Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_00-cv-02287/USCOURTS-cand-4_00-cv-02287-0/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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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

In re HARMONIC, INC., SECURITIES

LITIGATION

No. C 00-2287 PJH _______________________________ ORDER GRANTING MOTION 

THIS ORDER REFERS TO: TO DISMISS IN PART AND 

ALL ACTIONS DENYING IT IN PART

_______________________________/

 Before the court is defendants’ motion to dismiss certain claims alleged in the third

amended complaint. Having read the parties’ papers and carefully considered their

arguments and the relevant legal authority, and good cause appearing, the court GRANTS

the motion in part and DENIES it in part.

INTRODUCTION

This is a proposed class action alleging violation of federal securities laws. Plaintiffs

filed suit against Harmonic, Inc. (“Harmonic”), C-Cube Microsystems, Inc. (“Old C-Cube”),

and a number of their top executives, following a decline in stock price of both Harmonic

and Old C-Cube shortly after the May 3, 2000, merger between Harmonic and a division of

Old C-Cube. Plaintiffs alleged claims under the 1934 Securities Exchange Act, against

both the Harmonic defendants and the C-Cube defendants, and under the 1933 Securities

Act, against the Harmonic defendants only. 

On November 13, 2003, this court dismissed the second amended complaint

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 The remaining entity was renamed C-Cube Semiconductor, Inc., which was later

renamed C-Cube Microsystems, Inc. (“New C-Cube”).

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(“SAC”) without leave to amend. On November 8, 2005, the Ninth Circuit affirmed the

dismissal of the claims under the 1934 Securities Exchange Act (thereby affirming the

dismissal of all C-Cube defendants from the case); and reversed the dismissal of the 1933

Securities Act claims, with the exception of the § 15 claim against Harmonic, as to which it

granted leave to amend. 

On May 17, 2006, plaintiffs filed the third amended complaint (“TAC”), in which they

amended the § 15 claim against Harmonic, added a new § 15 defendant, and amended the

§ 12(a)(2) claim to add new defendants and new allegations of material omissions. In

addition, the TAC retained as “background” many of the allegations that had previously

been used to support plaintiffs’ claims under the 1934 Securities Exchange Act.

Defendants now move to dismiss the revised § 12(a)(2) claim, and the revised 

§ 15 claim, and also seek an order striking the allegations against the new defendants in

those claims, as well as the “background” allegations pertaining to the dismissed Exchange

Act claims. 

BACKGROUND

On October 27, 1999, Harmonic and Old C-Cube announced that Harmonic would

merge with DiviCom, Inc. (“DiviCom” – a division of Old C-Cube), by acquiring C-Cube after

C-Cube had spun off its non-DiviCom assets. On March 23, 2000, Harmonic filed a Form

S-4 Registration Statement for the issuance of 25,371,225 shares of Harmonic common

stock. Included with the registration statement was a Harmonic and C-Cube joint proxy

statement (seeking shareholder approval of the merger and an increase in the authorized

shares of Harmonic stock) and prospectus (relating to the issuance of Harmonic stock to

the former C-Cube shareholders). On April 24, 2000, the shareholders of both companies

voted to approve the merger. On May 3, 2000, the merger was completed. Pursuant to the

merger, Harmonic acquired DiviCom, and Old C-Cube ceased to exist.1

Twelve days after the completion of the merger, on May 15, 2000, Harmonic filed a

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Form 10-Q with the SEC reporting that, for the first quarter of 2000 – when DiviCom had

still been a C-Cube subsidiary – DiviCom’s income had declined from the first quarter of

1999, while DiviCom’s revenues had increased only 3%. On June 26, 2000, Harmonic

announced preliminary results for the second quarter of 2000, which plaintiffs claim were

approximately half the amount previously forecast by defendants. 

On June 28, 2000, plaintiffs filed suit, asserting claims under the 1934 Securities

Exchange Act against Harmonic and C-Cube defendants, and claims under the 1933

Securities Act against Harmonic defendants only. Plaintiffs alleged that Harmonic, 

C-Cube, and several of their executives had made false and misleading statements about

Harmonic’s past financial performance and its future prospects – in particular about

Harmonic’s sales to AT&T, one of its largest customers. Plaintiffs also claimed that

defendants had misrepresented DiviCom’s financial condition by failing to report that

DiviCom’s sales had declined after the merger announcement, which led to customer

concerns about how the merger would affect them. Plaintiffs asserted that defendants’

purpose in making these statements was to obtain shareholder approval of Harmonic’s

acquisition of DiviCom, while the defendants engaged in insider selling. 

The court dismissed the first amended complaint for failure to state a claim, with

leave to amend, and plaintiffs filed the SAC on August 13, 2001. The SAC asserted the

same Exchange Act claims against the same Harmonic and C-Cube defendants. The SAC

also alleged claims under §§ 11(a), 12(a)(2), and 15 of the Securities Act against the

Harmonic defendants. The § 11(a) claim was asserted against Harmonic and seven

Harmonic executives – Anthony Ley, Robin Dickson, Moshe Nazerathy, Floyd Kvamme,

David Lane, Barry Lemieux, and Michel Vaillaud. The § 12(a)(2) claim and the §15 control

person claim were asserted against Harmonic and Ley only. 

On November 13, 2002, this court dismissed the SAC without leave to amend. The

Exchange Act claims were dismissed for failure to plead falsity and scienter with

particularity, as required by the Private Securities Litigation Reform Act (PSLRA) and

Federal Rule of Civil Procedure 9(b). The Securities Act claims were dismissed on the

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basis that they were grounded in fraud, and that plaintiffs had failed to allege fraud with

particularity. The control-person claims were dismissed on the basis that the plaintiffs had

failed to plead the primary violations. 

Plaintiffs filed a motion to amend the judgment – in essence a motion for

reconsideration of the order denying leave to amend. That motion was denied.

Both sides appealed, and the Ninth Circuit affirmed the dismissal of the Exchange

Act claims, but reversed the dismissal of the § 11 and § 12(a)(2) claims, finding that those

claims were not grounded in fraud because plaintiffs had alleged a basis for § 11 liability

other than fraud – i.e., the omission of a material fact from the registration statement – and

had adequately pleaded a violation of § 12(a)(2) by alleging that defendants negligently

omitted material facts from the prospectus. See Knollenberg v. Harmonic, Inc., 152 Fed.

Appx. 674, 684 (9th Cir. 2005). 

The Ninth Circuit also reversed the dismissal of the § 15 claim as to Ley, finding that

plaintiffs had adequately stated a claim by alleging Ley’s position as president, CEO, and

Chairman of the Board of Harmonic; and alleging that Ley had signed the registration

statement, and jointly with his co-defendants, actively caused the prospectus to be drafted,

revised, and approved. Id. at 685. The court affirmed the dismissal of the § 15 claim

against Harmonic, noting that it rested on allegations that Harmonic exerted control over

itself, but stated that plaintiffs “might be able to” amend the complaint so as to “cure th[e]

defect.” Id.

Both sides filed petitions for rehearing, which were denied by the Ninth Circuit

without comment on February 16, 2006. 

On May 17, 2006, plaintiffs filed the TAC, in which they amended the § 15 claim

against Harmonic, but also added a new “control-person” defendant (Harmonic executive

Dickson). The TAC alleges that Ley controlled Harmonic, by virtue of his positions as

president, CEO, and Chairman of the Board; that Dickson controlled Harmonic, by virtue of

his position as CFO; and that Harmonic controlled both Ley and Dickson in its capacity as

their employer.

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 It is not entirely clear whether the TAC alleges the § 12(a)(2) claim directly against

Dickson. 

3

 In the SAC, this statement was alleged to be misleading in violation of § 14(a) of the

Exchange Act (prohibiting the inclusion of false or misleading statements in proxy statements

or solicitations), not in violation of the Securities Act. The § 14(a) claim was dismissed.

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Plaintiffs also amended the § 12(a)(2) claim to add six defendants – Harmonic

executives Dickson, Nazerathy, Kvamme, Lane, Lemieux, and Vaillaud.2

 In addition, the

TAC alleges a third false or misleading statement in the registration statement. The first

two allegedly misleading statements are (1) the statement that “[m]ore recently, Harmonic’s

sales to AT&T has [sic] accounted for an increasingly significant portion of its historic net

sales,” which plaintiffs claim was misleading because it omitted to state that Harmonic’s

sales to AT&T had fallen in the last quarter of 1999; and (2) the “hypothetical statement”

about a concentration of Harmonic’s and DiviCom’s customer base and the negative effect

that a loss of a key customer would have on the combined company following the merger,

which plaintiffs claim was misleading because it omitted to state either that AT&T’s sales

had declined, or that DiviCom’s sales had declined shortly after the October 1999 merger

announcement, and that DiviCom’s largest customers had openly expressed serious

concerns regarding the effect of the merger on those customers’ operations. 

The third allegedly misleading statement is the statement in the joint proxy

statement/prospectus that each company’s Board of Directors had unanimously determined

prior to the announcement of the merger that “the merger is in the best interests” of their

respective shareholders.3

 The TAC asserts that this statement was false and misleading

as to the C-Cube shareholders because unbeknownst to those shareholders, they would be

acquiring shares in a company that was already experiencing a sharp decline in its sales to

AT&T; and also because DiviCom was already experiencing a dramatic downturn in growth

as a result of three key customers withdrawing orders in response to the merger. 

In addition, the TAC retains as “background” many of the allegations that plaintiffs

previously used to support their claims under the Exchange Act – e.g., allegations of

misleading statements in press releases, analyst reports, and other public statements.

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DISCUSSION

A. Legal Standards

1. Motions to Dismiss for Failure to State A Claim

A court should dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to

state a claim only where it appears beyond doubt that plaintiff can prove no set of facts in

support of the claim which would entitle the plaintiff to relief. Conley v. Gibson, 355 U.S.

41, 45-46 (1957); Williamson v. Gen’l Dynamics Corp., 208 F.3d 1144, 1149 (9th Cir.), cert.

denied, 531 U.S. 929 (2000). All allegations of material fact are taken as true and

construed in the light most favorable to the nonmoving party. Smith v. Jackson, 84 F.3d

1213, 1217 (9th Cir. 1996). 

Review is generally limited to the contents of the complaint. Allarcom Pay

Television, Ltd. v. Gen. Instrument Corp., 69 F.3d 381, 385 (9th Cir. 1995). However,

material that is properly presented to the court as part of the complaint may be considered

as part of a motion to dismiss. Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir.

2001). In addition, whether requested or not, the court may take judicial notice of facts that

are capable of accurate and ready determination by resort to sources whose accuracy

cannot be questioned. See Fed. R. Evid. 201; see also In re Silicon Graphics, Inc., Sec.

Litig., 183 F.3d 970, 986 (9th Cir. 1999). 

2. Motions to Strike

Federal Rule of Civil Procedure 12(f) allows the court to “order stricken from any

pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous

matter." Fed. R. Civ. P. 12(f). Motions to strike are not favored and "should not be granted

unless it is clear that the matter to be stricken could have no possible bearing on the

subject matter of the litigation." Colaprico v. Sun Microsystem, Inc., 758 F.Supp. 1335,

1339 (N.D. Cal.1991). When a court considers a motion to strike, it "must view the

pleading in a light most favorable to the pleading party." In re 2TheMart.com, Inc. Sec Lit.,

114 F Supp. 2d 955, 965 (C.D. Cal. 2000). A court must deny the motion to strike if there is

any doubt whether the allegations in the pleadings might be relevant in the action. Id.

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B. The 1933 Securities Act

The 1933 Securities Act prohibits the public sale of securities without a registration

statement, or pursuant to a registration statement or a prospectus containing a materially

false statement. The Securities Act consists of 26 sections and 2 schedules. Section 2 

defines the important terms used in the Act. 15 U.S.C. § 77b. A “registration statement” is

“the statement provided for in [§ 6 of the Act] and includes any amendments thereto and

any report, document, or memorandum filed as part of such statement or incorporated

therein by reference.” Id. § 77b(8). A “prospectus” is “any prospectus, notice, circular,

advertisement, letter, or communication, written or by radio or television, which offers any

security for sale or confirms the sale of any security . . . “ with two exceptions, not

significant here. Id. § 77b(10). The Supreme Court has described “prospectus” as “a term

of art referring to a document that describes a public offering of securities by an issuer or

controlling shareholder.” Gustafson v. Alloyd Co., 513 U.S. 561, 584 (1995).

Section 6 describes the procedure for registering a security, and section 7 and the

two accompanying schedules detail the information required in the registration statement. 

15 U.S.C. §§ 77f, 77g, 77aa. Section 11 provides civil penalties for providing false

information in any part of the registration statement – describing who may be sued, the

shifting burdens of proof, the standard of negligence, and the calculation of damages. Id.

§ 77k. Section 10 lists the information required in the prospectus. Id. § 77j. Section 12

provides for civil liability for selling a security without an effective registration statement, or

for providing false information in a “prospectus or oral communication.” Id. § 77l. 

C. Defendants’ Motion

1. Section 15 Claim

Defendants argue that the § 15 claim against Harmonic, Ley, and Dickson should be

dismissed for failure to plead control-person liability. Section 15 imposes joint and several

liability upon every person who controls any person liable under § 11 or § 12. 15 U.S.C. 

§ 77o. To establish a prima facie case of control-person liability, a plaintiff must prove a

primary violation of the federal securities laws, and that the defendant exercised actual

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power or control over the primary violator. Howard v. Everex Sys., Inc., 228 F.3d 1057,

1065 (9th Cir. 2000). 

Although § 15 is not identical to § 20 of the 1934 Exchange Act, the “controlling

person” analysis is the same. Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1578 (9th

Cir. 1990). The statute does not define “control,” but the SEC has defined it to mean “the

possession, direct or indirect, or the power to direct or cause the direction of the

management and policies of a person, whether through ownership of voting securities, by

contract, or otherwise.” 17 C.F.R. § 230.405. 

"In general, the determination of who is a controlling person . . . is an intensely

factual question." Arthur Children's Trust v. Keim, 994 F.2d 1390, 1396 (9th Cir. 1993). 

Congress, in using the term "controlling person" intended to encompass all persons who

exerted actual control over someone who violated the securities laws. Durham v. Kelly,

810 F.2d 1500, 1504 (9th Cir. 1987). To establish that someone is a "controlling person"

the complainant must show that there was a relationship between the controlling and

controlled person and that actual power or influence was exerted over the alleged

controlled person. Id. at 1503-04.

 Defendants argue that the § 15 claim must be dismissed because a defendant

cannot be both a primary violator and a controlling person, as the TAC alleges with regard

to Harmonic, Ley, and Dickson. They also contend that one defendant cannot both control

another defendant and be controlled by that defendant, as the TAC alleges – i.e., that

Harmonic controlled Ley and Dickson, and that Ley and Dickson controlled Harmonic.

In support of the argument that a defendant cannot be both a primary violator and a

controlling person, defendants cite Kalnit v. Eichler, 85 F.Supp. 2d 232 (S.D.N.Y. 1999) and

two cases that cite Kalnit – In re Capstead Mortgage Corp. Sec. Litig., 258 F.Supp. 2d 533

(N.D. Tex. 2003), and PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 697 n.4 (6th Cir.

2004). 

In Kalnit, the plaintiff sued a corporation and its directors under § 10(b) and Rule

10b-5, and also sued the individual directors under § 20. The district court dismissed the 

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§ 20 claim because the plaintiff had not adequately alleged a primary violation. Kalnit, 85

F.Supp. 2d at 246. The court then stated that even had the plaintiff adequately alleged a

primary violation, the § 20 claim against the individual directors would have failed because

the directors were alleged to be primary violators (the first element required for the controlperson claim) and “could not be control persons.” Id. 

In Capstead, the plaintiffs alleged § 20 claims against three defendants whom they

had also named as primary violators under § 10(b) and Rule 10b-5. The district court first

observed that “[a]rguably, a § 20(a) claim cannot be asserted against a defendant who is

also charged with primary violation of § 10(b) and Rule 10b-5" because “secondary liability

under § 20(a) is an alternative, not a supplement, to primary liability under § 10(a) and Rule

10b-5" (citing Lemmer v. Nu-Kote Holding, Inc., 2001 WL 1112577, at *12 (N.D. Tex., Sept.

6, 2001), which also relied on Kalnit). However, the court found that it “need not decide the

issue,” because the complaint failed to adequately plead a primary violation by the

“controlled person.” Capstead, 258 F.Supp. 2d at 566. 

Similarly, in PR Diamonds, the Sixth Circuit stated, “Without deciding the question,

we note that some authority suggests that a plaintiff may not be able simultaneously to

assert both Section 10(b) and Rule 10b-5 claims and Section 20(a) claims against the

same defendant.” 364 F.3d at 697 n.4 (citing Kalnit, Capstead, and Lemmer). 

In opposition, plaintiffs argue that in ruling that plaintiffs stated a claim against Ley

for control-person liability, and also stated a claim against him under § 11(a) and 

§ 12(a)(2), the Ninth Circuit has already determined that a defendant in the present case

can be alleged to be both a primary violator and a controlling person. In addition, plaintiffs

assert that defendants waived this argument as to Harmonic and Ley by failing to raise it in

their motion to dismiss the FAC or their motion to dismiss the SAC, or before the Ninth

Circuit in their motion for reconsideration.

Plaintiffs also argue that Kalnit and Capstead are not persuasive authority, because

the district courts in those cases first determined that the plaintiffs had failed to allege a

primary violation, thereby eliminating any possibility of control-person liability. They argue,

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therefore, that the statements in those cases that a defendant cannot be both a primary

violator and a controlling person are dicta. 

Plaintiffs cite a number of cases in which the courts have found claims adequately

asserted against a single defendant for violations of securities laws as both primary violator

and controlling person (e.g., In re Daou Sys., Inc., Sec. Litig, 411 F.3d 1006, 1029-30 (9th

Cir. 2005), cert. denied, 126 S.Ct. 1335 (2006); Nursing Home Pension Fund, Local 144 v.

Oracle Corp., 380 F.3d 1226, 1235 (9th Cir. 2004); No. 84 Employer-Teamster Joint

Council Pension Trust Fund v. America West Holding Corp., 320 F.3d 920, 937-46 (9th Cir.

2003); and In re North Point Communications Group, Inc., Sec. Litig., 221 F.Supp. 2d

1090, 1105-06 (N.D. Cal. 2002)). Plaintiffs also contend that in any event, alternative

theories of liability are proper at the pleading stage.

The court finds defendants’ argument unpersuasive. Their only support is the Kalnit

decision, as Capstead, Lemmer, and PR Diamonds all rely on Kalnit. However, the Kalnit

decision plainly indicates that the control-person claim was dismissed because the

complaint failed to plead a primary violation. Moreover, there appears to be no authority for

a rule that plaintiffs cannot plead that the same defendant is both the primary violator and a

controlling person. While defendants are correct that none of the cases cited by plaintiffs

contain any analysis of whether a defendant can be both a primary violator and a

controlling person, plaintiffs are correct that the Ninth Circuit has allowed cases to go

forward where the plaintiffs have alleged that a defendant is both a primary violator and a

controlling person. 

For example, in America West, the plaintiffs sued the corporation, its officers and

directors, and two of its largest shareholders (TPG and Continental) under the 1934

Securities Exchange Act. The district court dismissed the case for failure to comply with

the requirements of the PSLRA. The Ninth Circuit reversed, finding that the plaintiffs had

adequately alleged § 10(b) and Rule 10b-5 claims against all the defendants, including

TPG and Continental; and had also adequately alleged control-person claims against TPG

and Continental. America West, 320 F.3d at 937-46. 

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This court is more persuaded by the fact that the Ninth Circuit allowed the plaintiff to

allege claims of both primary violations and control-person violations against TPG and

Continental in the America West case than it is by the comments of the district judge in

Kalnit, particularly given that her comments are dicta. 

In their second argument, defendants assert that the § 15 claim against Harmonic,

Ley, and Dickson should be dismissed because Harmonic cannot both control Ley and

Dickson and be controlled by Ley and Dickson, as the TAC alleges. In support, defendants

cite Rochez Bros. Inc. v. Rhoades, 527 F.2d 880 (3d Cir. 1975); and In re Regal

Communications Corp. Sec. Litig., 1996 WL 411654 (E.D. Pa., July 17, 1996).

 In Rochez, the plaintiff alleged claims under Rule 10b-5 against a corporation and

its president, and also asserted a § 20 control-person claim against the corporation. The

Third Circuit held that the corporation could not be liable as a controlling person in the

absence of any culpable participation in the alleged fraud. Rochez, 527 F.2d at 889-90. 

The court also concluded that the corporation’s president was the controlling person,

because he ran the day-to-day business activities of the corporation, and had the power to

influence the policies and actions of the corporation. Thus, the court stated, the plaintiff’s

argument that the corporation was the controlling person “must . . . fail because [the

president] and [the corporation] cannot simultaneously be ‘controlling persons’ as to each

other.” Id. at 891.

In In re Regal, the plaintiffs alleged violations of § 10(b) and Rule 10b-5, and

violations of § 11, against the corporation’s CEO and its CFO, and against Ernst & Young,

LLP (“E&Y”), the corporation’s outside auditor. The plaintiffs also alleged § 15 and § 20

control-person claims against E&Y. The district court denied E&Y’s motion for summary

judgment as to the Exchange Act claims and as to the § 11 claim, finding disputed issues of

fact as to both. The court granted summary judgment as to the control-person claims,

stating that “[w]here, as here, the defendant is alleged to be primarily liable for violations of

the securities laws, it makes no sense to assert secondary liability under Sections 15 and

20(a). A person cannot be both the controller and the controlled.” In re Regal, 1996 WL

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 Despite plaintiffs’ having improperly failed to seek leave to amend to add the § 15

claim against Dickson, the court allows this claim to proceed, largely because plaintiffs would

probably have been able to make the requisite showing if they had sought leave. Plaintiffs

assert that it is not improper to amend a complaint to assert new claims against a defendant

already in the case, citing Lucas v. Bechtel Corp., 800 F.2d 839, 852-53 (9th Cir. 1986).

However, there is no rule of law stated in the Lucas case that allows a plaintiff to amend a

complaint without first obtaining leave of court, and there is not even a suggestion in the pages

plaintiffs cite that the court below had allowed amendment without leave of court. Plaintiffs

also argue that such amendment is proper where the new claims are based on the same facts

as the claims that were dismissed with leave to amend, citing Lucas, and Percy v. San

Francisco Gen’l Hosp., 841 F.2d 975, 978 (9th Cir. 1988). In Percy, the Ninth Circuit

discussed the “relation back” provision in Federal Rule 15(c), with regard to a request to

amend the complaint to add a claim against an existing defendant. Again, there is no

suggestion in that case that amendment is proper where the plaintiff has not obtained leave

of court. 

12

411654 at *3-4. 

In opposition to the present motion, plaintiffs argue that in ruling that plaintiffs

adequately alleged that Harmonic was controlled by Ley, and that plaintiffs might be able to

allege that Harmonic controlled a primary violator, the Ninth Circuit has already determined

that a defendant can be alleged both to control another defendant and to be controlled by

that defendant. 

Plaintiffs also contend that Rochez and In re Regal are distinguishable on the basis

that both were decided after discovery, when the plaintiffs were required to prove the

claims against the defendants – not simply plead facts stating a claim. They assert that

cases such as Rochez and In re Regal, which decline to allow plaintiffs to recover on

alternative theories of liability, do not support defendants’ argument here that plaintiffs

cannot, prior to discovery, plead alternative theories of liability.

The court finds that the motion to dismiss the § 15 claim against Ley must be

DENIED, as the Ninth Circuit has already found that plaintiffs have stated a control-person

claim against Ley. The motion to dismiss the § 15 claim against Dickson is also DENIED,

because it is substantially similar to the claim against Ley.4

 In line with the Ninth Circuit’s

ruling with regard to Ley, the court finds that the TAC adequately states a § 15 claim

against Dickson.

The motion to dismiss the § 15 claim against Harmonic is also DENIED. It is true

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that plaintiffs cite no cases supporting the imposition of liability on one defendant as the

person controlling a second defendant, and the imposition of liability on the second

defendant as the person controlling the first defendant. Nor do they provide any

explanation as to how two defendants could simultaneously control each other. 

Nevertheless, plaintiffs are correct that the cases cited by defendants involve motions for

summary judgment, not Rule 12(b)(6) motions to dismiss, and for that reason are not

persuasive in the context of the present motion. 

A complaint may contain two or more statements of a claim for relief, “alternatively or

hypothetically, either in one count . . . or in separate counts.” Fed. R. Civ. P. 8(e)(2); see

also McCalden v. Calif. Library Ass’n, 955 F.2d 1214, 1219 (9th Cir. 1990). Moreover, a

party may set forth as many separate claims “as he has regardless of consistency and

whether based on legal, equitable or maritime grounds . . . “ provided that all such claims

are made in compliance with Rule 11. Fed. R. Civ. P. 8(e)(2); see Molsbergen v. United

States, 757 F.2d 1016, 1018 n.3 (9th Cir. 1985) (plaintiff permitted to allege factually

inconsistent theories of recovery against same defendant for same injury – negligent act

and intentional act).

Although plaintiffs will likely be ultimately unable to establish that Harmonic both

controlled Ley and Dickson and was controlled by them, and will arguably not be able to

show that Harmonic was both controlling person and controlled person (though resolution

of that question may depend on plaintiffs’ factual showing of “control” by Harmonic), the

allegations in the TAC are adequate to state a claim for control-person liability. 

2. Section 12(a)(2) Claim

Plaintiffs allege the § 12(a)(2) claim against Harmonic, Ley, Dickson, Nazerathy,

Kvamme, Lane, Lemieux, and Vaillaud, asserting that Harmonic and Ley signed the

prospectus, that Nazarathy, Kvamme, Lane, Lemieux, and Vaillaud “ordered the

[p]rospectus to be signed,” and that “[e]ach defendant solicited proxies by means of the

[p]rospectus which was mailed to C-Cube shareholders, by permitting the use of their

names in the [p]rospectus, by recommending in the [p]rospectus that C-Cube shareholders

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 Although it limited its ruling to § 12(a)(1) claims, the Court also noted that most courts

treat the “offers or sells” language in § 12(a)(2) as having basically the same meaning as the

“offers or sells” language in § 12(a)(1) (which applies to “[a]ny person who . . . offers or sells

a security in violation of section 77e,” the provision that prohibits the sale of unregistered

securities.) See Pinter, 486 U.S. at 642 n.20. In Moore v. Kayport Package Express, Inc., 885

F.2d 531 (9th Cir. 1989), the Ninth Circuit held that Pinter “provides the standard for

determining liability as a ‘seller’ under section 12(2) as well as under section 12(1) of the

Securities Act of 1933.” Id. at 536. 

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approve the merger, and/or by controlling the remaining defendants as alleged with respect

to Harmonic, Ley and/or Dickson.” TAC ¶¶ 136-137. 

Defendants argue that the § 12(a)(2) claims against the individual defendants

(including Ley) should be dismissed because the allegations in the TAC do not establish

that any of these defendants was a “seller” against whom § 12(a)(2) claim can be asserted.

Section 12(a)(2) provides that “[a]ny person who . . . offers or sells a security . . . by

means of a prospectus . . . which includes an untrue statement of material fact” or a

material omission “shall be liable . . . to the person purchasing such security from him.” 15

U.S.C. § 77l(a)(2). To state a claim under § 12(a)(2), plaintiffs must allege that the

prospectus contained a misrepresentation or omission, and that the misrepresentation or

omission was material. See In re Stratosphere Corp. Sec. Litig., 1 F.Supp. 2d 1096, 1120

(D.Nev. 1998). In addition, plaintiffs must also allege that the defendants were “sellers” –

that they did more than simply urge another person to purchase a security, and that they

solicited purchase of the securities for their own financial gain. In re Daou, 411 F.3d at

1029. Id.

In Pinter v. Dahl, 486 U.S. 622 (1988), the Supreme Court held that the “offers or

sells” language in § 12(a)(1) applies to two categories of defendants – persons who pass

title to the securities in question, and persons who “engage[ ] in solicitation” of securities

sales for financial gain, id. at 643, “motivated at least in part by a desire to serve [their] own

financial interests or those of the securities owner,” id. at 647. The Court held further that 

§ 12(a)(1) does not impose liability “for mere participation in unlawful sales transactions,” or

on “participants collateral to the offer or sale.” Id. at 648-50 & 651 n.27.5

 The Court rejected the use of the “substantial factor” standard to define who qualifies

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as a “seller” under § 12. Under that standard, a nontransferor seller is defined as “one

‘whose participation in the buy-sell transaction is a substantial factor in causing the

transaction to take place.’” Id. at 648-49 (citation omitted). The Court concluded that such

an approach “divorce[d] the analysis of seller status from any reference to the applicable

statutory language and from any examination of § 12 in the context of the total statutory

scheme.” Id. at 651. 

In analyzing the text of § 12, the Court found that the “purchases from” requirement

“focuses on the defendant’s relationship with the plaintiff-purchaser,” while the “substantial

factor” test “focuses on the defendant’s degree of involvement in the securities transaction

and its surrounding circumstances.” Id. Thus, the Court noted, while the “substantial

factor” test properly brought into the scope of liability those who passed title or actively

solicited the purchase, it could also improperly include those with only a remote

involvement with the sales relationship. Id. 

Defendants argue that the claims against the individual defendants must be

dismissed because the TAC does not allege that they actively “solicited” purchases of the

securities for their own financial motives, as required by Pinter; and also does not allege

that any of the individual defendants “sold” Harmonic stock or any of the Harmonic shares

that plaintiffs obtained in the merger. 

As indicated above, the TAC alleges that Ley signed the prospectus, and that

Nazerathy, Kvamme, Lane, Lemieux, and Vaillaud did not sign the prospectus, but rather

“ordered” it “to be signed.” Defendants argue that plaintiffs plead no facts showing

solicitation, and assert that simply alleging that a defendant signed a registration statement

or a prospectus provides an insufficient legal basis for relief under § 12(a)(2). Defendants

cite a number of cases in support of this argument, including Cent. Laborers Pension Fund

v. Merix Corp., 2005 WL 2244072 at *6 (D. Or., Sept, 15, 2005) (dismissing § 12(a)(2)

claim against two directors who signed prospectus, on ground that simply signing a

registration statement or prospectus is an insufficient legal basis for relief under § 12(a)(2));

In re DDi Corp. Sec. Litig., 2005 WL 3090882 at *21 (C.D. Cal., July 21, 2005) (dismissing

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claims against corporate officers who signed registration statement and prospectus

because plaintiffs did not allege that officers actively solicited plaintiffs’ purchase of

securities to further their own financial motives); In re Infonet Servs. Corp. Sec. Litig., 310

F.Supp. 2d 1080, 1101 (C.D. Cal., 2003) (same); and In re Stratosphere, 1 F.Supp. 2d at

1120-21 (finding allegation that defendants signed prospectus to be insufficient to satisfy

requirement that plaintiffs allege that defendants were “sellers”). 

In opposition, plaintiffs argue that they have adequately alleged liability for all

defendants under § 12(a)(2). First, they contend that because the Ninth Circuit has already

found that plaintiffs adequately alleged a § 12(a)(2) claim against Ley and Harmonic, 

defendants’ motion is barred by the “law of the case.” They also argue that because the

Ninth Circuit did not find that plaintiffs were required to allege that Ley was a “seller,” this

court cannot now revisit the claim as to Ley. In a related argument, they submit that

because the Ninth Circuit found that the SAC adequately stated a § 12(a)(2) claim against

Ley, and did not require an allegation of facts showing that he was a “seller,” this court

cannot now require such allegations with regard to the newly-added individual defendants. 

Plaintiffs claim that to do so would be to apply a different standard to these new defendants

than the Ninth Circuit did to Ley. 

Second, plaintiffs claim that Ley waived any argument that he must be dismissed if

the TAC does not allege that he was a “seller” of stock. Plaintiffs maintain that the

argument that officers and directors who simply sign a prospectus are not statutory sellers

under § 12(a)(2) should have been raised before this court when the § 12(a)(2) claim was

first asserted against Ley; and that in failing to do so (or to make the argument in the

motion to dismiss the SAC or in the motion for rehearing before the Ninth Circuit),

defendants have waived the argument, at least as to Ley. 

Third, plaintiffs contend that the TAC adequately alleges that the individual

defendants “solicited” the purchase of Harmonic’s stock. They assert that the C-Cube

shareholders purchased Harmonic stock directly from Harmonic pursuant to the prospectus

(citing TAC ¶¶ 2, 12), and that Ley, Dickson, Nazerathy, Kvamme, Lane, Lemieux, and

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 Actually, what plaintiffs allege in the TAC is that Harmonic and all the individual

defendants signed the registration statement, TAC ¶ 126; and that Harmonic and Ley signed

the prospectus, and Ley, Nazarathy, Kvamme, Lane, Lemieux, and Vaillaud “ordered the

[p]rospectus to be signed.” TAC ¶ 137.

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Vaillaud – officers and directors of Harmonic – signed the registration statement and

prospectus (citing TAC ¶¶ 126, 135, 137-139).6

 They also note that the TAC alleges that

defendants “actively and jointly caused to be drafted, revised, and approved the

[p]rospectus, finalized it, and caused it to become effective,” TAC ¶ 135; that the purpose of

the acquisition of DiviCom through the sale of Harmonic stock to C-Cube shareholders was

to benefit Harmonic, TAC ¶¶ 27, 32-33. 

Plaintiffs assert that in each of the cases cited by defendants for the proposition that

a signature on a prospectus is insufficient solicitation for liability under § 12(a)(2), there was

no buyer-seller relationship between the plaintiff and the “user.” They also contend that

most of the cases relied on by defendants involved “firm commitment” offerings – an

offering in which the issuer of the securities sells all the shares to be offered to one or more

underwriters, and investors purchase the shares directly from the underwriters and not

directly from the issuer – and they note, as the Supreme Court stated in Pinter, that “a

buyer cannot recover against his seller’s seller.” Pinter, 486 U.S. at 644 n.21. 

Plaintiffs cite four district court opinions in support of their argument that when a

purchaser buys a stock from the issuer, an officer or director of that issuer can be liable

under § 12(a)(2) for signing a misleading prospectus – In re Nat’l Golf Props., Inc. Sec.

Litig., 2003 WL 23018761 at *8-11 (C.D. Cal., Mar. 19, 2003) (allegations that issuer signed

a registration statement were sufficient to allege active solicitation of purchase of security);

Warman v. Overland Data, Inc., 1998 WL 110018 at *6 (S.D. Cal., Feb. 20, 1998)

(allegation that “defendants, as officers, were sellers, offerors and/or solicitors” of sales of

shares in IPO was sufficient to state claim under § 12(a)(2); In re Proxima Corp. Sec. Litig.,

1994 WL 374306 at *5 (S.D. Cal., May 3, 1994) (allegations that defendants actively

encouraged prospective purchasers to buy stock during road shows and as part of

telemarketing sales pitches, and thereby solicited sales by disseminating false

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prospectuses or by oral statements, satisfied Pinter and were sufficient to state claim under

§ 12(a)(2)); and In re Melridge, Inc., Sec. Litig., 1992 U.S. Dist. LEXIS 20510 at *12 (D. Or.

Mar. 3, 1992) (allegations that defendants signed registration statement and that securities

were sold by use of communication in interstate commerce or of the mails were sufficient to

state claim under § 12(a)(2)). 

The court finds that the motion must be GRANTED as to all the individual

defendants. As an initial matter, the court notes that the decision on appeal did not create

“law of the case” with regard to who qualifies as a “seller” in the present action. Under the

jurisprudential doctrine of “law of the case,” a “decision of an appellate court on a legal

issue must be followed in all subsequent proceedings in the same case.” Snow-Erlin v.

United States, __ F.3d __, 2006 WL 3290414 at *2 (9th Cir., Nov. 14, 2006) (quotations

and citations omitted), amended Dec. 6, 2006. For the “law of the case” doctrine to apply,

however, the appellate court “must actually have decided the matter, explicitly or by

necessary implication,” in its previous disposition. Id. Accordingly, on remand, the district

court is required to respect only “what the higher court decided,” not “what it did not

decide.” Id. (citation and quotation omitted).

Here, the Ninth Circuit did not consider whether plaintiffs had adequately alleged

that defendants were “sellers” under § 12(a)(2). For that reason, there is no “law of the

case” precluding defendants from moving to dismiss on the grounds that the individual

defendants are not “sellers.” The issue raised in the present motion is different from the

issue raised on appeal – which was whether the SAC adequately alleged that the

registration statement and prospectus contained misleading statements or material

omissions. 

A similar situation arose in In re Daou. The Ninth Circuit found that the plaintiffs had

adequately alleged material misrepresentations in defendants’ various periodic disclosures.

However, relying on Pinter, the court ruled that a plaintiff in a § 12(a)(2) suit must also

allege facts showing that the defendants were “directly involved” in the actual solicitation of

the securities purchase, for their own financial gain or that of the securities holder. In re

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 Standing is a jurisdictional prerequisite that courts are bound to address as early as

possible in the case. See Hickman v. Block, 81 F.3d 98, 101 (9th Cir. 1996); see also Nordyke

v. King, 319 F.3d 1185, 1192 (9th Cir. 2003). 

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Daou, 411 F.3d at 1029. The court below had failed to reach that issue, because it

dismissed the § 12(a)(2) claim for lack of adequate allegations that defendants had made

false and misleading statements or material omissions. The Ninth Circuit remanded the

case for consideration of the remaining elements of plaintiffs’ § 12(a) claim to determine

whether the allegations were sufficient to survive dismissal under Rule 12(b)(6). Id. 

Similarly unpersuasive is plaintiffs’ argument that Ley waived this ground for

dismissal by not raising it in earlier motions or before the Ninth Circuit. Under Rule 12(h),

defenses for failure to state a claim may be presented at any time up to and including trial,

and under Rule 12(g), a party does not waive a ground for moving to dismiss for failure to

state a claim by not including that ground in an earlier motion to dismiss. Fed. R. Civ. P.

12(g), (h). As for the other individual defendants, they could not have waived the defense

as they were not previously named as defendants in this cause of action. And to the extent

that the issue is one of standing – a question of subject matter jurisdiction – that defense is

never waived.7

 

Finally, the court finds that the § 12(a)(2) claim against the individual defendants

must be dismissed because the TAC does not adequately allege that they “solicited” the

purchase of Harmonic stock. The TAC alleges that Dickson, Nazarathy, Kvamme, Lane,

Lemieux, or Vaillaud did not sign the prospectus, and that their involvement was limited to

participating in the drafting of the prospectus, in “order[ing] it to be signed,” and in soliciting

proxies by “permitting the use of their names” in the prospectus and by recommending in

the prospectus that the C-Cube shareholders approve the merger. However, that level of

involvement is insufficient under Pinter to qualify those defendants as “sellers,” and the

TAC does not allege facts showing active solicitation of sales of stock. See In re

Stratosphere, 1 F.Supp. 2d at 1121 (finding defendant’s simple involvement in preparing 

registration statement or prospectus, or participation in activities regarding the sale of

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securities, not enough by itself to establish statutory seller status; see also DDi, 2005 WL

3090882 at *18. Plaintiffs cite no cases holding that a defendant that has not signed a

prospectus can be liable under § 12(a)(2), absent allegations of facts showing actual

personal “solicitation” of sales of stock. 

Nor is the addition of the claim against Ley that he signed the prospectus sufficient

to qualify him as a “seller.” The Ninth Circuit has not addressed whether merely signing a

prospectus constitutes active solicitation sufficient to render the signatory a "seller" under

12(a)(2). While district courts are split on this issue, as demonstrated by the cases cited by

the parties herein, the circuits that have addressed the issue have determined that simply

signing a registration statement or prospectus provides an insufficient legal basis for relief. 

See Rosenzweig v. Azurix Corp., 332 F.3d 854, 871 (5th Cir. 2003) (rejecting the

contention that "signing the registration statement suffices for solicitation"); Craftmatic Sec.

Litig. v. Kraftsow, 890 F.2d 628, 636 (3d Cir. 1989) (“purchaser must demonstrate direct

and active participation in the solicitation of the immediate sale to hold the issuer liable as a

§ 12(2) seller"). 

These rulings comport with the Pinter Court's determination that the fact that an

individual's activities constitute a "substantial factor" in a sale of securities is insufficient to

render that individual a seller under Section 12. Pinter, 486 U.S. at 649-50. The Court

emphasized that § 12(a) does not apply to those who merely “participate in soliciting the

purchase” of securities but do not actually solicit the purchase. Id. at 650-51, n.27. 

In addition, the Court carefully distinguished between § 11(a) – which “explicitly

enumerates the various categories of persons involved in the registration process who are

subject to suit . . . including many who are participants in the activities leading up to the

sale” – i.e., every person who signed the registration statement, every person who was a

director of or partner in the issuer at the time the registration statement was filed, every

person named in the registration statement as being or about to become a director, every

accountant named as having prepared part of the registration statement, and every

underwriter with respect to such security – and § 12(a), which contains no such provisions. 

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Id. at 650 n.26 (“Congress did not intend to extend § 12 primary liability to collateral

participants in the unlawful securities sales transaction”). The Court concluded that

Congress “did not intend such persons [the categories enumerated in § 11] to be

defendants in § 12 actions.” Id. 

Based on the Pinter Court’s analysis, this court concludes that § 12(a), unlike 

§ 11(a), does not extend liability to those who simply sign a prospectus, without more. The

court agrees with defendants that the cases they have cited state the better rationale for

resolving the issue here. Under Pinter, the individual Harmonic defendants, all of whom

signed the registration statement, are already potentially liable under § 11(a), and cannot

be liable under § 12(a)(2) merely for preparing or signing a prospectus. 

None of the cases cited by plaintiffs addresses this critical distinction between 

§ 11 and § 12. The district court in Melbridge does not mention Pinter at all. While the

Warman and In re Proxima courts do mention Pinter, they do not acknowledge that Pinter

excluded “mere participation” in solicitation as a basis for § 12(a) liability. See Pinter, 486

U.S. at 651-52 n.27. In particular, In re Nat’l Golf, the case on which plaintiffs primarily rely,

fails to explain how holding persons liable under § 12(a) for merely signing a prospectus

comports with Pinter’s conclusion that Congress did not intend to include in 

§ 12 the categories denominated in § 11 of persons who are “participants in the activities

leading up to the sale.” Pinter, 486 U.S. at 650 n.26. 

The fact that many of the cases cited by defendants involved a “firm commitment

underwriting” does not alter the result. In a firm commitment underwriting, the issuer does

not sell its stock directly to the purchasers, but instead sells to the underwriter, who in turn

sells to the purchasing shareholders. In re Stratosphere, 1 F.Supp. 2d at 1120 n.19. As

defendants note, however, this distinction affects only who passes title, and does not

determine what constitutes “solicitation.” Passing title is one way to become a “seller”

under § 12(a)(2), and actively “soliciting” the purchase for financial gain is another. Pinter,

486 U.S. at 643. Plaintiffs do not allege that the individual defendants passed title to any

securities. Thus, the fact that several of the cases cited by defendants involved firm

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commitment underwriting is without significance. 

Plaintiffs’ claim that the individual defendants were “sellers” because they were

acting to serve Harmonic’s interests is similarly unpersuasive. Even if the individual

defendants were attempting to serve Harmonic and its shareholders by completing the

DiviCom merger, that motivation alone is not sufficient to make them sellers, absent

allegations in the complaint of actual solicitation of stock purchases. 

Finally, the court finds that the dismissal of the § 12(a)(2) claims against the

individual defendants must be without leave to amend. Plaintiffs have had four

opportunities to allege their claims, and they offer no suggestion as to how they would

amend to better state a claim under § 12(a)(2).

3. Statement of Opinion re “Best Interests”

Defendants argue that the statement of opinion regarding the “best interests” of 

C-Cube shareholders cannot provide a basis for any claim, for three reasons. First, they

note that this court previously dismissed the § 14(a) claim which alleged the same “best

interests” statement, and that the Ninth Circuit affirmed the dismissal. They contend that

plaintiffs are attempting to re-plead the same claim (negligently making false statements in

proxy solicitations that were distributed to shareholders for purpose of inducing them to

approve the proposed merger) as a § 11 cause of action (making false statements in

registration statement) and a § 12(a)(2) cause of action (making false statements in

prospectus). Defendants argue that plaintiffs should not be permitted to replead the same

claim under different statutory provisions. 

Second, defendants contend that the “best interests” statement represents a

determination by the C-Cube board of directors, and that Harmonic and its board members

(defendants here) did not make any fairness representation to C-Cube’s shareholders. 

Third, defendants assert that the TAC fails to plead that the C-Cube board did not

sincerely believe its fairness opinion, or that any defendant did not believe that the C-Cube

board sincerely held that opinion. Defendants note that in affirming the dismissal of the 

§ 14(a) claim, the Ninth Circuit held that the “best interests” statement was a “statement of

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opinion.” They contend that an opinion is actionable only if the plaintiff alleges that the

opinion was both objectively and subjectively false, and that the TAC alleges no facts

showing that the C-Cube board did not sincerely believe that the merger was in C-Cube’s

best interests at the time they made the recommendation. 

In opposition, plaintiffs assert that there is no scienter requirement for Securities Act

claims, and no requirement of a particularized pleading of falsity. They note that the Ninth

Circuit has already ruled that they need not plead the Securities Act claims under the

heightened pleading standard appropriate in fraud cases, and that it is therefore not a

requirement that they plead with particularity the falsity of the statement that the merger

was in C-Cube’s shareholders’ best interests. They argue that defendants have notice of

the alleged false statement that the merger was in the best interests of C-Cube

shareholders, and that nothing more is required at this stage of the litigation.

Plaintiffs assert that Ley, Dickson, Nazarathy, Kvamme, Lane, Lemieux, and

Vaillaud signed the registration statement, and sent it to C-Cube’s shareholders, and that

those defendants are responsible under § 11(a) for any misrepresentation or material

omission in the registration statement, even a statement attributed to C-Cube’s board of

directors. They also contend that under § 12(a)(2), all those who offer or sell a security

pursuant to a misleading prospectus are subject to liability, and there is no limitation that a

defendant is liable for only those parts of the prospectus that are directly attributable to him

or her. Thus, plaintiffs assert, plaintiffs are liable for any and all misleading statements in

the prospectus.

The court finds that the motion must be GRANTED. First, the statement is in the

portion of the proxy solicitation that is headed “Notice of Special Meeting of [C-Cube]

Shareholders,” and is signed by the President and CEO of C-Cube, “By Order of the Board

of Directors of C-Cube Microsystems, Inc.” Plaintiffs have alleged no facts showing that

this statement of opinion should be attributed to the Harmonic defendants. 

Moreover, the opinion expressed by C-Cube’s board of directors – that the merger

would be “in the best interests of C-Cube’s shareholders – is not a misstatement of

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“material fact,” or a statement of fact that is false or misleading because it omits to state

other material facts necessary to make it not misleading. While an “opinion” can be

considered a “fact” for purposes of § 11(a), a plaintiff must show that the defendant did not

believe in the statement made. See Kane v. Madge Networks N.V., 2000 WL 33208116 at

*12 n.16 (N.D. Cal., May 26, 2000) (plaintiffs failed to state § 11(a) claim because they

failed to plead facts showing that defendant directors did not believe in truth of fairness

opinion); see also Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1094-95 (1991)

(statement of opinion is actionable only if both objectively and subjectively false). 

Even if one assumes that plaintiffs adequately alleged facts showing that the 

C-Cube board’s opinion was objectively incorrect, the TAC alleges no facts showing that

the members of the C-Cube board did not sincerely believe that the merger was in 

C-Cube’s best interests at the time they made the recommendation. Because this opinion

is not a statement of fact, and plaintiffs do not allege any reason why it is false – e.g., that

the board of directors did not believe it – the statement cannot provide the basis for a claim

under § 11 or § 12.

4. Motion to Strike Background Allegations

Finally, defendants seek an order striking the “background” allegations in ¶¶ 45-56,

67-70, 74-76, 80, and 82. These are similar to the allegations of statements in conference

calls, press releases, analysts’ reports, and other publications – including press releases

and reports published after the registration statement and prospectus were issued – which

were alleged in the SAC to be false and misleading under § 10(b) and Rule 10b-5. In the

TAC, plaintiffs suggest that these statements created a “false impression” and failed to

report known negative information. 

Defendants contend that these “background” allegations should be stricken because

they are irrelevant to the § 11(a) and § 12(a)(2) claims, which turn on the alleged

misleading statements in the registration statement and the prospectus, not on any alleged

misrepresentations in press releases and other public statements by Harmonic defendants. 

Defendants submit that the issue of omitting information from the press releases and other

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public statements is simply not relevant to the issue of omitting information from the

registration statement and the prospectus. They contend that allowing plaintiffs to include

the allegations about public statements generally would blur the distinction between claims

under the Exchange Act and claims under the Securities Act.

Second, defendants argue that the “background” allegations should be stricken

because they are prejudicial to defendants. They note that these allegations have already

been found not to state an actionable claim under the Exchange Act, and argue that

plaintiffs are simply attempting to have the dismissed Exchange Act claims included as part

of the Securities Act claims. They assert that plaintiffs were able to proceed with their

Securities Act claims only by carefully re-pleading the complaint and specifically alleging

that the Securities Act claims were not based on any claim of fraud. Defendants contend

that it would be unfair for the court to allow plaintiffs to retain all the allegations of alleged

misleading statements that they used to support their securities fraud claims, now that

those claims have been dismissed. Defendants also argue that they should not have to

answer multiple paragraphs of “background” allegations, or have to respond to discovery

regarding warmed-over allegations that have been dismissed with prejudice. 

In opposition, plaintiffs argue that their “background” allegations are relevant to their

current claims, to show the extent of defendants’ solicitations, particularly the press

releases and the public statements issued prior to the merger. Plaintiffs claim that the

“background” allegations are relevant because they show what investors knew, what

Harmonic did and did not disclose, and what solicitation efforts the defendants made. They

argue that the allegations regarding public statements made shortly before and after the

issuance of the registration statement and prospectus are probative of “how the state of

affairs at Harmonic and DiviCom was portrayed to the market.” 

Plaintiffs also claim that what was said to the public outside the registration

statement – referring to the “background” allegations – helps show that the information

omitted from the offering documents was material. They contend that Harmonic provided, in

the registration statement and prospectus, past financial information that conformed with

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historically positive information relayed to the market, but omitted the information about the

downturn that had occurred in Harmonic’s and DiviCom’s business, and in so doing,

affirmatively created an impression that the businesses had not suffered the downturns

they in fact had suffered. 

Plaintiffs assert that defendants’ motion does not meet the standard for a motion to

strike under Rule 12(f), because defendants do not argue that the “background” allegations

are “redundant,” “irrelevant,” “impertinent,” or “scandalous.” They also contend that the

cases cited by defendants do not support their argument, but rather support an application

of the general standard of Rule 12(f), which involves examining the relationship of the

allegations to the claims in the complaint.

The court finds that the motion to strike the factual allegations in ¶¶ 45-56, 67-70,

74-76, 80, and 82 must be GRANTED. Plaintiffs included these allegations in the FAC and

the SAC to support their claims under the Exchange Act. As part of their effort to show that

the Securities Act claims were not grounded in fraud, plaintiffs argued at length that the

facts supporting the fraud claims were completely separate from the allegations supporting

the Securities Act claims. The Ninth Circuit accepted that argument and found that

plaintiffs had adequately alleged misrepresentations in the registration statement and the

prospectus, based on the assertions that the registration statement and the prospectus did

not disclose the slow-down in AT&T orders or the slow-down in DiviCom’s business, and

that those claims were not grounded in fraud. The allegations in ¶¶ 45-56, 67-70, 74-76,

80, and 82 are irrelevant to the violations of § 11 and § 12 as pled in the TAC.

Specifically, the allegations that the January 19, 2000, press release failed to

disclose the decline in sales to AT&T in 4Q1999 or the declining orders from At&T that

would inevitably result in declining sales to AT&T in 2000, and failed to disclose weakening

sales and income at DiviCom, TAC ¶ 46-50; and the allegations that the January 19, 2000,

conference call with analysts and portfolio managers failed to disclose declining sales to

and orders from AT&T, TAC ¶¶ 51-52, are irrelevant to a determination whether defendants

violated § 11 and § 12(a)(2) by failing to disclose in the March 23, 2000, registration

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statement and the prospectus the alleged slow-down in business for AT&T and DiviCom. 

Similarly, the allegations that the analysts’ reports issued on January 20, 2000, by

SG Cowen Securities and H.C. Wainwright & Co. estimated a $130 target price for

Harmonic stock, TAC ¶¶ 54-55; and the allegations that Harmonic and C-Cube issued

numerous press releases between October 27, 1999, and March 23, 2000, reporting bright

prospects for business are completely irrelevant to the question whether defendants

violated § 11 and § 12(a)(2) by failing to disclose in the March 23, 2000, registration

statement and the prospectus the alleged slow-down in business for AT&T and DiviCom.

Likewise, the allegations of statements made after the March 23, 2000, filing of the

registration statement and prospectus are all completely irrelevant to the question whether

defendants violated § 11 and § 12 by making misleading statements in the registration

statement and prospectus. In this category, the court includes the “numerous public

statements” and “six press releases” allegedly issued by Harmonic between March 23,

2000, and April 24, 2000, regarding the strength of its business and DiviCom’s business,

TAC ¶¶ 67, 76; the statements allegedly made by Ley and Dickson to financial analysts at

a March 28, 2000, conference in Cannes, France, regarding Harmonic’s “strong business

trends,” TAC ¶ 68; the reports released by S.G. Cowen on March 28, 2000, allegedly based

on the statements made by Ley and Dickson at the Cannes conference, TAC ¶¶ 69-70; the

joint press release issued by Harmonic and C-Cube on April 19, 2000, stating that “AT&T

continued to be [Harmonic’s] largest single customer;” stating that “[w]e [referring to

Harmonic] are very pleased with our sales and profitability in the first quarter;” and stating

that the acquisition of DiviCom “will allow us to offer more complete solutions for cable

operators, as well as expand our penetration into telco, satellite, wireless, and other

emerging broadband markets,” TAC ¶¶ 74-75; the C-Cube press release issued April 24,

2000, reporting the shareholder approval of the merger, and reporting 1Q 2000 revenue for

C-Cube which specifically did not include revenue for DiviCom, TAC ¶ 80; and the analyst’s

report issued by Cowen on May 4, 2000, allegedly based on conversations with Ley and

Dickson, TAC ¶ 82. 

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In addition, given the fact that these allegations are irrelevant to the Securities Act

claims, the court finds that defendants would be prejudiced if they were compelled to

respond to these allegations, or to respond to discovery propounded by plaintiffs into any

issues beyond those raised in the § 11 and § 12(a)(2) claims – that is, whether sales to and

orders from AT&T were down as of the date of the issuance of the offering documents,

whether DiviCom’s business was down in the first quarter of 2000, and whether the

registration statement and prospectus were misleading because they omitted to include

information regarding this alleged decline in business. 

CONCLUSION

1. The motion to dismiss the § 15 claim against Ley is DENIED. The motion to

dismiss the § 15 claim against Dickson is DENIED. The motion to dismiss the § 15 claim

against Harmonic is DENIED. 

2. The motion to dismiss the § 12(a)(2) claims against Nazerathy, Kvamme,

Lane, Lemieux, and Vaillaud is GRANTED because the TAC does not allege that they

signed the prospectus and also does not allege facts showing that they were “sellers” who

“solicited” the purchase of securities. For the same reasons, the motion is also GRANTED

as to Dickson, to the extent that the TAC alleges this claim against Dickson. The motion is 

GRANTED as to Ley because, even though the TAC alleges that Ley signed the

prospectus, that allegation alone (even with the additional allegations) is not sufficient to

state facts showing solicitation or active participation. The dismissal of the § 12(a)(2)

claims against the individual defendants is WITHOUT LEAVE TO AMEND.

3. The motion to dismiss the claim that the statement of opinion regarding

the merger being in the “best interests” of C-Cube shareholders is GRANTED because it is

an opinion, not a statement of fact, and because plaintiffs allege no facts showing that

defendants believed the statement was false. Moreover, the statement is in the portion of

the proxy solicitation that is headed “Notice of Special Meeting of [C-Cube] Shareholders,”

and is signed by the President and CEO of C-Cube, “By Order of the Board of Directors of

C-Cube Microsystems, Inc.” and is therefore not a statement attributable to any of the

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Harmonic defendants. 

4. The motion to strike the background allegations in ¶¶ 45-56, 67-70, 74-76,

80, and 82 is GRANTED, as they are irrelevant to the 1933 Act claims, and because

defendants would be prejudiced if compelled to defend against such irrelevant allegations.

IT IS SO ORDERED.

Dated: December 11, 2006 ______________________________

PHYLLIS J. HAMILTON

United States District Judge

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