Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_08-cv-01697/USCOURTS-casd-3_08-cv-01697-0/pdf.json

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

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

SANDRA LIFSCHITZ, on behalf of

herself and all others similarly situated,

Plaintiff,

CASE NO. 08CV1697-LAB (WMC)

ORDER GRANTING

DEFENDANT’S MOTION TO

vs. DISMISS WITHOUT PREJUDICE

NEXTWAVE WIRELESS INC., ALLEN

SALMASI, GEORGE C. ALEX and

FRANK A. CASSOU,

Defendants.

Once again, the Court considers whether Plaintiff’s complaint satisfies the pleading

standards for a securities class action set forth in Dura Pharms. v. Broudo and the PSLRA.

Once again, the Court finds it doesn’t. 

The legal standards here aren’t in dispute. To state a claim under Section 10(b) of

the Securities Exchange Act of 1934, a plaintiff must allege: (1) a material misrepresentation

or omission; (2) made with scienter; (3) in connection with the purchase or sale of a security;

(4) reliance by the plaintiff on the misrepresentation or omission; (5) economic loss; and (6)

a causal nexus between the misrepresentation or omission and the loss. Dura, 544, U.S.

336, 341–42 (2005). The PSLRA fortifies the first and second elements. Tellabs, Inc. v.

Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (“The PSLRA Act requires plaintiffs

to state with particularity both the facts constituting the alleged violation, and the facts

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evidencing scienter.”). As to the first, “the complaint shall specify each statement alleged

to have been misleading” along with “the reason or reasons why the statement is

misleading.” 15 U.S.C. § 78u-4(b)(1)(B). As to the second, “the complaint shall . . . state

with particularity facts giving rise to a strong inference that the defendant acted with the

required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A).

The Court previously dismissed Plaintiff’s complaint without prejudice because it did

not contain “a short and plain statement of the claim showing that the pleader is entitled to

relief.” Fed. R. Civ. P. 8(a)(2). Instead, it was puzzle-pled; in 64 pages, Plaintiff quoted

extensively from public statements made by NextWave over a significant period of time and

then left it to NextWave (and the Court) to figure out exactly why those statements were

misleading on the basis of lengthy allegations from confidential NextWave witnesses. The

Court said the complaint read “as though Plaintiffs conducted an investigation into the

conduct of NextWave and simply transcribed all of their notes into a legal pleading, hoping

they would coalesce into a well-pleaded complaint.” (Doc. No. 52, p. 6.) Rather than

dismiss the complaint with prejudice, however, the Court gave Plaintiff the opportunity to

transform the complaint into one that NextWave and the Court “needn’t pore over to

understand.” (Id. at p. 7.) It reaches the same conclusion this time around. The complaint

remains inadequate, but not so inadequate that it should be dismissed with prejudice. 

By the Court’s count, Plaintiff takes issue with 17 statements made by NextWave that

were allegedly false and misleading and expose the company to civil liability under Rule

10(b) of the Exchange Act: (1) a Form 10-Q for the third quarter of 2006 (¶ 13); (2) a January

3, 2007 announcement by NextWave that it reached an agreement to acquire GO Networks,

Inc. (¶ 16); (3) a March 30, 2007 Form 10-K for 2006 (¶ 19); (4) an April 2, 2007 press

release announcing “Full Year Financial Results” (¶ 22); (5) an April 9, 2007 announcement

that it reached an agreement to acquire IP Wireless, Inc. (¶25); (6) a May 4, 2007 interview

in Investor’s Business Daily (¶26); (7) a May 14, 2007 press release announcing first quarter

of 2007 financial results (¶29); (8) a May 15, 2007 Form 10-Q for the first quarter of 2007 (¶

32); (9) a Jun3 6, 2007 announcement that NextWave planned to introduce WiMAX “chip

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sets” through its subsidiary NextWave Broadband (¶ 35); (10) an August 14, 2007 Form 10-

Q for the second quarter of 2007 (¶ 38); (11) An August 15, 2007 announcement about the

Form 10-Q for the second quarter of 2007 (¶39); (12) A November 13, 2007 Form 10-Q for

the third quarter of 2007 (¶ 42); (13) A November 14, 2007 announcement about the Form

10-Q for the third quarter of 2007 (¶ 43); (14) a March 13, 2008 Form 10-K for 2007 (¶45);

(15) A March 14, 2008 announcement about the Form 10-K for 2007) (¶47); (16) an April 14,

2008 annual report for 2007 (¶ 48); (17) a May 8, 2008 press release about first quarter of

2008 financial results and an accompanying Form 10-Q (¶49). 

Seventeen statements amounts to a lot of alleged puffery on NextWave’s part,

especially considering that (1) the target statements are lengthy excerpts from public

documents rather than discrete sentences, and (2) the entirety of the statements aren’t

alleged to be false and misleading. For example, the 2006 Form 10-K “statements” that

Plaintiff calls out fill two pages of the complaint and contain uncontroversial information, such

as: “An RFIC is part of the front-end of a radio system that receives a radio frequency signal,

converts it to a lower frequency and modifies it for further processing. Our initial multi-band

RFIC, the NW1200, was sent to manufacture in late 2006. Sample chips have undergone

successful testing and evaluation.” (Compl. ¶ 19.) Plaintiff’s explanation of what is false and

misleading in the Form 10-K says nothing about the definition of an RFIC, or the date on

which the NW1200 was sent to manufacture, or the representation that sample chips had

undergone successful testing. And so it is with many of the NextWave statements that are

excerpted in the complaint: the Court (just as much as NextWave) has to determine for itself

exactly what the Plaintiff finds objectionable. Plaintiff has therefore failed to heed the Court’s

directive to “take the heightened pleading standards of the PSLRA to their keyboard, along

with Rule 8 of the Federal Rules of Criminal Procedure, in amending their complaint.” (Doc.

No. 52, p. 7.) 

It doesn’t help that Plaintiff’s attempt to establish scienter sends the Court (and again,

NextWave) on a search mission through the allegations of twelve confidential witnesses

without any particular directions. (See ¶ 21.) The PSLRA requires the Plaintiff to plead

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particularized facts giving rise to a strong inference that NextWave knew, or was deliberately

reckless in not knowing, that its statements were false and misleading when made. Plaintiff

shirks this obligation by directing the Court to pages upon pages of allegations in the rear

of the complaint that, it assures the Court, shout scienter. It’s true that confidential witness

allegations have popped up in securities class actions with increasing frequency since

Congress enacted the PSLRA, but courts have also grown to regard them with a good

amount of skepticism. See Campo v. Sears Holding Corp., 371 Fed.Appx. 212 (2d Cir.

2010) (approving deposition of confidential witnesses for purposes of motion to dismiss);

Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 995 (9th Cir. 2009) (“the confidential

witnesses whose statements are introduced to establish scienter must be described with

sufficient particularity to establish their reliability and personal knowledge”); Higginbothem

v. Baxter Intern., Inc., 495 F.3d 753, 757 (7th Cir. 2007) (confidential witness allegations

usually discounted steeply); City of Livonia Employees’ Ret. Sys. v. Boeing, 2011 U.S. Dist.

Lexis 22347 (N.D. Ill. Mar. 7, 2011) (dismissing class action complaint that survived initial

motion to dismiss after confidential witness was identified and deposed). Against this

backdrop, Plaintiff has to do more than direct the Court to the entirety of a confidential

witness’s testimony on the hope that the Court will draw a “strong inference” of scienter

there. This is especially true where, as here, the confidential witness allegations are a

plaintiff’s only evidentiary basis for alleging scienter in the first place. 

When considering NextWave’s first motion to dismiss, the Court observed that “the

Plaintiffs don’t match any particular confidential witness statements with the allegedly

misleading NextWave statements that are the basis for their claims.” (Doc. No. 52, p. 5.)

Plaintiff did not take this observation seriously, it seems, because the amended complaint,

after quoting the allegedly false statements at length, offers a series of unsupported

allegations that NextWave knew they were false followed by the sweeping claim that the

confidential witness allegations “further support Defendants’ scienter.” (See, e.g., ¶ 21, 24,

28, 31, 34, 37, 41, 44.) That’s not good enough. See Gold v. Morrice, 2008 WL 467619 at

*2 (Jan. 31, 2008) (“In its current form, Plaintiff’s complaint lacks clarity in articulating the

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grounds for its claims. Although the Complaint contains many detailed factual allegations,

it does not clearly identify the allegedly false statements or which of the factual allegations

support an inference that particular statements are false or misleading.”).

The Court regrets that it held this motion under submission for as long as it did only

to tell the Plaintiff, again, to amend its complaint to better state a claim. (The Court is aware

of and not unsympathetic to NextWave’s costs in filing a motion to dismiss, and Plaintiff

should be, too.) The structural inadequacies of the complaint — and they are substantial —

make a substantive assessment of its merits under the PSLRA nearly impossible. Until

Plaintiff can whittle down the allegedly false and misleading statements to capture the core

statements at issue, and identify specific confidential witness allegations that reveal those

statements to be knowingly false and misleading, the Court can’t determine whether this

case deserves to go forward. Perhaps the more sensible structural arrangement is topical.

That is, Plaintiff should allege generally what it believes NextWave misrepresented, then

identify specific statements that manifest this misrepresentation (rather than paste lengthy

excerpts of public documents), and then identify specific confidential witness allegations that

substantiate the allegations of falsity and scienter. That makes better sense, in the Court’s

view, than running through the allegedly false statements in chronological sequence and

then directing the reader to flip back several pages to see what the confidential witnesses

have to say. In any event, it is up to Plaintiff to comply with Rule 8 of the Federal Rules of

Civil Procedure, Dura Pharms., and the PSLRA, and the Court will allow Plaintiff one last try.

If the complaint is again a chore to piece together, it will be dismissed with prejudice.

Plaintiff must file an amended complaint within 21 days of the date this Order is entered.

IT IS SO ORDERED.

DATED: March 15, 2011

HONORABLE LARRY ALAN BURNS

United States District Judge

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