatements. First, they

allege that KPMG misrepresented that SeraCare’s audited financial statements fairly

presented the company’s financial position in all material respects in SeraCare’s 2003

and 2004 10-Ks, and SeraCare’s Registration Statement, because in fact, SeraCare’s

financial statements contained improperly recognized revenue and overvalued

inventory. (Consol. Compl. ¶¶ 93-94, 115-16, 251-54.) Second, Plaintiffs allege that

KPMG misstated in SeraCare’s 2003 and 2004 Form 10-Ks that it audited SeraCare’s

financial documents according to GAAS. (Id. ¶¶ 236-40.) Third, Plaintiffs allege that

KPMG is responsible for misstatements made by SeraCare in its unaudited 2005

quarterly financial statements. (Id. ¶¶ 117-31, 166, 234, 327-334.) KPMG argues that

Plaintiffs have failed to plead with particularity that SeraCare’s audited 2003 and 2004

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financial statements contained misrepresentations, that KPMG failed to audit

SeraCare’s financial statements according to GAAS, or facts to demonstrate that KPMG

should be liable for any statements made in SeraCare’s unaudited 2005 quarterly

statements.

a. SeraCare’s 2003 and 2004 Audited Financial Statements

1. Premature Recognition of Revenue

If properly pled, overstating revenues on financial statements may state a claim

for securities fraud, because under GAAP, revenue must be earned before it can be

recognized. See Daou Systems, Inc., 411 F.3d at 1016. When pleading irregularities

in revenue recognition, plaintiffs should allege: (1) such basic details as the

approximate amount by which revenues and earnings were overstated; (2) the products

involved in the contingent transaction; (3) the dates of any of the transactions; or (4) the

identities of any of the customers or company employees involved in the transactions.

See id. A plaintiff does not necessarily need to allege each of these details, but they

must allege enough information so that a court can discern whether the alleged GAAP

violations were minor or technical in nature, or whether they constituted widespread

and significant inflation of revenue. See id. at 1017. 

Plaintiffs allege that KPMG’s statement that SeraCare’s 2003 audited financial

statements fairly presented SeraCare’s financial position is false because SeraCare

recognized $1 million in revenue from the sale of albumin to Wyeth Pharmaceuticals,

Inc. (“Wyeth”) in the March 2003, even though delivery did not occur until after

September 30, 2003, in other words in fiscal year 2004. (Consol. Compl. ¶¶ 172-78.)

The albumin was shipped approximately six months after March 2003, directly from

Grifols, the manufacturer of the albumin. (Id. ¶¶ 172, 177.) Wyeth paid for the

albumin in October, 2003. (Id. ¶ 177.) 

This recognition of revenue allegedly violated the rule from the SEC’s Staff

Accounting Bulletin (“SAB”) Topic 13 that revenue should generally not be recognized

until delivery has occurred, which takes place when the customer takes title and

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assumes the risks and rewards of ownership. (Consol. Compl. ¶¶ 196-201.) Plaintiffs

allege that confidential witness number 1 (“CW-1”) can verify the fact that the delivery

of albumin to Wyeth occurred after September 30, 2003. (Id. ¶ 173.) Plaintiffs also

allege that an e-mail attached to the complaint as exhibit 8 corroborates CW-1's

knowledge that the albumin was delivered to Wyeth after September 30, 2003. That email, sent to SeraCare’s chief executive officer (“CEO”) Michael Crowley and dated

Friday, September 26, 2003 at 8:56 a.m., stated that the shipment had not “cleared FDA

hold,” but that if it cleared on September 26, 2003, it would be delivered to Wyeth on

Tuesday, September 30, 2003. 

Defendants argue that Plaintiffs have failed to particularly plead that CW-1 has

personal knowledge about the date the albumin was shipped to Wyeth. Plaintiffs allege

that CW-1 was employed at SeraCare from approximately September 1998 through July

2005. (Id. ¶ 159.) CW-1 worked as an albumin salesperson, and was promoted to Vice

President of Bioprocessing Products in March 2005. (Id.) He worked closely and was

in frequent contact with SeraCare’s senior management, including SeraCare’s CEO

Michael Crowley, regarding product shipment. (Id.) 

These allegations are particular enough to justify Plaintiffs’ use of CW-1 as a

confidential witness. See Daou Systems, Inc., 411 F.3d at 1016 (a confidential witness

is described with sufficient particularity by numbering the witness, describing his job

description and responsibilities, and stating to which executive the witness reports).

When a witness is not named, however, a plaintiff must provide corroborating facts to

provide an adequate basis for believing that the defendants’ statements were false. See

id. at 1015. Plaintiffs do not provide adequate corroborating facts. First, the delivery

was made by Grifols directly to Wyeth, which decreases the probability that CW-1

knew exactly when the delivery occurred. Second, the e-mail does not corroborate CW1's knowledge that the delivery occurred after September 30, 2003, because the e-mail

states that if the albumin was cleared on September 26, 2003, than it would be delivered

to Wyeth on September 30, 2003. Therefore, Plaintiffs have failed to allege with

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sufficient particularity that SeraCare mistakenly reported that it received the revenue

from the albumin sale to Wyeth during fiscal year 2003, and accordingly, Plaintiffs

have failed to allege that KPMG misstated that SeraCare’s 2003 audited financial

statements fairly presented the company’s financial position in all material respects

based on that sale.

 Additionally, Plaintiffs argument that CW-5 was aware that Wyeth cancelled its

order, but that SeraCare believed that they did not have the right to cancel the order

after the product was produced (id. ¶ 174), fails to corroborate the delivery date,

especially considering that Plaintiffs allege that Wyeth paid for the albumin in October

2003. (Id. ¶ 177.)

Plaintiffs also allege that CW-1 is aware that SeraCare prematurely recognized

revenue in association with a shipment of albumin to Biogen in 2003. (Id. ¶¶ 179-80.)

Plaintiffs allege that Biogen cancelled their order for $385,000 of albumin, but SeraCare

sent the product anyway, and recognized the revenue in 2003. (Id. at ¶ 179.) The

matter was allegedly resolved by the parties agreeing that Biogen would pay SeraCare

$280,000, after which Biogen shipped the product back to Biogen. (Id. at ¶ 180.) This

allegation fails to meet Rule 9(b)’s particularity pleading requirement because it fails

to provide corroborating evidence for CW-1 knowledge of this transaction, or describe

when the companies resolved their conflict, whether SeraCare accounted for the

resolution of the conflict on their financial documents, and how SeraCare’s recognition

violated GAAP. 

Plaintiffs allege that SeraCare prematurely recognized revenue from a sale of

albumin to BioVitrum. (Id. 181-84.) SeraCare allegedly recognized the revenue in

September 2005. (Id. ¶ 182.) Therefore, this allegation can not demonstrate that

KPMG’s statements that SeraCare’s 2003 and 2004 audited financial statements fairly

present the financial position of SeraCare in all material respects. 

 Plaintiffs also allege that CW-1, 2, 5, 7, 9, and 11 are aware that SeraCare

habitually shipped products out before customers wanted the product at the end of

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quarters so that they could recognize revenue during that quarter. (Id. ¶ 185-93.) They

allege that customers, including Sigma and Merck, frequently complained about this

practice. (Id. ¶ 186.) CW-7 allegedly heard Michael Crowley, SeraCare’s CEO, and

other senior management as SeraCare state, “The customer doesn’t want the shipment

until mid-month next month, but let’s send it now because we need to make our

numbers for the quarter.” (Id. ¶ 189.) Plaintiffs allege that CW-1 is aware that at the

end of each quarter, defendants would prematurely book up to, and sometimes more

than $500,000. (Id. ¶ 187.) These allegations fail to show with particularity that

KPMG’s statements regarding SeraCare’s financial statements as of September 30,

2003 and 2004 were material misrepresentations, because they fail to allege the specific

products that were involved in these shipments, when they were shipped, how much

revenue was recorded on SeraCare’s financial statements as of September 30, 2003 and

2004 from these shipments, and how that recorded revenue violated GAAP. 

2. Inventory Accounting

Plaintiffs allege that SeraCare violated GAAP by overvaluing products they held

in inventory. (Consol. Compl. ¶¶ 202-207.) Plaintiffs rely in part on CW-9, a former

President and member of the Board of Directors of SeraCare until he left the company

in 2001. (Id. ¶¶ 167, 202-204.) CW-9 allegedly kept close contact with senior

management of SeraCare until 2005. (Id. ¶ 167.) This description of CW-9 is

insufficiently particular to support his use as a confidential witness regarding KPMG’s

allegedly false statements regarding SeraCare’s audited financial statements between

2003-2005, since it fails to support the probability that a person in the position occupied

by CW-9, who left SeraCare in 2001, would possess the information alleged. See Daou

Systems, Inc., 411 F.3d at 1015-16.

 Plaintiffs allege that CW-7 noticed that inventory values significantly increased

in mid-2004, such that products that were close to expiring increased in value from

$5.00/ml to $20.00/ml, which was not justifiable in CW-7's opinion. (Consol. Compl.

¶ 205.) Plaintiffs allege CW-7 was a Warehouse Logistics Manager at SeraCare’s

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corporate headquarters from 2001-2005, whose responsibilities included shipping and

receiving final product and raw materials (both domestic and international shipments),

distributing and tracking production materials, managing inventory, and performing

annual inventory audits at SeraCare’s Oceanside, California facility. (Consol. Compl.

¶ 165.) This description fails to support a probability that CW-7 possesses information

regarding SeraCare’s inventory valuation. See Daou Systems, Inc., 411 F.3d at 1015.

Furthermore, Plaintiffs’ fail to offer corroborating evidence regarding the fact that the

inventory values should not have been increasing. Additionally, CW-7 alleged

knowledge that in 2004, he performed an inventory count that failed to match the

quantity of the inventory in the computer with the amount of inventory on hand lacks

specificity regarding the extent of the mismatch, and how that mismatch was reflected

on the audited financial statements, which is critical for the Court determining whether

the mismatch was minor or significant in nature. See id., 411 F.3d at 1017. 

Plaintiffs allegation that Plaintiffs’ carried “worthless plasma” on its books that

it stored in its Hatboro facility (Consol. Compl. ¶ 207), lacks particularity regarding the

key elements of why the plasma was worthless, and what was the financial impact on

SeraCare’s financial statements. Similarly, their allegation that SeraCare’s inventory

included “esoteric” material that was of unknown sales value (id. ¶ 208) lacks

particularity regarding what material they are referring to, why the material was

worthless, and what was the financial impact on SeraCare’s financial statements.

 Plaintiffs allege that SeraCare improperly capitalized overhead expenses to

inventory, in violation of chapter 4 of ARB 43, causing an overvaluation of the value

in inventory. (Id. ¶¶ 209-12, 215-20.) As with Plaintiffs’ other allegations, this

allegation suffers from Plaintiffs’ failure to particularly allege how the adjustments

affected the company's financial statements and whether they were material in light of

the company's overall financial position. Plaintiffs allegations on this issue are limited

to two facts. First, CW-6, a bookkeeper for SeraCare’s Hatboro, Pennsylvania

subsidiary (id. ¶ 164), had knowledge that an item was valued at $1.00 before SeraCare

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purchased BioMedical Resources, Inc. (“BMR”) in July 2003, was valued at $13.00

after the acquisition. (Id. ¶ 210.) Second, Plaintiffs allege that on April 7, 2006,

SeraCare reported that its “bankable” inventory was $17 million, which was a 50%

reduction from the inventory SeraCare allegedly reported on its June 30, 2005 quarterly

public statement. (Id. ¶ 219.) Plaintiffs allegations regarding SeraCare’s statement

regarding “bankable” inventory fails to particularly allege how that statement relates

to SeraCare’s reporting of inventory on their 2003 and 2004 audited financial

statements. Furthermore, the totality of Plaintiffs’ allegations fail to demonstrate by

how much Plaintiffs’ alleged practice of improperly capitalizing overhead expenses to

their inventory inflated the value of the inventory on SeraCare’s 2003 and 2004 audited

documents. 

3. Conclusion Regarding SeraCare’s 2003 and 2004

Audited Financial Statements

Plaintiffs have failed to allege with particularity that any false statements were

made on SeraCare’s 2003 or 2004 audited financial statements. Therefore, Plaintiffs

have also failed to allege with particularity that KPMG’s statements that those audited

financial statements fairly presented SeraCare’s financial position on SeraCare’s 2003

and 2004 10-Ks, and the Registration Statement, were material misrepresentations. 

b. Audits Performed According to GAAS

Plaintiffs allege that KPMG made a false and misleading statement in SeraCare’s

2003 and 2004 10-Ks, and the Registration Statement, when it stated that it audited

SeraCare’s financial statements according to GAAS. (Compl. ¶ 233, 236-40.) Since

Plaintiffs have failed to particularly allege the falsity of SeraCare’s underlying financial

statements, any statement regarding the quality of KPMG’s audit, even if it were false,

would not be an actionable statement under section 10(b) and Rule 10b-5 because it

would not be a material false statement connected to damages related to the purchase

or sale of a security. Therefore, Plaintiffs have failed to particularly allege that

KPMG’s statements that they performed their audits according to GAAS on SeraCare’s

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2003 and 2004 10-Ks, and the Registration Statement, was a material misrepresentation.

c. SeraCare’s 2005 Quarterly Statements

Plaintiffs allege that KPMG is liable for materially false statements made in

SeraCare’s first three quarterly statements of 2005. (Consol. Compl. ¶¶ 117-31, 327-

34.) Although Plaintiffs’ do not allege that KPMG made any public statements

regarding those quarterly reports, nor do they allege that KPMG was mentioned in

them, Plaintiffs argue that KPMG is liable under a “substantial participation” theory.

An accounting firm’s substantial participation or intricate involvement in the

preparation of fraudulent statements is grounds for primary liability even though that

participation might not lead to the accounting firm actual making the statements. See

In re Software Toolworks Inc., 50 F.3d 615, 628-29 & n. 3 (9th Cir. 1994); see also

Howard v. Everex Systems, Inc., 228 F.3d 1057, 1061 n.5 (9th Cir. 2000). In Software

Toolworks Inc., the Ninth Circuit held that evidence that a letter sent by a client to the

SEC indicating that the letter was prepared after extensive review and discussions with

an accounting firm, and that referred the SEC to two partners of the accounting firm for

further information, along with additional evidence that the accounting firm played a

significant role in drafting and editing the letter, was sufficient to sustain a primary

cause of action against the accounting firm under section 10(b). See id. at 628 n.3. 

Plaintiffs allege that KPMG participated in editing and approving SeraCare’s

2005 quarterly statements, and that SeraCare stated that KPMG evaluated the financials

contained in the 10-Q for the period ending June 30, 2005. (Consol. Compl. ¶ 234.)

Additionally, Plaintiffs allege that CW-8 has knowledge that KPMG started reviewing

SeraCare’s third quarter 2005 10-Q in July 2005 and continued to work on them until

they were filed. (Id.) CW-8 worked at SeraCare’s Oceanside, California facility from

April 2003 through April 2006, first as a Quality Control Technician, and later as a

Quality Assurance Supervisor, and reported to Facility Operations Manager Duane

Pinkerton. (Id. ¶ 166.) CW-8 participated in annual and other periodic physical

inventory counts at the Oceanside facility. (Id.) 

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The Court concludes that these allegations are insufficient to allege with

particularity the degree of substantial participation or intricate involvement required to

make KPMG primarily liable for any misstatements in SeraCare’s 2005 10-Qs.

Allegations that KPMG participated in editing and approving the 10-Qs, and that

KPMG evaluated them, falls significantly short of the type of participation that the

Ninth Circuit found sufficed to establish liability under a substantial participation theory

in Software Toolworks Inc. Therefore, Plaintiffs have failed to particularly allege that

KPMG made any material misrepresentations in association with SeraCare’s three 2005

10-Qs. 

Since Plaintiffs have failed to allege with particularity that KPMG made any

material misrepresentations, the Court grants KPMG’s motion for summary judgment

on Plaintiffs’ 10(b) claim. The Court declines to address KPMG’s other arguments

regarding Plaintiffs’ failure to adequately allege facts in support of their § 10(b) claim

as those arguments are moot.

B. Plaintiffs’ Section 11 Claim Against KPMG

1. Pleading Standard

 Plaintiffs allege that KPMG violated § 11 of the Securities Act of 1933, 15

U.S.C. § 77k. 11. (Consol. Compl. ¶¶ 351-62.) Section 11 creates a private remedy

against certain individuals when any part of a registration statement, when it became

effective, contains an untrue statement of a material fact or omitted to state a material

fact required to be stated therein or necessary to make the statements therein not

misleading. See 15 U.S.C. § 77k(a). “No scienter is required for liability under § 11;

defendants will be liable for innocent or negligent material misstatements or

omissions.” In re Stac Electronics Securities Litigation, 89 F.3d 1399, 1404 (9th Cir.

1996). 

Among the class of individuals that are potentially liable under § 11 are: 

[E]very accountant . . . who has with his consent been named as having

prepared or certified any part of the registration statement, or as having

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prepared or certified any report or valuation which is used in connection

with the registration statement, with respect to the statement in such

registration statement, report, or valuation, which purports to have been

prepared or certified by him.

15 U.S.C. § 77k(a)(4). “Section 11 of the 1933 Act permits an action against an

accountant based on material misstatements or omissions in a registration statement, but

only as to those portions of the statement that purport to have been prepared or certified

by the accountant.” Monroe v. Hughes, 31 F.3d 772, 774 (9th Cir. 1994). 

KPMG argues that Plaintiffs’ § 11 claim against them “sounds in fraud” and

should therefore be dismissed for failure to adequately plead with particularity the

circumstances constituting the claim, pursuant to Rule 9(b) of the Federal Rules of Civil

Procedure. Plaintiffs counter that their § 11 claim against KPMG is based on their

allegation that KPMG negligently violated their duty to ensure the accuracy and

completeness of the registration statement associated with the Secondary Offering, and

therefore they are only required to plead a short and plain statement of their claim

pursuant to Rule 8(a).

In cases where fraud is not a necessary element of a claim, but a plaintiff chooses

to allege a unified course of fraudulent conduct and rely entirely on that course of

conduct as the basis of the claim, the claim is said to be “grounded in fraud” or to

“sound in fraud,” and the pleading of that claim as a whole must satisfy the particularity

requirement of Rule 9(b). See Vess, 317 F.3d at 1103-04; see also In re Stac Elecs. Sec.

Litig., 89 F.3d 1399, 1404-05 (9th Cir. 1996) (“We now clarify that the particularity

requirements of Rule 9(b) apply to claims brought under Section 11 when, as here, they

are grounded in fraud.” In cases where a plaintiff chooses to allege some fraudulent and

some non-fraudulent conduct, however, only the allegations of fraud are subject to Rule

9(b)’s heightened pleading requirements. See Vess 317 F.3d at 1104. 

The Court concludes that Plaintiffs’ claims against KPMG allege a unified course

of fraudulent conduct, are grounded in fraud, and thus Plaintiffs’ § 11 claim must

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satisfy the particularity requirement of Rule 9(b). See Vess, 317 F.3d at 1103-04; Stac

Elecs. Sec. Litig., 89 F.3d at 1404-05. Plaintiffs have not simply chose to allege some

fraudulent and some non-fraudulent conduct against KPMG. Rather, Plaintiffs have

consistently alleged throughout their complaint that KPMG has made a myriad of

fraudulent misrepresentations, and then tries to allege that the same conduct was merely

negligent when applied to their § 11 claim. See Daou Systems, Inc., 411 F.3d at 1028

(relying on fact that the plaintiffs alleged myriad misrepresentations made by

defendants in finding that their complaint sounded in fraud against those defendants).

Plaintiffs allege that KPMG actively participated in SeraCare’s fraudulent efforts

to artificially increase the value of their inventory and prematurely recognize revenue.

(Consol. Compl. ¶¶ 56, 59, 61.) Plaintiffs allege that KPMG falsely stated its audits of

SeraCare’s 2003 and 2004 10-K’s were performed according to GAAS, when in fact

they failed to perform the most basic functions of an audit. (Id. ¶¶ 62-63.) They allege

that KPMG refused to see, or simply ignored, obvious overstatements in inventories,

numerous unsupported sales transactions, changes to inventory balances, capitalization

of overhead expenses, and excess inventory. (Id. ¶ 233.) Plaintiffs also allege that

despite KPMG’s knowledge or reckless disregard regarding SeraCare’s false and

misleading financial statements, they failed to disclose material adverse facts about the

financial condition and business prospects of SeraCare. (Id. ¶¶ 38, 331.) They also

allege that KPMG knowingly or recklessly prepared false or misleading SEC filings or

press releases, and knowingly or recklessly gave false information to security analysts,

money and portfolio managers, and institutional investors. (Id. ¶ 330.) Additionally,

as in Daou Systems, Inc., Plaintiffs fully incorporated their previously averred

allegations of fraud into their § 11 claim. (Id. ¶ 351.) Cf. In re Daou Systems, Inc., 411

F.3d at 1028. 

KPMG is only liable under Section 11 for those portions of the Registration

Statement that purport to have been prepared or certified by the accountant. See

Monroe, 31 F.3d at 774. Plaintiffs basis for KPMG’s § 11 liability is the fact that

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KPMG stated in the Registration Statement that SeraCare’s 2003 and 2004 audited

financial statements fairly presented SeraCare’s financial position, as of September 30,

2003 and 2004, in all material respects. (Consol. Compl. ¶ 152.) This is the same

unified course of fraudulent conduct Plaintiffs allege KPMG undertook throughout their

complaint. Plaintiffs’ attempt to avoid the Court concluding that it is the same unified

course of conduct as pleaded throughout the complaint by stating that their § 11 claim

against KPMG is based solely on strict liability and/or negligence is an insufficient

disclaimer. See Stac Elecs. Sec. Litig., 89 F.3d at 1405 n.2 (nominal efforts to disclaim

allegations of fraud with respect to § 11 claims are unconvincing where the gravamen

of the complaint is plainly fraud). Therefore, the Court concludes that Plaintiffs’ suit

against KPMG sounds in fraud, and Rule 9(b)’s heightened pleading standards apply

to Plaintiffs’ § 11 allegation against KPMG.

2. Plaintiffs’ Pleadings

Since the Court has determined that Plaintiffs complaint against KPMG sounds

in fraud, Plaintiffs must demonstrate, with particularity, that the registration statement

contained an omission or misrepresentation, and that the omission or misrepresentation

was material, that is, it would have misled a reasonable investor about the nature of his

or her investment.’ See In re Daou Systems, Inc., 411 F.3d at 1028. As previously

noted, Plaintiffs’ may only bring a § 11 claim against KPMG based on those portions

of the Registration Statement that purport to have been prepared or certified by KPMG.

See Monroe, 31 F.3d at 774. 

Plaintiffs allege that KPMG is liable under § 11 based on their statement in the

Registration Statement that they audited SeraCare’s balance sheets for the fiscal years

2003 and 2004, and the related statements of income, shareholders’ equity, and cash

flows for each of the years in the three-year period ended September 30, 2004, and

found that they fairly present SeraCare’s financial position in all material respects.

(Consol. Compl. ¶¶ 253-54.) Plaintiffs allege this statement was false based on the

same arguments it alleged that this and similar statements were false in association with

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its § 10(b) claim against KPMG. (Id. ¶¶ 172-202.) Therefore, the Court has already

concluded that Plaintiffs have failed to allege with particularity that KPMG’s statement

was a misrepresentation. Accordingly, the Court grants KPMG’s motion to dismiss

Plaintiffs’ § 11 claim. 

C. Plaintiffs’ Section 11 Claim Against the Underwriter Defendants 

Plaintiffs also allege that the Underwriter Defendants violated § 11. (Consol.

Compl. ¶¶ 351-62.) Section 11 creates a private remedy against every underwriter to

a security when any part of the registration statement, when it became effective,

contains an untrue statement of a material fact or omitted to state a material fact

required to be stated therein or necessary to make the statements therein not misleading.

See 15 U.S.C. § 77k(a)(5).

The Underwriter Defendants similarly argue that Plaintiffs’ § 11 claim “sounds

in fraud” and should therefore be dismissed for failure to adequately plead with

particularity the circumstances constituting the claim, pursuant to Rule 9(b). Plaintiffs

again contend that their § 11 claim against the Underwriter Defendants is based on their

allegation that the Underwriter Defendants negligently violated their duty to ensure the

accuracy and completeness of the registration statement associated with the Secondary

Offering, and therefore they are only required to plead a short and plain statement of

their claim pursuant to Rule 8(a).

The Court concludes that Plaintiffs’ complaint against the Underwriter

Defendants also sounds in fraud. Plaintiffs allege in the introductory paragraphs to their

complaint that defendants, including the Underwriter Defendants (and KPMG), were

motivated to engage in a fraudulent practice in order to increase SeraCare’s financial

covenants on their loans, acquire more companies, meet Wall Street’s financial

estimates, and push SeraCare’s stock price higher. (Consol. Compl. ¶ 1, 3). See Daou

Systems, Inc., 411 F.3d 1029 (finding it notable that a plaintiff’s first sentence in his

complaint introduced a § 11 claim as resulting from a fraudulent scheme and course of

business by defendants in determining the claim sounds in fraud). Based on this early

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allegation of a joint fraudulent practice amongst the defendants, the numerous

subsequent allegations of fraud pertaining to other defendants, and the fact that

Plaintiffs fully incorporate all of their previous allegations for purposes of their § 11

claim against the Underwriter Defendants, the complaint against the Underwriter

Defendants sounds in fraud.

Therefore, to survive dismissal, Plaintiffs must demonstrate, with particularity,

that the Registration Statement contained an omission or misrepresentation, and that the

omission or misrepresentation was material, that is, it would have misled a reasonable

investor about the nature of his or her investment. See id. Most of Plaintiffs’

allegations that the Registration Statement contained misrepresentations are based on

the same arguments the Court previously concluded were not plead with particularity,

regarding SeraCare’s alleged premature recognition of revenue, overvaluation of

inventory, and improper capitalization of overhead costs to inventory. (Consol. Compl.

¶¶ 147-48.) The Court relies on its previous analysis in concluding that Plaintiffs have

failed to allege with particularity that these misrepresentation were made.

Plaintiffs also allege that the Underwriter Defendants are liable under § 11 for

misrepresentations made in SeraCare’s 10-Q statements for the first two quarters of

fiscal year 2005, regarding SeraCare’s net sales of $27.8 million and net income of $3.7

million, that were included in the Registration Statement. (Id. ¶ 146.) Plaintiffs allege

that on March 15, 2006, SeraCare admitted in a press release that these financial

statements should no longer be relied upon, that the company expects to restate one or

more of its financial statements for the first three quarters of fiscal 2005, and that the

company believes that there are material weaknesses in its internal control over

financing. (Id. ¶ 141.) Plaintiffs further allege that SeraCare publicly stated on March

27, 2006, that it needed to restate its financial statements because there were errors with

respect to inventory valuation and the capitalization of overhead to inventory, and that

the financial statements were false due to SeraCare’s revenue recognition errors. (Id.

¶ 58.) Finally, Plaintiffs allege that MHM, the external auditor hired by SeraCare to

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replace KPMG, sent a letter to SeraCare, attached to the complaint, addressing

numerous concerns with the company’s 2005 financial statements. (Id. ¶ 7, Ex. 7.) The

addressed concerns included that SeraCare appeared to have made numerous

unsupported changes to costs of items in its inventory and to quantities of inventory,

and that there appeared to be an absence of any method or process to evaluate the

inventory for potential excess quantities on hand. (Id.) The Court concludes that these

allegations are sufficient to support with particularity that the Registration Statement

contained material misrepresentations regarding SeraCare’s net sales and net income

for the first two quarters of 2005, and the Court also concludes that the affirmative

defense of lack of causation does not appear on the face of the complaint with regard

to these allegations. As previously stated, however, the other allegations in Plaintiffs’

§ 11 claim against the Underwriter Defendants are not plead with the requisite

particularity. Accordingly, the Court grants without prejudice the Underwriter

Defendants’s motion to dismiss Plaintiffs’ § 11 claim against them, other than the

allegations based on SeraCare’s quarterly reports for the first two quarters of 2005. 

III. Motion for Court to Review Motion for Sanctions and Supporting

Documents in Camera 

According to KPMG’s application, as modified by its clarification, it asks that

the Court review in camera a motion for sanctions under Rule 11 of the Federal Rules

of Civil Procedure and supporting documents. KPMG asserts that in camera review and

an order allowing it to file the motion and supporting documents under seal are

necessary because the papers contain confidential, proprietary, and/or trade secret

information of KPMG and SeraCare. In support of their application, KPMG submits

the declaration of Bradley Monahan, the engagement partner assigned to the audits of

SeraCare’s financial statements. In response, Plaintiffs argue that any sanctions motion

is premature, and KPMG has failed to show any compelling reasons to overcome the

strong presumption of public access to court records. Further, Plaintiffs argue that

KPMG’s sanctions motion would only serve to improperly inject extrinsic evidence into

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the pending motion to dismiss and compel the Court to conduct an in camera

evidentiary hearing in violation of Rule 12(b)(6) of the Federal Rules of Civil

Procedure.

A. Legal Standard to File Documents Under Seal

As the Ninth Circuit has noted, “courts have recognized a ‘general right to

inspect and copy public records and documents, including judicial records and

documents.’” Kamakana v. City & County of Honolulu, 447 F.3d 1172, 1178 (9th Cir.

2006) (quoting Nixon v. Warner Commc’ns, Inc., 435 U.S. 589, 597 & n.7 (1978)).

This right of access is justified by the interests of citizens in keeping watch on the

workings of public agencies. See id. Outside of grand jury materials and warrant

materials during an investigation, which have traditionally been kept secret, courts

“start with a strong presumption in favor of access to court records.” Foltz v. State

Farm Mut. Ins. Co., 331 F.3d 1122, 1135 (9th Cir. 2003). To overcome this strong

presumption, a party seeking to seal a record must show compelling reasons. See id.

at 1135. Specifically, the party must articulate compelling reasons supported by

specific factual findings that outweigh the history of public access and the public

policies favoring disclosure. See Kamakana, 447 F.3d at 1178-79. A court must

balance the competing interests of the public and the party seeking to file documents

under seal. See id. at 1179. If after considering these interests the court decides to seal

documents, it must base its decision on compelling reasons and it must articulate the

factual basis for the ruling without relying on conjecture or hypothesis. See id. (citing

Hagestad v. Tragesser, 49 F.3d 1430, 1434 (9th Cir. 1995)).

While “good cause” suffices to seal documents during discovery under Rule 26

of the Federal Rules of Civil Procedure, a showing of good cause, without more, will

not satisfy the “compelling reasons” test. See id. This is because, unlike private

documents in discovery, judicial records are public records to which the public is

entitled to access by default. See id. Finally, the Ninth Circuit has carved out an

exception to the presumption of access for previously sealed discovery documents

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attached to non-dispositive motions. See id. at 1179-80. In short, a party seeking to

keep secret documents attached to dispositive motions must meet the “compelling

reasons” test, while a showing of “good cause” will keep previously sealed documents

attached to non-dispositive motions sealed. See id.

 B. Analysis

As an initial matter, KPMG’s motion for sanctions seeks to strike all allegations

against it from Plaintiffs’ complaint. (See Daniel S. Drosman Decl. Supp. Pls.’ Opp.

KPMG’s Appl. (KPMG’s proposed order).) Accordingly, because the case against

KPMG will be over if the Court grants its motion, KMPG’s motion is dispositive.

Therefore, KPMG must meet the compelling reasons test to justify sealing the motion

for sanctions and supporting documents. Here, KPMG has failed to meet the

compelling reasons test. Since the Court has granted KPMG’s and the Underwriter

Defendants’ motions to dismiss, there is no complaint to strike allegations from. The

Court has, however, granted Plaintiffs leave to amend. Under these circumstances, and

at this stage of the proceedings, there is no compelling reason for the Court to review

KPMG’s sanctions motion and papers in camera. Accordingly, the Court denies

without prejudice KPMG’s motion to file certain documents under seal. 

Conclusion

 For the reasons discusses, the Court GRANTS WITHOUT PREJUDICE

KPMG’s motion to dismiss Plaintiffs’ Section 10(b) and Section 11 claims. The Court

GRANTS WITHOUT PREJUDICE the Underwriter Defendants’ motion to dismiss

Plaintiffs’ Section 11 claim consistent with this order. The Court DENIES WITHOUT

PREJUDICE KPMG’s motion to file certain documents under seal. Plaintiffs have 30

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days from the date this order is filed to file an amended complaint correcting the

deficiencies of their complaint regarding their claims dismissed without prejudice. 

IT IS SO ORDERED.

DATED: March 19, 2007

MARILYN L. HUFF, District Judge

UNITED STATES DISTRICT COURT

cc: all counsel of record

Case 3:05-cv-02335-JLS-CAB Document 122 Filed 03/19/07 Page 26 of 26