Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_06-cv-00228/USCOURTS-casd-3_06-cv-00228-0/pdf.json

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

---

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- 06cv228

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

In re DOT HILL SYSTEMS

CORPORATION SECURITIES

LITIGATION,

Case No. 06-CV-228 W (WMc)

ORDER GRANTING

MOTION TO DISMISS

Plaintiffs commenced this securities class action against Defendants Dot Hill

Systems Corporation (“Dot Hill” or the “Company”) and four of its officers and directors

alleging fraud under Sections 10(b) and 20(a) of the Securities Exchange Act. Plaintiffs

filed the operative First Amended Consolidated Complaint (Complaint) on August 25,

2006. Defendants move to dismiss the Complaint under Federal Rule of Civil Procedure

12(b)(6). The court decides the motion on the papers submitted and without oral

argument. S.D. Cal. Civ. L.R. 7.1(d)(1). Because Plaintiffs have failed to comply with

the pleading standards of the Private Securities Litigation Reform Act of 1995 (PSLRA),

the Court will GRANT the motion to dismiss the Complaint, with LEAVE TO

AMEND.

Case 3:06-cv-00228-JLS-WMC Document 52 Filed 03/15/07 Page 1 of 7
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- 06cv228

I. Background

Plaintiffs represent a class of shareholders who purchased shares of Dot Hill

between April 23, 2003, and April 27, 2006. Dot Hill provides data storage devices

(essentially, hard disk drives) to clients. Sun Microsystems (Sun) was Dot Hill’s largest

customer, accounting for roughly 85% of their revenue. (Compl. at 3:6–7) In February

of 2004, Dot Hill acquired Chaparral Network Storage, Inc. (Chaparral), to cut costs

and thereby improve profit margins. The Complaint asserts that, during the class

period, Dot Hill and four of its officers and directors made materially false and

misleading statements about various aspects of Dot Hill’s business. Plaintiff alleges that

these misrepresentations artificially increased Dot Hill’s stock price from $3 per share

to more than $18. Dot Hill then sold $155 million in securities—including

approximately $23 million that Defendants owned personally—in a September 2003

stock offering. After Dot Hill fully disclosed all material facts, the stock tumbled to

$4.50 per share.

In support of their theory, Plaintiffs cite the “firsthand accounts” of 23 former Dot

Hill employees (confidential witnesses or “CWs”). The statements bolster five general

allegations:

(1) Dot Hill was aware—but purposefully concealed—that Sun was growing

dissatisfied with Dot Hill products. 

(2) Because of known internal problems within the company, Dot Hill was

having little success attracting new customers. 

(3) The integration of Chaparral controllers into Dot Hill products was, contrary

to Defendants statements, not proceeding successfully. 

(4) Dot Hill’s “lean” business model was not efficient. Rather, it was the known

cause for the inadequate internal operations that were causing “fleeting and

illusory” profits. (Pls.’ Mem. in Opp. at 2:2–5.) 

(5) The accounting errors that Dot Hill revealed in February 2005 resulted from

known inadequate accounting practices that Defendants refused to correct. 

Case 3:06-cv-00228-JLS-WMC Document 52 Filed 03/15/07 Page 2 of 7
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- 06cv228

II. Legal Standards

Under Federal Rule 12(b)(6), the court may dismiss a cause of action for failure

to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). A motion

to dismiss under Rule 12(b)(6) tests the claim’s sufficiency. See N. Star Int’l. v. Ariz.

Corp. Comm’n, 720 F.2d 578, 581 (9th Cir. 1983). In ruling on a motion to dismiss, the

court assumes the truth of all factual allegations and construes them in the light most

favorable to the plaintiff. Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th Cir. 2002).

The court may dismiss if it “appears beyond doubt that the plaintiff can prove no set of

facts in support of his claim which would entitle him to relief.” Levine v. Diamanthuset,

Inc., 950 F.2d 1478, 1482 (9th Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41,

45–46 (1957)).

A complaint alleging fraud must meet the particularity requirements of Federal

Rule of Civil Procedure 9(b). A plaintiff must specifically identify the allegedly

fraudulent statements or acts of fraud. Kaplan v. Rose, 49 F.3d 1363, 1370 (9th Cir.

1994). This requires the plaintiff to plead evidentiary facts including the dates, times,

places, and persons associated with each misrepresentation or act of fraud. In re

GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548–49 n.7 (9th Cir. 1994) (en

banc)(superseded by statute on other grounds); Neubronner v. Milken, 6 F.3d 666, 672

(9th Cir. 1993).

In a securities case, the complaint must also conform to the PSLRA. Ronconi v.

Larkin, 253 F.3d 423, 429 (9th Cir. 2001). The PSLRA “altered the pre-Act pleading

requirements in private securities fraud litigation by requiring that a complaint plead

with particularity both falsity and scienter.” Id. Accordingly, plaintiffs “must state

specific facts indicating no less than a degree of recklessness that strongly suggests actual

intent.” In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 979 (9th Cir. 1999). The

Court must dismiss under 12(b)(6) if the allegations are not sufficiently particular or

where, taken as a whole, they do not raise a “strong inference” of knowing and

deliberate recklessness. Ronconi, 253 F.3d at 429.

Case 3:06-cv-00228-JLS-WMC Document 52 Filed 03/15/07 Page 3 of 7
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- 06cv228

III. Discussion

A. The complaint lacks the required particularity to establish falsity.

According to the PSLRA, a complaint must “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) (2000). But the Complaint repeatedly fails to link the allegedly

false statement with the supporting reasons. Further, Plaintiffs fail to distinguish

between reasons supporting actual falsity and particular facts supporting an allegation

based on information or a belief, or even what that belief might be. This is true, in large

part, because the Complaint’s lack of organization drowns these distinctions in an ocean

of redundancy, cross-reference, and irrelevant factual overkill.

For example, paragraph 46 of the Complaint, states: 

46. Throughout the Class Period, Defendants maintained that their

relationship with Sun was excellent and only continued to improve, and

that the integration of Chaparral RAID technology was likewise

proceeding excellently and producing enthusiastic customer response (as

detailed in ¶¶ 93–175 below). Such statements were materially false and

misleading because they omitted the following material adverse facts:

(a) Dot Hill was having significant trouble integrating Chaparral

RAID technology into Dot Hill storage devices - thus frustrating its

own sales staff (which didn't have a product to sell) and purported

customers (who weren't offered a product to buy), which 

(b) Consequently was preventing achievement of the Chaparral

acquisition's other goals: freeing Dot Hill of the problematic

relationship with Infortrend, the problematic costs imposed by

Infortrend, and the problematic technology provided by Infortrend;

improving revenues, and improving margins; and which

(c) Was leading to further problems in Dot Hill's relationship with

Sun, who, was dissatisfied with Infortrend and unwilling to wait for

Dot Hill to solve its technology problems, ultimately de-committed

to Dot Hill's new technology and selected a new provider for its

entry-level data storage devices.

Case 3:06-cv-00228-JLS-WMC Document 52 Filed 03/15/07 Page 4 of 7
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- 06cv228

(Compl. ¶ 46). In a single paragraph, Plaintiffs allege two separate misleading

statements: (1) about the reality of the relationship with Sun, and (2) about the

difficulties with integrating Chaparral technology. To find these statements, the reader

is then directed to paragraphs 93 through 175. Paragraphs 93 through 175, should the

reader follow the cross-reference, consist of various press releases and transcripts from

conference calls and covers nearly 47 pages of the Complaint. Some of the press

statements are given in their entirety and many appear to be randomly bolded. (Compl.

¶ ¶ 15, 106, 116, 124, 127, 130, 133, 136, 150, 155, 160, 165.) 

Next, Plaintiffs offer the three reasons for falsity, or allegations formed on

information or belief—they never explain which—in subsections (a) through (c). These

sections also introduce a third topic, problems with Infortrend, bearing no apparent

relationship to the first two topics. Finally, the reader is provided ten confidential

witness statements in support of the allegations in paragraph 46. (Compl. ¶ 47.) Not

surprisingly, the statements do not include an explanation about why they prove falsity

or justify any belief therein.

To make any sense of paragraph 46, the reader must wade back and forth between

unconnected allegations and pages of randomly bolded material, searching for

supporting evidence relevant to three separate aspects of wrongdoing. And paragraph

46 is by no means the only paragraph in the Complaint that makes that demand. This

disorganized, unclear, and confusing manner of pleading fails to meet the heightened

standard under the PSLRA. See Silicon Graphics, 183 F.3d at 979. Each section of the

complaint must focus on one allegation, detail who made the statement, why that

statement was false or misleading, and state with particularity all the facts justifying any

belief in falsity. See GlenFed, 42 F.3d at 1548; 15 U.S.C. § 78u-4(b)(1). The

Complaint fails that simple standard and must be dismissed. Ronconi, 253 F.3d at 429.

The Court has also examined the paragraphs alleging scienter. (Compl. ¶¶

176–186.) Plaintiffs are advised to take note of the requirements for pleading scienter

with particularity, clarity, and simplicity. See Silicon Graphics, 183 F.3d at 975.

Case 3:06-cv-00228-JLS-WMC Document 52 Filed 03/15/07 Page 5 of 7
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- 06cv228

B. Meeting a heightened pleading standard does not require a lengthy complaint.

The original complaints in Brody v. Dot Hill (No. 06-228), the lead case, and

three member cases (Naryznai v. Dot Hill (No. 06-281), Jardin v. Dot Hill (No. 06-341),

and Steinberg v. Dot Hill (No. 06-662)) total 113 pages. Now, the First Amended

Consolidated Complaint is 112 pages. While the Court acknowledges the original

complaints had some differences, it seems Plaintiffs chose to collate, rather than to

consolidate, their complaints.

The Court acknowledges Plaintiffs’ concern about showing sufficient details to

meet the PSLRA’s heightened pleading standards. However, a heightened pleading

standard does not automatically translate to a lengthy complaint. See McHenry v.

Renne, 84 F.3d 1172, 1178 (9th Cir. 1996) (noting in another context requiring

heightened pleading that “[a] heightened pleading standard is not an invitation to

disregard Rule 8’s requirement of simplicity, directness, and clarity.”) Redundancy does

not help to establish the “strong inference” necessary to survive a motion to dismiss—

only relevant factual allegations, probative of each element under Section 10(b), and

supported with details where necessary, will suffice.

C. The Complaint is deficient but Plaintiffs are granted leave to amend.

Defendants have argued that “it is doubtful any viable amendment” to the

Complaint is possible. (Defs.’ Br. at 2:26–28.) In support of their contention, they cite

the size of the Complaint, the number of confidential witnesses relied upon, and the

length of time that has passed since the initial Complaint was filed. (Id.) They request

the Court dismiss the Complaint with prejudice.

However, the Complaint at issue was the Plaintiffs’ first attempt at consolidation.

While the Complaint currently lacks the organization and particularity to meet the

heightened pleading standards of the PSLRA, the Court will not preclude Plaintiffs from

attempting to correct these deficiencies.

//

Case 3:06-cv-00228-JLS-WMC Document 52 Filed 03/15/07 Page 6 of 7
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

-7- 06cv228

Thus, Plaintiffs are granted LEAVE TO AMEND. The Court would urge

Plaintiffs, if they choose to amend, to plead with greater particularity and clarity as

explained earlier, while using substantially fewer pages in the body of the Complaint.

III. Conclusion

The court hereby GRANTS Defendants’ motion to dismiss and DISMISSES

Plaintiffs’ complaint WITH LEAVE TO AMEND. Plaintiffs shall have until no later

than April 20, 2007 to file and serve a second consolidated amended complaint.

IT IS SO ORDERED.

DATED: March 15, 2007

Hon. Thomas J. Whelan

United States District Judge

Case 3:06-cv-00228-JLS-WMC Document 52 Filed 03/15/07 Page 7 of 7