Source: https://law.justia.com/cases/federal/appellate-courts/F3/380/1226/533588/
Timestamp: 2020-08-13 21:11:23
Document Index: 655496360

Matched Legal Cases: ['§ 78', '§ 78', '§ 240', '§ 240', '§ 240', '§ 78', '§ 78', '§ 78', '§ 78', '§ 10']

No. 03-15883, 380 F.3d 1226 (9th Cir. 2004) :: Justia
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No. 03-15883, 380 F.3d 1226 (9th Cir. 2004)
US Court of Appeals for the Ninth Circuit - 380 F.3d 1226 (9th Cir. 2004) Argued and Submitted April 12, 2004
Filed September 1, 2004
A number of purchasers of Oracle Corporation stock (collectively referred to as "Plaintiffs") appeal the District Court's dismissal under Rule 12(b) (6) of their revised second amended complaint ("the Complaint") against Oracle Corporation and three of its top executive officers (collectively referred to as "Oracle" or "Defendants"). Plaintiffs' Complaint alleged that Defendants violated section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, promulgated thereunder. Plaintiffs further alleged that Oracle is liable under section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a).
A series of dismissals and filings of amended complaints ensued until, on March 24, 2003, the District Court granted Oracle's motion to dismiss Plaintiffs' revised second amended complaint (the operative "Complaint") with prejudice for failure to state a claim under Fed. R. Civ. P. 12(b) (6) because the pleadings did not meet the heightened pleading requirements of the PSLRA.
A dismissal for failure to state a claim under Rule 12(b) (6) of the Federal Rules of Civil Procedure is reviewed de novo. Zimmerman v. City of Oakland, 255 F.3d 734, 737 (9th Cir. 2001). The general rule for 12(b) (6) motions is that allegations of material fact made in the complaint should be taken as true and construed in the light most favorable to the plaintiff. Burgert v. Lokelani Bernice Pauahi Bishop Trust, 200 F.3d 661, 663 (9th Cir. 2000). A complaint should not be dismissed unless it appears beyond doubt that the plaintiff cannot prove any set of facts that would entitle him or her to relief. Williamson v. Gen. Dynamics Corp., 208 F.3d 1144, 1149 (9th Cir. 2000).
Rule 10b-5 is the regulation promulgated under Section 10(b). 17 C.F.R. § 240.10b-5. It provides that it is unlawful to use any facility of the national securities exchange " [t]o employ any device, scheme, or artifice to defraud." Id. § 240.10b-5(a). It further provides that it is unlawful " [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." Id. § 240.10b-5(b).
Rule 9(b) imposes a particularized pleading requirement on a plaintiff alleging fraud or any claim premised on fraud. Fed. R. Civ. P. 9(b). In addition, this action is brought under the PSLRA, which amended the 1934 Act to apply a heightened pleading standard to private class actions. See, e.g., 15 U.S.C. § 78u-4(a) (1); In re Silicon Graphics Sec. Litig., 183 F.3d 970, 973 (9th Cir. 1999).
To avoid dismissal under the PSLRA, the Complaint must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which the belief is formed." 15 U.S.C. § 78u-4(b) (1). If a plaintiff fails to plead the alleged misleading statements or omissions or the defendant's scienter with particularity, the complaint must be dismissed. § 78u 4(b) (3) (A). In addition, the PSLRA requires that the Complaint "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind," or scienter. § 78u-4(b) (2). The required state of mind is one of "deliberate recklessness." Silicon Graphics, 183 F.3d at 975. " [R]ecklessness only satisfies scienter under § 10(b) to the extent that it reflects some degree of intentional or conscious misconduct." Id. at 977.
In assessing whether Plaintiffs have sufficiently pled scienter, we must consider "whether the total of plaintiffs' allegations, even though individually lacking, are sufficient to create a strong inference that defendants acted with deliberate or conscious recklessness." No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. West Holding Corp., 320 F.3d 920, 938 (9th Cir. 2003). In determining whether a strong inference of scienter exists, we must consider all reasonable inferences, whether or not favorable to the plaintiff. Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir. 2002).
At first glance, these allegations might seem comparable to those made in Lipton v. Pathogenesis Corp., 284 F.3d 1027 (9th Cir. 2002). There, plaintiffs alleged that defendant corporation PathoGenesis "could regularly track its sales data" and that the company "tracked patient demand using data provided by IMS [Health, an information vendor, which] indicated that patient demand was flat." Id. at 1035-36. We held that such allegations were insufficient to plead scienter under the PSLRA because, although "plaintiffs referr [ed] to the existence of the IMS data and ma [d]e a general assertion about what they think the data show [ed]," they had no hard numbers or other specific information. Id. at 1036.
The Second Circuit has held that personal sources of information relied upon in a complaint should be "described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged." Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000) (permitting personal sources to go unnamed in a complaint so long as their positions are adequately described). Although the Complaint describes the witnesses with sufficient particularity to establish that they were in a position to know Oracle's accounting practices, more importantly, the documents themselves appear to establish improper revenue adjustment. Each of the debit memos lists a "credit" in the amount of the overpayment and clearly states "Revenue" at the start of the line item. Each of the credit line items offsets a debit of the same amount that is identified as a "Receivable," which reveals that the funds apparently moved from the receivable to the revenue account. In other words, the amounts were improperly recognized as revenue. Additionally, Oracle's SEC filings report approximately $215 million less "Customer advances and unearned revenue" in the second quarter than in the first quarter. The Plaintiffs' statistical expert had calculated that the total amount of money covered by the debit memos would be $228 million, a difference of only $13 million. It is reasonable to infer that the $215 million difference was attributable to improper revenue adjustment.
The District Court believed that the only evidence of scienter with regard to the allegedly improper accounting maneuvers was the top executives' micro-management of Oracle operations. Citing to In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1087 (9th Cir. 2002), the District Court held that mere allegations of a "hands-on" management style were insufficient to establish the strong inference of scienter required by the PSLRA. However, unlike in Vantive, Plaintiffs allege specific admissions from the three top executive officers of Oracle. For example, they allege that CEO Ellison said, "I love getting involved in every detail of the business," and that all three top executives said that they monitored portions of Oracle's global database. It is reasonable to infer that the Oracle executives' detail-oriented management style led them to become aware of the allegedly improper revenue recognition of such significant magnitude that the company would have missed its quarterly earnings projection but for the adjustments.
The District Court relied on Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231, 1246 (N.D. Cal. 1998), in holding that the Complaint must provide direct quotations from the defendants rather than analysts' paraphrasing. However, in Wenger, the plaintiffs did not quote analysts but instead did their own "repackag [ing of] defendants' actual oral statements in vague and impressionistic terms." Id. Here, Plaintiffs do not repackage Oracle's statements themselves; nor do the analysts they quote appear to have re-framed Oracle's statements "in vague and impressionistic terms." Indeed, Oracle acknowledges that the analysts' reports "simply repeat" other statements at issue in this litigation that were quoted directly.
The cases cited by Oracle are also inapt. Both In re Harmonic, Inc. Securities Litigation, 163 F. Supp. 2d 1079 (N.D. Cal. 2001), and Plevy v. Haggerty, 38 F. Supp. 2d 816 (C.D. Cal. 1998), address projections made by third parties, not statements (including forecasts) made by defendants and communicated via third parties. The cases state that, where third parties make such forecasts, defendants are not liable unless they "put their imprimatur" on the projections. Harmonic, 163 F. Supp. 2d at 1094-95; Plevy, 38 F. Supp. 2d at 823. Here, the statements clearly originated from Oracle and were merely reported by the third parties.