Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_15-cv-00347/USCOURTS-cand-3_15-cv-00347-3/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:77 Securities Fraud

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United States District Court

For the Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

IN RE LEAPFROG ENTERPRISE, INC.

SECURITIES LITIGATION,

___________________________________/

This Document Relates to:

All Actions.

Case No. 15-cv-00347-EMC 

ORDER GRANTING DEFENDANTS’ 

MOTION TO DISMISS

Docket No. 72

I. INTRODUCTION

Plaintiffs have filed a class action against LeapFrog Enterprises Inc., and two of its 

officers, John Barbour (“Barbour”) and Raymond L. Arthur (“Arthur”), for violations of federal 

securities laws. Defendants‟ motion to dismiss Plaintiffs‟ First Amended Consolidated Class 

Action Complaint (“FAC”) focuses on the allegedly false and misleading statements about 

LeapFrog‟s inventory, the roll out of LeapTV, LeapFrog‟s financial guidance, and accounting. 

For the reasons stated below, the Court GRANTS Defendants‟ motion to dismiss. 

II. REQUESTS FOR JUDICIAL NOTICE 

A. Defendants‟ Request

Defendants ask the Court to take judicial notice over nine categories of documents or to

consider them under the doctrine of incorporation by reference: (1) LeapFrog‟s press releases filed 

with the SEC as attachments to Forms 8-K (Exs. 1, 4, 8, 14, 16); (2) LeapFrog‟s earnings and 

conference call transcripts (Exs. 2, 5, 7, 9, 11, 12, 15); (3) LeapFrog‟s Forms 10-Q filed with the 

SEC (Exs. 13, 17); (4) LeapFrog‟s Forms 10-K filed with the SEC (Exs. 3, 19); (5) LeapFrog‟s 

Forms DEF 14A filed with the SEC (Exs. 20, 21); (6) LeapFrog‟s press releases published through 

PRNewswire (Exs. 6, 18); (7) SunTrust Robinson Humphrey‟s Report about LeapFrog‟s 1Q15 

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results (Ex. 10); (8) a Microsoft Excel Spreadsheet with the data about LeapFrog‟s daily stock 

price for the period of January 1, 2014 to July 17, 2015 (Ex. 22); and (9) copies of Defendants‟ 

Form 4 (Exs. 23, 24). See Docket No. 73, (“Foster Decl.”), Docket No. 74 (“D‟s RJN”). 

Plaintiffs object to the Court‟s consideration of three of the items. Docket No. 76

(“Response to D‟s RJN”). Plaintiffs object to (1) Exhibit 21 – copies of LeapFrog‟s Form DEF 

14A filed with the SEC on July 2, 2015 (“Proxy Statement”) and (2) Exhibits 23 and 24 – copies 

of Defendants‟ Forms 4, which show that Defendants exercised LeapFrog stock options.1 

Defendants respond that Exhibits 21, 23, and 24 are public filings with the SEC and thus subject to 

judicial notice. Docket No. 81 at 4 (“D‟s Reply to P‟s RJN”). Because these exhibits are not 

necessary to this decision, the Court declines to take judicial notice.

Plaintiffs also ask the Court to strike all factual assertions and arguments derived from 

Exhibits 3, 15, and 19, (LeapFrog‟s 10-K filed March 14, 2014; a transcript of an earnings call 

held February 5, 2015; and LeapFrog‟s 10-K filed June 15, 2015) asserting that Defendants 

improperly rely on these exhibits for the truth of these factual assertions:

 Exhibit 3: “LeapFrog‟s business depends on being able to predict highly 

changeable trends and consumer preferences, which is no easy task, especially in 

the toy market.” Docket No. 53 at 2; (“MTD”) (citing Ex. 3 at 9); “LeapFrog‟s 

products help teach children things like phonics, reading, writing, math, sciences, 

social studies, creativity, and life skills.” MTD at 2 (citing Ex. 3 at 1; ¶ 21); 

“LeapFrog‟s business is highly seasonal, and its overall success depends on sales 

relating to a brief, but critical, holiday season.” MTD at 2-3 (citing Ex. 3 at 11). 

 

1

Plaintiffs do not object to the Court considering Defendants‟ Exhibits 1, 2, 4-14, 16-18, 20, and 

22. The Court GRANTS Defendants‟ request for judicial notice of the Exhibits 1, 2, 4-14, 16-18, 

20, and 22. When ruling on a motion to dismiss, a court may take judicial notice of SEC filings. 

Dreiling v. Am. Express Co., 458 F.3d 942, 946 n.2 (9th Cir. 2006). In this case, LeapFrog‟s 

securities filings are judicially noticeable because they are matters of public record. Courts can 

consider securities offerings and corporate disclosure documents that are publicly available. See 

Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1064 n.7 (9th Cir. 2008). 

Similarly, it is proper to take judicial notice of LeapFrog‟s net sales figures reported in 2013 Form 

10-K and 3Q14 Form 10-Q. See In re Am. Apparel Shareholder Derivative Litig., No. CV 10-

06576 MMM (RCx), 2012 U.S. Dist. LEXIS 146970, *60 (C.D. Cal. July 31, 2012) (taking 

judicial notice of a company‟s forms 10-K, 10-Q, 8-K, and its annual reports). The Court does not 

take judicial notice of the filings for the facts therein. However, the Court takes judicial notice of 

these filings for the fact that these statements were made, as well as for the wording and timing of 

the statements.

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 Exhibit 15: “Worldwide sales of children‟s tablets „shrunk for the first time since 

2010,‟ causing „significant sales declines‟ industrywide.” MTD at 6 (citing Ex. 15 

at 3).

 Exhibit 19: “Its products include, among others, the LeapPad learning tablets and, 

since the fall of 2014, the LeapTV educational video game system.” MTD at 2 

(citing Exh. 19 at 1; ¶ 21); “Over 70% of LeapFrog‟s sales come in the second half 

of the calendar year, with 40% in the period between October and December.” 

MTD at 3 (citing Ex. 19 at 7). 

Defendants respond that the contents of Exhibits 3, 5, and 19 must be considered for the 

truth of the facts asserted therein because these exhibits are incorporated by reference into the 

FAC. Docket No. 81 at 1 (“D‟s RJN Reply”). 

Under the incorporation by reference doctrine, if a document is referenced in a complaint, 

a court may “properly consider the [document] in its entirety.” In re NVIDIA Corp. Sec. Litig., 

768 F.3d 1046, 1058 n.10 (9th Cir. 2014) (“Once a document is deemed incorporated by reference, 

the entire document is assumed to be true for purposes of a motion to dismiss, and both parties –

and the Court – are free to refer to any of its contents.”). Specifically, courts may take into 

account “documents whose contents are alleged in a complaint and whose authenticity no party 

questions, but which are not physically attached to the [plaintiff‟s] pleading.” Knievel v. ESPN, 

393 F.3d 1068, 1076 (9th Cir. 2005). A court “may treat such a document as part of the 

complaint, and thus may assume that its contents are true for purposes of a motion to dismiss 

under Rule 12(b)(6).” United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). Here, Plaintiffs 

expressly referred to these exhibits in the FAC, and relied on them as sources of the allegedly 

fraudulent statements. See, e.g., FAC ¶¶ 55, 24, 176. Therefore, the Court DECLINES to strike 

all factual assertions and arguments derived from Exhibits 3, 15, and 19. 

B. Plaintiffs‟ Request

Plaintiffs filed a conditional request to take judicial notice of a November 5, 2014 analyst 

article entitled “LeapFrog Continues To Offer Rare And Compelling Value Going Into The 

Holidays,” published by Seeking Alpha. Docket No. 78, Exhibit 1 (“Article”). “If the Court takes 

judicial notice of the extrinsic evidence (Defendants‟ Exhibits 21, 23, and 24) on which 

Defendants base their factual assertions concerning Barbour‟s and Arthur‟s stock ownership and 

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does not strike the assertions, Plaintiff respectfully requests that it also take judicial notice of 

Exhibit 1.” Docket No. 77 at 1 (“P‟s RJN”). Since the Court is not taking notice of Exhibits 21, 

23, and 24, Plaintiff‟s request is denied. In any event, judicial notice is not proper. Plaintiffs must 

allege sufficient facts, not wait to see what Defendants challenge and then seek to add facts at the 

briefing stage. Because Plaintiffs attach the Article in an improper attempt to introduce new facts 

at briefing, and because the Court is not taking judicial notice of Defendants‟ Exhibits 21, 23, and 

24, the Court DENIES judicial notice of Plaintiffs‟ Exhibit 1.

III. BACKGROUND

A. The Parties and Claims

Defendant LeapFrog creates electronic learning toys and content. FAC ¶ 5. The putative 

class consists of all persons or entities who purchased shares of LeapFrog common stock during 

the Class Period. Id. ¶ 1. The Class Period is between May 5, 2014 and June 11, 2015. Id. 

During the Class Period, Barbour was LeapFrog‟s director and CEO; id. ¶ 38; Arthur was 

LeapFrog‟s CFO. Id. ¶ 39. Plaintiffs allege that from May 2014 to June 2015 Defendants made 

false statements about: (1) LeapFrog‟s carryover inventory and development delays with Leap 

TV; and (2) LeapFrog‟s financial guidance and accounting.

B. Roll Out of LeapTV

Plaintiffs allege that Defendants claimed that LeapTV would help LeapFrog to deliver 

growth. Id. ¶ 9. In January 2014, the management decided to move up the release of LeapTV to a 

calendar 2014 release. Id. ¶ 6. Because the product had not been slated for such an early release, 

the decision placed a tight timeline for development and production of the new product. Id. 

Plaintiffs allege that Defendants misled investors by representing on June 11, 2014 that LeapTV 

would be shipping at the end of September, id. ¶ 81, and would be “hitting stores in October.” Id. 

¶ 72. However, LeapTV did not ship until mid-October meaning that LeapTV was not on store 

shelves until November as the result of the typical lag time between shipment and arrival of the 

product in stores of weeks. Id. ¶ 77. Plaintiffs contend that because Defendants knew about 

development delays of LeapTV, they lacked any basis for telling investors that it would ship at the 

end of September. Id. ¶ 100. Finally, Plaintiffs allege that Defendants misled investors during 

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the November 3, 2014 conference call that “LeapTV [was] off to a very strong start.” Id. ¶ 105. 

This was supposedly misleading because the late launch caused Target to relegate LeapTV to endcap space and important retailers to drop LeapTV from sales. Id. ¶ 112(c).

C. Inventory

Plaintiffs allege that LeapFrog “faced a substantial retail inventory hangover of LeapPads 

from 2013 that management knew would impact both margins and sales heading into 2014.” Id. 

¶¶ 6, 77. Plaintiffs allege that defendants made false and misleading statements on May 5, 2014 

that “[i]inventories at retail have come down from where they were at year end by a fair 

amount . . . . []The important fact is that isn‟t across the board . . . . We don‟t have higher 

inventories across the board. We have some pockets of inventory.” Id. ¶ 45. Plaintiffs allege that 

the above statements were false and misleading because in fact “there remained a massive volume 

of carryover inventory at retailers that required discounts to sell.” Id. Plaintiffs further allege that 

Defendants “deliberate[ly] conceal[ed] the nature and impact of the carryover inventory” when 

referring to inventory hangover as a “one-off situation” and stating that the bulk of the inventory 

will be gone by Thanksgiving. Id. ¶¶ 88, 97. 

D. Guidance

1. May 5, 2014

On May 5, 2014 (the first day of the proposed class period), LeapFrog issued a press 

release announcing LeapFrog‟s financial guidance for the rest of 2014. Id. ¶ 41. The company 

reported expected sales for the 2014 year of $554-$580 million, or $0.18-$0.25 per diluted share. 

Id. ¶ 42. Defendants are quoted in the press release as stating that “[their] line-up of major new 

product introductions will begin shipping in late summer and fall.” Id. ¶ 41.

The same day Defendants held a 1Q14 earnings conference call to review LeapFrog‟s 

results for the first quarter ended March 31, 2014. Id. ¶ 41; Ex.5 at 3. Arthur projected net sales 

for the second quarter of $48-$52 million. Id. ¶ 43; Ex.5 at 7. Arthur announced that LeapFrog 

expected “net sales and earnings growth in the second half of the year, largely due to new product 

introductions.” Id. Arthur noted that “[w]ithin the second half of this year, [LeapFrog‟s] results 

will be much more back-end-loaded with some new products shipping for the first time in 

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September.” Id. In response to questions about inventory allowances for the next quarter, Arthur 

asserted that possible clearance costs are not going to be “incredibly significant.” Id. ¶ 46; Ex.5 at 

10. Following these announcements, the price of the company‟s stock increased from $6.83 to 

$7.29 per share, or approximately 6%. Id. ¶ 47.

Plaintiffs contend that there was no reasonable basis for these projections. They cite the 

August 4, 2014 press release stating that for the full fiscal year ending March 31, 2015 the 

company expected net sales to be $480-$505 million as opposed to $554-$580 million and net 

income (loss) per basic and diluted share to be in the range of a loss per share of $0.04-$0.10 as 

opposed to a loss of $0.18-$0.25. Id. ¶ 197; Ex.8 at 3. Plaintiffs emphasize that Defendants 

explained the reduction in guidance to be due “elevated beginning retail inventory levels, a 

challenging market environment and POS trends as well as the timing of new product shipments.” 

Id. Moreover, Plaintiffs assert that on May 5, 2014 the shipment date of “as-yet undeveloped and 

untested” LeapTV was in question. Id. ¶ 68. 

2. August 4, 2014

On August 4, 2014, LeapFrog issued a press release announcing its financial results for the 

quarter ended June 30, 2014 and lowering its earning guidance for the 2015 fiscal year ending 

March 31, 2015. Id. ¶ 80; Ex. 8. The company noted that the new guidance will be offset by “a 

very back-end loaded year with Leap TV shipping at the end of September,” and “the introduction 

of new products that we expect to perform very well in the market place in fiscal 2015 and 

beyond.” Id. ¶ 81. The press release stated that LeapFrog would experience a “strong holiday 

season” and a “solid net sales growth in both the December and March quarters, led largely by 

sales of new releases including LeapTV, LeapBand, LeapPad3, LeapPad Ultra XDi and related 

content.” Id. ¶ 82; Ex. 8 at 1, 3.

On August 4, 2014, Defendants held a 1Q15 conference call to review LeapFrog‟s results 

for the first fiscal quarter, ended June 30, 2014. Id. ¶ 83; Ex. 9. Barbour stated that LeapFrog 

expected “double-digit sales growth in the December and March quarters.” Id. ¶ 83; Ex. 9 at 3. 

Barbour also stated: “We expect this growth to be driven by shipments of our exciting new 

product introductions for the year . . . .” Id. ¶ 84; Ex. 9 at 3. Arthur added that LeapFrog expected 

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“solid growth in [its] third and fourth fiscal quarters” and that it was “well positioned for a strong 

holiday season with a new lineup of tablets, fantastic new products in LeapTV and LeapBand set 

to enter the market . . . .” Id. ¶ 85; Ex. 9 at 8. Arthur stated that the company expected net sales in 

the second quarter to be in the range of $125-$130 million. Id. ¶ 86; Ex. 9 at 7. When asked how 

to reconcile an old guidance with the new guidance,

2 Arthur said: “Definitely the third quarter of 

our fiscal year is a big quarter for us, bigger than it has been for a long time. I think that‟s 

primarily the result of LeapTV starting to ship at the end of September, so most of the channel fill 

is going to occur in Q3.” Id. ¶ 90; Ex. 9.

Plaintiffs contend that the projections offered during this period were false and misleading, 

given that three months later Defendants reported a loss of $0.13 to $0.25 per share and net sales 

of $450-$470 million (as opposed to expected EPS of $0.04 to $0.10 and net sales of $480-$505 

million). Id. ¶ 95. In a November 3, 2014 press release, Defendants explained that “slippage of 

first shipments of LeapTV” was the primary reason for reduced guidance. Id. ¶ 95; Ex. 12 at 1. 

3. November 3, 2014

On November 3, 2014, LeapFrog issued a press release announcing financial results for the 

quarter ended September 30, 2014. Id. ¶ 103; Ex. 12. Defendants are quoted in the press release 

as stating that LeapFrog was “well-positioned for the all-important holiday season” and that the 

company expected “financial results in . . . fiscal third quarter ending December 31, 2014 to 

improve year-over-year given the launch of LeapTV, two new LeapPad tablets . . . .” Id. ¶ 103; 

Ex. 12 at 2. Defendants stated that “for the full fiscal year ending March 31, 2015, [LeapFrog] 

expected net sales to be in the range of $450 million to $470 million compared to $528 million for 

the twelfth-month period ended March 31, 2014.” Id. ¶ 104; Ex. 12 at 3. Plaintiffs contend this

was misleading, as Defendants “knew” that reaching even this lowered sales guidance “would be 

impossible due to their awareness of adverse facts and circumstances . . . .” FAC ¶ 110. For the 

third fiscal quarter ending December 31, 2014, LeapFrog expected “net sales to be in the range of 

 

2

Per the FAC, sales guidance decreased by $75 million (from a range of $554-$580 million to a 

range of $480-$505 million), and EPS declined from a range of $0.18-$0.25 to a range of $(0.04-

$0.10. FAC ¶¶ 11, 58.

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$220 million to $240 million, up 18% to 28%, compared to $187 million for the quarter ended 

December 31, 2013.” Id. 

On November 3, 2014, defendants held a conference call to review results for the second 

fiscal quarter ended September 30, 2014. Id. ¶ 105; Ex. 11. Barbour emphasized that “[t]he 

second half of fiscal 2015 will be much brighter and [LeapFrog] expected double-digit sales 

growth in the December and March quarters.” Id. ¶ 105; Ex. 11 at 3. Barbour stated that this 

growth will be driven “by shipments of [LeapFrog‟s] exciting new product introductions for the 

year.” Id. Finally, Barbour reported that LeapFrog “started shipping [LeapTV] units to retailers a 

few weeks ago and . . . LeapTV [was] off to a very strong start.” Id. ¶ 105; Ex. 11 at 4. Arthur 

reiterated: “[w]e expect sales to increase for the balance of our fiscal year versus the same period 

of last year as we are well positioned for the holidays with our best product lineup ever and strong 

support from significant retail, trade, and advertising campaigns, as well as off-shelf promotions.” 

Looking forward to the full-year outlook, Arthur stated: “[w]hile our reported results through the 

second fiscal quarter of 2015 reflect sales and earnings reductions versus the same periods in the 

prior year, we expect to see improved results for the remaining two quarters of the year versus the 

same periods a year ago.” Id. ¶ 106; Ex. 11 at 6. When asked if LeapFrog would make up for the 

second quarter shortfall of LeapTV sales in the fiscal third quarter, Barbour responded: “We 

would hope that we would make up most of it, yes . . . .” Id. ¶ 107; Ex. 11 at 9. Barbour added: 

“if you take the carryforward tablet from last year out of the equation, our inventory is actually 

quite tight in the marketplace at the moment. So I think it may be more than normalized at the 

moment, and that is why we are looking at growth . . . for the third quarter and into the fourth 

quarter.” Id. ¶ 108; Ex. 11 at 11. 

Plaintiffs assert that Defendants‟ forecasts during this period were materially false and 

misleading because Defendants knew that to achieve this guidance, the company “had to have 

holiday 2014 sales that surpassed those of its successful launch of LeapPad in 2011, and knew that 

this would be impossible due to their awareness of adverse facts and circumstances at the time.” 

Id. ¶ 110. Plaintiffs contend given that “LeapTV had shipped to retailers late, in mid-October” 

Defendants “knew that LeapTV could not drive the 3Q15 and FY 2015 guidance they issued.” Id. 

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¶ 111. Plaintiffs also allege that Defendants “deliberate[ly] conceal[ed] the nature and impact of 

the carryover inventory,” in telling investors that the carryover was “a „one-off situation‟” and 

“build-up would be gone by Thanksgiving.” FAC ¶ 97. Specifically, Plaintiffs allege that a 

“shocking amount” of carryover inventory remained, which would require “further discounts” and 

“cannibalizing of new tablet sales.” Id. 

4. February and May 2015

On February 5, 2015, Defendants held a conference call to review results for the third 

fiscal quarter ended December 31, 2014. Id. ¶ 154; Ex. 15. Barbour stated that financial results 

for the third quarter of fiscal 2015 “were very disappointing.” Id. ¶ 154; Ex. 15 at 2. Barbour 

explained: “[b]ased on these factors, and our own experiences with consumers playing with 

LeapTV, we believe this platform will deliver, but understand that financial performance did not 

live up to expectations for this past holiday season.” Ex. 15 at 4. 

Arthur announced that LeapFrog “will not be providing guidance for fiscal fourth quarter 

or full year beyond indicating that we believe sales for our fiscal fourth quarter will be below that 

of the prior year period.” Ex. 15 at 6. Arthur stated: 

We are very disappointed that our performance in the third fiscal 

quarter of 2015 was significantly below our expectations. . . . In our 

projections for the third quarter we planned for a decline in retail 

sales of LeapPad tablets. However, we are surprised by the 

magnitude of the actual decline across the tablet business and our 

key competitors during the holiday season, which was significantly 

in excess of our expectations.

FAC ¶ 155. Plaintiffs contend that Defendants materially misled investors regarding their surprise 

about across the tablet business sales declines because, in part, Defendants already knew that 

leading up to Black Friday 2014 LeapTV sales were off-trend and that the carryover inventory 

would not allow LeapFrog to achieve its guidance forecasts. Id. ¶ 163. 

E. Accounting

1. November 3, 2014

On November 3, 2014, defendants held a conference call to review results for the second 

fiscal quarter ended September 30, 2014. Id. ¶ 122; Ex. 11. The company reported a net income 

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loss of $2,026 and EPS of negative $0.03. Id. ¶ 122. Plaintiffs assert that if LeapFrog had 

properly recorded goodwill impairment charges of $19.5 million in 2Q15, then the company 

should have reported a net income loss of $17,442 and EPS of negative $0.25. Id. ¶ 125. 

On November 10, 2014, LeapFrog filed its 2Q15 form 10-Q with the SEC, which reported 

that “[a]s of September 30, 2014, based on [company‟s] assessment of various qualitative factors 

and projection of future operating results, the Company does not believe that sufficient indicators 

of impairment of its goodwill currently exist that would require performing step one of the twostep test for goodwill impairment.” Id. ¶ 123; Ex. 13 at 9. 

2. February 5, 2015

On February 9, 2015, LeapFrog filed its 3Q15 form 10-Q with the SEC. Id. ¶ 167. The 

company reported a net income loss of $124,212 and EPS of $1.77 with negative $0.22,

accounting for goodwill. Id. Plaintiffs assert that if LeapFrog had properly recorded goodwill 

impairment charges of $36.5 million in 3Q15, then the company should have reported a net 

income loss of $145,233 and EPS of $2.07. Id. ¶ 170. The company concluded that its long-lived 

assets were not impaired as of December 31, 2014. Id. ¶ 168; Ex.17 at 9. 

3. GAAP Violation

Plaintiffs claim that LeapFrog fraudulently inflated its financial results for the second and 

third quarters of 2015. See FAC ¶¶ 17, 24. Plaintiffs first allege “that a $19.5 million goodwill 

impairment that LeapFrog took after its disappointing holiday season for the quarter ended 

December 31 should have been taken in the second quarter ended September 30, 2014.” MTD at 

15-16. Second, Plaintiffs allege that “the 36.5 million long-lived asset impairment that LeapFrog 

recorded in the quarter, ended March 31 should have been taken in the quarter ended December 

31.” MTD at 16. 

Plaintiffs allege that “Defendants falsely reported 2Q15 financial results in the November

3, 2014 press release and during the conference call on the same day as well as in the Company‟s 

Form 10-Q filed with the SEC on November 10, 2014, as a result of failing to timely write-off 

$19.5 million of impaired goodwill.” FAC ¶ 17. Plaintiffs allege Defendants violated GAAP 

principles. GAAP are the principles recognized in the accounting field as the conventions, rules, 

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and procedures necessary to define accepted accounting practice at a particular time. Docket No. 

52, CAC ¶ 91 n.6. “Financial statements filed with the Commission which are not prepared in 

accordance with generally accepted accounting principles will be presumed to be misleading or 

inaccurate, despite footnote or other disclosures, unless the Commission has otherwise provided.” 

17 C.F.R. § 210.10-01(a). Here, according to Plaintiffs, under GAAP, there were triggering 

events known to Defendants which should have led to earlier reporting of impairment to goodwill 

and long-lived assets: (1) the sustained decrease in share price of approximately 19% when the 

Company reported 1Q15 financial results on August 4, 2014; (2) the increased competition that 

Defendants admittedly faced; and (iii) the declines in actual and planned net sales and earnings, 

including knowledge that 2Q15 sales and EPS were going to be 7.8% and 9.5% below consensus 

estimates and that LeapFrog knew that it would have to dramatically reduce guidance with an 

anticipated loss for the fiscal year. FAC ¶ 17. 

IV. DISCUSSION

A. Legal Standard Governing Motions to Dismiss Under Rule 12(b)(6)

Defendants move to dismiss Plaintiffs‟ claims under Federal Rule of Civil Procedure 

12(b)(6), arguing Plaintiffs failed to state a claim that was “plausible on its face.” Mot. at 2. In 

evaluating a motion to dismiss for failure to state a claim, the Court should “accept as true all 

factual allegations in the complaint and draw all reasonable inferences in favor of the nonmoving 

party.” Retail Prop. Trust v. United Bhd. of Carpenters & Joiners of Am., 768 F.3d 938, 945 (9th 

Cir. 2014). However, Plaintiffs must allege “more than labels and conclusions, and a formulaic 

recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 

544, 555 (2007). The Court is “not bound to accept as true a legal conclusion couched as a factual 

allegation.” Twombly, 550 U.S. at 555; accord Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) 

(“Threadbare recitals of the elements of a cause of action, supported by mere conclusory 

statements, do not suffice.”). 

1. Rule 9(b) of the Federal Rules of Civil Procedure

Rule 9(b) of the Federal Rules of Civil Procedure provides that the “circumstances 

constituting fraud or mistake shall be stated with particularity.” Fed. R. Civ. Proc. 9(b). It is not 

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enough for a plaintiff merely to identify an allegedly fraudulent statement made by defendants. In 

re GlenFed, Inc. Securities Litigation, 42 F.3d 1541, 1548 (9th Cir. 1994) (en banc). Plaintiffs

must allege “why the disputed statement was untrue or misleading when made.” Id. at 1549

(emphasis added).

2. The Private Securities Litigation Reform Act

The Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4, further

provides that “a securities fraud complaint shall identify: (1) each statement alleged to have been 

misleading; (2) the reason or reasons why the statement is misleading; and (3) all facts on which 

that belief is formed.” Silicon Graphics, 183 F.3d at 996; 15 U.S.C. § 78u-4(b)(1). In alleging 

scienter, plaintiffs must “state with particularity . . . facts giving rise to a strong inference that the 

defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). If the complaint does 

not adequately allege scienter, it must be dismissed. 15 U.S.C. § 78u4(b)(3)(A).

As noted in Silicon Graphics, in enacting the PSLRA, “Congress intended to elevate the 

pleading requirement[s]” that previously applied to securities fraud complaints. Silicon Graphics, 

183 F.3d at 974, see also Tellabs, 351 U.S. at 319 (describing the new procedures and new 

pleading standards set forth in PSLRA). Under the PSLRA, it is no longer sufficient to plead 

“facts showing mere recklessness or a motive to commit fraud and opportunity to do so.” Silicon 

Graphics, 183 F.3d at 974. Rather, “a private securities plaintiff proceeding under the PSLRA 

must plead in great detail, facts that constitute strong circumstantial evidence of deliberately 

reckless or conscious misconduct.” Id. 

Finally, the PSLRA creates a “safe harbor” for “forward-looking” statements that are 

immaterial, are limited by “meaningful cautionary statements,” or are made without actual 

knowledge of their falsity. 15 U.S.C. §§ 77z-2(c), 78u-5(c). “Forward-looking” statements 

include statements of future economic performance and management plans and objectives. 15 

U.S.C. §§ 77z-2(i), 78u-5(i). This “safe harbor” has much the same effect as the “bespeaks 

caution” doctrine, which provides that forward-looking representations that contain adequate 

cautionary language or risk disclosure protect a defendant from securities liability. See, e.g., Plevy 

v. Haggerty, 38 F.Supp.2d 816, 830 (C.D. Cal. 1998).

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B. Sufficiency of Count I: Violation of Section 10(b) of the 1934 Act and Rule 10(b)-5

1. Legal Standards Governing Section 10(b) and Rule 10b-5

Rule 10b-5 makes it unlawful for any person to use “manipulative or deceptive device[s]” 

in connection with the purchase or sale of securities. 15 U.S.C. § 78j(b). One may not “(a) . . . 

employ any device, scheme, or artifice to defraud; (b) . . . make any untrue statement of a material 

fact or 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; or (c) . . . engage in any act, 

practice, or course of business which operates or would operate as a fraud or deceit upon any 

person, in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5.

To state a claim under Section 10(b) and Rule 10b-5, a plaintiff must sufficiently allege

(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.

Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1206 (9th Cir. 2016) (line breaks added). The Ninth 

Circuit applies the heightened pleading standards of Rule 9(b) “to all elements of a securities fraud 

action, including loss causation.” Oregon Pub. Employees Ret. Fund v. Apollo Grp. Inc., 774 F.3d 

598, 605 (9th Cir. 2014).

A misstatement or omission may be is material when there is “a substantial likelihood that 

the disclosure of the omitted fact would have been viewed by the reasonable investor as having 

significantly altered the „total mix‟ of information made available.” Basic Inc. v. Levinson, 485 

U.S. 224, 231-32 (1976). To plead materiality, the complaint‟s allegations must “suffice to raise a 

reasonable expectation that discovery will reveal evidence satisfying the materiality requirement, 

and to allow the court to draw the reasonable inference that the defendant is liable.” Matrixx 

Initiatives, Inc. v. Siracusano, 563 U.S. 27, 47 (2011).

“As for section 20(a), it essentially provides for derivative liability; that is, it „makes 

certain „controlling‟ individuals also liable for violations of section 10(b) and its underlying 

regulations.‟” Westley v. Oclaro, Inc., 897 F. Supp. 2d 902, 912 (N.D. Cal. 2012) (citing Zucco 

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Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009)).

Scienter is “a mental state embracing intent to deceive, manipulate, or defraud.” Ernst & 

Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). The Ninth Circuit has clarified that 

recklessness “satisfies scienter under § 10(b)” only to the extent that it “reflects some degree of 

intentional or conscious misconduct.” Silicon Graphics, 183 F.3d at 977. 

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.” 15 U.S.C. § 78u4(b)(2)(A). To be “strong,” an inference of scienter “must be more than merely plausible or 

reasonable – it must be cogent and at least as compelling as any opposing inference of 

nonfraudulent intent.” Id. at 314. The inference must be that “the defendant[ ] made false or 

misleading statements either intentionally or with deliberate recklessness.” Zucco, 552 F.3d at 

991. Deliberate recklessness means the conduct “reflects some degree of intentional or conscious 

misconduct.” S. Ferry LP, No.2 v. Killinger, 542 F.3d 776, 782 (9th Cir. 2008). “[A]n actor is 

[deliberately] reckless if he had reasonable grounds to believe material facts existed that were 

misstated or omitted, but nonetheless failed to obtain and disclose such facts although he could 

have done so without extraordinary effort.” In re Oracle Corp. Sec. Litig., 627 F.3d 376, 390 (9th 

Cir. 2010). “Facts showing mere recklessness or a motive to commit fraud and opportunity to do 

so provide some reasonable inference of intent,” but are not independently sufficient. Silicon 

Graphics, 183 F.3d at 974. “It may also be reasonable to conclude that high-ranking corporate 

officers have knowledge of the critical core operation of their companies.” Reese v. Malone, 747 

F.3d 557, 569 (9th Cir. 2014) (citing S. Ferry LP, 542 F.3d at 785-86).

Courts “must review all the allegations holistically” when determining whether scienter 

has been sufficiently pled. Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 48 (2011). “The 

relevant inquiry is „whether all of the facts alleged, taken collectively, give rise to a strong 

inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that 

standard.‟” Reese, 747 F.3d at 569 (quoting Tellabs, 551 U.S. at 323; N.M. State Inv. Council v. 

Ernst & Young LLP, 641 F.3d 1089, 1095 (9th Cir. 2011)). In the instant case, Defendants 

challenge Plaintiffs‟ securities fraud claims on the ground that Plaintiffs has failed to adequately 

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plead both falsity and scienter.

2. Whether Plaintiffs‟ Complaint Sufficiently Pleads Defendants‟ Alleged 

Misrepresentations and/or Omissions

As noted above, to state a claim for securities fraud, a complaint must specify “each 

statement alleged to have been misleading, [and] the reason or reasons why the statement is 

misleading.” 15 U.S.C. § 78u-4(b)(1). 

Defendants argue that there is “an „insufficient basis for fraud allegations because [the 

FAC] fails to state with particularity all facts on which [the] belief is formed.‟” MTD at 8 

(quoting Silicon Graphics, 183 F.3d at 985). Defendants assert that the FAC‟s lack of 

corroboration and particularity is fatal to the allegations of falsity and scienter. Id. “To plead 

falsity, a complaint must allege contemporaneous statements or conditions that are „necessarily 

inconsistent‟ with the challenged statement.” Id. (citing In re Read-Rite Corp., 335 F.3d 843, 848 

(9th Cir. 2003), abrogated on other grounds as recognized in South Ferry, L.P., 542 F.3d at 782-

84). 

Many of the statements Plaintiffs challenge are predictions or statements of belief. 

Forward-looking statements are exempted under the PSLRA‟s safe harbor provision. See 15 

U.S.C.A. § 78u-5(c). Under the PSLRA, forward-looking statements are exempt if they are 

identified as such and accompanied by “meaningful cautionary” language, see id. at § 78u5(c)(1)(A); if the plaintiff is unable to show the statement “was made with actual knowledge . . . 

that the statement was false or misleading,” id. at § 78u-5(c)(1)(B); if the statement was made 

orally and accompanied by a warning that the statement was forward-looking at “that the actual 

results might differ materially from those projected,” id. at § 78u-5(c)(2). As to statements of 

belief, all Defendants need show is “(1) that the statement is genuinely believed, (2) that there is a 

reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts 

tending to seriously undermine the accuracy of the statement.” In re VeriFone Sec. Litig., 11 F.3d 

865, 870-71 (9th Cir. 1993) (quoting Hanon v. Dataproducts Corp., 976 F.2d 497, 501 (9th Cir.

1992)). However, if one of those inquiries proves inaccurate, then liability may attach. See id. 

(citing Rule 10b-5). “The fact that the prediction proves to be wrong in hindsight does not render 

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the statement untrue when made.” Id. (citing Marx v. Computer Sciences Corp., 507 F.2d 485, 

489-90 (9th Cir. 1974)). 

The statements which Plaintiffs challenge as false may be grouped into four categories: 

statements about carryover inventory, about LeapTV, about financial guidance, and about 

financial results for the second and third quarters of fiscal 2015 (focusing on goodwill).

a. LeapFrog‟s Statements About Carryover Inventory

With regard to the first category, statements about carryover inventory, Plaintiffs contend

that the following statements were false:

 February 12, 2014 statement: “We are going [to] face some challenges early in the 

year with the [excess retail] inventory.” FAC ¶ 7

 May 5, 2014 statement: “[I]f you look at the inventory . . . it was quite a unique 

situation . . . .” FAC ¶ 44.

 May 5, 2014 statements: “Inventories at retail have come down from where they 

were at year end by a fair amount.[] The important fact is that this isn‟t across the 

board . . . . We don‟t have higher inventories across the board. We have some 

pockets of inventory . . . .” FAC ¶ 45.

 May 5, 2014 statement: “There will probably be some cost associated with the 

clearance [of pockets of inventory], but I don‟t think it‟s going to be incredibly 

significant.” FAC ¶ 46.

 June 11, 2014 statement: “From inventory retail, it‟s still being worked down . . . . 

That will probably take [until] second and third quarter to clear up because they‟re 

traditionally not high volume quarters at all.” FAC ¶ 71. 

 August 4, 2014 statement: “I think we have given all the discounting and 

promotional offers we‟ve needed to give during this quarter and taken the pain so 

that those units will now clear out more quickly.” FAC ¶ 87. 

 August 4, 2014 statement: “My sense is that the bulk of it will be cleared as we 

move into probably late fall, into the early part of the season . . . . So again, our 

sense is that the bulk of it will be gone as you get close – as we get close to 

Thanksgiving . . . . We‟re dealing with a one-off situation here, which, as I say, we 

have explained many times on the calls in the past where we are trying to deal with 

it as quickly as possible.” FAC ¶ 88. 

 August 4, 2014 statement: “we should be done with the discounting.” FAC ¶ 89. 

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 November 3, 2014 statement: “The carryover inventory was primarily in tablets 

and we substantially sold through the excess inventory in tablets that‟s at the 

marketplace . . . .” FAC ¶ 108. 

 January 22, 2015 statement: “Despite these sales declines, the children‟s tablet 

business remains a sizeable business around the world . . . .” FAC ¶ 150. 

 February 5, 2015 statement: “[O]ne of the big advantages we have this year is that 

there‟s less inventory at retail, and that retail is significantly cleaner . . . .” FAC ¶ 

157. 

Overall, Plaintiffs argue that Defendants knew the carryover inventory would harm their 

financial results, and that they attempted to conceal this future harm. See, e.g., FAC ¶ 45. 

However, Rule 10b-5 prohibits “only misleading and untrue statements, not statements that are 

incomplete.” Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002). Indeed, 

the PSLRA‟s safe harbor provision for forward-looking statements says that “[n]othing in this 

section shall impose upon any person a duty to update a forward-looking statement.” 15 U.S.C.A. 

§ 78u-5(d). Thus, Defendants will not face liability unless they “affirmatively create[d] an 

impression of a state of affairs that differ[ed] in a material way from the one that actually exists.” 

Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1061 (9th Cir. 2014). 

First, many of these statements are too vague to induce reliance by a reasonable investor.3 

Multiple courts in this District have refused to find material falsity where a statement was so 

“vague” as to be “nonactionable.” See, e.g., In re Splash Tech. Holdings, Inc. Sec. Litig., 160 F. 

Supp. 2d 1059, 1076-77 (N.D. Cal. 2001).

4

 “Vague, amorphous statements are not actionable 

because reasonable investors do not consider „soft‟ statements or loose predictions important in 

making investment decisions.” Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231, 1245 (N.D. Cal. 

1998). Here, the Defendants made statements about “some cost” or a “fair amount.” Because no 

 

3

See FAC ¶¶ 7 (“face some challenges”), 44 (describing the “situation” as “unique”), 45 

(inventories “have come down . . . by a fair amount”, though there are “some pockets” remaining), 

46 (“There will probably be some cost”), 88 (“My sense is that the bulk of it will be cleared”), 150 

(“the children‟s tablet business remains a sizeable business”). 

4

See also In re Northpoint Commc’ns Grp., Inc. Sec. Litig., 184 F. Supp. 2d 991, 1005 (N.D. Cal. 

2001) (“vague and amorphous statements do not give rise to liability for securities fraud, since 

reasonable investors do not consider such puffery”); In re Calpine Corp. Sec. Litig., 288 F. Supp. 

2d 1054, 1088 (N.D. Cal. 2003).

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reasonable investor would rely on a statement about “some” unquantified cost, these statements 

are too vague to be actionable.

To the extent a statement might be interpreted as implying concrete facts about inventory 

(see, e.g., FAC ¶¶ 71, 87-89), the problem for Plaintiffs is that Defendants had issued public 

acknowledgments of the hang-over inventory problem:

 “We expect that this inventory plus current difficult retail conditions will 

negatively impact our net sales in the first and second quarters of 2014 and also for 

the full year.” Ex. 1 at 9 (February 12, 2014 statement in a press release of 

LeapFrog‟s 2013 financial results). 

 “[W]e‟re continuing to deal with significant headwinds that will probably remain 

through late summer and the fall until we begin to ship our major new introductions 

this fall.” Ex. 5 at 3 (May 5, 2014 statement in an earnings call following 

announcement of Leapfrog‟s first quarter 2014 earnings). 

 “[Inventory] may not get sold in the second quarter. It may get sold in the third 

quarter. But clearly from our perspective, we believe it‟s good and marketable 

inventory that‟s going to get sold through before the end of the year.” Ex. 5 at 11

(same). 

 Barbour represented LeapFrog was “just over halfway for clearing the product that 

was there . . . and the bulk of it will be gone . . . as [LeapFrog] get[s] close to 

Thanksgiving.” FAC ¶ 88 (quoting a statement from an August 4, 2014 earnings 

call following announcement of LeapFrog‟s first quarter 2015 financial results). 

 LeapFrog expected “continued headwinds in the September quarter from the 

remaining carryforward inventory and the timing of new product shipments 

compared to the prior year,” purportedly because of “a challenging market 

environment and POS trends.” FAC ¶ 80, 84 (August 4, 2014 statements in the 

earnings call and in a press release). 

 “[W]e still face the headwind of the remaining clearance inventory at retail 

and weak market conditions in some of our key categories. We had hoped the retail 

carryover inventory would be sold through by Thanksgiving, but we now believe 

that there will be sales of this inventory over the holiday season.” Ex. 11 at 6

(statement from a November 3, 2014 earnings call discussing LeapFrog‟s second 

quarter 2015 financial results). 

These disclosures put the alleged misleading statements about carryover inventory in context. 

They substantially mitigate the potentially misleading nature of the challenged statements.

Furthermore, many of the statements about expected inventory reduction were forward 

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looking – these are subject to the PSLRA Safe Harbor. In re Cutera Securities Litig., 610 F.3d 

1103, 1111 (9th Cir. 2010). Under the PSLRA, a person may not be held liable for making an 

untrue statement of material fact if the statement is (1) a statement that is, and is identified as, a 

“forward-looking statement” and (2) is accompanied by “meaningful cautionary statements 

identifying important factors that could cause actual results to differ materially from those in the 

forward-looking statement.” 15 U.S.C. § 78u-5(c)(1)(A). Under this “safe harbor” provision, a 

“forward-looking statement” is defined as “any statement regarding (1) financial projection, (2) 

plans and objectives of management for future operations, (3) future economic performance, or (4) 

the assumptions „underlying or related to‟ any of these issues.” Bartlet v. Affymax, Inc., 13-CV01025-WHO, 2014 WL 231551, at *13 (N.D. Cal. Jan. 21, 2014) (quoting No. 84 EmployerTeamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 936 (9th Cir. 

2003)). Here, multiple statements expressly refer to what “will” happen in the future. 5 Because 

they discuss future plans and expectations, these statements are forward-looking.

To fall within the safe harbor, a statement must not only be forward-looking, but also 

accompanied by meaningful cautionary language. 15 U.S.C. § 78u-5(c)(1)(A)(i). Cautionary 

language is meaningful where it “identif[ies] important factors that could cause actual results to 

differ materially from those in the forward-looking statement[s].” Intuitive Surgical, 759 F.3d at 

1058; Cutera, 610 F.3d at 1110-11. Defendants point to a number of specific cautionary 

statements by Leapfrog, including “if inventory levels are too high . . . our operating results will 

be adversely affected,” see Ex.3 at 12; the “failure to manage production introductions and 

transitions, could adversely affect our operating results,” id. at 9; “it can be difficult to correctly 

predict changing consumer preferences and accurately forecast optimal product and sales targets 

for these products,” id. These warnings identify the very risks that came to fruition here: Plaintiffs 

contend that LeapFrog‟s financial performance was harmed by an excess of inventory. See FAC ¶ 

6. 

 

5

See ¶¶ 7 (“We are going to . . .”), 46 (“There will probably be . . .”); 71 (“That will probably take 

. . .”), 87 (“those units will now clear out . . .”), 88 (“the bulk of it will be cleared”), 157 (referring 

at the very beginning of the year to an expected “advantage[] we have this year”).

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In any event, the FAC does not allege any specific evidence demonstrating that the 

Defendants did not believe their assessment of the inventory problem at the time the statements

were made. As quoted in the FAC, there are no specific figures given about the current level of 

inventory at the time of each particular statement that would demonstrate falsity (and hence 

knowledge thereof) at the time. The FAC cites no specific evidence or cites any reports that 

would have alerted Defendants in advance that inventory problems were going to exceed what 

they had disclosed. Although Plaintiffs allege that LeapFrog “maintained weekly POS reports 

regarding LeapPad sales that showed the previous week‟s sales, as well as year-to-date sales and 

the inventory levels being held by retailers,” FAC ¶ 117, they fail to “cite to any specific report, to 

mention any dates or contents of reports, or to allege their sources of information about any 

reports.” In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1088 (9th Cir. 2002). Nor does the FAC 

allege there was something said during demand planning, consensus, and weekly E-Commerce 

team meetings which would have demonstrated the challenged statements were false and 

knowingly so. FAC ¶¶ 54, 101, 117. Because Plaintiffs have failed to raise any inference that 

defendants “intentionally or with deliberate recklessness” “made false or misleading statements,” 

much less a strong inference, they have failed to plead scienter. Zucco, 552 F.3d at 991.

Plaintiffs‟ theory is basically an assertion of fraud by hindsight – judging the statements on 

how things actually turned out subsequently. Such proof is not adequate to state a claim. Silicon 

Graphics, 183 F.3d at 988 (9th Cir. 1999) (“Congress enacted the PSLRA to put an end to the 

practice of pleading “fraud by hindsight.‟”); In re VeriFone Sec. Litig., 11 F.3d 865, 871 (9th Cir. 

1993) (“The fact that the prediction proves to be wrong in hindsight does not render the statement 

untrue when made.”). Similarly, although Plaintiffs allege that “Defendants were only halfway 

through the shocking amount of carryover inventory for months after May 5, 2014 . . . .”, FAC ¶ 

54, as of May 2014, Defendants may well have been anticipating that the inventory was going to 

move more quickly over the next two or three months. Plaintiffs allege no facts establishing that 

Defendants did not honestly believe such, other than establishing by hindsight where in fact the 

inventory did not in fact move so quickly.

Plaintiffs fail adequately to allege actionable fraud as to the carryover statements.

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b. LeapFrog‟s Statements and Predictions About LeapTV

The second category of statements which Plaintiffs challenge have to do with LeapTV, 

specifically the day of its launch and financial consequences of its delay. See, e.g., FAC ¶¶ 72, 

154. The FAC alleges that Defendants believed that LeapTV would ship to stores at “the end of 

September.” FAC ¶ 81. Though Defendants repeatedly referred to an October launch date, 

Plaintiffs argue that when Defendants represented LeapTv would “hit[] stores in October,” this 

necessarily required a September ship date “as the result of the typical lag time between shipment 

and arrival of the product in stores . . . .” FAC ¶ 77. 

Ultimately, LeapTV shipped in mid-October. FAC ¶ 77. Plaintiffs allege that “[b]y 

September 2014, it was obvious internally that the original launch date [of October 2014, with a 

ship date of September 2014] of LeapTV was not going to be achieved.” FAC ¶ 112. However,

Plaintiffs do not plead any specific allegation that at the time of the announced September 

expected date of shipping Defendants had reports or other information that made it clear that 

LeapFrog would not meet the September ship date. “Missing are allegations linking specific 

reports and their contents to the executives.” Intuitive Surgical, 759 F.3d at 1063. Moreover, the 

sparse allegations Plaintiffs do provide contradict Plaintiffs‟ theory. For example, Plaintiffs allege 

that “for much of 2014 no one at the Company knew when it would launch.” FAC ¶ 67. If “no 

one at the Company,” which logically includes Defendants, knew when LeapTV would ship, then 

how could Defendants know LeapTV would miss its ship date?

Plaintiffs describe “[m]eetings in which discussions regarding LeapTV development being 

behind schedule were attended by those involved in its development, including engineers and 

product managers.” Id. ¶ 66. But Plaintiffs do not plead the specific dates of the meetings with 

engineers, what precisely was said, or even that Barbour or Arthur attended or received reported 

about the meetings. Cf. id. (stating the Chief Marketing Officer “was conveying [] Barbour‟s 

position . . . during the meetings,” but not saying Barbour was informed about the meetings). 

Lacking are “contemporaneous statements or conditions that demonstrate the intentional or the 

deliberately reckless false or misleading nature of the statements when made.” Ronconi v. Larkin, 

253 F.3d 423, 432 (9th Cir. 2001). Plaintiffs‟ allegations are too vague to establish that the 

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statements above were false, or that Defendants were aware of any alleged falsity.

Finally, LeapTV shipped late only by 2-4 weeks, hardly an indication of clear advance 

knowledge that shipping would be delayed. Plaintiffs are required to plead allegations giving rise 

to an “inference of scienter cogent and at least as compelling as any opposing inference one could 

draw from the facts alleged.” Tellabs, 551 U.S. at 324. An equally logical inference suggested by 

Plaintiffs‟ facts is that LeapFrog encountered unexpected difficulties in developing the LeapTV, 

something not uncommon when developing new products, and that these difficulties caused an 

unexpected and slight delay in shipping. Plaintiffs have failed to state a claim with respect to 

statements about LeapTV.

c. LeapFrog‟s Statements Regarding Financial Guidance

The third category of statements that Plaintiffs challenge is LeapFrog‟s financial guidance. 

Plaintiffs argue that, because of the inventory and LeapTv issues addressed above, Defendants‟ 

guidance lacked a reasonable basis. See, e.g., FAC ¶ 50. Defendants contend that, because 

Plaintiffs cannot establish the statements regarding inventory and LeapTV were false, they also 

cannot show that the statements regarding financial guidance were false at the time they were 

made. MTD at 14.

As a general proposition, missed guidance alone generally does not render Defendants‟ 

financial projects false or misleading. See In re Rigel Pharms., Inc. Secs. Litig., Inter-Local 

Pension Fund GCC/IBT v. Deleage, 697 F.3d 869, 882 n.12 (9th Cir. 2012) (“The mere fact that 

stated expectations fail to pass does not make a statement concerning expectations or plans 

false.”); see also In re VeriFone Sec. Litig., 11 F.3d 865, 871 (9th Cir. 1993) (the fact that a 

prediction proves to be wrong in hindsight does not render the statement untrue when made); In re 

GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1549 (9th Cir. 1994) (plaintiffs must show that a 

difference between earlier and later statements is “not merely the difference between two 

permissible judgments, but rather the result of a falsehood”). 

More specifically, Plaintiffs‟ argument fails for two reasons. First, LeapFrog disclosed the 

fact that it faced challenging sales trends. There were changes in the industry such as tightened 

inventory controls and a fall-off in sales for all margins, which Defendants predicted would harm 

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sales. See FAC ¶ 104 (noting that retailers were “running far tighter inventories” and “lowering [] 

outlook” as a result). Defendants thus warned investors about the effect this industry-wide decline 

would have on LeapFrog‟s results. Second, sales of other new LeapFrog products (such as new 

LeapPad tablets, id. ¶¶ 103, 154) were weaker than expected. Plaintiffs also acknowledge that 

Defendants faced a “declining demand for the LeapPad tablets” irrespective of the carryover 

inventory. See FAC ¶¶ 12, 163; see also ¶ 118 (“These declines informed Defendants that the 

Company‟s LeapPad business was deteriorating.”). As new tablets failed to sell well, this decline 

cannot necessarily be attributed to Defendants‟ carryover inventory problem. See id. ¶ 154 (“two 

exciting new tablets, the LeapPad3 and LeapPad Ultra XDi” also failed to perform as expected). 

The Complaint does not allege the decline in demand for tablets was foreseeable and incorporated 

into the guidance.

Given what appears to be an unexpected decline in demand for a key LeapFrog product, 

along with the lack of viable allegations of knowing false representation about the state of 

inventory, Plaintiffs have not established the financial guidance was false and knowingly so.

d. LeapFrog‟s Statements About Impairment Charges

The fourth category of challenged statements, regarding financial results for the second 

and third quarters of 2015, focus on whether LeapFrog should have recorded impaired goodwill or 

long-lived assets earlier than it actually did. See FAC ¶¶ 171, 24.6 Defendants correctly note that 

Plaintiffs must show “that the accounting was a result of a „falsehood‟ rather than the „difference 

between two permissible judgments.‟” Reply at 6. Plaintiffs have not done so.

With regard to the impairment of long-lived assets, Plaintiffs argue that Defendants should 

have taken a $36.5 million impairment charge one fiscal quarter before they did so. See FAC ¶ 

172. Specifically, they allege that “Defendants falsely claimed” that LeapFrog‟s Form 10-Q for 

third quarter fiscal 2015 “was a fair statement of LeapFrog‟s financial results and that the results 

were prepared in accordance with GAAP.” FAC ¶ 168. Plaintiffs also contend Defendants lied 

 

6

Plaintiffs contend that “Defendants fail to address the particularized allegations concerning their 

failure to test for goodwill impairment at 2Q15 or record $19.5 million in impaired goodwill.” 

Opp. at 6. However, Defendants addressed both these topics in their Motion. See MTD at 15.

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when they said that “the Company concluded that its long-lived assets were not impaired as of 

December 31, 2014.” Id. Plaintiffs do not appear to argue that Defendants failed to test for 

impairment, but rather challenge Defendants‟ conclusion that long-lived assets were not impaired. 

See id.

7

Plaintiffs have failed sufficiently to allege LeapFrog lied when it stated its long-lived 

assets were not impaired. They contend LeapFrog was required “to evaluate its long-lived assets 

for impairment whenever events or changes in circumstances indicate[d] that the carrying value of 

an asset group may not be recoverable.” FAC ¶ 173 (emphasis added) (citing but not quoting ASC 

360-10-35-17). However, the relevant accounting standard states that “[a]n impairment loss shall 

be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and 

exceeds its fair value.” ASC 360-10-35-17 (emphasis added). This occurs when “[t]he carrying 

amount of [the] long-lived asset . . . exceeds the sum of the undiscounted cash flows expected to 

result from the use and eventual disposition of the asset . . . .” Id. (emphasis added). This 

determination, in turn, should be calculated from “the existing service potential of the asset,” 

which “encompasses its remaining useful life, cash-flow-generating capacity, and for tangible 

assets, physical output capacity.” ASC 360-10-35-33. 

According to Plaintiffs, Defendants had to take an impairment charge because of “the 

„significant decline‟ of the trading value of LeapFrog‟s stock,” which “follow[ed] announcement 

of 3Q15 results.” Opp. at 9. That is, Defendants‟ 3Q15 Form 10-K issued disappointing results, 

which then led to a stock decline, which then supposedly led to the need to take the $36.5 million 

impairment charge. See Opp. at 9-10; FAC ¶ 176. However, stock price is not included in the list 

of factors companies are directed to consider when evaluating their long-lived assets. See ASC 

360-10-35-33. Plaintiffs‟ FAC is silent on the factors that companies are directed to consider. See

FAC ¶¶ 167-83 (failing to discuss the assets‟ useful life, cash-flow-generating capacity, or 

physical output capacity). Moreover, by Plaintiffs‟ argument, the market‟s reaction to the results 

 

7

Plaintiffs state that “[f]or 3Q15, Defendants acknowledged the existence of triggers requiring 

testing . . . as of December 31, 2014 . . . .” ¶ 174. They do not allege Defendants failed to 

perform any required test.

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required the impairment charge; it would therefore be impossible for Defendants to calculate the 

impairment before releasing results to the public and getting that reaction. Thus, Plaintiffs‟ 

argument actually supports Defendants‟ statement that no impairment charge was necessary as of 

December 31, 2014, as according to Plaintiffs, the event that necessitated that impairment charge 

did not occur until several weeks later. 

Plaintiffs also seem to argue that Defendants should have taken an impairment charge

between January 23 and February 9, 2015. FAC ¶ 171. But the statement Plaintiffs challenge 

says that “long-lived assets were not impaired as of December 31, 2014.” FAC ¶ 168. Because of 

this limitation, the statement was not rendered false by events occurring between January 23 and 

February 9, 2015.

With regard to goodwill, Plaintiffs have not provided enough facts to suggest Defendants 

“fail[ed] to timely write-off $19.5 million impaired goodwill.” FAC ¶ 126. Plaintiffs contend 

that Defendants were required “to test for goodwill impairment if any of the triggering events 

made it more likely than not” that the value of LeapFrog‟s goodwill was less than its book value. 

Id. ¶ 131 (citing ASC 350-20-35-30). Those triggering events are outlined in ASC 350-20-35-

30(C):

a. Macroeconomic conditions such as deterioration in general 

economic conditions, limitations on accessing capital, fluctuations in 

foreign exchange rates, or other developments in equity and credit 

markets;

b. Industry and market considerations such as a deterioration in the 

environment in which an entity operates, an increased competitive 

environment, a decline in market-dependent multiples or metrics 

(consider in both absolute terms and relative to peers), a change in 

the market for an entity‟s products or services, or a regulatory or 

political development;

c. Cost factors such as increases in raw materials, labor, or other 

costs that have a negative effect on earnings and cash flows;

d. Overall financial performance such as negative or declining cash 

flows or a decline in actual or planned revenue or earnings 

compared with actual and projected results of relevant prior periods;

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e. Other relevant entity-specific events such as changes in 

management, key personnel, strategy, or customers; contemplation 

of bankruptcy; or litigation;

f. Events affecting a reporting unit such as a change in the 

composition or carrying amount of its net assets, a more-likely-thannot expectation of selling or disposing all, or a portion, of a 

reporting unit, the testing for recoverability of a significant asset 

group within a reporting unit, or recognition of a goodwill 

impairment loss in the financial statements of a subsidiary that is a 

component of a reporting unit; and

g. If applicable, a sustained decrease in share price (consider in both 

absolute terms and relative to peers).

FAC ¶ 30 (emphases removed). Plaintiffs contend that triggers b, d, and g were present. Id.

Specifically, Plaintiffs argue that Defendants lied when they said “they did „not believe‟ 

there were „sufficient indicators of [goodwill] impairment‟ to even test for goodwill impairment”

“as of September 30, 2014.” FAC ¶ 128, 123. In City of Dearborn Heights Act 345 Police & Fire 

Ret. Systems v. Align Technology, Inc., 65 F. Supp. 3d 840 (N.D. Cal. 2014), the plaintiffs argued 

that the defendants “did not conduct interim goodwill impairment analysis, nor did it take any 

interim goodwill impairments,” when it should have. Id. at 845. The court noted that, while the 

Ninth Circuit has yet to weigh in on this issue, the Second Circuit has twice held that because 

goodwill depends on estimates and “„management‟s determination of the “fair value” of the assets, 

. . . statements regarding goodwill . . . are subjective ones rather than “objective factual matters.”‟” 

Id. at 850 (quoting Fait v. Regions Fin. Corp., 655 F.3d 105, 111 (2d Cir.2011)). Agreeing with 

the Second Circuit, the court held that “statements regarding goodwill are inherently subjective 

and involve management‟s opinion.” Id. Because these were expressions of opinion, the court 

required plaintiffs to show the opinions were “both objectively and subjectively false or 

misleading.” Id. at 851 (quoting Rubke v. Capitol Bancorp Ltd, 551 F.3d 1156, 1162 (9th Cir. 

2009)). Further supporting the conclusion that they are expressions of opinion rather than 

statements of fact, the statements here expressly contains the qualifier, “the Company does not

believe.” FAC ¶¶ 123, 128. These are thus statements of opinion. See Apollo Grp., 774 F.3d at

607 (holding allegedly misleading statements were opinions where they “were subjective and 

preceded by qualifiers, such as „We believe.‟”). 

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Opinions, like predictions, are actionable only if the statement is not genuinely believed, 

there is no reasonable basis for that belief, or the speaker is aware of undisclosed facts that 

“seriously undermine the accuracy of the statement.” In re Wells Fargo Sec. Litig., 12 F.3d 922, 

930 (9th Cir. 1993), superseded by statute on other grounds, 15 U.S.C. § 78u-4(b)(1). In other 

words, because these statements regarding goodwill “are alleged to be misleading opinions, not 

statements of fact,” Plaintiffs can state a claim “only if the complaint alleges with particularity that 

the statements were both objectively and subjectively false or misleading.” Rubke, 551 F.3d at

1162.

8

 Plaintiffs must allege with particularity both that Defendants did not believe this statement, 

and that the statement is objectively false. See id. 

In the case at bar, Plaintiffs do not allege that Defendants believed the following statement

was false: “As of September 30, 2014, based on its assessment of various qualitative factors and 

projection of future operating results, the Company does not believe that sufficient indicators of 

impairment of its goodwill currently exist that would require performing step one of the two-step 

test for goodwill impairment.” Ex. 11 at 9. Plaintiffs contend that Defendants knew of the 

conditions that rendered the statement false, but they do not actually allege that Defendants did not 

believe this statement. See FAC ¶ 128; see generally, FAC ¶¶ 122-147. Plaintiffs thus fail to 

allege the statement was subjectively false. Furthermore, the statement does not appear to be 

objectively false. Plaintiffs contend that good will was impaired because LeapFrog had 

experienced a sustained decrease in share price, see FAC ¶¶ 133-38; had poor overall financial 

performance, id. ¶¶ 139-142; and was facing increased competition and changing industry 

conditions, id. ¶¶ 143-45. The triggering event on which Plaintiffs rely most heavily is “a 

sustained decrease in share price.” FAC ¶ 130(g) (emphasis added). They allege that, because 

Defendants‟ share price decreased from the $7.00 range to “the $6 range” for the trading period 

between August 4, 2014 and September 30, 2014, Defendants should have conducted an 

impairment analysis. FAC ¶¶ 133-134. But the FAC does not establish that a depressed period of 

 

8 While this was a section 11 case, its principles have been applied in section 10 cases as well. See

City of Omaha, Neb. Civilian Employees’ Ret. Sys. v. CBS Corp., 679 F.3d 64, 67 (2d Cir. 2012) 

(applying Rubke); City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 

65 F. Supp. 3d 840, 851 (N.D. Cal. 2014) (same).

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a little over a month is enough to be considered a “sustained” decrease, particularly since the stock 

traded in the $6 range for most of April and May, 2014. Ex. 22. Thus, Plaintiffs have failed to 

plead why this period required a goodwill impairment charge.9 

Finally, as Defendants note, accounting standards also direct them to consider “positive 

and mitigating events.” Mot. at 17 n.7; see also FAC ¶ 142 (same). Plaintiffs argue 

“Defendants . . . knew that there were no offsetting „positive and mitigating circumstances‟ that 

could conceivably obviate an impairment charge,” referring to the alleged problems with LeapTV, 

declining tablet sales, and carryover inventory. FAC ¶ 142. But these are not Defendants‟ only 

products. For example, Defendants also introduced LeapBand, “the first wearable activity tracker 

for children,” “inspired by the Let‟s Move initiative by First Lady Michelle Obama.” Ex. 8 at 5; 

see also FAC ¶ 82 (referring to LeapBand). This product was purportedly “a hit in many of 

[LeapFrog‟s] markets around the world,” and was “selling very well in most of those 

marketplaces.” Ex. 11 at 4, 15. Thus, the fact that there were problems in the three areas of 

competitive environment, negative financial performance, and decreased share price does not by 

itself show that Defendants could not have considered positive events such as the promising sales 

of LeapBand, and expected those events to offset the problems. As above, Plaintiffs have failed to 

raise an “inference of scienter cogent and at least as compelling as an[] opposing inference” of 

innocent conduct. Tellabs, 551 U.S. at 324. 

3. PSLRA Safe Harbor

As Defendants note, the Court has already observed that the majority of the alleged 

misrepresentations are forward-looking, especially forecasting. MTD at 23. For example, these 

statements discuss “how we think LeapTV is going to do, what impact it‟s going to have, how we 

think the inventory is going, and how long it will take to dispose of that.” Id. (quoting Transcript 

at 3:8-12). 

 

9

Plaintiffs also allege that “[a]t the time Defendants reported LeapFrog‟s 2Q15 financial results 

the Company was underwater,” and that it was “underwater beginning on October 24, 2014.” 

FAC ¶¶ 127, 138. Plaintiffs use the stock prices from November 4 and October 24, 2014 for their 

calculations. But the statement Plaintiffs challenge refers to good will “as of September 30, 

2014.” FAC ¶ 123. Even assuming LeapFrog was underwater after October 24, 2014, this does 

not render Defendants‟ prior statement as to September 30, 2014 false.

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Twenty-two of these statements forecast quarterly and annual financial results, including 

projected net sales and earnings growth. See FAC ¶¶ 41-43, 72, 80, 82, 83-86, 90, 103-07, 156, 

169. Such statements are inherently forward-looking. Intuitive Surgical, 759 F.3d at 1058

(“growth and revenue projections . . . are forward-looking on their face.” ). Five more statements 

discuss future operations, such as the launch date for LeapTV and how that launch date will affect 

LeapTV‟s performance. See id. ¶¶ 44, 72, 81, 91, 154. Finally, another four discuss LeapFrog‟s 

plans and ability to work through carryover inventory. See id. ¶¶ 46, 71, 88, 89; see also Docket 

No. 72-1, Defs.‟ Appendix A (grouping statements).

All of these statements fall within the PSLRA‟s safe harbor. They are expressly forwardlooking and were accompanied by meaningful cautionary language. For example, Defendants 

expressly warned that “if inventory levels are too high . . . our operating results will be adversely 

affected,” and that the “failure to manage production introductions and transitions, could adversely 

affect our operating results.” Defs.‟ Ex. 3 at 12, 9. This is precisely the problem Plaintiffs 

complain of with regard to the carryover inventory. Defendants warned there was no certainty that 

“any new products or services will be widely accepted and purchased by consumers” and “if the 

marketing for our products and services fails to resonate with consumers, particularly during the 

critical holiday season . . . our business and operating results could be materially affected.” Id. at 

9. This is precisely the problem that occurred with regard to LeapTV‟s disappointing holiday 

sales. Not only were Defendants‟ forward-looking statements accompanied by cautionary 

language, but the problems of which Plaintiffs complain were specifically disclosed within that 

cautionary language. This satisfies the PSLRA‟s requirement that the cautionary language be 

“meaningful.” See 15 U.S.C.A. § 78u-5(c)(1)(A). 

4. Whether, When Considered Holistically, Plaintiffs‟ Complaint Adequately Pleads 

Scienter

Plaintiffs‟ failure to allege a misstatement or omission is enough to dismiss the FAC. See 

Apollo Grp. Inc., 774 F.3d at 607. Despite their recitation that scienter should be assessed 

“holistically,” Opp. at 20, Plaintiffs also failed to adequately plead scienter. Even considered 

holistically, the FAC fails to raise an inference of scienter that is as strong as the inference of 

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innocence. Tellabs, 551 U.S. at 326. 

As an example, Plaintiffs contend that Defendants were aware the LeapTV would have a 

delayed release date in part because the impossibility of meeting the schedule was discussed at 

engineering meetings. FAC ¶ 66. While Plaintiffs allege that management‟s views were 

expressed to the engineers when the Chief Marketing Officer “convey[ed] Defendant Barbour‟s 

position on LeapTV during” engineering meetings, see id., Plaintiffs do not allege what 

information, if any, went in the other direction, from engineers to management. Nowhere do they 

plead that anyone was tasked with reporting the engineers‟ concerns about meeting deadlines to

management. The only meetings Defendants are alleged to have attended are “monthly consensus 

meetings.” FAC ¶¶ 54, 101. But Plaintiffs only allege that those meetings were “to determine 

how many products needed to be produced, shipped, and delivered,” not that they discussed 

development problems with the LeapTV. Id. ¶ 101. 

Without allegations showing Defendants knew of the engineers‟ concerns, Plaintiffs are 

unable to show that Defendants acted with scienter. 

5. Sufficiency of Count II: Violation of Section 20(a) of the 1934 Act

As noted above, Section 20(a) imposes control person liability only where there is an 

underlying violation of the securities laws. See 15 U.S.C. § 78t(a). Because Defendants did not 

violate Section 10(b), the Court dismisses the Section 20(a) claim as well.

V. CONCLUSION

For the foregoing reasons, Defendants‟ motion to dismiss is GRANTED with leave to 

amend within thirty (30) days from the date of this order. 

Although the Court is skeptical that Plaintiffs can amend to assert valid claims, it will 

afford Plaintiffs one last opportunity to amend.

This order disposes of Docket No. 72.

IT IS SO ORDERED.

Dated: August 2, 2016

______________________________________

EDWARD M. CHEN

United States District Judge

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