Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-00882/USCOURTS-cand-3_05-cv-00882-8/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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States District C

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For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In re LEADIS TECHNOLOGY, INC.

SECURITIES LITIGATION

___________________________________/

This Document Relates To:

ALL ACTIONS

 /

No. C 05-00882 CRB

MEMORANDUM AND ORDER

This is a securities class action alleging claims under section 11, 12(b)(2) and 15 of

the Securities Act of 1933 (“Securities Act”). Plaintiffs principally allege that they 

purchased stock from Leadis’s initial public offering (“IPO”) and that Leadis’s IPO

Prospectus contained materially false and misleading statements and omitted material facts

necessary to avoid making misleading statements. Plaintiffs also contend that all defendants,

including the underwriters, are liable under section 12(b)(2) as “direct sellers” of the security,

and that the individual officers of the company are liable as controlling individuals of the

company under section 15. Now pending before the Court are motions to dismiss pursuant to

Rule 12(b)(6) filed by the Leadis defendants and the Underwriter defendants. After carefully

considering the parties’ moving papers, and with the benefit of an extensive oral argument,

the motions to dismiss are hereby GRANTED.

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BACKGROUND

I. Factual Background

Leadis Technology is a Delaware corporation with its principal place of business in

Sunnyvale, California. Formed in 2000, Leadis designs, develops and markets

semiconductors called “display drivers.” Leadis’s main products consisted of two types of

display drivers, commonly referred to as LCD drivers and the more technologically advanced

OLED drivers. Its customers were module manufacturers, who incorporated the display

drivers with other components to create display modules, or displays, which are used for

wireless handsets. Leadis’s customers sell their products as components to wireless handset

manufacturers, including industry giants such as LG Electronics, Nokia, and Samsung

Electronics.

Leadis began to commercially ship its drivers in the third quarter of 2002 and

immediately began to see positive growth. By the time of its June 16, 2004, IPO, Leadis had

posted six consecutive profitable quarters. Its two primary customers were Philips Mobile

Display System (“Philips”) and Samsung OLED, which accounted for 75.9 percent and 23.4

percent of Leadis’s revenue, respectively, in 2003. On June 16, 2004, Leadis issued

6,000,000 shares of stock through a firm underwritten commitment from several

underwriters, including Goldman, Sachs & Co., Merrill Lynch, Thomas Weisel Partners, and

Needham & Co., who are also defendants to this action. Leadis completed a Registration

Statement on Form S-1 on March 24, 2004, and later amended it on April 30, May 20, and

June 16. It also filed a prospectus with the SEC on June 16, 2003 pursuant to Rule 424(b). 

The IPO price was $14.00.

On July 28, 2004, Leadis announced that its revenues increased for a seventh

consecutive quarter in the second quarter of 2004. On October 21, 2004, it announced that

its revenues for the third quarter decreased marginally. In addition, Leadis announced that it

expected revenues to decline in the fourth quarter because of increased pricing pressures and

a slowdown in demand for OLED products, even though demand for its LCD products would

remain healthy. On October 22, 2004, Leadis’s common stock fell from $16.94 to $8.79, a

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decrease of 48 percent. On January 10, 2005, Leadis’s stock price fell 8.37 percent after the

company announced it was not comfortable with predicted revenues for the first quarter of

2005. On March 25, 2005, Leadis revealed that Philips and Samsung OLED accounted for

52.3 percent and 36.7 percent of its revenue in 2004, respectively. 

At issue in this action is whether Leadis’s IPO Prospectus was materially false or

misleading as it pertained to price pressures and demand in the industry and its continued

relationship with its customers, particularly Samsung OLED. 

II. Procedural History

This action was filed on March 2, 2005. On June 10, 2005, the Court appointed

Ngoan Van Le, Richard Beedenbender and Scott Strouse (“Le Group”) as named plaintiffs. 

On August 8, plaintiffs filed a Consolidated Class Action Complaint (“Complaint”) against

all defendants. In addition to the corporation, the Leadis defendants include individual

defendants Sung Tae “Steve” Ahn, Victor Lee, Keunmyung “Ken” Lee, Lip-Bu Tan,

Kenneth Goldman, and Arati Prabhakar. The Leadis defendants and the Underwriter

defendants listed above filed this motion to dismiss on October 28, 2005. The Court held an

oral argument on February 24, 2006. 

LEGAL STANDARDS

I. Motion to Dismiss

The motion to dismiss for failure to state a claim is viewed with disfavor and is rarely

granted. Gilligan v. Jamco Develop. Corp., 108 F. 3d 246, 249 (9th Cir. 1997). Under Rule

12(b)(6), a complaint should not be dismissed unless a plaintiff can prove “no set of facts in

support of his claim that would entitle him to relief.” Parks Sch. of Bus., Inc. v. Symington,

51 F.3d 1480, 1484 (9th Cir. 1995). The court must take the non-moving party’s factual

allegations as true and must construe those allegations in the light most favorable to the nonmoving party. See id. “Dismissal can be based on the lack of a cognizable legal theory or on

the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica

Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). However, “conclusory allegations of law

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and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a

claim.” Epstein v. Washington Energy Co., 83 F.3d 1136, 1139 (9th Cir. 1996).

II. Section 11 of the Securities Act

Section 11 of the Securities Act creates a private remedy for any purchaser of a newly

issued security if any part of the prospectus “contained 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.” 15 U.S.C. § 77(k). The plaintiff in a section 11 claim

must demonstrate (1) that the registration statement contained an omission or

misrepresentation, and (2) that omission or misrepresentation was material and would have

misled a reasonable investor about the nature of his or her investment. In re Daou Systems,

Inc. Secs. Litig., 411 F.3d 1006, 1027 (9th Cir. 2005) (citing In re Stac Electronics Secs.

Litig., 89 F.3d 1399, 1403-1404 (9th Cir. 1996) (citations omitted)). “No scienter is required

for liability under § 11; defendants will be liable for innocent or negligent material

misstatements or omissions.” Id. (citing Herman & MacLean v. Huddleston, 458 U.S. 375,

382 (1983)). 

III. Section 12(a)(2) of the Securities Act

Pursuant to section 12(b)(2), a person who offers or sells a security by means of a

prospectus containing a false statement of material fact or omitting a material fact is liable to

the person purchasing the security from him. 15 U.S.C. § 771(a)(2). Liability under section

12(b)(2) requires (1) passing title of the security to a plaintiff, or (2) soliciting the purchase,

motivated in part by the defendant’s own financial interest. Pinter v. Dahl, 468 U.S. 622,

647-648 (1988). 

IV. Section 15 of the Securities Act

Section 15(a) imposes joint and several liablity upon every person who controls any

person liable under sections 11 or 12. 15 U.S.C. § 77o; see also In re Daou, 411 F.3d at

1029. Violation of section 15 is therefore predicated upon a violation of section 11 or 12.

//

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DISCUSSION

I. Proper Pleading Standard

As a threshold matter, the Court must determine whether the liberal pleading standard

of Rule 8(a) or the heightened standard of Rule 9(b) applies to this action. Defendants

contend that the Complaint is “grounded in fraud” and should therefore be held to the

heightened standard of Rule 9(b). See Stac, 89 F.3d at 1405. Plaintiffs argue that the

Complaint alleges a true section 11 claim not grounded in fraud which merely requires the

Court to apply the liberal pleading standard of Rule 8(a). 

A. Legal Standard

Although section 11 does not require a plaintiff to allege or prove fraud, a plaintiff

may nonetheless be subject to Rule 9(b)’s heightened pleading standard if the gravamen of

the complaint is based in fraud. See In re Daou, 411 F.3d at 1027; see also Rombach v.

Chang, 355 F.3d 164, 171 (2d Cir. 2004) (holding that the wording of Rule 9(b) “is cast in

terms of the conduct, and is not limited to allegations styled or denominated as fraud or

expressed in terms of the constituent elements of a fraud cause of action”). The Ninth

Circuit has determined that a complaint “sounds in fraud” or is “grounded in fraud” if the

plaintiff alleges a “unified course of fraudulent conduct and rel[ies] entirely on that course of

conduct as the basis of the claim.” Id. (quoting Vess v. Ciba-Geigy Corp., 317 F.3d 1097,

1103-1104 (9th Cir. 2003)). “In a case where fraud is not an essential element of a claim,

only allegations of fraudulent conduct must satisfy the heightened pleading requirements of

Rule 9(b).” Id.

B. Analysis

Plaintiffs’ Complaint does not include allegations of fraud or any other terms or

phrases generally associated with fraud, such as “intentional,” “knowing,” or “purposeful.” 

In fact, the Complaint very carefully attempts to outline only a negligence claim of strict

liability under section 11. Yet the inquiry here is not whether plaintiffs’ allegations, on their

face, allege fraud or negligence; rather, to determine whether Rule 9(b) applies, the Court

must determine whether the allegations are “predicated on fraud.” Rombach, 355 F.3d at 171. 

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1This is particularly true with regard to Leadis’s relationship with the two Samsung

entities since Leadis does not have a duty to investigate and disclose non-public information

about a customer and competitor. As a result, the only information Leadis would have been

obligated to disclose would have been information its officers knew at the time of the IPO.

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Although the Complaint includes 121 paragraphs with many sub-paragraphs,

plaintiffs’ counsel acknowledged at oral argument that the crux of the allegations is that the

cautionary warnings included in the Prospectus pertaining to (1) defendants’ relationship

with Samsung Electronics and its affiliate, Samsung OLED, and (2) to pricing pressures on

Leadis’s OLED drivers were already occurring at the time of the IPO. In other words, the

Complaint alleges that Leadis had already encountered reduced OLED driver orders from its

customer, Samsung OLED, in light of competition from its competitor, Samsung Electronics,

and sales prices for Leadis’s OLED drivers had already decreased due to pricing pressures in

the broader OLED industry. Because the Prospectus merely warned of the possibility or

likelihood that these two developments would happen in the future, plaintiffs contend that the

failure to disclose that these events were already occurring constituted an omission of a

material fact that resulted in a misleading Prospectus.

At the time of the IPO, Leadis had 67 employees, manufactured two products, and had

two customers. If plaintiffs’ theory of liability is taken as true, as the Court is required to do

under a Rule 12(b)(6) motion to dismiss, it is implausible that defendants would not have

known about the falsity of the representations or omissions.1 In fact, the alleged material

misrepresentations and omissions were not–and could not have been–a result of a failure to

exercise reasonable care. Cf. In re DDi Corp. Secs. Litig., 2005 WL 3090882 at *10 (C.D.

Cal. 2005) (“Each of the defendants owed to the purchasers of DDI stock ... the duty to make

a reasonable and diligent investigation of the statements contained in the ... Prospectus.”). 

Rather, the true factual basis for plaintiffs’ claims is that defendants knew that the cautionary

warnings regarding Samsung and the OLED driver price decreases were already happening at

the time of the IPO yet failed to disclose that information in the Prospectus. This is a

quintessential fraud claim. Despite plaintiffs’ best efforts to mask this reality and merely

plead a negligence claim, their allegations necessarily depend on defendants’ knowledge of

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2Although most of the discussion supra concerns section 11, it is equally applicable to

section 12(a)(2), because it pertains to the requirement of both that the prospectus contain a false

statement of material fact or omit a material fact. 

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these on-going occurrences and their decision to mislead investors by making the disclosures

in forward-looking–rather than present-tense–statements. To be sure, sections 11 and

12(b)(2) do not require plaintiffs to prove defendants’ knowledge of these material omissions

or their intent to mislead by failing to disclose this information. Nonetheless, that does not

change the fact that these allegations, regardless of how they are facially pled in the

Complaint, are “grounded in fraud.” Moreover, because the theory of the Complaint hinges

on these omissions, the claims are therefore predicated on a “unified course of fraudulent

conduct.” See In re Daou, 411 F.3d at 1027. Accordingly, the Court finds that the

heightened pleading standard of Rule 9(b) must apply to this action in its entirety.

This determination is supported by the purpose of the heightened pleading standard of

Rule 9(b). As the Ninth Circuit has explained, Rule 9(b) “deter[s] the filing of complaints

‘as a pretext for the discovery of unknown wrongs.’” In re Stac, 89 F.3d at 1405 (quoting

Semegen v. Weidner, 780 F.3d 727, 731 (9th Cir. 1985)). Where, as here, the allegations of

negligent conduct are grounded in a fraud-based theory of liability, a plaintiff shall not be

permitted to circumvent the requirements of Rule 9(b) merely by avoiding express mention in

the Complaint of the unavoidable reality of the fraudulent nature of the claims. See id.

(noting that the “same policy considerations apply to Section 11 claims sounding in fraud”). 

III. Application of Rule 9(b) to Sections 11 and 12(a)(2)2

The Court’s analysis would ordinarily now engage in an evaluation of Complaint to

determine if it satisfies the heightened pleading standard of Rule 9(b). Yet that analysis is

unnecessary here because plaintiffs conceded in open court that the current Complaint does

not meet the standard of particularity for averments of fraud. See In re Stac, 89 F.3d at 1404

(quoting In re GlenFed, Inc. Secs. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) (“The plaintiff

must set forth what is false or misleading about a statement [or omission], and why it is false. 

In other words, the plaintiff must set forth an explanation as to why the statement or omission

complained of was false or misleading.”). Moreover, plaintiffs’ counsel further conceded at

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Since plaintiffs’ section 15 claim is predicated on liability under sections 11 or 12, the

Court includes the section 15 claim into this analysis. 

G:\CRBALL\2005\0882\order 2 re mtd.wpd 8

oral argument that, if given leave to amend, plaintiffs still would not be able to meet the

particularity requirements of Rule 9(b).3 This admission therefore ends the Court’s inquiry. 

CONCLUSION

This is a classic fraud case masquerading as a negligence claim. While plaintiffs need

not prove fraud, the gravamen of the Complaint is nevertheless “grounded in fraud.” Thus,

the heightened pleading standard of Rule 9(b) applies. Plaintiffs have admitted the

Complaint fails to meet the particularity requirements of Rule 9(b), and the Court agrees. 

Since plaintiffs have further represented to the Court that an amendment to the Complaint

would be futile, defendants’ motions to dismiss are GRANTED WITH PREJUDICE.

IT IS SO ORDERED.

Dated: March 1, 2006

 

CHARLES R. BREYER

UNITED STATES DISTRICT JUDGE

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