Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_05-cv-02512/USCOURTS-azd-2_05-cv-02512-0/pdf.json

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

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

The Court will deny Defendants’ request for oral argument because the parties have

submitted thorough memoranda and the Court concludes that oral argument will not aid its

decisional process. See Mahon v. Credit Bur. of Placer County, Inc., 171 F.3d 1197, 1200

(9th Cir. 1999); Partridge v. Reich, 141 F.3d 920, 926 (9th Cir. 1998); Lake at Las Vegas

Investors Group, Inc. v. Pacific. Dev. Malibu Corp., 933 F.2d 724, 729 (9th Cir. 1991), cert

denied, 503 U.S. 920 (1992).

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

IN RE ACTION PERFORMANCE

COMPANIES INC. SECURITIES

LITIGATION 

)

)

)

)

)

)

)

No. 05-2512-PHX-DGC

ORDER

Defendant Motorsports Authentics, Inc., formerly Action Performance Companies,

Inc. (“Action”), and Fred W. Wagenhals (collectively “Defendants”) have moved to dismiss

Plaintiff’s Amended Class Action Complaint. Dkt. #65. The Court has reviewed the

memoranda submitted by the parties. Dkt. ##65, 68, 69. For the reasons stated below, the

Court will grant Defendants’ motion.1

I. Background.

Action is a public company involved in the design and marketing of licensed Nascar

memorabilia, including apparel and die cast replicas of vehicles. Dkt. #65 at 7. In 2003,

Action reported lower fourth quarter (“4Q03") earnings than expected, triggering a decline

in the price of its shares. Dkt. #64 at ¶ 110. Action had predicted 4Q03 revenues from $100

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 1 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

The Court is uncertain why Plaintiff extends the class period to April 20, 2004.

According to the Complaint, Action disclosed its 4Q03 results on November 5, 2003. Dkt.

#64 at ¶ 110. This issue does not, however, affect the current motion.

- 2 -

million to $115 million, or $0.52 to $0.65 per share. Id. at ¶ 99. On October 23, 2003,

Action issued a press release stating that 4Q03 earnings would not meet expectations and

explaining many of the factors that impacted earnings. Id. at ¶ 107. The price of Action

shares fell the following day from $26.32 per share to $20.25 per share. Id. at ¶ 108. On

November 5, 2003, Action reported its final 4Q03 results. Id. at ¶ 110. Earnings per share

were $0.15, well below the company’s predictions. Id. Action’s shares fell further, closing

at $17.88 per share on November 6, 2003. Id. at ¶ 111. Action attributed its weak financial

performance to several factors, including the change in Nascar’s primary sponsor from

Winston to Nextel, inventory liquidation caused by driver changes during the 2003 Nextel

Cup season, and increased freight cost. Id. at ¶ 107. 

Plaintiff Cornelia I. Crowell GST Trust seeks to represent a class of individuals who

acquired Action securities during a Class Period from June 2, 2003 to April 20, 2004. Dkt.

#64 at ¶¶ 11, 15-20.2

 Plaintiff alleges that Defendants violated Section 10(b) of the Securities

Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 through false representations and

material omissions. Id. at ¶¶ 114-120. The Amended Complaint (“Complaint”) also alleges

that Fred Wagenhals, the chief executive officer and president of Action, violated Section

20(a) of the Exchange Act by causing Action to disseminate false and misleading

information. Id. at ¶¶ 121-25.

Plaintiff contends that Defendants made forecasts regarding Action’s 4Q03

performance that they knew were false or misleading, and failed to notify investors that

certain factors would decrease earnings for the quarter. These factors include Action using

air shipping rather than freight shipping to meet deadlines for several races, and Action

experiencing inventory obsolescence due to the sponsorship change and early season driver

terminations. Id. at ¶¶ 3-4. Although Defendants knew that these increased costs would

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 2 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 - 3 -

diminish earnings during 4Q03, Plaintiff alleges, they failed to notify investors of Action’s

troubles. Id. at ¶ 5. Plaintiff alleges that Defendants’ motive was to use the inflated stock

price to acquire Funline Merchandise Co. in September of 2003. Id.

II. Pleading Requirements in Securities Fraud Actions.

Defendants bring their motion under Federal Rules of Civil Procedure 9(b) and

12(b)(6) and the Private Securities Litigation Reform Act of 1995 (“PSLRA”). In ruling on

a motion to dismiss, the Court must accept the plaintiff’s allegations as true and construe

them in the light most favorable to plaintiff. Gompper v. VISX, Inc., 298 F.3d 893, 896 (9th

Cir. 2002).

To establish a claim under Section 10(b) and Rule 10b-5, a plaintiff must plead and

prove (1) a material misrepresentation or omission, (2) scienter, (3) a connection with the

purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation. See

Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). The pleading must conform to

the “particularity” requirements of Rule 9(b). See Gompper, 411 F.3d at 1014; Semegen v.

Weidner, 780 F.2d 727, 729, 734-35 (9th Cir. 1985). 

The PSLRA enhanced the pleading requirements in private securities fraud litigation.

A 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.” 15 U.S.C. § 78u-4(b)(1). The complaint must also,

“with respect to each act or omission[,] . . . state with particularity facts giving rise to a

strong inference that defendant acted with the required state of mind,” or scienter. 15 U.S.C.

§ 78u-4(b)(2). To plead scienter properly, “[t]he complaint must allege that the defendant

made false or misleading statements either intentionally or with deliberate recklessness or,

if the challenged representation is a forward looking statement, with actual knowledge that

the statement was false or misleading.” In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1085

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 3 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

Defendants argue that their statements were forward-looking, requiring Plaintiff to

plead “actual knowledge” to satisfy the scienter requirement. See 15 U.S.C. § 78u-5(c)(1).

Because the Court finds that Plaintiff has failed to plead that Defendants acted with even the

lower standard of intent or deliberate recklessness, the Court will decline to address whether

Defendants’ statements are protected by the safe-harbor provision for forward-looking

statements. See Employers Teamsters Local Nos. 175 and 505 Pension Trust Fund v. The

Clorox Co., 353 F.3d 1125, 1132 (9th Cir. 2004).

- 4 -

(9th Cir. 2002) (internal quotations omitted).3

 “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.” Gompper,

411 F.3d at 1015 (internal quotation marks and citations omitted). Upon motion from any

defendant, a court must dismiss any complaint that does not satisfy these requirements. 15

U.S.C. § 78u-4(b)(3)(A). Congress enacted the PSLRA to put an end to the practice of

pleading “fraud by hindsight.” See In re Daou Systems, Inc., 411 F.3d 1006, 1021 (9th Cir.

2005). 

III. Analysis.

A. Falsity and Scienter.

 The PSLRA requires a complaint to “specify each statement alleged to have been

misleading[.]” 15 U.S.C. § 78u-4(b)(1). Given this requirement, the Court will not consider

allegedly false or misleading statements not specified in the Complaint, but discussed in

Plaintiff’s brief, such as Wagenhals’ statements from the July 23, 2003 conference call that

Nascar’s sponsorship change was “very good news for Action” and presented “wonderful

opportunities for the sport and for Action Performance,” or Action CFO David Martin’s

statement that “there has not been a change fundamentally in any of the business lines.” Dkt.

#68 at 6. 

The Complaint includes four pages of block quotes, but it specifically identifies only

three omissions that allegedly rendered four statements false or misleading. Dkt. #64 at

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 4 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 - 5 -

¶ 101. These omissions and misrepresentations will be the focus of the Court’s analysis. The

Court will address each alleged omission and misrepresentation “to determine whether singly

or together they were both misleading and material.” McCormick v. Fund American

Companies, Inc., 26 F.3d 869, 878 (9th Cir. 1994). 

1. Three Alleged Omissions.

Plaintiff asserts that the 4Q03 forecasts were rendered false or misleading by

Defendants’ failure to disclose (a) Action’s accumulation of obsolete inventory due to the

sponsorship change or driver changes, (b) delays in receiving design information, which

could lead to delays in filling orders for track-side sales, and (c) increases in shipping costs

necessary to avoid the delays. Dkt. #64 at ¶ 101.

Rule 10b-5(b) makes it illegal “[t]o make any untrue statement of a material fact or

to omit to state a material fact necessary in order to make the statements made, in the light

of the circumstances under which they were made, not misleading[.]” (emphasis added). 

“To be actionable under the securities laws, an omission must be misleading; in other words

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

from the one that actually exists.” Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006

(9th Cir. 2002). Before addressing whether an omission is material, however, the Court must

first analyze whether the Complaint states with particularity the facts on which Plaintiff bases

its belief that the alleged omission is true. See 15 U.S.C. § 78u-4(b)(1); McCormick, 26 F.3d

at 878 (reviewing the district court’s grant of summary judgment by examining whether facts

existed that could prove the truth of the alleged omissions).

a. Obsolete Inventory.

 Plaintiff alleges that Defendant failed to disclose that its earnings would be adversely

affected by inventory rendered obsolete by the sponsorship and driver changes during the

period. The Complaint, however, fails to provide specific facts showing what problems of

inventory obsolescence existed during 4Q03 and which of these problems became known to

Defendants before the 4Q03 forecasts. Specifically, although the Complaint list various

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 5 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 - 6 -

problems related to inventory, it is largely devoid of dates on which these problems arose or

became known to Action. 

The Court has found only 6 paragraphs in the Complaint that even vaguely refer to

a date before the 4Q03 forecast. Dkt. #64 at ¶¶ 41, 55, 60, 66, 67, 72. These paragraphs

relate to three events: the Nextel sponsorship change in June of 2003, the departure of driver

Steve Park in May of 2003, and a change in UPS sponsorship in the “spring of 2003.” The

Complaint does not allege specific facts showing why these events resulted in an adverse

effect during 4Q03, or, more importantly, why Defendants knew or should have known

before the projections that the events would have such an effect. Furthermore, these

paragraphs pertain only to the alleged omission regarding obsolete inventory; there are no

dates in the Complaint supporting other alleged misrepresentations and omissions. Without

the dates that problems became known, the Complaint does not “state with particularity facts

giving rise to a strong inference that defendant acted with the required state of mind” – that

Defendants either intentionally or with deliberate recklessness concealed facts they knew

would adversely affect Action’s 4Q03 performance. 15 U.S.C. § 78u-4(b)(2).

While the Complaint states that the Nextel sponsorship change was announced in June

of 2003, the Complaint does not with particularity allege facts showing that problems

associated with the sponsorship change were known to Defendants when they made their

forecasts. For example, the Complaint states “much of Action Performance’s already

produced but unsold product inventory was rendered worthless” by the sponsorship change.

Dkt. #64 at ¶¶ 41, 55. There are no details about why this occurred (given the apparent fact

that the change was not to take effect until the next year), which products were rendered

worthless, what qualifies as “much” inventory, or when the obsolescence became known to

Defendants. 

The Complaint’s allegations regarding the termination of driver Steve Park are

similarly conclusory. There are no facts showing the extent of this change on inventory

levels, and Plaintiff never provides the names of other “discontinued drivers” it alleges

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 6 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

Plaintiff’s other facts are similarly insufficient to show the truth of the omission

concerning inventory. Plaintiff alleges that “by 2003” there was a build-up of “unsold

inventory,” but does not state with particularity when this build-up occurred. Dkt. #64 at ¶

71. Additionally, Plaintiff alleges that CW2 was instructed not to count certain inventory

during 2003, but fails to allege that such a count took place before Defendants made the

4Q03 forecasts. 

- 7 -

affected the inventory. Dkt. #64 at ¶ 66. In fact, Defendants disclosed inventory problems

caused by driver changes in its July 23, 2003 conference call, in which it stated that “two

drivers this year . . . got fired and we had to liquidate a lot of inventory[.]” Dkt. #65, Ex. D

at 12. The Complaint does not allege that this statement referred to drivers other than Park.

If it referred to Park, there appears to have been no omission. 

Plaintiff alleges that a change in the UPS logo in the Spring of 2003 rendered $1

million worth of inventory obsolete, but does not mention the type of inventory and whether

the obsolescence included die cast cars and other products sold track-side. Id. at ¶ 72.

Moreover, the Complaint does not allege facts showing why the inventory was rendered

obsolete or when and why this fact would have been known to management. Furthermore,

this information comes from CW3, who worked in the Charlotte office, which was not

involved in the die cast collectible production that forms the bulk of Plaintiff’s Complaint.4

Allegations that Wagenhals was a “hands on” manager who “kept his pulse on

everything” or that Action held regular meetings does not, without more detail regarding the

dates and contents of those meetings, establish a strong inference that Defendants acted with

the required state of mind in failing to disclose inventory information. See In re Vantive

Corp., 283 F.3d 1079, 1087 (9th Cir. 2002) (rejecting plaintiff’s attempt to establish

knowledge by referring to defendants’ “‘hands on’ management style, their ‘interaction with

other corporate officers and employees, their attendance at management and board meetings,

and reports generated on a weekly and monthly basis in the Finance Department’”).

Finally, Plaintiff argues that “it is reasonable to infer that defendants were aware of

the impact of the Nascar sponsorship change and the large number of driver changes.” Dkt.

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 7 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 - 8 -

#68 at 13. But a reasonable inference of scienter is not enough under the PSLRA. The

statute requires facts that establish a “strong inference.” 15 U.S.C. § 78u-4(b)(2).

b. Delays in Filling Orders.

Plaintiff devotes much of the Complaint to alleging that delays in receiving design

confirmation from Nascar and various sponsors led to delays in filling special orders in time

for track-side sales during 4Q03. As noted, however, the Complaint does not allege facts

showing why Action would have experienced such delays in 4Q03 given that the sponsorship

change did not take effect until 2004. In fact, Plaintiff does not allege with any specificity

that Action was unable to fill orders during 4Q03. 

The Complaint alleges that much of the delay arose not from the June 2003

announcement of the sponsorship change, but from subsequent difficulties in communicating

with Nextel. But the Complaint provides no allegations concerning when these subsequent

difficulties arose and whether they were known to Defendants before the 4Q03 projections.

The Complaint lists specific examples of certain sponsors or drivers from whom

Action generally had difficulty obtaining design changes with sufficient lead time to order

products in time for certain races. Dkt. #64 at ¶ 52. This list, however, provides absolutely

no details about whether Action actually experienced delays in getting inventory in time for

a specific race. 

In sum, Plaintiff has failed to plead facts showing that the alleged omissions were true.

And Plaintiff has pleaded nothing to demonstrate that the alleged delays were both known

to Defendants and intentionally or recklessly concealed by Defendants at the time they made

the 4Q03 forecasts. See In re Vantive Corp., 283 F.3d at 1085. 

c. Increased Shipping Costs.

Plaintiff argues that Defendants should have disclosed that Action would have to pay

extra to ship products by air rather than by sea, but provides no specific allegations about the

extent to which Defendants knew such shipping problems would occur or when they knew

it. Moreover, the Complaint provides no particularized allegations that Action actually paid

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 8 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 - 9 -

extra for air shipping. Plaintiff’s allegations seem to derive solely from Action’s October 23,

2003 statement that freight costs impacted earnings. Given the 120 day lead time for

products, a reasonable inference can be drawn that Defendants knew they might be forced

to pay more for air shipping during 4Q03. But this is not enough. Plaintiff must plead

particularized facts giving rise to a strong inference that Defendant acted intentionally or

with deliberate recklessness in failing to disclose information about shipping costs. See 15

U.S.C. § 78u-4(b)(2).

2. Four Alleged Misrepresentations.

The Complaint specifies four statements that were allegedly false or misleading:

(1) Action’s reference to its “conservative inventory management policies,” (2) Action’s

statement that it was “careful not to produce die cast product in excess of demand,”

(3) Action’s statements about the increase in track-side sales, and (4) Action’s representation

that it had a “strong business model.” Dkt. #64 at ¶ 101. 

a. Inventory Management.

Defendants’ statement that Action had “conservative inventory management policies”

is, in the absence of specifically-pled and directly-relevant omissions, too general to be

actionable. As concluded above, the Complaint’s alleged omissions regarding inventory are

not pled with the required level of particularity or facts that create a strong inference of

scienter. And in addition to the absence of properly pled omissions that would render this

general statement misleading, there is no discussion of what would constitute a “conservative

inventory management policy” and how Action’s inventory management policy differed from

that model. See, e.g., In re Vantive Corp., 283 F.3d at 1087 (“The complaint also does not

indicate what it means for a management team to be ‘extremely strong,’ what the ‘continual’

disagreements that supposedly ‘plagued’ the managerial team consisted of, or why such

disagreements would make it misleading for the company to have characterized its

management as being ‘strong’”).

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 9 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 - 10 -

b. Production of Die Cast Products.

Defendants’ statement that Action was “careful not to produce die cast product in

excess of demand” is not actionable for two reasons. First, the Complaint does not state with

particularity facts on which Plaintiff bases its belief that the statement was false or

misleading. The only information Plaintiff provides about excess production of inventory

is that Action would sometimes order a full production run of products “when team owners

would request smaller orders from Wagenhals.” Dkt. #64 at ¶ 74. Defendants’ remarks

about not producing die cast products in excess of demand, however, were made during a

discussion of mass retailers and distributors, not team owners. Dkt. #64 at ¶ 97. While the

Complaint states that Action “did produce several cars despite having received orders that

were below the MOQ [minimum order quantity],” the Complaint provides no particularity

regarding when Action placed those orders and whether they were made for retailers as

opposed to team owners. 

Second, the Complaint fails to plead specific facts concerning this alleged

misrepresentation that give rise to a strong inference of scienter. Without providing any

details, Plaintiff claims that ordering products in excess of demand was acknowledged by

Melodie Volosin, an Action executive, as “a risk the company took.” Dkt. #64 at ¶ 76.

Plaintiff fails to allege when Volosin made her comment about inventory and whether she

was discussing the retail market. Moreover, general allegations concerning “sales and

inventory” reports, a “color-coded spreadsheet,” and weekly “numbers meetings” (Dkt. #64

at ¶¶ 85-88) provide no basis for strongly inferring scienter, and allegations that Volosin,

Wagenhals, or other officers received inventory figures “on a daily basis” (id. at ¶ 86) say

nothing about when they knew of problems in the production or demand of die cast products.

See In re Vantive Corp., 283 F.3d at 1087-88 (finding complaint deficient for stating that

officers received different kinds of “revenue reports” on a regular basis). 

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 10 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 - 11 -

c. Track-side Sales.

Defendants stated during the July 23, 2003 conference call that “track-side sales have

increased.” Dkt. #64 at ¶ 99. Plaintiff contends that even if the statement were technically

true, it was misleading because Action failed to disclose that “recent driver and sponsor

changes, combined with the 120 day minimum lead time, guaranteed that items then in

production would not be ready for timely track-side sales unless the company opted to pay

substantially more for expedited shipping thus cutting into revenues.” Dkt. #68 at 6. 

This argument fails for several reasons. First, statements that simply report past

performance generally may not be used by plaintiffs to show they were misled about future

performance. In re Convergent Techs. Sec. Litig., 948 F.2d 507, 512-13 (9th Cir. 1991)

(addressing remarks about a company’s past growth rate in a “fraud on the market” context).

Second, the statement that track-side sales increased does not address what method Action

would use to ship future track-side inventory – the allegedly misleading aspect of the

statement. Third, the Court has already determined that the Complaint does not sufficiently

plead facts relating to the omission of information about increased shipping costs – the basis

for this misrepresentation claim. Finally, Action CFO David Martin made the statement in

the context of the cautionary approach Action was taking in its 4Q03 forecasts, noting only

that increased track-side sales was reason for optimism. Dkt. #64 at ¶ 99. The statement did

not “affirmatively create an impression of a state of affairs that differ[ed] in a material way

from the one that actually exist[ed].” Brody, 280 F.3d at 1006. 

Further, the statements about track-side sales are not supported by facts that give rise

to a strong inference of scienter. Plaintiff argues that Defendants owed a duty to disclose that

the only way they could maintain the increases of track-side sales, given their 120-day lead

time, would be to pay more for air shipping to get the products to the track sooner. Dkt. #68

at 6. This lead time might support a reasonable inference that Defendants knew, prior to

making their 4Q03 forecasts, that at some point during the quarter they would be forced to

ship products by air. But a reasonable inference of scienter is not enough under the PSLRA.

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 11 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 - 12 -

The Complaint does not allege specific facts indicating that Defendants knew the extent of

the shipping problems they would encounter during 4Q03, or when Defendants made the

decision to ship products by air rather than by sea. 

d. Strong Business Model.

In a June 2, 2003 press release, Action stated that it “continues to benefit from a

strong balance sheet and a business model that gives us both liquidity and flexibility.” Dkt.

#64 at ¶ 96. During the July 23, 2003 conference call, Martin referred to “the integrity of

[Action’s] business model that serves [Action] so well,” and stated “[w]e believe that we

have a business that will consistently generate income in cash and increase shareholder

value.” Dkt. #64 at ¶ 99. Plaintiff argues that these statements were made misleading by the

omissions detailed above. Because the Complaint fails properly to plead the omissions, as

explained above, this misrepresentation claim also fails.

In addition, the statements about Action’s business model are too vague to support

Plaintiff’s claim. See, e.g. Wenger v. Lumisys, Inc., 2 F.Supp.2d 1232, 1245 (N.D.Cal. 1998)

(“Vague statements of opinion are not actionable under the federal securities laws because

they are considered immaterial and discounted by the market as mere ‘puffing’”); Plevy v.

Haggarty, 38 F.Supp.2d 816, 827 (C.D. Cal. 1998). “No matter how untrue a statement may

be, it is not actionable if it is not the type of statement that would significantly alter the total

mix of information available to investors.” Wenger, 2 F.Supp.2d at 1245 (quotations

omitted). “Vague, amorphous statements are not actionable because reasonable investors do

not consider ‘soft’ statements or loose predictions important in making investment

decisions.” Id. Such general statements about business models are seen in virtually every

public statement companies make. See Plevy, 38 F.Supp.2d at 827. 

Additionally, Plaintiff pleads no facts showing that the statement was false – that

Action did not have a strong business model. The Complaint does not define what would

constitute a “strong business model” in the die cast collectible market and how Action’s

business model was weak. See, e.g., In re Vantive Corp., 283 F.3d at 1087 (finding

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 12 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

Plaintiff relies on In re Infineon Techs. A.G. Sec. Litig., No. CV-04-4156, 2006 WL

1329887, at *6 (N.D.Cal. May 16, 2006), for the proposition that “[a] statement need not be

detailed in order to trigger a disclosure duty.” Dkt. #68 at 5. There, the court found that

statements that competition was “intense” were misleading when in fact the defendant was

engaged in price-fixing and had little or no competition at all. In the context of such plainly

contradictory omissions, the defendant’s general statement was clearly misleading. Plaintiff

has pled no such plainly contradictory omissions in this case.

- 13 -

complaint insufficient for failing to indicate what would constitute an “extremely strong”

management team).5

 

In short, it appears Plaintiff has attempted to use Defendant’s stated reasons for failing

to meet 4Q03 earnings goals, outlined in the revised financial guidance Action issued after

4Q03 ended (Dkt. #64 at ¶ 107), as the basis for its entire Complaint. Such an attempt to

prove “fraud by hindsight” does not satisfy the PSLRA. In re Daou, 411 F.3d at 1021. 

B. Funline Acquisition.

Plaintiff argues that Action’s acquisition of Funline on September 23, 2003, was the

motive for Defendants’ misrepresentations and thus constitutes evidence of scienter. But the

Complaint generally pleads that “the artificial inflation of Action Performance stock enabled

defendants advantageously to fund their acquisition of Funline.” Dkt. #64 at ¶ 112.

 Courts have held, however, that stock-based acquisitions do not allow a strong

inference of scienter. See, e.g., In re PETsMART Sec. Litig., 61 F.Supp.2d 982, 999 (D. Ariz.

1999). Moreover, the Funline acquisition was completed using less than 2% of Action’s

outstanding stock. Action would have only saved a fraction of that amount by inflating its

stock price to complete the acquisition. What is more, Plaintiff pleads no information about

the extent to which the allegedly inflated share price benefitted Action. See In re Vantive

Corp., 283 F.3d at 1097 (finding that complaint insufficiently pleaded motive inferred from

a stock-based acquisition because the complaint lacked information on the total number of

shares that would have been issued absent the misrepresentation, the total number of shares

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 13 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 - 14 -

of the acquiring company, or what the defendants stood to gain by making

misrepresentations).

Plaintiff also argues that the acquisition of Funline on September 23, 2003 “triggered

a duty to disclose known problems emanating from the driver and sponsorship changes that

Action was then experiencing.” Dkt. #68 at 7; Dkt. #64 at ¶ 106; see, e.g. McCormick, 626

F.3d at 876. Essentially, Plaintiff is trying to take advantage of the “disclose or abstain” rule,

which “make[s] it illegal in some circumstances for those possessing inside information

about a company to trade in that company’s securities unless they first disclose the

information.” Brody, 280 F.3d at 1000. The Ninth Circuit, however, has adopted the

contemporaneous trading requirement for Section 10(b) and Rule 10(b)-5 actions that allege

some form of insider trading with a duty to disclose. See Neubronner v. Milken, 6 F.3d 666,

669 (9th Cir. 1993). A plaintiff bringing this sort of insider trading claim must have traded

in a company’s stock at about the same time as the insider. Brody, 280 F.3d at 1001. Here,

Plaintiff makes no allegation that it traded shares around the time of the acquisition of

Funline and cites no complaints of anyone who exchanged shares or assets of Funline for

Action stock. Plaintiff thus cannot avail itself of the protections of the “disclose or abstain”

rule and cannot use Action’s failure to disclose information in connection with its acquisition

of Funline to support a claim for fraud on itself and alleged class members.

C. Section 20(a) Claim Against Wagenhals.

Rule 20(a) of the Exchange Act provides for liability against:

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

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

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

any person to whom such controlled person is liable, unless the controlling

person acted in good faith and did not directly or indirectly induce the act or

acts constituting the violation or cause of action.

15 U.S.C. § 78t(a).

“To establish control person liability, a plaintiff must show that a primary violation,

e.g., a Section 10(b) violation, was committed[.]” Wenger, 2 F.Supp.2d at 1252. Because

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 14 of 15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 - 15 -

the Court will dismiss Plaintiff’s Section 10(b) and Rule 10b-5 claims, the claim under

Rule 20(a) must be dismissed as well. 

D. Leave to Amend.

Because the Court cannot conclude that Plaintiff is unable to plead a claim, Plaintiff

will be granted leave to amend its Complaint in accordance with the schedule set forth below.

IT IS ORDERED:

1. Defendant’s Motion to Dismiss (Dkt. #65) is granted.

2. Plaintiff’s Amended Complaint (Dkt. #64) is dismissed with leave to file a

further amended complaint by March 12, 2007, submitting both clean and redlined versions in compliance with Local Rule LRCiv 15.1.

3. Any motion by Defendants to dismiss a further amended complaint must be

filed within 28 days of service of the amended complaint, any response within

14 days of service of the motion, and any reply within 7 days of service of the

response.

DATED this 13th day of February, 2007.

Case 2:05-cv-02512-DGC Document 70 Filed 02/13/07 Page 15 of 15