Source: https://law.justia.com/cases/federal/appellate-courts/F3/137/616/605882/
Timestamp: 2020-02-23 02:26:47
Document Index: 235774399

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

Norman Cooper; Barry Roseman, M.d., P.c. Profit Sharingplan; Theodore Deconne; Michael Dennis; Michael Kessler,on Behalf of Themselves and a Class of All Others Similarlysituated, Plaintiffs-appellants, v. Michael D. Pickett; Merisel, Inc.; Robert F. Leff; Davidwagman; James L. Brill; John J. Connors; John F.thompson; Lehman Brothers; Robinson-humphrey Company;deloitte & Touche, Defendants-appellees, 137 F.3d 616 (9th Cir. 1998) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Ninth Circuit › 1998 › Norman Cooper; Barry Roseman, M.d., P.c. Profit Sharingplan; Theodore Deconne; Michael Dennis; Micha...
Norman Cooper; Barry Roseman, M.d., P.c. Profit Sharingplan; Theodore Deconne; Michael Dennis; Michael Kessler,on Behalf of Themselves and a Class of All Others Similarlysituated, Plaintiffs-appellants, v. Michael D. Pickett; Merisel, Inc.; Robert F. Leff; Davidwagman; James L. Brill; John J. Connors; John F.thompson; Lehman Brothers; Robinson-humphrey Company;deloitte & Touche, Defendants-appellees, 137 F.3d 616 (9th Cir. 1998)
US Court of Appeals for the Ninth Circuit - 137 F.3d 616 (9th Cir. 1998) Argued and Submitted June 4, 1996. Decided Aug. 8, 1997. As Amended On Denial of Rehearing and Rehearing En BancJan. 30, 1998
because [the complaint] fails to meet the pleading standards enunciated in In re GlenFed, Inc., Securities Litigation, 42 F.3d 1541 (9th Cir. 1994) (en banc). The Complaint lacks concise, intelligible allegations sufficient to put the Merisel defendants on notice of their alleged wrongdoing. The Complaint also fails to plead particularized facts demonstrating that the statements made by the Merisel defendants were false when made.
In reviewing the district court's dismissal of the complaint we consider only the contents of the complaint, taking as true all the allegations of material fact. Warshaw v. Xoma Corp., 74 F.3d 955, 957 (9th Cir. 1996). In ruling on a motion to dismiss, a district court generally "may not consider any material beyond the pleadings." Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir. 1994).
However, material which is properly submitted as part of the complaint may be considered on a motion to dismiss....
[A] document is not "outside" the complaint if the complaint specifically refers to the document and if its authenticity is not questioned.... [W]hen [the] plaintiff fails to introduce a pertinent document as part of his pleading, [the] defendant may introduce the exhibit as part of his motion attacking the pleading.... [D]ocuments whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading, may be considered in ruling on a Rule 12(b) (6) motion to dismiss.
Id. at 453-54 (quotations & citations omitted). Thus, for example, a court ruling on a motion to dismiss may consider the full texts of documents which the complaint quotes only in part. Fecht v. The Price Co., 70 F.3d 1078, 1080 n. 1 (9th Cir. 1995), cert. denied, 517 U.S. 1136, 116 S. Ct. 1422, 134 L. Ed. 2d 547 (1996); In re Stac Electronics Sec. Litig., 89 F.3d 1399, 1405 n. 4 (9th Cir. 1996). Merisel argues that the transcripts and other documentary evidence are "part of the complaint" and therefore can be reviewed in evaluating the district court's dismissal.
The same holds true for the declaration submitted by Merisel to explain that the internal projections were faxed not to securities analysts but to the corporate finance department of Robinson-Humphrey. The declaration "assumes" that the projections attached to it as an exhibit are those referred to in the complaint, and then proceeds to explain that the corporate finance department did not share information with the securities analysts within Robinson-Humphrey. None of this is "referenced" in the complaint, and plaintiffs objected to these declarations in the district court and on this appeal.
Merisel cites Townsend v. Columbia Operations, 667 F.2d 844 (9th Cir. 1982), to support its position but that case was converted by the district court from a motion to dismiss to one for summary judgment because of the need to examine certain documents. Id. at 848. The issue therefore was not whether the particular documents could be considered on appeal from an order of dismissal, but rather whether they were properly in the appellate record on an appeal from summary judgment.
The district court's order granting dismissal cites Federal Rule of Civil Procedure 12(b) (6), which authorizes dismissal of a complaint that fails to state a claim on which relief can be granted. We review de novo the dismissal of a complaint for failure to state a claim. Warshaw, 74 F.3d at 957. "We take as true all allegations of material fact stated in the complaint and construe them in the light most favorable to the nonmoving party." Id. "To state a claim under § 10(b) and Rule 10b-5, the shareholders must allege that [the corporation] knowingly or recklessly published an 'untrue statement of fact' or omitted to state a material fact 'necessary to make the statements made, in light of all the circumstances in which they were made, not misleading.' " In re Wells Fargo Sec. Litig., 12 F.3d 922, 926 (9th Cir. 1993) (quoting In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989)).
Merisel advances several reasons why dismissal under Rule 12(b) (6) was appropriate. Since we conclude that, if proved, many of the allegations of the complaint state causes of action, we need not at this juncture in the case opine on some of the closer questions, such as whether the rosy forecasts were known to be false and are therefore actionable. These judgments should be made after discovery is complete.
Merisel argues that it is not responsible for the recommendations of securities analysts, even if it provided information on which the analysts' assessments were based. This argument fails, as we have held that corporate defendants may be directly liable under 10b-5 for providing false or misleading information to third-party securities analysts.
[I]f defendants intentionally misled securities analysts and the press in order to stave off a Xoma stock sell off, then these third-party reports would be relevant to determine Xoma's securities fraud liability. The Complaint asserts that Xoma intentionally used these third parties to disseminate false information to the investing public. If this is true, Xoma cannot escape liability simply because it carried out its alleged fraud through the public statements of third parties. The Complaint should not have been dismissed under 12(b) (6) without a contextual, "delicate assessment" of the facts presented-including the statements of third-party analysts.
Warshaw, 74 F.3d at 959 (citation omitted). Merisel contends that our decisions in In re Stac Electronics Securities Litigation, 89 F.3d 1399 (9th Cir. 1996) ("Stac") and In re Syntex Corporation Securities Litigation, 95 F.3d 922 (9th Cir. 1996) ("Syntex") foreclose liability for corporate defendants who provide information to securities analysts without placing "their imprimatur, express or implied, on the projections" issued by analysts. Syntex, 95 F.3d at 934 (quoting Stac, 89 F.3d at 1410). However, our decisions in Stac and Syntex did not consider whether corporate defendants could be directly liable for misrepresentations to securities analysts. See In re Cirrus Logic Securities Litigation, 946 F. Supp. 1446, 1467 n. 13 (N.D. Cal. 1996). Instead, the issue in Stac and Syntex was whether corporate defendants could be held liable for analysts' interpretations of defendants' truthful statements. See id. Our decisions in Stac and Syntex do not preclude plaintiffs' claims that Merisel made false and misleading statements to securities analysts with the intent that the analysts communicate those statements to the market.
In Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 114 S. Ct. 1439, 128 L. Ed. 2d 119 (1994), the Supreme Court held that there could be no liability under § 10(b) for aiding and abetting securities fraud. Unless the defendant "commit [ted] a manipulative or deceptive act within the meaning of § 10(b)," the defendant has not violated the securities laws. Id. at 191, 114 S. Ct. at 1455.
Merisel claims that Central Bank precludes holding it liable for the analysts' statements. As Warshaw held, this argument is foreclosed. Merisel is alleged to have made misleading statements to the analysts with the intent that the analysts communicate those statements to the market. This is not aiding and abetting or secondary liability; the complaint alleges that Merisel is liable for its own false statements to the analysts. See In re Software Toolworks Inc. Sec. Litig., 50 F.3d 615, 628 n. 3 (9th Cir. 1995) (complaint's allegation of accountant's liability for company's letter to SEC actionable under Central Bank because allegations that accountant participated in drafting letter enough for primary cause of action).
Merisel also argues that plaintiffs cannot allege a "scheme" to defraud, because those are conspiracy allegations foreclosed by Central Bank. After Central Bank, there is no private right of action for "conspiracy" liability under the securities laws. In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 592 (9th Cir. 1995) ("GlenFed II") . The complaint does not allege a conspiracy, however, as a separate cause of action. Instead, it alleges a "scheme" in which Merisel and the other defendants directly participated, tracking the language of Rule 10b-5(a), which makes it unlawful for any person " [t]o employ any device, scheme, or artifice to defraud." (emphasis added).
Central Bank, 511 U.S. at 191, 114 S. Ct. at 1455 (citation omitted).
The district court found that the complaint did not satisfy Federal Rule of Civil Procedure 9(b). It stated only that the complaint "fails to plead particularized facts demonstrating that the statements made by the Merisel defendants were false when made." The order cites In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994) (en banc) ("GlenFed I"), which relied on Rule 9(b), and at the hearing on the motion the district court stated: "The motion to dismiss is granted with prejudice, and see what the court of appeals has to say about GlenFed."
Federal Rule of Civil Procedure 9(b) requires that " [i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." The rule applies to actions brought under the federal securities laws. GlenFed I, 42 F.3d at 1545. To satisfy Rule 9(b),
[A] plaintiff might allege that he bought a house from defendant, that defendant assured him that it was in perfect shape, and that in fact the house turned out to be built on landfill, or in a highly irradiated area; plaintiff could simply set forth these facts (presumably along with time and place), allege scienter in conclusory fashion, and be in compliance with Rule 9(b). We agree that such a pleading would satisfy the rule. Since "in perfect shape" and "built on landfill" are at least arguably inconsistent, plaintiff would have set forth the most central "circumstance constituting fraud"--namely, that what defendant said was false. Notably, the statement would have been just as false when defendant uttered it as when plaintiff discovered the truth.
Id. Here, the shareholders argue that they have satisfied this test. The complaint alleges that they purchased Merisel's stock, and that Merisel assured them (through its financial statements, its own positive statements, and optimistic projections mirrored in analysts' reports) that Merisel was in good shape due to its acquisition of Computerland, its reorganization overseas, and its positive sales figures. In fact, the Computerland acquisition had plunged Merisel deep into debt, its overseas operations continued to lose money, and it was improperly recognizing revenue from shipments of unordered goods and goods shipped on consignment to keep up the appearance of high sales; as a result, its second quarter earnings for 1994 were disastrously low. Merisel's stock plummeted in value. Merisel's assurances took place at specified times during the class period, and the defendants knew they were false. Merisel's financial house, in other words, was built on a landfill. Because "falseness is clear from the facts that had existed all along and were later revealed," id. at 1549, the complaint meets GlenFed I 's requirements on this "skeletal analysis," Warshaw, 74 F.3d at 960 (setting forth a similar brief analysis).
In Fecht, we applied the rule that a complaint must contain allegations that fraudulent statements were false when made, and found the complaint satisfied Rule 9(b). 70 F.3d at 1083-84. Applying Fecht 's analysis here, the complaint alleges that the positive statements about the Computerland acquisition were false when made, because in truth the purchase created a debt that Merisel could not support. To ensure that a stock offering would ease its debt burden, Merisel misrepresented the state of its overseas operations and its overall prospects to stock analysts, who passed that misinformation on to the market. To keep its annual and quarterly reports positive, Merisel engaged, with Deloitte's help, in deceptive accounting practices. "For purposes of Rule 9(b), allegations of specific problems undermining a defendant's optimistic claims suffice to explain how the claims are false." Id. at 1083.
In addition, the complaint alleges that Merisel decided to cancel the stock offering very shortly after optimistic statements were made (three weeks before June 7). "This shortness of time is circumstantial evidence that the optimistic statements were false when made." Id. The circumstantial evidence mounts with the allegations that the need for the proceeds from a stock offering was great, and that company officials sold their stock at inflated prices while Merisel expressed optimism for the future. See id. at 1084.
deliberately shipped excessive amounts of product to several of its accounts....
A "company that 'substantially overstate [s] its revenues by reporting consignment transactions as sales ... mak [es] false or misleading statements of material fact.' " In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1418 (9th Cir. 1994) (quoting Malone v. Microdyne Corp., 26 F.3d 471, 478 (4th Cir. 1994)). Nevertheless, Merisel claims the allegations of overstatement are not specific enough, because "the Complaint does not allege the time, customer, amount, or other circumstances, of a single wrongful transaction of any type." Merisel cites DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir. 1990), for the proposition that the failure to plead a specific transaction is fatal.
In this case, the complaint identified who (eight of Merisel's customers), what (four types of improper revenue recognition), when (last two quarters of 1993 and first quarter of 1994), and where (reported in financial statements). The complaint alleged that Merisel misled by inflating its revenues by specific amounts, and by falsely claiming that its revenue recognition policy was stricter than it really was ("how"). This is more than fraud by hindsight, and far more specific than DiLeo 's allegations, which did not specify which customer's loans were problems, what was problematic about them, or how the defendant intentionally misled the stockholders.
It is not fatal to the complaint that it does not describe in detail a single specific transaction (i.e. shipment) in which Merisel transgressed as above, by customer, amount, and precise method. Comparable precedent does not require greater detail. In Fecht, we found sufficiently particular allegations that newly opened Price Co. stores had low sales volumes, and that nine named stores (three in particular) were losing money. 70 F.3d at 1083 n. 5 & n. 6. We did not require a specific number or a precise time frame. The complaints in GlenFed I and Wells Fargo each alleged "specific problems which they allege undermined defendants' optimistic claims," rather than "stat [ing] simply that defendants' public statements were false, without explaining how they were false." GlenFed I, 42 F.3d at 1551; Wells Fargo, 12 F.3d at 926-28. Both cases pointed to specific problem loans. Id. Here, the complaint points to specific quarters and specific customers, and provides dollar figures for each quarter.
We hold that the complaint meets the particularity requirement of Rule 9(b). Overall, the complaint " 'identifies the circumstances of the alleged fraud so that defendants can prepare an adequate answer.' " Warshaw, 74 F.3d at 960 (quoting Kaplan v. Rose, 49 F.3d 1363, 1370 (9th Cir. 1994), cert. denied, 516 U.S. 810, 116 S. Ct. 58, 133 L. Ed. 2d 21 (1995)). We decline to require that a complaint must allege specific shipments to specific customers at specific times with a specific dollar amount of improperly recognized revenue; "we cannot make Rule 9(b) carry more weight than it was meant to bear." GlenFed I, 42 F.3d at 1554. If the shareholders cannot prove any specific instances of excessive revenue recognition with specific customers, they will not prevail on that claim at summary judgment or trial. Because " [w]e do not test the evidence at this stage," id. at 1550, the complaint should go forward.
[b]ecause of their ... positions as securities analysts employed by Merisel's investment banker, ... each of the defendants (a) knew or had access to the material, adverse non-public information about Merisel's adverse financial outlook and then existing business conditions which was not disclosed; and (b) drafted, reviewed and/or approved the misleading statements, releases, reports and other public representations of and about Merisel.
[W]hen a complaint alleges with particularity the circumstances constituting fraud, as required by [Rule 9(b) ], then generally it will also have set forth facts from which an inference of scienter could be drawn.... If, however, [defendants' argument] is read ... to mean that Rule 9(b) contains an independent requirement that the complaint allege with particularity facts giving rise to an inference of scienter--which we would take to mean alleging such things as that defendants had read or otherwise knew about particular documents giving rise to an inference that the charged statements were false when made--then we decline to adopt it.
42 F.3d at 1546. To hold that the shareholders' complaint must explain what specific information the analysts obtained to make them know that their statements were false would ignore Rule 9(b)'s simple statement that "knowledge ... may be averred generally."2
Robinson-Humphrey and Lehman Brothers assert that they followed SEC rules which prevent the sharing of inside information within their companies. 15 U.S.C. § 78o(f) requires registered brokers or dealers to create and enforce "written policies and procedures reasonably designed ... to prevent the misuse ... of material, nonpublic information by such broker or dealer or any person associated with such broker or dealer," and authorizes the SEC to create rules for such policies. If Robinson-Humphrey and Lehman Brothers have established such policies and followed them in this case, they may raise that as a defense. The existence of such policies does not, however, preclude plaintiffs from asserting in their complaint that inside information was misused.
Even the analysts' optimistic statements can be actionable if not genuinely and reasonably believed, or if the speaker is aware of undisclosed facts that tend seriously to undermine the statement's accuracy. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989). The complaint alleges that the analysts were aware of undisclosed facts that showed there was no reasonable basis for their forecasts, which they did not genuinely believe.
The complaint does more than merely recite customer names. It alleges that Merisel engaged in a variety of improper accounting practices in shipments to customers, and then alleges that " [t]hese customers included: Comp. USA, CompuCom, Corporate Software, Softmart, Egghead Software, P.C. Connection, MicroCenter, Software, Etc." If, as Deloitte implies, this is just a random list of some of Merisel's larger customers, that is a factual issue that cannot be resolved on a motion to dismiss. Accepting the allegations as true, it appears that each of the named customers received shipments on which Merisel improperly recognized revenue in the second half of 1993 and first quarter of 1994, and Deloitte knowingly certified financial statements including the false revenue figures.
Section 10(b) makes it unlawful " [t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). Rule 10b-5, adopted by the SEC in 1942, similarly provides
CFR § 240.10b-5
15 U.S.C. § 78u-4(b) (2) now requires that in securities fraud actions "the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." This section does not apply to any action commenced before and pending on December 22, 1995
If later proceedings demonstrate that plaintiffs' counsel possessed no evidence supporting these allegations at the time the complaint was filed, the district court may consider sanctions under Rule 11. See California Architectural Bldg. Products, Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1472 (9th Cir. 1987)