Opinion ID: 3048173
Heading Depth: 4
Heading Rank: 1

Heading: March 5, 2004 Form 10-K Filing

Text: On March 5, 2004, MIVA filed its Form 10-K annual report with the SEC for the fiscal year ending December 31, 2003. Both Defendants Pisaris-Henderson (CEO) and Thune (COO)13 signed the form and certified its accuracy pursuant to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).14 (See MIVA 10-K, filed 13 Apparently Defendant Thune was both the Chief Operating Officer (COO) and Chief Financial Officer (CFO) at the time. (See MIVA 10-K, filed Mar. 5, 2004, Exs. 31.2, 32.2). 14 See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 302, 116 Stat. 745, 777 (codified at 15 U.S.C. § 7241) (requiring that “the principal executive officer or officers and the principal financial officer or officers . . . certify in each annual or quarterly report,” inter alia, that “the signing officer has reviewed the report,” that “based on the officer’s knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading,” and that “based on such officer’s knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of the [company]”); id. § 906, 116 Stat. 745, 806 (codified at 18 U.S.C. § 1350) (requiring the chief executive officer and chief financial officer to “certify that the periodic report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act [o]f 1934 . . . and that information contained in the 18 Mar. 5, 2004, at 41 & Exs. 31.1-32.2). The Plaintiffs point to the following relevant statements found in the 10-K: The FindWhat.com Network is dedicated to delivering high-quality keyword ads as a result of an Internet user’s search query. As such, we have written and strictly enforce advertising guidelines to try to ensure high relevancy standards. .... . . . We are dedicated to delivering high-quality traffic to our advertisers’ websites. We employ an integrated system of numerous automated and human processes that continually monitor traffic quality, often eliminating any charges for low quality traffic proactively from the advertisers’ accounts. We enforce strict guidelines with our Network partners to ensure the quality of traffic on the system. .... Business with Third Parties: We expect that our consultants, agents, resellers, distributors, subcontractors, and other business partners will adhere to lawful and ethical business practices. It is important to our company’s reputation that we avoid doing business with companies which violate applicable laws or have reputations which could harm our business. Our policy prohibits engaging agents or other third parties to do indirectly what we as a company should not do under our own policies outlined in this code. (MIVA 10-K, Mar. 5, 2004, at 5, 6 & Ex. 14.2) (emphasis added) (quoted in Compl. ¶¶ 75, 73).15 periodic report fairly presents, in all material respects, the financial condition and results of operations of the [company]”). 15 We are permitted to review the Defendants’ SEC filings ourselves in evaluating the sufficiency of the Plaintiffs’ allegations. See SFM Holdings, Ltd. v. Banc of Am. Sec., LLC, 600 F.3d 1334, 1337 (11th Cir. 2010) (“In ruling upon a motion to dismiss, the district court may consider an extrinsic document if it is (1) central to the plaintiff’s claim, and (2) its authenticity is not challenged.”); Maxcess, Inc. v. Lucent Techs., Inc., 433 F.3d 1337, 1340 n.3 (11th Cir. 2005) 19 The Complaint alleges that these statements are false or misleading for two reasons: first, the Plaintiffs claim that the Defendants violated the stated Company “policy” by allowing its two largest distribution partners -- Saveli and Dmitri -- to generate click traffic through fraudulent methods (Compl. ¶ 74); and, second, the Plaintiffs allege that the Defendants did not enforce any “strict guidelines” to ensure high-quality traffic -- rather, according to the Plaintiffs, the Defendants intentionally ignored and even encouraged illicit practices to generate click traffic (id. ¶ 76). The district court concluded that these Form 10-K statements were not actionable because they were not misleading. In particular, the court determined that “[s]tatements expressing an expectation of associating with ethical and lawful third-parties does not mean that FindWhat warrants that it does not have current questionable associations.” In re MIVA, 511 F. Supp. 2d at 1254. The court also concluded that “a dedication to high-quality keyword ads and traffic is not inconsistent with the existence of low-quality keyword ads and traffic.” Id. (“[A] document outside the four corners of the complaint may still be considered [on a motion to dismiss] if it is central to the plaintiff’s claims and is undisputed in terms of authenticity.”); Hoffman-Pugh v. Ramsey, 312 F.3d 1222, 1225 (11th Cir. 2002) (holding in libel case that the entire allegedly defamatory book “was properly before the court on the motion to dismiss,” even though it had not been attached to the complaint, “because [the plaintiff] referred to it in her complaint and it [was] central to her claims”). Moreover, in securities fraud actions, a court may take judicial notice of the content of documents filed with the SEC. See Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991); Fed. R. Evid. 201(b)(2). 20 Moreover, the court found that “the Form consists of mostly forward-looking statements, [which are] protected by the safe harbor provisions of Section 78u- 5(c), [because] . . . the statements are accompanied by cautionary statements.” Id.; see 15 U.S.C. § 78u-5(c)(1)(A)(I), (i)(1) (defining “forward-looking statements” as encompassing, inter alia, projections of revenues, statements regarding management’s future plans and objectives, and statements regarding future economic performance, and providing a “safe harbor” for such statements to the extent that they are identified as forward-looking and are accompanied by “meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement”); see generally Bryant, 187 F.3d at 1276 n.7 (describing the PSLRA’s safe-harbor provision). We disagree, however, with the district court’s view that no portion of the Form 10-K could be considered materially misleading. The Form 10-K contains affirmative statements of present fact -- “[w]e employ an integrated system . . . that continually monitor[s] traffic quality,” and “[w]e enforce strict guidelines . . . to ensure the quality of traffic,” (Compl. ¶ 75) (emphases added) -- that unquestionably create the impression that MIVA maintains an active and sophisticated monitoring system for screening fraudulent traffic. Accepting the 21 Plaintiffs’ allegations as true, these statements are misleading because they could mislead a reasonable investor into believing that the Defendants had systems in place that would detect and remove distribution partners engaged in extensive fraudulent revenue-generating practices, when in truth and in fact they did not. See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 863 (2d Cir. 1968) (en banc) (holding that a statement is misleading if “in the light of the facts existing at the time of the [statement] . . . [a] reasonable investor, in the exercise of due care, would have been misled by it”). To avoid being misleading, the Defendants’ statements triggered a duty to disclose the grave defects that existed within the “enforce[ment]” system they voluntarily touted. See SEC v. Merchant Capital, LLC, 483 F.3d 747, 770-71 (11th Cir. 2007) (holding that a duty to disclose all material information relating to a particular subject arises by voluntarily “touting” the subject to investors); see also Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1043 (11th Cir. 1986) (“A duty to disclose may . . . be created by a defendant’s previous decision to speak voluntarily.”); First Va. Bankshares v. Benson, 559 F.2d 1307, 1317 (5th Cir. 1977) (“[A] duty to speak the full truth arises when a defendant undertakes to say anything.”).16 16 Because this former Fifth Circuit opinion was issued before the close of business on September 30, 1981, it is binding precedent. See Bonner v. City of Prichard, 661 F.2d 1206, 1207 (11th Cir. 1981) (en banc). 22 The Defendants’ failure to disclose these defects rendered their statements materially misleading, which was not cured by any general cautionary or riskdisclosing language. See Merchant Capital, 483 F.3d at 769. The Form 10-K’s cautionary language consisted only of general warnings about risks inherent to the Company’s business model, and was not “specifically tailored” to risks from click fraud. See id. at 768. Indeed, the 10-K disclosed nothing to indicate even potential weaknesses in the Company’s click-fraud monitoring systems, much less any information regarding actual known breaches of those systems.17 As this Circuit has held, “to warn that the untoward may occur when the event is contingent is prudent, to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit.” Id. at 769 (quoting Rubinstein v. Collins, 20 F.3d 160, 171 (5th Cir. 1994)) (bracket omitted); see also Rubinstein, 20 F.3d at 171 (“[T]he inclusion of general cautionary language regarding a prediction [does] not excuse the alleged failure to reveal known 17 The 10-K generally warned about increased competition in the market for Internet-based marketing services and generally cautioned that the Company’s success depended on its relationships with its distribution partners and advertisers. In particular, the latter warnings stated that “any adverse changes in our relationship with key distribution partners could have a material adverse impact on our revenue and results of operations,” and “[i]f we are unable to attract additional advertisers to use our services or fail to maintain relationships with our current advertisers, it could have a material adverse effect on our business, prospects, financial condition and results of operations.” (MIVA 10-K, filed Mar. 5, 2004, at 14-15). Such statements clearly fail to provide meaningful cautionary language regarding the ineffectiveness of the click-fraud monitoring systems the Company purported to employ and voluntarily touted. 23 material, adverse facts.”). In addition, because the Defendants’ statements purport to represent present facts, the Defendants cannot claim protection under the PSLRA’s safe-harbor provision for forward-looking statements. See 15 U.S.C. § 78u-5(c)(1)(A)(I), (i)(1). Nonetheless, although we disagree with the ground on which the district court found that the March 5, 2004 Form 10-K filing was non-actionable -- namely, that the statements were not misleading -- we affirm the district court’s dismissal of the March 5, 2004 Form 10-K statements on the alternative ground that the Plaintiffs have failed to plead scienter adequately with respect to these statements. Rule 10b-5 requires a plaintiff to show that the defendant made the material misstatement or omission with the requisite culpable state of mind, or scienter. In this Circuit, “scienter consists of intent to defraud or severe recklessness on the part of the defendant.” Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F.3d 783, 790 (11th Cir. 2010) (internal quotation marks omitted). As we have explained, [s]evere recklessness is limited to those highly unreasonable omissions or misrepresentations that involve . . . an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it. 24 Mizzaro, 544 F.3d at 1238 (quoting Bryant, 187 F.3d at 1282 n.18). As we’ve noted, the PSLRA explicitly requires that the complaint’s allegations create “a strong inference” of scienter. 15 U.S.C. § 78u-4(b)(2) (emphasis added). “To qualify as ‘strong’ . . . an inference of scienter must be more than merely plausible or reasonable -- it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007). “The inquiry is inherently comparative,” as “the court must take into account plausible opposing inferences.” Id. at 323. The PSLRA also mandates that the court assess scienter “with respect to each act or omission alleged to violate this chapter.” 15 U.S.C. § 78u-4(b)(2); accord Phillips, 374 F.3d at 1016 (“[Scienter] must be inferred for each defendant with respect to each violation.” (emphasis added)).18 “In sum, the reviewing court must ask: When the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference?” Mizzaro, 544 F.3d at 1239 (quoting Tellabs, 551 U.S. at 326). 18 Thus, although the Plaintiffs are correct that the court’s inquiry is a “holistic[]” one, Tellabs, 551 U.S. at 325, and that “factual allegations may be aggregated to infer scienter,” Phillips, 374 F.3d at 1016, the district court was correct to analyze scienter separately with respect to each allegedly false statement. 25 The full extent of the Plaintiffs’ allegations that could potentially contribute to an inference of scienter by the time of the Defendants’ March 5, 2004 10-K statements are these19: • Sometime during the Proposed Class Period -- that is, between September 3, 2003 and May 4, 2005, inclusive -- Defendant Pisaris-Henderson (CEO) attended a meeting in the Company’s fifth floor Executive Conference Room, in which growing internal concern over Saveli and Dmitri’s illicit revenue-generating practices was discussed. (Compl. ¶ 54). (The Complaint provides no further information about this meeting.) • Between September 2003 and May 2004, the Company announced various plans that together would result in the acquisition of four other companies, for a total price of $223.5 million, paid for in part by MIVA’s inflated stock. (Id. ¶ 129-30). • In a June 2004 meeting, certain members of the management team decided to terminate the Company’s relationship with Saveli and Dmitri because they were “basement operators” who employed spyware. However, Defendants Pisaris-Henderson (CEO) and Thune (COO) ultimately disallowed the termination because of the negative impact it would have had on revenue. (Id. ¶¶ 55-57). • At some point, a former Director of Business Development at MIVA discussed the need to negotiate relationships with higher-quality affiliates by increasing distribution partners’ revenue share from 50 percent to 60 percent, but Defendants Pisaris-Henderson and Thune refused to let him go forward with this plan. (Id. ¶¶ 34-35). (No dates or further information are provided.) • In or around November 2004, Defendants Pisaris-Henderson and Thune approved an increase in the percentage of revenue paid to partners other 19 We adopt both the Plaintiffs’ factual allegations and the Plaintiffs’ characterization of those facts for purposes of this analysis. Garfield, 466 F.3d at 1261. 26 than Saveli and Dmitri from 50 percent to 70 percent, in an attempt to dilute the bad traffic coming from Saveli and Dmitri. (Id. ¶ 57). • During a one-on-one meeting in December 2004 or January 2005, Defendant Pisaris-Henderson asked the former Director of Business Development whether he thought the Company’s traffic quality problems had to do with Saveli and Dmitri, and the former Director answered affirmatively. (Id. ¶ 58). • In the fourth quarter of 2004, three company insiders (including Defendants Pisaris-Henderson and Thune) sold some of their Company stock, totaling roughly $7 million in sales. (Id. ¶¶ 117-20). None of these individuals sold any stock in 2003 or 2005. (Id. ¶ 119). • On February 21, 2005, an internal company e-mail was sent saying, “There was a large increase in traffic coming thru Saveli, [Dmitri], [and two other distribution partners] -- Can we make sure that this additional traffic was valid?” The e-mail also indicated that much of the traffic was being generated through pornographic websites, which is an indicator of click fraud.20 (Id. ¶¶ 47-48). • Every Thursday, the Company’s executive management team received “War Reports” from the Company’s Business Development unit. (Id. ¶ 51). The Business Development unit then met every Friday at 10:00 a.m. to discuss executive management’s response to the War Reports, as well as pending deals, prospective deals, and current relationship issues, such as unscrupulous Internet traffic. (Id.) (No dates or further details regarding the War Reports are provided.) • The Defendants maintained an internal computer system called the “Interface” from which executive management could view the Company’s Internet traffic in “real-time.” (Id. ¶ 52). The Interface displayed legitimate 20 The entities that run pornographic websites sometimes hide malignant programs, such as spyware, behind the pictures displayed on the site. When a user clicks on a picture, the user’s browser or computer is infected and used to drive traffic to affiliates of pay-per-click services, such as MIVA. Thus, it is a red flag signaling click fraud when pornographic websites generate a high volume of click traffic for non-adult keywords. (Compl. ¶¶ 47, 49). 27 Internet traffic in blue and illegitimate traffic in red. (Id. ¶ 53). (No further details are provided regarding the “Interface” system.) • At some point, Saveli and Dmitri were generating revenue-per-click rates in excess of $0.40, when the Company’s average rate was approximately $0.12. (Id. ¶ 59). Indeed, at least twenty-seven other distribution partners were generating rates that were similarly “outside the expected or normal range” and indicative of “surreptitious traffic.” (Id. ¶ 60). Such high revenue-per-click rates suggested that the affiliates were using spyware programs to generate clicks on only the highest-bid keywords.21 (Id. ¶ 59). • It was “commonly known” within the Company that Saveli and Dmitri relied on click fraud, such as browser hijacking. (Id. ¶ 45). • The Defendants were highly motivated to hide their reliance on fraudulent, low-quality click traffic because they desperately needed the funds from Saveli and Dmitri in order to meet Wall Street’s demanding revenue goals. (Id. ¶¶ 32, 35, 38, 57, 123-31). After reviewing all of the Plaintiffs’ allegations relating to scienter, we agree with the district court that “[t]he earliest possible date which can be ascertained from the Amended Complaint [on which the Defendants knew, or were severely reckless in not knowing, of the alleged fraudulent revenue-generating scheme] was June 2004, when a meeting took place to discuss the termination of Saveli and Dmitri.” In re MIVA, 511 F. Supp. 2d at 1252. Even viewing all of the Plaintiffs’ allegations in concert, the Complaint contains no allegations from 21 Because MIVA uses a bidding model, different keywords produce different revenue-perclick rates. When a distribution partner uses click fraud, it can “cherry pick” the highest-value keywords. (Compl. ¶ 59). Therefore, excessively high revenue-per-click rates are an immediate red flag signaling click fraud to anyone monitoring the traffic. (Id.) 28 which we can infer that anyone in MIVA’s management knew or “must have” known about the click fraud before June 2004. See Mizzaro, 544 F.3d at 1238. Not only do the Plaintiffs fail to allege any direct evidence that the Defendants knew about MIVA’s click fraud problems before the June 2004 meeting, but none of the Plaintiffs’ circumstantial allegations of knowledge relate to the time period before June 2004 either. The internal e-mail regarding pornographic websites was not sent until February 2005. (Compl. ¶¶ 47-48). The alleged insider trading did not occur until the fourth quarter of 2004. (Id. ¶¶ 11720). The revenue-split increase from 50 percent to 70 percent intended to dilute illicit traffic did not occur until roughly November 2004. (Id. ¶ 57). And other allegations, including those regarding the “Interface” computer system, (id. ¶¶ 5253), Saveli and Dmitri’s excessively high revenue-per-click rates, (id. ¶¶ 59-60), and the weekly War Reports, (id. ¶ 51), are undated entirely. The Plaintiffs admit that the Complaint only provides dates for relevant events occurring in June 2004 or thereafter. (Appellant Br. at 34). However, the Plaintiffs argue that “those interactions with Defendants detail their acknowledgment of an ongoing problem, not one that had suddenly surfaced.” (Id.) The Plaintiffs assert that, “if a decision had already been made in June 2004 29 to remove Saveli and Dmitri as distribution partners because of their reliance on click fraud,” the Defendants must have known of the problem before that. (Id.) This claim is wholly speculative. It is equally plausible that management made the decision to terminate Saveli and Dmitri immediately upon learning of their reliance on click fraud. In addition, the Plaintiffs are necessarily asking the court to project the Defendants’ presumed knowledge of click fraud a full three months into the past, to the time of the March 5, 2004 Form 10-K filing. Even if the Defendants’ interactions suggest that the June 2004 meeting was not the first time management learned of MIVA’s click fraud problems, there are no facts, much less any that are pled with particularity, demonstrating that the Defendants had such knowledge a full three months earlier. Cf. Mizzaro, 544 F.3d at 1250-51 (“[W]e indulge at least some skepticism about allegations that hinge entirely on a theory that senior management ‘must have known’ everything that was happening . . . . The . . . complaint . . . must at least allege some facts showing how knowledge of the fraud would or should have percolated up to senior management.”). The Plaintiffs’ other allegations are simply insufficient to support a strong inference of scienter. Their allegations regarding the “Interface” computer system are insufficiently particularized, because they fail to indicate when the computer 30 system became available; which executives accessed it; how they accessed it and how often; whether it was installed on a single computer or was available on a network; whether there were any policies regarding its use; or even what its purpose was. Cf. id. at 1242 (finding allegations regarding a strategic operating plan insufficiently particularized where the complaint “[did] not explain who wrote it, how it was distributed to employees, or who received it”); Garfield, 466 F.3d at 1265 (concluding that allegations about what was said at a meeting involving senior executives was insufficiently particularized where the complaint “failed to allege what was said at the meeting, to whom it was said, or in what context”). Without any allegations that the Defendants could and did access the “Interface” system before March 2004, and indicating what they would have seen had they done so, it is impossible to draw the requisite “strong inference” of scienter, 15 U.S.C. § 78u-4(b)(2) -- that is, one that is “cogent” and “compelling,” Tellabs, 551 U.S. at 314. Similarly, the Plaintiffs’ allegation that it was “commonly known” within the Company that Saveli and Dmitri relied on click fraud, (Compl. ¶ 45), is conclusory and plainly lacks sufficient particularity to create a strong inference of scienter. See Thompson, 610 F.3d at 634 (“[C]onclusory allegations are 31 insufficient to establish a ‘strong inference that the defendants acted with the required state of mind.’” (quoting Tellabs, 551 U.S. at 314)). The Defendants’ alleged motives to meet Wall Street’s revenue expectations are also insufficient to establish scienter. We have rejected the notion that “allegations of motive and opportunity to commit fraud, standing alone, are sufficient to establish scienter in this Circuit.” Bryant, 187 F.3d at 1285; see also Thompson, 610 F.3d at 689 (Tjoflat, J., concurring in the appeal and dissenting in the cross-appeal) (“It stands to reason, of course, that a company’s officers and directors have a motive to commit securities fraud. But that could be said of any public company’s officers and directors, which is why the precedent of this circuit squarely forecloses any argument that stand-alone allegations of ‘motive and opportunity’ will satisfy the PSLRA’s standard.”). In addition, because scienter analysis is comparative, we note the alternative inferences that arise from the Complaint’s allegations (and apparent omissions). First, if click fraud were so dramatically driving down traffic quality in early 2004, it might be expected that advertisers would have complained to MIVA about the diminishing conversion rates they were experiencing, thereby bringing the problem to management’s attention. However, despite the Plaintiffs’ access to numerous management-level employees, including a former Director of Business 32 Development “primarily responsible for the development and maintenance of distribution partner relationships,” (Compl. ¶ 40), the Complaint makes no mention of even a single advertiser who complained about low conversion rates. Cf. Mizzaro, 544 F.3d at 1253 (“[T]he . . . complaint makes no mention of even a single vendor who complained to anyone at Home Depot [about allegedly widespread return-to-vendor fraud], let alone complained to senior management.”). Second, the Plaintiffs neglect to provide even approximate dates for numerous allegations, despite the allegations’ otherwise detailed nature. Thus, for example, no approximate date is offered for the allegation that Saveli and Dmitri -- and at least twenty-seven other distribution partners -- were generating excessively high revenue-per-click rates, even though the data is otherwise comprehensive, including each affiliate’s name, FindWhat ID number, and precise revenue-perclick amount. (Compl. ¶¶ 59-60). Similarly, the Plaintiffs do not indicate even an approximate date (apart from alleging that it occurred sometime within the twenty months constituting the Proposed Class Period) for the meeting Defendant PisarisHenderson attended in the fifth floor Executive Conference Room in which growing internal concern over Saveli and Dmitri’s illicit revenue-generating practices was discussed. (Id. ¶ 54). The inference that the Plaintiffs’ sources were 33 wholly unable to remember even approximate dates for these events, despite recalling otherwise detailed content, is less strong than the inference that the Plaintiffs or their sources omitted such dates strategically after concluding that the information would not be helpful to their allegations. “[O]missions and ambiguities count against inferring scienter.” Tellabs, 551 U.S. at 326. Finally, despite having access to a former Manager of Business Development who was allegedly involved in providing the weekly War Reports to the executive management team, the Plaintiffs have failed to allege even a single instance in which click fraud was discussed in the War Reports. (See Compl. ¶ 51). This glaring omission raises an inference that such fraud was not in fact discussed. Therefore, even though the March 5, 2004 statements may have been materially misleading, the Plaintiffs have not alleged sufficient facts to yield a strong inference of scienter on or before that date. We, therefore, affirm the district court’s dismissal of all claims predicated on this statement.