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UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF CALIFORNIA 

JOHN COSTABILE, 

Plaintiff, 

v. 

NATUS MEDICAL INCORPORATED, et 

al., 

Defendants. 

Case No. 17-cv-00458-JSW 

ORDER GRANTING DEFENDANTS' 

MOTION TO DISMISS PLAINTIFF'S 

FIRST AMENDED COMPLAINT 

Re: Dkt. No. 29 

 Now before the Court for consideration is the motion filed by Natus Medical Incorporated 

(“Natus Medical”), James B. Hawkins, and Jonathan A. Kennedy (collectively, “Defendants”) 

seeking to dismiss this securities class action. The Court has considered the parties’ papers, 

relevant legal authority, and the record in this case, and the Court finds the motion suitable for 

disposition without oral argument. See N.D. Civ. L.R. 7-1(b). For the reasons set forth below, the 

Court HEREBY GRANTS Defendants’ motion to dismiss, but will afford Plaintiff leave to 

amend. 

BACKGROUND 

 Plaintiff John Costabile alleges that he purchased Natus Medical common stock at 

“artificially inflated” prices due to alleged misrepresentations and omissions made by Defendants 

regarding a supply contract between a Natus Medical subsidiary and the Venezuelan Ministry of 

Health.1

 Plaintiff seeks to represent a class of all individuals who purchased or acquired Natus 

Medical stock during the Class Period (defined as October 16, 2015 and April 3, 2016). (Dkt. No. 

 

1

 Though not in the FAC, in the documentation supporting Plaintiff’s motion to become lead 

plaintiff in this action, Plaintiff represented he purchased 2,000 shares on March 15, 2016 and 

eventually sold those shares on April 8, 2016. (Dkt. No. 14-3.) 
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25, First Amended Complaint (“FAC”) ¶¶ 1, 122.) 

A. Natus Medical and the Supply Contract with the Venezuelan Ministry of Health. 

 Natus Medical is a company which designs, manufactures, and markets newborn care and 

neurology healthcare products and services worldwide. (Id.¶ 2.) On October 16, 2015, Defendant 

James Hawkins, Natus Medical’s CEO, and Defendant Jonathan Kennedy, the CFO, announced 

that Natus Medical, through its wholly-owned Argentinian subsidiary Medix I.C.S.A. (“Medix”), 

had entered into a three-year, $232.5 million supply contract to provide medical equipment, 

supplies, and services to the Ministry of Health of Venezuela (“Supply Contract”). (Id. ¶ 3.) In 

the announcement, Defendants represented that $69 million in prepayments under the Supply 

Contract were expected by the first quarter of 2016. (Id. ¶¶ 3, 50). 

 The announcement of the Supply Contract was received as a significant development by 

analysts. (See, e.g., id. ¶¶ 4-5.) On October 21, 2015, Defendants issued a press release which, 

quoting Hawkins, provided details regarding the impact of the Supply Contract on Natus 

Medical’s revenue forecasts. Specifically, after citing the Supply Contract, Defendant Hawkins 

noted how Natus Medical had increased its revenue guidance for the fourth quarter of 2015 by $3 

million and its non-GAAP earnings per share from $ 0.47 to $0.49. (Id.¶ 53.) Hawkins also 

indicated that Defendants were “increasingly confident that we can achieve and potentially exceed 

our long term operating margin goal of 20% in 2016.” (Id.) 

 That same day, Defendants held a conference call with analysts to discuss Natus Medical’s 

earnings. A number of representations were made during this call. For example as with the prior 

press releases, Defendants represented that the Supply Contract would have a positive impact on 

Natus Medical’s revenue, with payments from the agreement being anticipated by the first quarter 

of 2016. (Id. ¶ 55.) For instance, Hawkins told analysts: 

Last Friday we announced that Medix . . . signed a three-year 

agreement with the Ministry of Health of Venezuela for $232.5 

million to supply Venezuela with neonatal and obstetric equipment 

supplies and services. As stated in our filing, we are to receive three 

payments totaling $69 million by the end of the first quarter of 2016. 

Prepayments are to continue throughout the contract period as we 

fulfill our requirements. We expect to commence on this contract in 

our fourth quarter, but revenue is expected to be minimal in the 

fourth quarter. 
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(Id.) Later in the call, an analyst asked Hawins to provide additional information on how the 

Supply Contract would contribute to Natus Medical’s revenue and earnings in 2016. Hawkins 

answered by again referring to anticipated payments being received in the fourth quarter of 2015 

and first quarter of 2016: 

We expect to receive some payments here by the end of the year, to 

start those three payments totaling the $69 million. And then to—

most likely those would extend into the first quarter of next year . . . 

As we—way this contract is, we’re going to be prepaid throughout 

the entire contract. 

(Id. ¶ 57.) Hawkins further indicated that Natus Medical had, conservatively, included a “couple 

of million dollars” in its fourth quarter 2015 guidance attributable to the Supply Contract. 

(Id.¶ 59.) 

 In addition, during the conference call Kennedy made the point of highlighting that the 

Supply Contract was not the first contractual arrangement between the Ministry of Health and 

Medix. Kennedy instead referenced how the Supply Contract represented a “continuation of an 

ongoing relationship.” (Id.¶ 61.) Specifically, Kennedy addressed how, around 2010, Medix had 

completed an almost $100 million deal with Venezuela, thus demonstrating the “ongoing 

relationship between Medix and other South American countries.” (Id.) 

 Finally, analysts during the call asked about the currency exchange risk inherent in the 

Supply Contract. (Id. ¶ 63.) Kennedy asserted that the risk was “minimal” because Natus Medical 

was protected by the fact that the Supply Contract was “denominated in dollars, and our payment 

is a dollar-denominated payment.” (Id.) 

 The representations by Hawkins and Kennedy continued into November and December 

2015 at various healthcare conferences. On November 19, 2015, during his opening remarks to a 

conference, Hawkins expressed “pride” at Natus Medical’s financials and lauded the “major” $232 

million Supply Contract. (Id. ¶ 65.) Hawkins not only touted the ultimate value of the Supply 

Contract, but emphasized that Natus Medical was to “be paid up front as we go on this business” 

with the first payment expected “by the end of the year, and .. . . continu[ing] throughout the life 

of the contract.” (Id.) 

 At least one analyst at the conference asked how confident Hawkins was regarding 
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Venezuela’s ability to perform on the Supply Contract over the entire three-year term. (Id. ¶ 67.) 

Hawkins responded to this question by acknowledging that there is “always a potential risk with 

any contract.” (Id.) He then sought to downplay this risk by pointing to Medix’s prior contractual 

relationship with Venezuela: 

Yes, so, always a potential risk with any contract. The one thing I 

would say with this one, before we bought our subsidiary, which is 

located in Buenos Aires, which is who received this order, a 

company called Medix, they had received an $82 million order 

maybe seven years ago and it came through just fine. The money 

showed up as expected, and it did happen. 

So we have pretty good confidence that it should happen. We have 

been told the money is set aside, and we are looking to get our first 

payment here by the end of December. 

(Id.) 

 At a similar December 1, 2015 healthcare conference, Hawkins again lauded the “very 

large order that [Natus Medical] received from Venezuela totaling $ 232.5 million.” (Id. ¶ 71.) 

As he had in October and November, he again asserted that Natus Medical was anticipating 

receiving revenue under the Supply Contract before the end of 2015: 

We look to some of these revenues to start in December. We expect 

to get our first $23 million payment in the weeks ahead and then 

we’ll be prepaid on all of this as we go forward on a rolling basis. 

It’s quite a big order for us and we are very excited to not only have 

it ourselves, but also for the babies and mothers in Venezuela. 

(Id.) Later, in response to a request from an analyst for additional details, Hawkins again pointed 

to the imminent commencement of payments and its impact on Natus Medical’s financials: 

The money . . . that we are receiving for this purchase is all in US 

dollars. And there always is some potential currency risk as we 

transfer those dollars into Argentine pesos to do the purchasing and 

delivering of product. But overall, over this three-year period, we 

are convinced it’s going to be a good piece of business for us. 

It will have average corporate margins of 18% to 20%. And 

although the gross profits won’t be near that, but the bottom line 

operating margin should be the same. So we are quite encouraged. 

We’re expecting to get payment here in the next few weeks and 

looking for this to kick off . . . . 

(Id. ¶ 73.) 

 In summary, throughout the fourth quarter of 2016, Defendants represented that the Supply 
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Contract was a done deal that would have a significant positive impact on Natus Medical’s 

revenue, starting in the fourth quarter of 2015. As alleged in the FAC, the market responded 

favorably to this news, and on December 17, 2015, Natus Medical shares reached an all-time high 

closing price of $50.48 per share. (Id. ¶ 12.) 

B. The Alleged Undisclosed Truth.

 Plaintiff, however, alleges that the above representations regarding the existence of the 

Supply Contract and its potential impact on Natus Medical’s revenue were false and misleading 

for a number of reasons. 

 First, and most fundamentally, Plaintiff contends that that there was no enforceable 

contract at all. Plaintiff relies on a confidential witness (“CW1”) who served as the Venezuelan 

Ministry of Health’s Purchasing Coordinator between February 2016 and July 2016. (Id. ¶ 40.) In 

this role, CW1 was responsible for “preparing price quotes, handling and maintaining information 

regarding payments due under contracts for purchases and services, and tracking receipt of goods 

and services.” (Id. ¶¶ 40.) Plaintiff alleges that CW1 has represented that the Supply Contract 

was “substantially negotiated” leading up to the fourth quarter of 2015, but not actually executed. 

(Id. ¶ 43.) As a result, Plaintiff asserts there was, in fact, no Supply Contract in the fourth quarter 

of 2015 or first quarter of 2016, thus rendering all of Defendant’s statements about that contract 

(and its potential impact on revenue) misleading. Specifically, he asserts that because the Supply 

Contract was not executed, no prepayments were scheduled or owed in the fourth quarter of 2015 

or first quarter of 2016, contrary to Defendants representations. (Id. ¶ 42.) 

 Second, even if the Supply Contract had been executed, Plaintiff contends that Defendants 

did not disclose to investors that the Ministry of Health failed to make required payments. As 

detailed above, Defendants repeatedly asserted that they expected the Ministry of Health to begin 

making prepayments by the first quarter of 2016. Plaintiff contends that these representations 

were misleading, however, because the terms of the Supply Contract required the Ministry of 

Health to make prepayments in October, November, and December 2015. (Id. ¶ 13.) None of 

these prepayments were timely made. In fact, Plaintiff alleges that by December 1, 2015—when 

Defendants were still touting the imminent receipt of the pre-payments—the Ministry of Health 
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was $47 million in default under the terms of the Supply Contract as the October and November 

payments had not been made. (Id. ¶ 72.) 

 Third, Plaintiff alleges that Defendants failed to disclose that the Supply Contract left 

Natus Medical with no effective means to enforce its rights under the agreement. Plaintiff relies 

on the fact that the Supply Contract provided that any questions of interpretation, application, and 

performance of the contract would be governed by the laws of Venezuela with the City of Caracas 

being the “special domicile” for such enforcement. (Id. ¶ 47.) According to Plaintiff, this left 

Defendants with “no means of effectively enforcing their rights under the Supply Contract” 

because they would be forced to litigate in a Venezuelan court against the Venezuelan 

government. (Id. ¶ 48.) In support of this contention, Plaintiff points to the allegedly “turbulent 

legal, political, and economic systems in Venezuela” and the Venezuelan government’s alleged 

intrusion into the independence of the judicial system. (Id.) 

 Compounding this issue, Plaintiff contends that contracts with the government of 

Venezuela were often disregarded when ministers were replaced. CW1, for example, asserts that 

“Here things happen in a different way. The minister leaves and everything that he does that isn’t 

invoiced gets lost — if the money is not committed. One thing is a promise to do a contract and 

another thing is a contract.” (Id. ¶ 49.) Given this reality, Plaintiff contends that Defendants 

either were aware, or should have been aware, that imminent elections in Venezuela meant that 

there was a significant risk that the unsigned Supply Contract would never come to fruition. (Id.) 

 Fourth, Plaintiff asserts that it was misleading for Defendants to bolster public perception 

of the Supply Contract by referencing the prior agreement prior between Venezuela and Medix. 

While acknowledging that Medix and the Venezuelan Ministry did have a prior agreement in 

2011, Plaintiff contends that the prior agreement did not match Defendants’ rosy description. 

Again relying on CW1, Plaintiff alleges that the prior agreement “failed to come to completion 

and was cancelled or suspended when the final amounts owing under the contract were not paid to 

Medix by the Ministry of Health.” (Id. ¶ 44.) Another confidential witness (“CW2”), who 

worked as Natus Medical’s Director of Operations in Argentina from 2011 to 2013, supports 

CW1’s description, stating that the prior agreement “was always in the air. Medix was always 
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trying to close it” and that there had been a “history of difficulties with payments with 

Venezuela.” (Id. ¶ 46.) 

 Fifth, Plaintiff alleges that Defendants misrepresented to investors that the Supply Contract 

called on the Ministry of Health to make payments in dollars. (Id. ¶ 63.) In fact, Plaintiff 

contends that the Supply Contract calls for payments to be made in “Argentinian Pesos at the 

current exchange rate for the effective day of payment.” (Id. ¶ 64.) 

C. Problems with the Supply Contract Materialize. 

Plaintiff alleges that the truth about the Supply Contract—withheld from investors during 

the fourth quarter of 2015—began to come to light in January 2016. 

 On January 11, 2016, Natus Medical filed a Form 8-K which announced that the company 

had failed to meet its revenue guidance for the fourth quarter of 2015. The attached press release, 

signed by Kennedy, blamed this on the fact that the prior guidance had “included expected 

revenue of approximately $4 million under the new Venezuelan Ministry of Health contract” but 

the expected prepayment had been “delayed.” (Id. ¶ 75.) Instead, Kennedy revealed the company 

“now expects to receive prepayment and begin shipments in the first quarter of 2016.” (Id.) He 

stated that $5 million of revenue from the Supply Contract was included in the new revenue 

guidance for the first quarter of 2016 and $60 million for the full year guidance. 

 Similarly, on January 27, 2016, another Form 8-K was filed which again blamed the fourth 

quarter 2015 shortfall on a “delay” in prepayments under the Supply Contract and this time made a 

general reference to unspecified “risks associated with our Venezuela contract.” (Id. ¶ 80.) 

Similar representations were made during a conference call that same day. (Id. ¶¶ 82.) During 

that call, and in response to a question from an analyst, Hawkins expressed “confid[ence] that this 

business will happen” and stated it was “safe to assume guidance implies about $0.20 in earnings 

from Venezuela this year.” (Id. ¶ 84.) Kennedy similarly assured analysts regarding economic 

benefit of the Supply Contract, by stating “[i]f I had a gun to my head and had to predict, it’s 

probably in the mid-40%s for a gross profit margin.” (Id. ¶ 86.) 

 Plaintiff contends that these partial disclosures of a “delay” and references to unspecified 

“risks” were themselves misleading as they failed to disclose known fundamental risks and issues 
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with the Supply Contract. (Id. ¶¶ 77, 87.) For instance, Defendants continued to not disclose the 

fact that three pre-payments had been missed during the fourth quarter of 2015. (Id.) 

 Analysts expressed reservation about the prospects of the Supply Contract and at least 

some analysts removed the Supply Contract from their guidance. (See id. ¶ 88.) Consequently, 

shares of Natus Medical declined. On January 11, 2016, Natus Medical closed at $38.25, down 

from $43.20, after a day of unusually high trading volume. (Id. ¶ 76.) On January 27, 2016, 

following the second Form 8-K and conference call, Natus Medical closed at $34.71, down from 

$37.15, again on abnormally high trading volume. (Id. ¶ 89.) 

 On February 29, 2016, Natus Medical filed its 2015 Form 10-K. Significantly, attached to 

the Form 10-K was an (unsigned) copy of the Supply Contract—the first time the Supply Contract 

had been publicly released. (Id. ¶ 92.) This revealed (1) the fact that approximately $70 million in 

prepayments had been missed in the fourth quarter of 2015, and (2) the allegedly problematic 

forum and venue selection clause. (Id. ¶¶ 92, 93.) Additionally, in the Form 10-K, Defendants 

disclosed that recent elections in Venezuela and Argentina had resulted in “significant political 

changes.” (Id. ¶ 91.) Defendants warned that this, combined with a “highly inflationary economy 

and recessionary economic conditions,” could “impact the likelihood of the Venezuelan Ministry 

of Health’s following through with orders under the agreement.” (Id.) Defendants further 

disclosed that Medix had “not yet received any prepayments under the agreement” and that in the 

absence of prepayments, Natus Medical would not receive “any benefit” from the Supply 

Contract.” (Id.) 

 In the wake of these disclosures, the price of Natus Medical shares again declined, closing 

at $36.32 on February 29, 2016, down from $37.21. (Id. ¶ 95.) 

 During a March 14, 2016 investor call, Hawkins finally conceded that analysts could 

discount the expected revenues from the Supply Contract but continued to maintain that the 

company “really believe[s] this is going to happen.” (Id. ¶ 97.) He acknowledged that the country 

of Venezuela was “quote, in the toilet” and that “trying to handicap exactly when, with all the 

changes going on in both governments, Ministry of Health, oil prices, it has made it very 

difficult.” (Id.) 
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 Approximately three weeks later, on April 4, 2016, Natus Medical issued a press release 

releasing its preliminary first quarter 2016 revenue results. (Id. ¶ 99.) The press release stated 

that Natus Medical had failed to meet its prior revenue guidance and that Natus Medical did not 

have “any revenue associated with the Venezuela Ministry of Health contract as [it] did not 

receive any prepayments during the quarter.” (Id.) In the wake of this press release, Natus 

Medical shares fell to $31.84 per share, down from a previous close of $39.64 — a loss of nearly 

20% on unusually high trading volume. (Id. ¶ 100.) 

 On April 20, 2016, Natus Medical released its final first quarter 2016 results. These results 

demonstrated that Defendants had slashed Natus Medical’s fiscal year 2016 guidance. In the 

guidance, Defendants conceded that they could “no longer include revenue or earnings from the 

agreement in . . . guidance until there is more clarity” on the Ministry of Health’s performance 

under the agreement. (Id.¶ 101.) 

D. Claims Asserted in this Action. 

 The first amended complaint in this action was filed on July 14, 2017. Plaintiff alleges that 

Defendants’ allegedly false or misleading statements violated (1) section 10(b) of the Securities 

Exchange Act of 1934 (“Exchange Act’), 15 U.S.C. § 78j(b), and Securities Exchange 

Commission Rule 10b-5, 17 C.F.R. § 240.10b-5; and (2) section 20(a) of the Exchange Act, 15 

U.S.C. § 78t. (Id. ¶¶ 130, 138.) Defendants have moved to dismiss these claims for failure to 

state a claim under Federal Rules of Civil Procedure 9(b) and 12(b)(6). (Dkt. No. 29, Motion, at 

1.) 

APPLICABLE LEGAL STANDARD 

A motion to dismiss is proper under Rule 12(b)(6) where the pleadings fail to state a claim 

upon which relief can be granted. The complaint is construed in the light most favorable to the 

non-moving party, and all material allegations in the complaint are taken to be true. Sanders v. 

Kennedy, 794 F.2d 478, 481 (9th Cir. 1986). The Court may consider the facts alleged in the 

complaint, documents attached to the complaint, documents relied upon but not attached to the 

complaint when the authenticity of those documents is not questioned, and other matters of which 

the Court can take judicial notice. Zucco Partners LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th 
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Cir. 2009) 

 Under Rule 8(a), a plaintiff need only provide a “short and plain statement of the claim 

showing that the pleader is entitled to relief.” Even under this liberal pleading standard, “a 

plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than 

labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” 

Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citing Papasan v. Allain, 478 U.S. 265, 

286 (1986)). Pursuant to Twombly, a plaintiff must not merely allege conduct that is conceivable 

but must instead allege “enough facts to state a claim to relief that is plausible on its face.” Id. at 

570. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court 

to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft 

v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). While this standard does 

not impose a “probability requirement,” it nonetheless “asks for more than a sheer possibility that 

a defendant has acted unlawfully. . . . When a complaint pleads facts that are merely consistent 

with a defendant’s liability, it stops short of the line between possibility and plausibility of 

entitlement to relief.” Id.

 A heightened pleading standard, however, applies in this case. Plaintiff is alleging that 

Defendants engaged in a pattern of fraudulent or misleading representations in violation of the 

Exchange Act and Rule 10b-5. Accordingly, Plaintiff’s FAC must meet both the heightened 

pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). 

See Zucco Partners, 552 F.3d at 990, 

 Under Rule 9(b), a plaintiff alleging fraud must allege “with particularity the 

circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). In the securities context, the 

PSLRA requires that a “complaint ‘plead with particularity both falsity and scienter.’” Zucco 

Partners, 552 F.3d at 990 (quoting Gompper v. VISX, 298 F.3d 893, 895 (9th Cir. 2002). 

Accordingly, a securities plaintiff alleging material misstatements or omissions must “specify each 

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

and, if an allegation regarding the statement or omission is made on information and belief, the 

complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-
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4(b)(1). To adequately plead scienter, the PSLRA requires that the plaintiff “state with 

particularity facts giving rise to a strong inference that the defendant acted with the required state 

of mind.” Id. § 78u-4(b)(2). 

DISCUSSION 

 Section 10(b) of the Exchange Act provides, in relevant part, that it is unlawful “to use or 

employ in connection with the purchase or sale of any security registered on a national securities 

exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules 

and regulations as the [Securities and Exchange] Commission may prescribe.” 15 U.S.C. § 78j(b). 

Rule 10b-5, promulgated under the authority of section 10(b), makes it unlawful for any person, 

engaged in interstate commerce, to: (a) employ any device, scheme or artifice to defraud; (b) to 

make any untrue statement of material fact or to omit to state a material fact necessary in order to 

make the statements made, in light of the circumstances under which they were made, not 

misleading; or (c) to 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 allege: (1) a 

misrepresentation or omission; (2) of material fact; (3) made with scienter; (4) on which the 

plaintiff justifiably relied; (5) that proximately caused the allege loss. See Binder v. Gillespie, 

184 F.3d 1059, 1063 (9th Cir. 1999). Where, as here, a plaintiff alleges a “control person” claim 

under section 20(a) claim which is based on an underlying violation of section 10(b), the pleading 

requirements are identical for both claims. See, e.g., In re Ramp Networks, Inc. Sec., 201 F. Supp. 

2d 1051, 1063 (N.D. Cal. 2002); see also City of Dearborn Heights Act 345 Police & Fire 

Retirement Sys. v. Align Tech., Inc., 856 F.3d 605, 623 (9th Cir. 2017) (“Plaintiff has not 

sufficiently alleged violations of Section 10(b) and Rule 10b-5. And, without ‘a primary violation 

of federal securities law,’ Plaintiff cannot establish control person liability.” (citation omitted)). 

A. Whether Plaintiff Has Alleged Actionable Misrepresentations or Omissions. 

 Under Rule 9(b) and the PSLRA, a plaintiff must “identify[] the statements at issue and 

set[] forth what is false or misleading about the statement and why the statements were false or 
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misleading at the time they were made.” In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 876 

(9th Cir. 2012). Notably, this requirement applies to each challenged representation or omission. 

See, e.g., Doll v. Stars Holding Co., No. 05-cv-01132 MMC, 2005 WL 2811767, at *3 (N.D. Cal. 

Oct. 27, 2005) (noting plaintiffs must “specify the reasons why each such statement or omission is 

false or misleading”). For purposes of Rule 10b-5, a statement is misleading “if it would give a 

reasonable investor the impression of a state of affairs that differs in a material way from the one 

that actually exists.” In re Cutera Sec. Litig., 610 F.3d 1103, 1109 (9th Cir. 2010) (quoting 

Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th Cir. 2008)). While a statement is not 

misleading simply because it is incomplete, it is also the case that a “statement that is literally true 

can be misleading and thus actionable under the securities laws.” Brody v. Transitional Hospitals 

Corp., 280 F.3d 997, 1006 (9th Cir. 2002). 

 Additionally, the false or misleading statement must also be “material.” Bodri v. GoPro, 

Inc., 252 F. Supp. 3d 912, 922 (N.D Cal. 2017). “A false or misleading statement or omission is 

material if 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.” Id. (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). 

While materiality should ordinarily be left to the trier of fact, “conclusory allegations of law and 

unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim.” 

Reese v. Malone, 747 F.3d 557, 568 (9th Cir. 2014), overruled on other grounds by Align Tech., 

Inc., 856 F.3d 605. 

1. Representations Relating to the Existence of the Contract. 

Plaintiff contends, in essence, that every challenged representation made during the Class 

Period is false or misleading for one simple reason: The Supply Contract was not signed and, as a 

result, there was no agreement between Natus Medical/Medix in the fourth quarter of 2015. (See

FAC ¶¶ 39, 42.) Because of this, Plaintiff argues that it was misleading for Defendants to 

announce the Supply Contract to investors, tout its potential benefits to Natus Medical, and 

include it in Natus Medical’s revenue guidance. Plaintiff, however, has failed to adequately allege 

that the Supply Contract was unexecuted. 
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 Plaintiff relies extensively on the allegations of CW1 to support this contention. As 

detailed above, CW1 is alleged to have been the “Purchasing Coordinator” for the Venezuelan 

Ministry of Health beginning in the first quarter of 2016. (Id. ¶ 43.) According to the FAC, as 

Purchasing Coordinator, CW1: 

(1) was “responsible for preparing price quotes, handling and 

maintaining information regarding payments due under contracts for 

purchases and services, and tracking receipt of goods and 

services[.]” (Id. ¶ 40) 

(2) had “oversight responsibility for purchasing department buyers 

and members of the Ministry of Health’s Commission on Purchasing 

and Supplies.” (Id ¶ 41.) This Commission, in turn, “advised the 

Health Minister and made recommendations on purchasing 

decisions, including . . . appropriate pricing and selection of 

suppliers.” (Id.) The Health Minister, however, had “ultimate 

authority for negotiating final prices and other material contract 

terms, and for executing contracts.” (Id.) 

Plaintiff alleges that CW1 “confirms that the Supply Contract was not executed by the Ministry of 

Health.” (Id. ¶ 39.) 

 The PSLRA’s particularity pleading requirements do not foreclose Plaintiff’s reliance on 

confidential witnesses. However, the PSLRA does require that such sources be described “‘with 

sufficient particularity to support the probability that a person in the position occupied by the 

source would possess the information alleged’” and that the complaint contain “‘adequate 

corroborating details.’” In re Daou Systems, Inc., 411 F.3d 1006, 1015 (9th Cir. 2005) (quoting 

Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1233 (9th Cir. 2004)). 

 On this record, Plaintiff’s reliance on CW1 is inadequate for two reasons. First, CW1 was 

“Purchasing Coordinator” for the Ministry of Health beginning in the first quarter of 2016—after

the Supply Contract was purportedly executed. This is significant because Plaintiff’s allegations 

regarding the responsibilities of the Purchasing Coordinator do not plausibly suggest that an 

individual in that role would have personal knowledge about whether a contract was (or was not) 

signed months before that individual assumed the role. At most, it appears that CW1 would have 

personal knowledge about whether the Ministry of Health was performing under the Supply 

Contract in early 2016. For example, CW1 would likely be in a position to state whether Supply 

Contract payments were being prepared by the Ministry of Health during this time. 
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 The second issue is closely related to the first. Perhaps recognizing that CW1 was not the 

Purchasing Coordinator at the relevant time, Plaintiff alleges: 

According to CW1, and based on information provided to CW1 by 

the Purchasing Coordinator who immediately preceded him, as well 

as two other individuals who were Purchasing Department buyers 

and members of the Commission on Purchasing and Supplies during 

the fourth quarter of 2015 . . . while the Supply Contract was 

substantially negotiated leading up to the fourth quarter of 2015, it 

was not actually executed by the Ministry of Health. 

(FAC ¶ 43 (emphasis added).) It thus appears that CW1’s knowledge about whether the Supply 

Contract was or was not executed came from hearsay statements by third parties. While reliance 

on hearsay does not disqualify a confidential witness’s statements from consideration, the Court 

must “examine [the] confidential witness’s hearsay report to determine if it is ‘sufficiently reliable, 

plausible, or coherent.’” Digimarc, 552 F.3d at 997 n.4. Plaintiff has not provided enough 

information from which the Court can conduct this inquiry. Plaintiff has not alleged what CW1 

was told by the prior Purchasing Director or the Purchasing Department buyers. In addition, he 

has not provided any context surrounding when, why, or how these individuals provided CW1 

with information regarding the Supply Contract. Instead, he simply states the conclusion that the 

“information provided” to CW1 demonstrates the Supply Contract was not executed. Such a 

conclusory assertion, without any supporting context, makes it impossible for the Court to 

determine if the statements are sufficiently “reliable, plausible, or coherent.” Compare Lloyd v. 

CVB Fin. Corp., 811 F.3d 1200, 1208 (9th Cir. 2016) (“Here, the statements reported by the COO 

were specific in time, context, and details, and involved important communications from a chief 

executive officer to the Board. They are sufficiently reliable for pleading purposes.”). 

 In sum, Plaintiff has not plead sufficient facts to “support the probability” that CW1 

possesses information regarding whether the Supply Contract was executed. In re Daou Systems, 

Inc., 411 F.3d at 1015. The Court, however, will afford Plaintiff leave to amend these allegations. 

Plaintiff must include specific allegations relating to what the prior Purchasing Coordinator and 

Purchasing Department buyers told CW1 and the context in which these discussions occurred. In 

addition, Plaintiff should include additional allegations regarding the role of the Purchasing 

Coordinator and Commission on Purchasing and Supplies in the Ministry of Health generally and 
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in the negotiation of contracts more specifically. On the current allegations, Plaintiff has 

established a probability that an individual in the role of Purchasing Coordinator would be in a 

position to know whether the Supply Contract was being implemented. This, however, is a 

distinct question from whether an individual in that position would know whether the Supply 

Contract was even executed. 

 Having found that Plaintiff fails to adequately allege that the Supply Contract unexecuted, 

the Court makes the following two observations. First, if Plaintiff is able to adequately allege that 

the Supply Contract was unexecuted in the fourth quarter 2015, that will have major implications 

for how the Court views the other challenged statements. For the remainder of this order, the 

Court will examine the challenged statements as though the Supply Contract was executed (insofar 

as Plaintiff has, as of now, failed to adequately allege the contrary). However, in any subsequent 

motion to dismiss, it would be useful for the Court if Defendants included alternative arguments, 

addressing whether each challenged representation would be false or misleading both if the Supply 

Contract had been executed and if it had not. 

 Second, the Court finds it necessary to address an issue resulting from the parties’ briefing. 

As discussed above, Plaintiff’s counsel has drafted a FAC that takes the position the Supply 

Contract was not executed in the fourth quarter of 2015. The filing of this FAC contains certain 

implicit representations by counsel regarding the existence of a sufficient basis for those 

allegations. See Fed. R. Civ. P. 11(b). In support of the reply brief (and directly responding to an 

argument made in Plaintiff’s opposition brief), Defendants’ counsel has attached what purports to 

be a copy of the Supply Contract executed in October 2015. (See Dkt. No. 22-1.) Defense 

counsel has sworn, under penalty of perjury, that the attached document is a “true and correct copy 

of the signed agreement.” (Dkt. No. 37.) The Court has not addressed this purportedly signed 

copy of the Supply Contract because, even assuming it is properly presented to the Court at the 

pleading stage, the Court cannot now adjudicate the disputed question of whether the Supply 

Contract was actually executed. The Court notes, however, that it is cognizant of the fact that 

counsel have made diametrically opposed representations to the Court. The Court therefore finds 

it necessary to remind all counsel of (1) their professional obligations relating to the presentation 
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of facts and arguments before the Court, and (2) the need to conduct a sufficient investigation into 

their respective positions before they make any further representation to the Court. See Fed. R. 

Civ. P. 11; see also Cal. R. Prof. Conduct 5-200. 

2. Defendants’ Representations Regarding the Prepayments. 

Many of the challenged statements on which Plaintiff relies involve the prepayments under 

the Supply Contract. The Supply Contract called for the Ministry of Health to make a prepayment 

of $69,262,000.00. (Dkt. No. 29-2, Supply Contract, cl. 4(a).)2 This prepayment was to be made 

in three installments: (1) $24,413,410.95 due October 2015; (2) $22,669,595.89 due November 

2015; and (3) $22,669,595.89 due December 2015. (Id.) Plaintiff argues that Defendants 

repeatedly misrepresented when the prepayments were due and then failed to disclose when the 

Ministry of Health defaulted on these payments. Plaintiff challenges four specific statement 

related to the prepayments: 

(1) October 15, 2015, Form 8-K: “Prepayments totaling 

approximately $69 million are expected by the first quarter of 

2016.” (FAC ¶ 50.) 

 

(2) October 21, 2015, Conference Call Statement by Hawkins: “We 

expect to receive some payments here by the end of the year, to start 

those three payments totaling the $69 million. And then to – most 

likely those would extend into the first quarter of next year.” (FAC 

¶ 57.) 

(3) November 19, 2015, Healthcare Conference Statement by 

Hawkins: “We are looking to get our first payment in by the end of 

the year, and those payments would continue throughout the life of 

the contract.” (FAC ¶ 65.) 

(4) December 1, 2015, Healthcare Conference Statement by 

Hawkins: “We look for some of these revenues to start in December. 

We expect to get our first $23 million payment in the weeks ahead 

and then we’ll be prepaid on all of this as we go forward on a rolling 

basis.” (FAC ¶ 71.) 

The Court concludes that Plaintiff has sufficiently alleged that the October 21, November 19, and 

December 1 statements were false and misleading. 

 As to the October 15, 2015 statement, however, the Court finds that Plaintiff has failed to 

 

2

 Defendant’s unopposed request for the Court to take judicial notice of various SEC filings that 

are referenced in the FAC is GRANTED. 
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allege a false or misleading statement. Plaintiff claims that this statement “failed to disclose that 

. . . three independent pre-payments were separately due in October, November, and December 

2015.” (FAC ¶ 51.) However, Plaintiff does not dispute that this statement was true, at least 

technically. Under the terms of the Supply Contract, the $69 million prepayment would be 

received “by the first quarter of 2016.” The simple fact that the press release statement could have 

included more detail regarding the timing of the prepayments, without more, does not render the 

statement misleading. See, e.g., In re Tut Sys., Inc. Sec. Litig., No. 01-cv-02659, 2002 WL 

35462358 (N.D. Cal. Aug. 15, 2002) (“Plaintiffs fault Defendants for failing to provide more 

details regarding the extent of the reserves that would need to be booked . . . . However, 

Defendants’ failure to disclose more specific information at an earlier date does not amount to 

fraud.”); see also Brody, 280 F.3d at 1006 (“Rule 10b-5 . . . in terms prohibit[s] only misleading 

and untrue statements, not statements that are incomplete.”). Plaintiff has not explained how 

Defendants’ failure to provide more granular detail regarding the timing of the prepayments 

created an “impression of a state of affairs that differ[ed] in a material way from the one that 

actually exists.” Id. (emphasis added). If Plaintiff wishes to rely on this statement, he will need to 

provide additional factual allegations to demonstrate why this statement, which appears consistent 

with the terms of the Supply Contract, was nonetheless materially false or misleading. 

 For the October 21, 2015 statement, Plaintiff is correct that the statement was arguably 

misleading. Whereas Hawkins represented that the $69 million prepayment would “start” in 2015 

and likely continue into 2016, he failed to disclose that the terms of the Supply Contract called for 

the entire $69 million prepayment to be received by the end of 2015. The Court finds Plaintiff has 

plausibly alleged that Hawkins’ statement was false or misleading. As to materiality, the Court 

finds, for purposes of the pleading stage, that a reasonable investor would view the true, shorter, 

payment schedule under the Supply Contract as “significantly alter[ing] the ‘total mix’ of 

information made available.” Bodri, 252 F. Supp. 3d at 922 

 For similar reasons, the Court finds that Plaintiff has adequately alleged that Hawkins’ 

November and December 2015 statements regarding the first prepayment were materially false or 

misleading. Hawkins represented to investors in November and December that Defendants 
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expected to receive the Supply Contract’s first prepayment by the end of the year. These 

statements effectively represented that the Supply Contract simply called for the first prepayment 

to be received by the end of 2015. As already discussed, however, Hawkins’ statement omitted 

the fact that the Ministry of Health was required to make prepayments in October, November, and 

December 2015. This omission was significant because at the time Hawkins made his November 

and December statements, the Ministry of Health had defaulted on its first and second 

prepayments, respectively. Taking all inferences in Plaintiff’s favor, Hawkins’ statement was 

more than just incomplete; rather, it created an “impression of [the Supply Contract] that differ[ed] 

. . . from the one that actually exist[ed].” In re Cutera, 610 F.3d at 1109. The Court has no 

problem concluding for purposes of the pleading stage that investors would have found the 

Ministry of Health’s default to be material. Accordingly, the Court finds that Plaintiff has 

adequately alleged that Hawkins made materially misleading statements by effectively hiding the 

Supply Contract’s prepayment schedule, and thus the Ministry of Health’s default, from investors. 

 Defendant argues, however, that these statements were “forward looking” and are therefore 

immunized under the PSLRA’s safe harbor provision. Under the safe harbor, a “defendant will 

not be liable for a false or misleading statement if it is forward-looking and either is accompanied 

by cautionary language or is made without actual knowledge that it is false or misleading.” In re 

Quality Sys., Inc. Sec. Litig., 865 F.3d 1130, 1142 (9th Cir. 2017). A “forward looking” statement 

is “‘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.’” In re Leapfrog Enter., Inc. Sec. Litig., 200 F. Supp. 3d 987, 1004 (N.D. Cal. 

2016) (quoting Bartlet v. Affymax, Inc., No. 13-cv-01025-WHO, 2014 WL 231551, at *13 (N.D. 

Cal. Jan. 21, 2014)). Significantly, the Ninth Circuit has recognized that the safe harbor is 

inapplicable to misleading statements of current or past facts: 

[T]he safe harbor is not designed to protect companies and their 

officials when they knowingly make a materially false or misleading 

statement about current or past facts. Nor is the safe harbor 

designed to protect them when they make a materially false or 

misleading statement about current or past facts, and combine that 

statement with a forward-looking statement. 
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See In re Quality Sys., Inc., 865 F.3d at 1142. 

 The Court finds that Defendant Hawkins’ statements regarding the prepayments are not 

“forward looking” statements for purposes of the PSLRA safe harbor. The Court acknowledges 

that each of the three statements discussed above contain a forward looking component, namely 

that Defendants “expected” to receive the first prepayment by the end of the year. Notably, 

however, Hawkins’ stated “expectation” related directly to a term of the Supply Contract, and both 

the Supply Contract and its terms were existing, present facts. Further, Hawkins’ statement was 

made in the context of a larger statement about the formation of the Supply Contract and its total 

value, again, both statements of present fact. Given this context, and the nature of Hawkins’ 

statements, the Court concludes that the challenged statements included implicit representations 

that the stated “expectation” was consistent with the Supply Contract’s term. On the facts alleged, 

this implicit representation was, at best, misleading given the Supply Contract’s prepayment 

schedule and (for the November and December statements) the Ministry of Health’s default. 

Accordingly, by announcing that he expected the first prepayment installment by the end of the 

year, without qualification or elaboration, Hawkins made an omission of present fact. See In re 

Celera Corp. Sec. Litig., No. 5:10-cv-02604 EJD, 2013 WL 4726097, at *2 (N.D. Cal. Sept. 3, 

2013) (“[T]he failure to alert investors to the reimbursement problem was not forward-looking; 

rather, it was an omission of a historical fact.”); see also In re CV Therapeutics, Inc., No. 03-CV03709-SI, 2004 WL 1753251, at *10 (N.D. Cal. Aug. 5, 2004) (“[W]hen the defendants possessed 

and failed to disclose detailed information about the FDA’s serious reservations concerning 

Raxena’s safety and efficacy, they failed to disclose historical facts. The fact that defendants used 

those inadequately disclosed historical facts to support unsound projections does not shield their 

alleged misrepresentations as forward-looking statements.”). 

3. Kennedy’s Representation Regarding Currency Exchange Risk 

 During the October 21, 2015 conference call, Defendant Kennedy allegedly asserted that 

the Supply Contract presented a “minimal” currency exchange risk because the Supply Contract’s 

payments were “denominated in dollars, and our payment is a dollar-denominated payment.” 

(FAC ¶ 63.) Plaintiff asserts this was misleading to investors because the Supply Contract, in fact, 
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required that payments be made in “Argentinian Pesos at the current exchange rate for the 

effective date of payment.” (Supply Contract, cl. 4.) 

 First, Plaintiff has abandoned this theory by failing to respond to Defendants’ arguments 

regarding it in his opposition to the motion to dismiss. See Homsy v. Bank of Am., N.A., No. 13-

cv-01608 LB., 2013 WL 2422781, at *5 (N.D. Cal. June 3, 2013) (“[W]here a plaintiff simply 

fails to address a particular claim in its opposition to a motion to dismiss that claim, courts 

generally dismiss it with prejudice.”). Second, on the merits, Plaintiff has failed to allege how 

Kennedy’s statement was false or misleading. In fact, the very terms of the Supply Contract 

suggest that Kennedy’s statement was accurate. The Supply Contract provides: 

The payment by [the Ministry of Health] to [Medix] shall be made 

through Debt Representative Securities (VRD) in US Dollars and 

payable in Argentinian Pesos at the current exchange rate for the 

effective day of payment . . . . 

(Supply Contract, cl. 4.) The precise payments are then defined in American dollars. For 

example, the entire prepayment is defined as a payment of $69,752,602. (Id.) Under the terms of 

the Supply Contract, the number of Argentinian pesos needed to satisfy the $69,752,602 amount 

would depend on the exchange rate at the time of payment, but the underlying dollar value of the 

payment would not change. In light of these facts, Plaintiff has failed to allege facts showing that 

Kennedy’s representations regarding the currency exchange risk were false or misleading. 

4. Representations Regarding Medix’s Prior Ministry of Health Contract.

 In the FAC, Plaintiff alleges that Defendants improperly sought to bolster investors’ 

perception of the Supply Contract by misrepresenting Medix’s prior agreement with the Ministry 

of Health. Plaintiff alleges Defendants did this on two separate occasions: 

(1) October 21, 2015, Conference Call Statement by Kennedy: 

“[T]his isn’t the first contract with Venezuela that Medix has 

entered into. So this is a continuation of an ongoing 

relationship. . . . So when we acquired Medix in 2010, they had just 

completed, I want to say, about a $100 million deal with 

Venezuela.” (FAC ¶ 61.) 

(2) November 19, 2015 Healthcare Conference Statement by 

Hawkins: “Yes, so, always a potential risk with any contract. The 

one thing I would say with this one, before we bought our 

subsidiary, which is located in Buenos Aires, which is who received 
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this order, a company called Medix, they had received an $82 

million order maybe seven years ago and it came through just fine. 

The money showed up as expected and it did happen.” (FAC ¶ 67.) 

According to Plaintiff, the prior contractual agreement between Medix and the Ministry of Health 

does not match the “rosy” picture painted by Defendants. 

 Plaintiff relies primarily on three confidential witnesses to support this assertion. CW1, 

discussed above in connection with the assertion that the Supply Contract was unexecuted, states 

that she “learned” that the previous contract “failed to come to completion and was cancelled or 

suspended when the final amounts owing under the contract were not paid to Medix by the 

Ministry of Health.” (FAC ¶ 44.) CW2, who is alleged to be Natus Medical’s former Medical 

Director of Operations in Argentina, states that the “contract with Venezuela was always in the air. 

Medix was always trying to close it.” (Id. ¶ 45.) CW2 also reports a “history of difficulties with 

payments with Venezuela.” (Id.) Finally, CW3, Natus Medical’s former Latin American 

Regional Sales Manager, similarly reports that “payment of the contract was done one or two 

months before I left the company” and that the last payment was a “very late payment. One or two 

years late.” (Id. ¶ 46.) 

 Plaintiff, however, fails to provide sufficient detail to support an inference that Defendants’ 

account was materially misleading. As to CW1, he is alleged to have been the Ministry of 

Health’s Purchasing Coordinator starting in February 2016. (FAC ¶ 40.) The prior contract, 

however, was entered into in 2010. Plaintiff does not allege facts explaining how CW1 has 

personal knowledge about the details of a contract which was allegedly executed and performed 

years before she assumed his role with the Ministry of Health. Instead, Plaintiff simply alleges 

CW1 “learned” of this fact from an undisclosed source at an undisclosed time. This is 

insufficient. Cf. Digimarc, 552 F.3d at 997 n.4 (“[A] hearsay statement, while not automatically 

precluded . . . may indicate that a confidential witnesses’ report is not sufficiently reliable, 

plausible, or coherent to warrant further consideration . . . .”). Further, CW2’s statement vaguely 

refers to a “history of difficulties’ regarding payments with the Ministry of Health, without 

providing any detail regarding the nature or pervasiveness of those difficulties. Finally, although 

CW3’s account of a “one to two years late” payment is in tension with Defendant Hawkins’ 
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representation that the money “came through just fine” or “showed up as expected” (FAC ¶ 67), 

the prior contract apparently involved multiple payments worth close to $100 million. Without 

more detailed allegations regarding the circumstances into this late payment, or the alleged 

“history of difficulties,” the Court is unable to determine whether Defendants’ representations 

regarding the prior contract were false or misleading (let alone in a material sense). 

5. Defendant’s Fourth Quarter/Full Year 2015 Guidance Adjustment. 

Plaintiff next contends that Defendants misled investors by including revenue from the 

Supply Contract in Natus Medical’s fourth quarter and full year 2015 revenue guidance. On 

October 21, 2015, Defendants filed a Form 8-K with the SEC which increased the fourth quarter 

revenue guidance from $102.0 million to $105.0 million and full-year guidance from $378 million 

to $381 million. (FAC ¶ 53.) In a quote, Defendant Hawkins attributed this increased guidance, 

in part, to the Supply Contract: “In addition to our record performance during the quarter, we 

recently secured a $235 million, three-year agreement between our Argentina subsidiary Medix, 

and the Venezuelan Ministry of Health.” (Id.) 

 In the FAC, Plaintiff argues that factoring the Supply Contract into Natus Medical’s 

revenue guidance was false and misleading for two reasons: (1) the Supply Contract was not 

executed and (2) even if executed, the Supply Contract’s Venezuelan choice of law provision 

rendered Natus Medical without any means of effectively enforcing its rights under that 

agreement. The Court has already disposed of the first of these theories above. The second fares 

no better. The Court begins by noting that Plaintiff has again abandoned this theory by failing to 

defend (or even reference) it in his opposition to the motion to dismiss. See Homsy, 2013 WL 

2422781, at *5 (“[W]here a plaintiff simply fails to address a particular claim in its opposition to a 

motion to dismiss that claim, courts generally dismiss it with prejudice.”). 

 Second, even addressing the theory on its merits, Plaintiff has failed to support it with 

sufficient factual allegations. The FAC relies entirely on a single quotation from a 2014 report by 

the “International Commission of Jurists” suggesting that the “failures by the authorities, as well 

as interference, intimidation, arbitrary suspensions and other pressures” have “undermined 

independence and impartiality of the country’s judges and prosecutors.” (FAC ¶ 48.) This single 
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quote, devoid of context, does not support Plaintiff’s expansive conclusion that any party who 

enters into a contract with the government of Venezeula and chooses the Venezuelan courts as the 

forum for resolving disputes is effectively left without a remedy for enforcing its rights. 

Accordingly, if Plaintiff intends to proceed with this theory, he will have to include additional 

factual allegations which give rise to an inference that the Supply Contract’s choice of forum 

provision rendered Defendants’ representations about that agreement false or misleading. 

 In addition to the October 21, 2015 statement announcing the increased revenue guidance, 

Plaintiff also challenges Defendants’ subsequent touting of that increased guidance during 

November and December. During the healthcare conferences held during these months, 

Defendant Hawkins allegedly reiterated the increased guidance (FAC ¶¶ 65, 71) and lauded the 

Supply Contract as one reason for this. (Id.) Plaintiff has adequately alleged that these statements 

were materially misleading. As discussed above, at the time Defendant Hawkins made these 

statements, the Ministry of Health had defaulted on its prepayments under the Supply Contract, 

thus undercutting the basis for that guidance. Defendant Hawkins, however, did not disclose this 

fact to investors, thus rendering his statements misleading. The Court further rejects Defendants’ 

contention that these statements are protected by the PSLRA’s safe harbor. As with the related 

representations, discussed above, that prepayments were “expected” by the end of the year, the 

Court finds that Plaintiff has adequately alleged that Defendants made an omission of present fact 

by failing to disclose this default. See In re CV Therapeutics, Inc., 2004 WL 1753251, at *10; see 

also Loftus v. Primero Mining Corp., 230 F. Supp. 3d 1209 (C.D. Cal. 2017) (“[B]ecause 

Plaintiffs allege that the way in which Primero’s representations about future tax projections were 

misleading was by omitting already-existing historical facts, the Court finds that these 

representations are not protected by the safe harbor provisions.”).

 6. Defendants’ 2016 Representations. 

Finally, Plaintiff alleges that Defendants continued to make materially false or misleading 

statements into 2016, after the truth about the Ministry of Health’s default on the prepayments 

came to light. Plaintiff, however, has failed to allege facts giving rise to an inference that these 

statements were materially false or misleading. 
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 First, Plaintiff challenges a number of statements made by Defendants in January 2016 that 

Natus Medical’s 2015 revenue shortfall was due to a “delay” in the Supply Contract’s prepayment. 

(See FAC ¶¶ 75, 80, 82.) This statement was literally true and it disclosed to investors the fact that 

the prepayment—which Defendants had previously announced was expected by the end of 2015—

had not been received. In both the FAC and the opposition, Plaintiff argues that Defendant failed 

to disclose that the “Ministry of Health was actually late on all three of its pre-payments under the 

terms of the Supply Contract.” (FAC ¶ 77.) Plaintiff, however, does not explain why it was 

materially false or misleading for Defendants to refer to a “delay” in the Supply Contract’s 

prepayment as opposed to providing the more granular detail Plaintiff now contends should have 

been given. See, e.g., Brody, 280 F.3d at 1006 (“Rule 10b-5 . . . in terms prohibit[s] only

misleading and untrue statements, not statements that are incomplete.”). 

 Second, Plaintiff contends that Defendants’ inclusion of Supply Contract revenue in Natus 

Medical’s 1Q and full year 2016 revenue guidance was false or misleading. In various January 

filings and conference calls, Defendants announced that the first quarter and full year 2016 

revenue guidance would include $5.0 million and $60.0 million, respectively, from the Supply 

Contract. (See FAC ¶ 75, see also Dkt. No. 29- 14.) In arguing that this was misleading, Plaintiff 

relies entirely on the prior failure of the Ministry of Health to make the prepayment installments. 

As just discussed, however, the fact that the prepayment had not been received as initially 

expected was disclosed to investors. Plaintiff alleges no facts, known to Defendants but unknown 

to investors, which would give rise to an inference that it was misleading for Defendants to 

include Supply Contract revenue in the guidance figures. The Court also notes that the Supply 

Contract provided for a three year term; the missed prepayments did not constitute the entire, or 

even a majority, of that agreement.3

 Third, Plaintiff challenges a March 14, 2016 conference call statement by Defendant 

Hawkins. Specifically, Plaintiff alleges it was false or misleading for Hawkins to state “[W]e 

 

3

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protected by the PSLRA’s safe harbor. Because the Court concludes Plaintiff has failed to allege 

sufficient facts showing this revenue guidance was false or misleading when made, however, the 

Court need not address this question at this time. 
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really believe this is going to happen” (referring to the Supply Contract) after noting that analysts 

could discount the expected revenues from the Supply Contract. (FAC ¶ 97.) The Court finds this 

statement to be non-actionable puffery. See, e.g., In re Cutera, 610 F.3d at 1111 (“This mildly 

optimistic, subjective assessment hardly amounts to a securities violation. Indeed, professional 

investors, and most amateur investors as well, know how to devalue the optimism of corporate 

executives.” (internal quotation marks omitted)); see also Robb v. Fitbit Inc., 216 F. Supp. 3d 

1017, 1028 (N.D. Cal. 2016) (“[S]tatements that merely express confidence in a company’s 

business and outlook are vague assertions of corporate optimism and are not actionable under 

federal securities laws.”). 

7. Summary. 

 For the reasons just stated, the Court does finds that Plaintiff has sufficiently alleged that 

the November and December 2015 statements regarding (1) the anticipated timing for receipt of 

the prepayment under the Supply Contract, and (2) restatement of increased revenue guidance 

were materially false or misleading. Plaintiff, however, has failed to allege sufficient facts 

showing that the various other statements he challenges in the FAC were materially false or 

misleading within the meaning of the PSLRA. The Court, however, will afford Plaintiff leave to 

file a second amended complaint to plead additional facts giving rise to an inference that 

Defendants’ other statements were, in fact, false or misleading. If Plaintiff intends to abandon his 

arguments that certain statements or omissions were misleading (for example, the choice of forum 

provision or the “exchange risk” statement), he shall not replead those in the second amended 

complaint. 

B. Plaintiff Has Failed to Raise a Strong Inference of Scienter. 

 The Court has found that Plaintiff’s FAC sufficiently alleges that certain statements made 

by Defendant Hawkins in November and December 2015 were false or misleading. The PSLRA 

requires that Plaintiff “state with particularity facts giving rise to a strong inference that the 

defendant acted with the required state of mind” in making those statements. 15 U.S.C. § 78u4(b)(2)(A). 

 The Ninth Circuit has explained that the “required state of mind” is “a mental state that not 
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only covers ‘intent to deceive, manipulate, or defraud,’ but also ‘deliberate recklessness.’” In re 

Quality Sys., 865 F.3d at 1144 (quoting Schueneman v. Arena Pharms., 840 F.3d 698, 705 (9th 

Cir. 2016)). To determine whether Plaintiff has adequately plead a “strong inference” of scienter, 

the Court must ask: “When the allegations are accepted as true and taken collectively, would a 

reasonable person deem the influence of scienter as least as strong as any opposing inference?” 

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007). This requires a dual 

inquiry. First, the Court must “determine whether any of the plaintiff’s allegations, standing 

alone, is sufficient to create a strong inference of scienter.” In re NVIDIA Corp. Securities Litig., 

768 F.3d 1046, 1056 (9th Cir. 2014). Second, if no allegation is alone sufficient, the Court then 

“consider[s] the allegations holistically to determine whether they create a strong inference of 

scienter taken together.” (Id.) 

 Plaintiff first argues that the fact that the Supply Contract was not executed provides strong 

evidence of scienter. This argument fails because Plaintiff has not adequately alleged that the 

Supply Contract was unexecuted. Plaintiff relies almost exclusively on CW1’s statements to 

support his conclusion that the Supply Contract was unexecuted. As detailed above, however, 

Plaintiff has failed to allege sufficient facts from which it can be inferred that CW1’s based his 

statements on his own personal knowledge or other reliable sources. As such, Plaintiff’s 

contention that the Supply Contract was unexecuted does not give rise to a strong inference of 

scienter. See, e.g., Zucco Partners, 552 F.3d at 996 (“Some of the confidential witnesses were 

simply not positioned to know the information alleged, many report only unreliable hearsay, and 

others allege conclusory assertions of scienter. These allegations are not sufficient to raise a 

strong inference of scienter because they demonstrate that the confidential witnesses are not 

reliable.”). 

 Plaintiff also contends that Defendants’ “subtl[y] shifting” representations regarding the 

Supply Contract’s prepayment terms supports a finding of scienter. The Court has found that 

Plaintiff has adequately alleged that Hawkins’ November and December 2015 statements that the 

prepayment was “expected” by the end of 2015 were misleading due to his failure to disclose the 

Ministry of Health’s default. Plaintiff, however, has failed to allege any facts supporting an 
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inference that Hawkins was deliberately reckless in making this statement or intended to mislead 

investors. See In re Quality Sys., 865 F.3d at 1144. Given the nature of these allegedly 

misleading statements, the Court cannot strongly infer scienter simply from the fact the statements 

were made. Even as alleged by Plaintiff, they are not direct falsehoods which conflict with a clear 

provision of the Supply Contract. Rather, they are statements regarding Hawkins’ “expectations” 

which, taking all inferences in Plaintiff’s favor, implicitly created a misleading impression about 

the Supply Contract’s prepayment schedule. While Plaintiff claims that Hawkins’ statements 

reflect a “deliberate effort to conceal the true state of affairs,” the statements are also subject to a 

competing inference that they were intended to be nothing more than Hawkins’ then-held belief 

about when payments actually would be received, and that any misleading implication was 

inadvertent or the result of an oversight. See, e.g., Zucco Partners, 552 F.3d at 991 (plaintiff must 

plead a “highly unreasonable omission, involving not merely simple, or even inexcusable 

negligence” (citation omitted)). In sum, these challenged statements may give rise to a possible 

(or even reasonable) inference of scienter, but the Court finds that they do not give rise to the 

necessary strong inference based on the facts alleged.4

 Finally, in the FAC, Plaintiff relies on Hawkins’ and Kennedy’s stock purchases to 

establish scienter. “‘Unusual’ or ‘suspicious’ stock sales by corporate insiders may constitute 

circumstantial evidence of scienter. . . .” In re Quality Systems, 865 F.3d at 1146 (citation 

omitted). To determine whether a stock sale is suspicious, the Court considers, inter alia, three 

factors: “(1) the amount and percentage of shares sold; (2) timing of the sales; and (3) consistency 

with prior trading history.’” Id. (quoting Nursing Home Pension Fund, Local 144 v. Oracle Corp., 

380 F.3d 1226, 1232 (9th Cir. 2004)). The Ninth Circuit has explained that stock sales by a 

company’s insiders are “‘suspicious only when [they are] dramatically out of line with prior 

trading practices at times calculated to maximize the personal benefit from undisclosed inside 

information.’” Align Tech, 856 F.3d at 621 (quoting Zucco Partners, 552 F.3d at 1005). 

 

4

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money is set aside” (and related statements) is unavailing. Plaintiff pleads no facts which give rise 

to a strong inference (as opposed to speculation) that the statements were made with the requisite 

state of mind. 
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 Plaintiff alleges that in October 2015, Kennedy sold 28,958 shares of Natus Medical stock, 

worth a total of $1,323,905. (FAC ¶ 104.) During October and November 2015, Hawkins sold 

200,000 shares worth a total of $9,422,055. (Id. ¶ 106.) This is around the time that Natus 

Medical’s share price allegedly reached its all-time high and after Defendants had announced the 

Supply Contract. (See id. ¶ 12.) However, “[e]ven assuming Defendants sold their stocks at a 

price that was close to the stock’s all-time high, ‘this alone is not sufficient for scienter 

purposes.’” Fadia v. FireEye, Inc., 14-cv-05204-EJD, 2016 WL 6679806, at *16 (N.D. Cal. Nov. 

14, 2016) (quoting In re Tut Sys., Inc., 2002 WL 35462358, at *11). 

 The FAC argues that the suspiciousness of Defendants’ fourth quarter 2015 sales is 

highlighted by the fact that Defendants’ gross proceeds from the sale “are more than three times 

greater than the gross proceeds from [Defendants’] stock sales during the six months preceding the 

Class Period.” (FAC ¶ 103.) In fact, comparing the purportedly suspicious sales to Defendants’ 

trading history over a longer period of time suggests the fourth quarter 2015 stock sales were not 

“dramatically out of line” with Defendants’ prior practices. During the fourth quarter of 2014 (one 

year prior to the announcement of the Supply Contract), Defendant Hawkins sold 270,000 shares 

of Natus Medical stock, while Defendant Kennedy sold 45,833 shares. (Dkt. No. 29-21; 29-22.) 5 

Both figures are significantly higher than the number of shares these Defendants sold as part of 

their allegedly “suspicious” stock transactions. Further, during the fourth quarter of 2013, 

Hawkins sold 206,878 shares of Natus Medical stock, further reinforcing the inference that it was 

not unusual for him to make large fourth quarter sales of Natus Medical stock. (See Dkt. No. 29-

21, at 2.) 

 In the face of this prior trading history, Plaintiff contends that the fourth quarter 2015 sales 

 

5

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quarter of 2014 and (for Defendant Hawkins) fourth quarter of 2013 to show the Defendants’ 

stock sales during this time. Even though these documents (or the information contained therein) 

were not directly referenced in the FAC, the Court may consider them. Plaintiff does not 

challenge the authenticity of these documents. Further, Plaintiff’s scienter allegations in the FAC 

rely extensively on Defendants’ allegedly suspicious trading patterns, information which is 

disclosed to the public through the Form 4. Under these circumstances, the Court may take 

judicial notice of the Form 4. See, e.g., In re Solarcity Corp. Securities Litig., 274 F. Supp. 3d 

972, 988 (N.D. Cal. 2017); City of Royal Oak Retirement Sys. v. Juniper Networks, Inc., 880 F. 

Supp. 2d 1045, 1059 (N.D. Cal. 2012) 
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are still suspicious because the gross proceeds realized from the sale far exceeded those of prior 

sales. Plaintiff, however, does not cite any case for the authority that courts should look to the 

realized proceeds of a sale, and the Court has located none. Instead, the relevant authority directs 

the Court to examine “the amount and percentage of shares sold.” In re Quality Systems, 865 F.3d 

at 1146. As stated above, the number of shares sold by these Defendants during the fourth quarter 

of 2015 does not appear suspicious in light of Defendants’ trading history. Further, Plaintiff has 

not plead any facts regarding the percentage of their holdings Hawkins and Kennedy sold during 

the fourth quarter 2015, so the Court cannot compare this to the Defendants’ prior sales. On this 

record, the Court finds that the evidence of Defendants’ prior trading history undermines any 

inference of scienter that may otherwise have arisen from Defendants’ fourth quarter 2015 stock 

sales.6 See, e.g., Kovtun v. VIVUS, Inc., No. 10-cv-4957-PJH, 2012 WL 4477647, at *21 (N.D. 

Cal. Sept. 27, 2012); In re Tibco Software, Inc., No. 05-cv-2146-SBA, 2006 WL 1469654, at *21 

(N.D. Cal. May 25, 2006). 

 In light of the above, the Court finds that Plaintiff has failed to plead facts giving rise to a 

“strong” inference of scienter.7 Specifically, the Court believes Plaintiff has not demonstrated that 

the “malicious inference is at least as compelling as any opposing innocent inference.” Zucco 

Partners, 552 F.3d at 1006. Accordingly, Defendants’ motion to dismiss Plaintiff’s section 10(b) 

claim is granted and the claim will be dismissed. The Court will, however, afford Plaintiff leave 

to amend to plead additional facts relevant to the question of scienter.8 

C. Because the Section 10(b) Claim Fails, the Section 20(a) Claim Also Fails. 

 Because Plaintiff has failed to adequately allege a violation of Section 10(b), his section 

20(a) claim necessarily fails. See, e.g., Align Tech., 856 F.3d at 623 (“Plaintiff has not sufficiently 

 

6

 This ruling is obviously without prejudice to Plaintiff alleging additional facts in his amended 

complaint which would suggest that, notwithstanding Defendant Hawkins’ and Defendant 

Kennedy’s prior fourth quarter stock sales, the fourth quarter 2015 sales were suspicious. 

7

 The Court does not address, because it need not at this stage, Defendant’s argument that Natus 

Medical’s repurchase of stock between October 2015 and March 2016 negates a finding of 

scienter. 

8

 Because the Court has found that Plaintiff has failed to adequately allege scienter, it need not 

address the parties’ loss causation arguments. 
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