Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_15-cv-03170/USCOURTS-cand-5_15-cv-03170-2/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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Case No.: 5:15-cv-03170-EJD

ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

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United States District Court

Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

SCOTT WELLER,

Individually and on behalf all others 

similarly situated

v.

SCOUT ANALYTICS, INC., et al.,

Defendants.

Case No. 5:15-cv-03170-EJD 

ORDER GRANTING DEFENDANTS’

MOTION TO DISMISS

Re: Dkt. No. 31

Scott Weller (“Plaintiff”) brings this putative class action against Scout Analytics, Inc.,

ServiceSource International Inc., and the Chief Executive Officer (“CEO”) of ServiceSource, 

Mike Smerklo (collectively, “Defendants”), alleging violations of Sections 10(b) and 20(a) of the 

Securities Exchange Act of 1934 and Rule 10b-5 of the U.S. Securities and Exchange Commission 

(“SEC”) promulgated thereunder. Compl. ¶ 2, Dkt. No. 1. Plaintiffs bring this action individually 

and on behalf of all other purchasers of ServiceSource stocks during the proposed class period of 

January 22, 2014 and May 1, 2014, inclusive. Compl. ¶ 1. 

Presently before the court is Defendants’ Motion to Dismiss for failure to state a claim 

upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6), and for 

failure to plead claims with the requisite level of particularity under Federal Rule of Civil 

Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), 15 

U.S.C. 78u-4 et seq. (1995). Defs.’ Mot. to Dismiss (“Mot.”) at 3, Dkt. No. 31. Having carefully 

considered the papers submitted by both parties in this matter, the court finds Defendants’ Motion 

well-taken. The Motion will therefore be granted for the reasons explained below. 

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I. BACKGROUND 

A. Factual Background

Defendant Scout Analytics, Inc. (“Scout”) is “is a cloud-based customer lifecycle 

management solution” company that offers “multiple platforms through which other companies –

particularly information service providers, media publishers and software companies – leverage 

user data.” Compl. ¶¶ 7, 21. More specifically, Scout provides analysis of customer subscription 

usage, spending, and other behaviors, allowing Scout’s client-companies to align product and 

account management strategies so as to “maximize customer value and accelerate sustainable 

growth in revenue and profits.” Compl. ¶ 7; Mot. at 3.

Defendant ServiceSource International Inc. (“ServiceSource”) is a U.S. based company 

headquartered in San Francisco, California that provides “cloud-based recurring revenue

management solutions,” helping clients manage and optimize their “subscription and servicecontract renewal process.” Compl. ¶ 8; Mot. at 3. ServiceSource’s stock trades on the NASDAQ

under the ticker symbol “SREV.” Compl. ¶ 8. Mike Smerklo (“Smerklo”) is the President and 

CEO of ServiceSource. Compl. ¶ 9. 

In early December of 2013, Plaintiff alleges that Scout was facing financial hardship and 

the company “predicted it would be out of cash within the first quarter of 2014.” Compl. ¶ 22. 

Accordingly, the Board solicited outside financing proposals, including a proposal of acquisition 

by ServiceSource, which it accepted. Compl. ¶¶ 23, 24. 

On January 22, 2014, ServiceSource officially acquired Scout, and at 4:05pm Eastern 

Standard Time, 1:05pm Pacific Standard Time, ServiceSource and Scout issued a joint press 

release announcing the acquisition (“the Press Release”). Compl. ¶ 24; see Mot. at 5. The first 

paragraph of the Press Release reads:

ServiceSource® (NASDAQ:SREV), the global leader in recurring 

revenue management, today announced that it has acquired Scout 

Analytics®, a leading provider of predictive analytics for 

subscription businesses. With more than $3.5 billion of recurring 

revenue under management, Scout Analytics extends 

ServiceSource’s reach into new markets while increasing its 

footprint to now $14.5 billion under management across more than 

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200 customer engagements. Together, the two companies offer a 

comprehensive recurring revenue solution for both subscription and 

traditional businesses. The transaction closed today and is expected 

to be accretive to non-GAAP EPS in 2015.

Compl. ¶ 24. 

The Press Release also goes on to provide, in relevant part, additional information about 

the concept of “recurring revenue” services and the companies’ provision of such services, 

explaining:

Recurring revenue is fast becoming a critical function for every 

company, spanning new subscription and cloud-based businesses, as 

well as established industries such as hardware, software, healthcare 

and industrials. As the "Internet of Things" connects businesses and 

people to a range of technology-enabled devices and cloud-based 

services, recurring revenue will play a pivotal role. As such, 

understanding how customers are using products and services is 

vital to today's businesses, not just for customer success and 

retention, but also for accelerating recurring revenue growth and 

profits.

....

Headquartered in the Cloud Corridor of San Francisco, 

ServiceSource® manages over $11 billion in recurring revenue for 

the world’s largest and most respected technology companies. 

ServiceSource renews a customer contract every 47 seconds through 

engagements in more than 150 countries and 40 languages.

....

[Scout Analytics’] solutions are designed to reduce customer and 

revenue churn, increase renewal revenue yield, optimize rate plan 

performance, and maximize trial conversions. Scout Analytics can 

increase annual recurring revenues by up to 10-15%. 

Decl. of Andrew R. Escobar (“Escobar Decl.), Ex. A, Dkt. No. 33-1;

1

see Decl. of Scott Weller 

 

1 Defendants’ Request for Judicial Notice as to Exhibit A, the full Press Release containing the 

statement at issue in this case, is GRANTED. Defs.’ Request for Judicial Notice (“RJN”), Dkt. 

No. 32. When ruling on a motion to dismiss, courts may consider documents incorporated by 

reference in a complaint or upon which a complaint necessarily relies, as well as matters subject to 

judicial notice. Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1061 (9th Cir. 

2008) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, (2007)). Federal 

Rule of Evidence 201 allows a court to take judicial notice of adjudicative facts “not subject to 

reasonable dispute in that [they are] . . . capable of accurate and ready determination by resort to 

sources whose accuracy cannot reasonably be questioned.” Fed. R. Evid. 201(b)(2). It is 

appropriate for the courts to take judicial notice of press releases where, as here, such press 

releases form the basis of a plaintiff’s claim. See In re Am. Apparel, Inc. S’holder Litig., 855 F. 

Supp. 2d 1043, 1062 (C.D. Cal. 2012) (“Courts in the Ninth Circuit routinely take judicial notice 

of press releases.”); In re Netflix, Inc., Sec. Litig., 923 F. Supp. 2d 1214, 1218 n. 1 (N.D. Cal. 

2013) (taking judicial notice of a press release).

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(“Weller Decl.”) ¶ 2, Ex. 1, Dkt. Nos. 36, 36-1. 

Plaintiff asserts that he “first read an online copy of the January 22, 2014 press release 

referenced in the Complaint on ServiceSource’s website on January 22, 2014 at approximately 

1:35 p.m., Pacific Standard Time.” Weller Decl. ¶ 2. Plaintiff represents that approximately 20 

minutes later, he “initiated a market order to purchase 250 shares of ServiceSource stock” and that 

he did so “[b]ased on the Press Release’s statements about Defendants’ revenue.” 2 Id. ¶ 3.

On May 1, 2014, ServiceSource released its quarterly financial report. Compl. ¶ 30. After 

reading the quarterly report, Plaintiff concluded that the Press Release had significantly 

misrepresented ServiceSource’s financial condition. Compl. ¶¶ 27-31. Specifically, based on the 

information contained in the report, Plaintiff believed that the Press Release had “failed to 

disclose that Defendants have never held more than $5 million in gross revenues, and have never 

managed funds, let alone in the 10 figure range.” Compl. ¶ 25. Thus, Plaintiff interpreted the 

quarterly report as revealing that the Press Release had overstated “Defendants’ true financial

condition...by a factor of 700.” Compl. ¶ 27.

At some point following the May 1st quarterly report, Plaintiff alleges without further 

detail that “the price of ServiceSource common stock fell precipitously.” Compl. ¶¶ 37, 38. As a 

result, Plaintiff contends that he and other purchasers of ServiceSource stocks between January 22, 

2014 and May 1, 2014, suffered economic damages. Compl. ¶ 39. 

B. Procedural Background

On March 20, 2014, Plaintiff filed suit against Defendants in King County Superior Court 

in Washington, alleging state securities fraud claims. Weller v. Scout Analytics, Inc. et al, No. 

2:14-cv-00874-JLR (W.D. Wash 2014), Dkt. No. 1, (noticing removal of Weller v. Scout 

Analytics, et al., No. 14-2-13781-8 SEA, from King County Superior Court in Washington).

3

 The 

 

2 While Plaintiff did not plead these specific facts in his Complaint – including when he read the 

Press Release, when he purchased the stock, or how much stock he purchased – Plaintiff submits a 

declaration containing this information in opposition to Defendants’ Motion. See Dkt. No. 36. 

Additionally, Plaintiff has certified that he purchased 250 shares of ServiceSource stock on 

January 22, 2014, in accordance with 15 U.S.C. §78U–4(A)(2). Dkt. No. 15, Ex. A at ¶ 4. 

3

The court hereby takes judicial notice of Plaintiff’s prior publicly filed lawsuits arising from the 

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Washington state lawsuit was based on the same allegedly false and misleading statement in the 

January Press Release at issue here. Id. Defendants removed the case to federal court in the 

Western District of Washington and Plaintiff voluntarily dismissed the case the following day. Id., 

Dkt. Nos. 1, 5.

On August 26, 2014, Plaintiff filed a federal securities action against Defendants in this 

court, also based on the January 22 Press Release. Weller v. Scout Analytics, et al., Case No. 14-

cv-05046-YGR (N.D. Cal. 2014), Dkt. No. 1. However, on January 26, 2015, Plaintiff again 

voluntarily dismissed his complaint. Id., Dkt. No. 4. Then, on July 8, 2015, Plaintiff filed the 

operative Complaint in the present action. Dkt. No. 1. Defendants move to dismiss all claims 

pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) . Dkt. No. 31. 

II. LEGAL STANDARD 

Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient 

specificity to “give the defendant fair notice of what the ... claim is and the grounds upon which it 

rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). A 

complaint which falls short of the Rule 8(a) standard may be dismissed if it fails to state a claim 

upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). Dismissal of a claim under Rule 

12(b)(6) may be based on a “lack of a cognizable legal theory or the absence of sufficient facts 

alleged under a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 

1097, 1104 (9th Cir. 2008); Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988). 

Moreover, the factual allegations “must be enough to raise a right to relief above the speculative 

level” such that the claim “is plausible on its face.” Twombly, 550 U.S. at 556-57.

Claims that sound in fraud are subject to a heightened pleading standard. Fed. R. Civ. P. 

9(b) (“In alleging fraud or mistake, a party must state with particularity the circumstances 

 

same series of events at issue in this case - Weller v. Scout Analytics, Inc. et al, No. 2:14-cv00874-JLR (W.D. Wash 2014) and Weller v. Scout Analytics, et al., No. 14-cv-05046-YGR (N.D. 

Cal. 2014). Fed. R. Evid. 201(b)(2) (instructing that a court may take judicial notice of 

adjudicative facts “not subject to reasonable dispute in that [they are] . . . capable of accurate and 

ready determination by resort to sources whose accuracy cannot reasonably be questioned.”).

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constituting fraud or mistake.”); Swartz v. KPMG LLP, 476 F.3d 756, 765 (9th Cir. 2007) (“Rule 

9(b) imposes heightened pleading requirements where the object of the conspiracy is fraudulent”). 

The allegations must be specific enough to give defendants notice of the particular misconduct 

which is alleged to constitute the fraud charged. Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 

1985). To that end, the allegations must contain “an account of the time, place, and specific 

content of the false representations as well as the identities of the parties to the 

misrepresentations.” Swartz, 476 F.3d at 764l; see Vess v. Ciba-Geigy Corp. USA, 317 F.3d 

1097, 1106 (9th Cir.2003) (citation omitted) (explaining that averments of fraud must be 

accompanied by the “who, what, when, where, and how” of the misconduct charged). 

Additionally, “the plaintiff must plead facts explaining why the statement was false when it was 

made.” Smith v. Allstate Ins. Co., 160 F.Supp.2d 1150, 1152 (S.D.Cal. 2001) (citation omitted); 

see also In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1549 (9th Cir.1994) (en banc) (superseded 

by statute on other grounds). In other words, fraud or claims asserting fraudulent conduct must 

generally contain more specific facts than is necessary to support other causes of action.

At the motion to dismiss stage, the court must read and construe the complaint in the light 

most favorable to the non-moving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337–38 (9th 

Cir. 1996). The court must accept as true all “well-pleaded factual allegations.” Ashcroft v. Iqbal, 

556 U.S. 662, 664 (2009). However, “courts are not bound to accept as true a legal conclusion 

couched as a factual allegation.” Twombly, 550 U.S. at 555. “In all cases, evaluating a

complaint’s plausibility is a context-specific endeavor that requires courts to draw on ... judicial 

experience and common sense.” Levitt v. Yelp! Inc., 765 F.3d 1123, 1135 (9th Cir. 2014)

(quoting Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011)). 

When deciding whether to grant a motion to dismiss, the court generally “may not consider 

any material beyond the pleadings.” Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 

1542, 1555 n. 19 (9th Cir. 1990). However, the court may consider material submitted as part of 

the complaint or relied upon in the complaint, and may also consider material subject to judicial 

notice. See Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001). In the event that a 

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motion to dismiss is granted, “leave to amend should be granted ‘unless the court determines that 

the allegation of other facts consistent with the challenged pleading could not possibly cure the 

deficiency.’” DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992) (quoting 

Schreiber Distrib. Co. v. Serv–Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986)).

III. DISCUSSION 

A. Sufficiency of Plaintiff’s 10(b) and 10b-5 Claims

In their motion to dismiss, Defendants argue Plaintiff failed to state a claim under Section 

10(b) of the Securities and Exchange Act (“Exchange Act”) or SEC Rule 10b-5 that satisfies the 

PSLRA’s heightened pleading standards. Section 10(b) of the Exchange Act provides that it shall 

be unlawful for any person “to 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.” 15 U.S.C. § 78(b). SEC Rule 10b-5 implements this provision by making it 

unlawful for any person “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 the light of the circumstances 

under which they were made, not misleading.” 17 C.F.R. §240.10b-5(b). 

Plaintiff alleges that Defendants engaged in a scheme to defraud the market when it issued

the materially false and misleading Press Release in violation of section 10(b) and 10b-5. To 

adequately state such a claim, Plaintiff must allege facts sufficient to establish: “(1) a material 

misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the 

misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the 

misrepresentation or omission; (5) economic loss; and (6) loss causation.” Matrixx Initiatives, 

Inc. v. Siracusano, 563 U.S. 27, 37-38 (2011) (quoting Stoneridge Inv. Partners LLC v. ScientificAtlanta, Inc., 552 U.S. 148, 157 (2008)). Defendants challenge the adequacy of Plaintiff’s 10(b) 

and 10b-5 allegations on the grounds that he has failed to plead facts sufficient to establish a 

material misstatement or scienter. Each will be addressed in turn. 

i. False or Materially Misleading Statement or Omission

Defendants first argue that Plaintiff has failed to identify any statement in the Complaint 

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that is false or materially misleading under the PSLRA. To adequately plead falsity or a material 

misrepresentation under Section 10(b), the plaintiff must specify each statement alleged to have 

been misleading and the reason(s) why the statement is false or misleading; if those allegations are 

made on information and belief, the complaint must also “state with particularity all facts on 

which that belief is formed.” 15 U.S.C. § 78u–4(b)(1); see also In re Daou Sys., Inc., 411 F.3d 

1006, 1014 (9th Cir. 2005); Mulligan v. Impax Labs., Inc., 36 F. Supp. 3d 942, 959 (N.D. Cal. 

2014). 

A material omission is one that a reasonable investor would consider to significantly alter 

the total mix of information. Matrixx, 131 S. Ct. at 1317. For an omission to be misleading, “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 Hosp. Corp., 280 F.3d 997, 1006 (9th Cir. 2002). 

“[A] statement that is technically true, may still be misleading and actionable under securities laws 

where it” creates such an impression. In re MGM Mirage Sec. Litig., 2013 WL 5435832, at *4 

(D. Nev. 2013) (quoting Brody, 280 F.3d at 1006). “Silence, absent a duty to disclose is not 

misleading under Rule 10b-5.” Basic v. Levinson, 485 U.S. 224, 238, 239, n.17. 

Here, the only statement Plaintiff identifies as false and materially misleading is the first 

paragraph of the January 22 Press Release; specifically, the sentence: “With more than $3.5 

billion of recurring revenue under management, Scout Analytics extends ServiceSource’s reach 

into new markets while increasing its footprint to now $14.5 billion under management across 

more than 200 customer engagements.” Compl. ¶ 24; Opp. at 2-3 (emphasis in Pl. Opp.). The 

reason Plaintiff contends this statement is false and materially misleading is “because 

[Defendants] misrepresented and failed to disclose that Defendants have never held more than $5 

million in gross revenues, and have never managed funds, let alone in the 10 figure range.” 

Compl. ¶ 25. Plaintiff therefore contends that the information disseminated by way of this Press 

Release “conceal[ed] Defendants’ true financial condition from would-be investors” and “inflated 

that condition by a factor of 700.” Compl. ¶¶ 27, 29, 45. 

Plaintiff’s argument is premised on a misreading of the statement contained in the Press 

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Release that is neither plausible nor reasonable. It appears that Plaintiff understood the Press 

Release’s references to “recurring revenue” or “recurring revenue under management” to be 

synonymous with representations of Defendants’ own gross revenue. See id.; Opp. 3. However, 

the court agrees with Defendants that no reasonable investor could read the Press Release in the 

way Plaintiff suggests. Not only is the term “recurring revenue under management” on its face 

distinct from the term gross revenue, which itself has a specific and widely understood definition, 

but the concept of “recurring revenue management” is further explained and referenced in the 

Press Release in such a manner as to avoid such confusion. For instance, the very next paragraph 

of the Press Release states: “Recurring revenue is fast becoming a critical function for every 

company, spanning new subscription and cloud-based businesses, as well as established industries 

such as hardware, software, healthcare and industrials.” Ex. A, Escobar Decl.; Ex. 1, Weller Decl. 

With respect to Defendants, the Press Release also provides, “ServiceSource® manages over $11 

billion in recurring revenue for the world’s largest and most respected technology companies” 

and “Scout Analytics can increase annual recurring revenues by up to 10-15%.” Id.

The suggestion that Defendants intended to mislead investors into believing that the 

statements about the companies’ recurring revenue management services were in reference to the 

companies’ own gross revenue is simply not a plausible interpretation of the above statements.4 In 

addition to being an unreasonable reading of the plain language of the Press Release, Plaintiff’s 

theory is also inconsistent with the information that ServiceSource publicly disclosed in its 10-K 

and 10-K/A filings with the SEC.

5

Escobar Decl., Exs. C, D, E, and F, Dkt. Nos. 33-3–33-6. For 

example, ServiceSource’s March 17, 2015 Form 10-K/A filed with the SEC states: “Our total 

revenue was $272.2 million, $272.5 million and $243.7 million for the years ended December 31, 

 

4

Indeed, replacing the concept of “recurring revenue” with the concept of “gross revenue,” as 

Plaintiff purportedly read the Press Release to do, renders the statement incoherent and illogical. 

5 Defendants’ Request for Judicial Notice of Exhibits C-F, Defendants’ public SEC filings from 

2009-2015, is GRANTED to the extent referenced in this Order. Dkt. No. 32. In a securities 

fraud case such as this one, judicial notice of such documents is generally appropriate. See In re 

Copper Mountain Sec. Litig., 311 F. Supp. 2d 857, 863–64 (N.D. Cal. 2004) (taking judicial 

notice of various SEC filings). 

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2014, 2013 and 2012, respectively.” Escobar Decl., Ex. F at 6, Dkt. No. 33-6. These filings 

report gross revenue as a separate and independent statistic from revenues under management. Id.

Moreover, the reasons Plaintiff offers as to “why the statement is false or misleading” bear 

no connection to the substance of the statement itself. That is, Plaintiff alleges Defendants “have 

never held more than $5 million in gross revenues,” but the Press Release does not mention “gross 

revenue.” See Compl. ¶¶ 25-28; Ex. A, Escobar Decl; Ex. 1, Weller Decl; see also 15 U.S.C. § 

78u–4(b)(1). While the court accepts Plaintiff’s factual allegations as true for the purposes of this 

Motion, as plead here, Defendants’ gross revenue has no bearing on whether the Press Release’s 

statement about the defendant companies’ recurring revenue management services was false or 

misleading. See Brody, 280 F.3d at 1006 (rejecting the plaintiffs’ argument that a company had a 

duty to disclose information regarding an imminent merger in a press release because it was not 

referred to or supported by the text of the actual press release).

Plaintiff also alleges that Defendants “have never managed funds, let alone in the 10 figure 

range.” Compl. ¶ 25. While this reason is arguably tethered to concepts addressed in the Press 

Release, Plaintiff offers no further explanation of what he means by “managed funds,” or what 

basis he has for this assertion. See Compl. ¶ 5; Opp. at 3. To the extent Plaintiff is equating the 

concept of “recurring revenue management” with a distinct concept of “fund management,” such 

as in the context of financial markets, Plaintiff again misunderstands the basic language of the 

Press Release, which includes no such reference. See id. To the extent Plaintiff is suggesting that 

Defendants do not actually provide the recurring revenue management services – in kind or to the 

degree – that they market themselves as providing, this claim is not clearly alleged or supported by 

the Complaint. Plaintiff therefore fails to satisfy even Rule 8(a)’s requirement that the claims 

alleged provide sufficient specificity to give Defendants “fair notice of what the ... claim is and 

the grounds upon which it rests,” much less the heightened pleading standard required by Rule 

9(b) and the PSLRA. See Twombly, 550 U.S. at 555; see Mendiondo, 521 F.3d at 1104; 15 

U.S.C. 78u-4; Daou, 411 F.3d at 1014. 

Finally, Plaintiff suggests that the Press Release “conceal[d] Defendants’ true financial 

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condition,” “overstated the value of Defendants’ equity and failed to disclose that Scout’s cash 

position was precarious at best.” Compl. ¶¶ 27-28. As discussed above, no reasonable investor 

could read the Press Release as a purported claim about Defendants’ gross revenue or equity. As 

to Defendant Scout’s “precarious” financial position, the allegations in the Complaint suggest that 

the information about Scout’s financial trouble was already known to the market. See Compl. ¶ 

22 (“In early December 2013, Scout and its Board predicted that it would be out of cash within the 

first quarter of 2014. So they solicited and received proposals for financing.”). Even if this 

information was not known to the market, nothing in the Complaint suggests that Defendants were 

under an obligation to disclose it in the Press Release announcing ServiceSource’s acquisition of 

Scout and discussing the recurring revenue management services offered by the companies.

Brody, 280 F.3d at 1006 (finding that a press release had not misled investors about an imminent 

merger where the “actual press release...neither stated nor implied anything regarding a merger,” 

explaining that “Rule 10b–5 and Section 14(e) in terms prohibit only misleading and untrue 

statements, not statements that are incomplete.”) (emphasis in original). Because the Press 

Release did not specifically or even generally address issues of the companies’ equity or 

individual financial circumstances, Defendants were not under a duty to include specific

information related thereto. See id.

In sum, the Complaint fails to allege facts to support the allegation that the Press Release 

issued by Defendants was false or misleading. Plaintiff is therefore unable state a claim under 

Section 10(b) and Rule 10b-5. See Matrixx, 563 U.S. at 37-38. Accordingly, Defendants’ Motion 

to Dismiss is GRANTED as to Plaintiff’s first cause of action for violation of Section 10(b) of the 

Exchange Act and Rule 10b-5 promulgated thereunder. 

ii. Scienter 

Even if Plaintiff sufficiently alleged false or misleading statements, the Complaint must 

nevertheless be dismissed because Plaintiff failed to properly plead facts giving rise to a strong 

inference of scienter. In addition to sufficiently alleging falsity, plaintiffs in securities fraud 

actions must state with particularity facts evidencing “the defendant’s intention ‘to deceive, 

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manipulate, or defraud.’” Tellabs, 551 U.S. at 313 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 

185, 194 at n.12 (1976)); see Reese v. Malone, 747 F.3d 557, 568 (9th Cir. 2014). “To adequately 

plead scienter, the complaint must ‘state with particularity facts giving rise to a strong inference

that the defendant acted with the required state of mind.’” Reese, 747 F.3d at 568 (quoting 15 

U.S.C. § 78u–4(b)(2)(A)) (emphasis in original). That is, a plaintiff must allege specific facts 

suggesting that “the defendant made false or misleading statements either intentionally or with 

deliberate recklessness.” Id. at 569 (emphasis in original). A strong inference of scienter requires 

more than mere plausibility; the inference “must be cogent and at least as compelling as any 

opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314. 

Here, Plaintiff attempts to satisfy the scienter element under the theory that the magnitude 

of the difference between Defendants’ “present revenue” and the recurring revenue figure 

announced in the Press Release is so significant as to constitute an “extreme departure” from the 

standards of ordinary care such that any reasonable actor would have known it was misleading. 

See Opp. at 11. However, for the reasons already discussed, this argument is unavailing in light of 

the fact that the Press Release neither addressed nor made any claims regarding Defendants’ 

present revenue. And, even if a reasonable investor could confuse the Press Release’s use of the 

term “recurring revenue” for a statement about Defendants’ gross revenue – which the court holds 

is not the case – the fact that these concepts are wholly distinct would nevertheless suggest that 

any such confusion was not intentional or deliberate on the part of Defendants. Dismissal is 

therefore also appropriate because Plaintiff has failed to adequately plead scienter.

B. Sufficiency of Plaintiff’s Section 20(a) Claim 

Plaintiff’s second and final cause of action asserts a Section 20(a) claim against Smerklo, 

the President and CEO of ServiceSource. Compl. ¶ 49. 

Section 20(a) of the Exchange Act provides that certain “controlling” individuals may be 

held liable for violations of § 10(b) and its underlying regulations. In re VeriFone Holdings, Inc. 

Sec. Litig., 704 F.3d 694, 711 (9th Cir. 2012); Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 

981, 990 (9th Cir. 2009), as amended (Feb. 10, 2009). In relevant part, § 20(a) stats that:

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

under any provision of this chapter or of any rule or regulation 

thereunder shall also be liable jointly and severally with and to the 

same extent as 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 prevail on its claim under Section 20(a), a plaintiff must demonstrate “a primary 

violation of federal securities law” and that “the defendant exercised actual power over the 

primary violator.” VeriFone, 704 F.3d at 711(quoting Zucco, 552 F.3d at 990). “Section 20(a) 

claims may be dismissed summarily... if a plaintiff fails to adequately plead a primary violation of 

section 10(b).” Id. 

Having found that Plaintiff has failed to adequately allege a primary violation under 

Section 10(b), the court finds that Plaintiff cannot state a controlling person liability claim against 

Smerklo under Section 20(a). Defendant’s Motion is therefore GRANTED as to Plaintiff’s second 

cause of action. 

IV. ORDER

For the foregoing reasons, Defendant’s Motion to Dismiss (Dkt. No 31) is GRANTED. 

All claims in the Complaint are DISMISSED WITH LEAVE TO AMEND. 

Any amended complaint must be filed on or before February 20, 2017, and must be 

consistent with the discussion above. Plaintiff is advised that, although leave to amend has been 

permitted, he may not add new claims or new parties to this action without first obtaining 

Defendants’’ consent or leave of court pursuant to Federal Rule of Civil Procedure 15. The court 

will dismiss this action without further notice for failure to prosecute under Federal Rule of Civil 

Procedure 41(b) if an amended complaint is not filed by the deadline designated herein.

Plaintiff is further advised that, pursuant to Federal Rule of Civil Procedure Rule 41(a)(1), 

an action may be voluntarily dismissed by the plaintiff “before the opposing party serves either an 

answer or a motion for summary judgment,” or by stipulation from all parties who have appeared. 

Fed. R. Civ. P. 41(a)(1)(A). Unless otherwise stated, such a voluntary dismissal is presumed to be 

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“without prejudice.” 41(a)(1)(B). However, “if the plaintiff previously dismissed any federal- or 

state-court action based on or including the same claim, a notice of dismissal operates as an 

adjudication on the merits.” Id.; see also Commercial Space Mgmt. Co. v. Boeing Co., 193 F.3d 

1074, 1076 (9th Cir. 1999) (“a voluntary dismissal of a second action operates as a dismissal on 

the merits if the plaintiff has previously dismissed an action involving the same claims. This is 

known as the “two dismissal rule.”). Accordingly, in light of the two prior lawsuits Plaintiff has 

filed and then voluntarily dismissed concerning the same subject matter at issue here, any 

voluntarily dismissal of this action going forward will be considered a dismissal on the merits and 

may preclude him from refiling a future action alleging the same facts and legal claims.

IT IS FURTHER ORDERED that the Case Management Conference presently set for 

February 2, 2017 is VACATED as moot. 

IT IS SO ORDERED.

Dated: January 31, 2017

______________________________________

EDWARD J. DAVILA

United States District Judge

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