Opinion ID: 777054
Heading Depth: 2
Heading Rank: 2

Heading: pleading scienter under silicon graphics

Text: 13 The dispositive issue for us is whether the district court erred in holding that the plaintiffs did not adequately plead scienter. Our inquiry here is governed by the PSLRA. There, Congress provided that in any private securities fraud action for money damages, a 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 that belief is formed. 15 U.S.C. § 78u-4(b)(1). The complaint must also state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. 15 U.S.C. § 78u-4(b)(2). 12 14 Although there is disagreement in the federal courts of appeals about the meaning of the required state of mind, 13 we have previously held that the PSLRA requires plaintiffs to plead, at a minimum, particular facts giving rise to a strong inference of deliberate or conscious recklessness. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 979 (9th Cir.1999) (emphasis added). Our decision in Silicon Graphics also holds that plaintiffs who plead the required state of mind in general terms of mere motive and opportunity or recklessness fail to meet the PSLRA's heightened pleading requirements. Id. Where pleadings are not sufficiently particularized or where, taken as a whole, they do not raise a strong inference of scienter, a Rule 12(b)(6) dismissal is proper. See Ronconi, 253 F.3d at 429. 15 Plaintiffs asserted that fraudulent misrepresentations and omissions occurred in (1) Gantz's January 15th statement that sales were continuing to ramp up; (2) Gantz's January 25th statement in a press release that PathoGenesis' strong showing is due to excellent acceptance of TOBI by the cystic fibrosis community; and (3) Meyer's February 3rd statement to investors at a conference that PathoGenesis was looking at very strong sales growth and earnings growth for the future. Plaintiffs' complaint challenged the accuracy and completeness of these statements and alleged that misrepresentations were made to create the perception of strong patient demand for TOBI. 14 16 We focus on the element of scienter, 15 the required state of mind that the PSLRA requires be pleaded with particularity. Plaintiffs attempted in their complaint to show scienter from: (1) defendants' alleged receipt of reports indicating flat patient demand; (2) Gantz's February 1999 sale of PathoGenesis stock; and (3) defendants' alleged motive to impress PathoGenesis lenders with reports of strong financial performance and to expand internationally. The district court found the allegations inadequate under the PSLRA and our decision in Silicon Graphics. 17 We review de novo the district court's dismissal of plaintiffs' complaint for failure to state a claim under Rule 12(b)(6). Silicon Graphics, 183 F.3d at 983. We agree with the district court that, taken as a whole, plaintiffs' allegations do not give rise to a strong inference that defendants acted with deliberate or conscious recklessness.
18 Plaintiffs allege that PathoGenesis knew that patient demand was flat because the company had access to (1) internal reports on sales data and (2) IMS patient demand data. According to plaintiffs, both types of data informed the defendants that 1Q99 sales would be lower than investors were led to believe. 19 We first address plaintiffs' allegation that PathoGenesis could regularly track its sales data to show that the defendants knew or should have known that patient demand for TOBI was flat during the class period. In Silicon Graphics, we explained that a proper complaint which purports to rely on the existence of internal reports would contain at least some specifics from those reports as well as such facts as may indicate their reliability. Id. at 985. Here, plaintiffs merely assert in conclusory terms that the defendants had access to internal data demonstrating a decline in sales of TOBI. Plaintiffs do not identify any internal reports of sales data, much less plead, in any detail, the contents of any such report or the purported data. See id. at 985. Without this information, as was the case in Silicon Graphics, we cannot ascertain whether there is any basis for the allegations that the officers had actual or constructive knowledge of flat patient demand that would cause their optimistic representations to the contrary to be consciously misleading. Id. 20 We next address the claim that defendants had access to IMS data that allegedly informed the defendants that patient demand for TOBI was flat. The plaintiffs' complaint states: Based on the IMS data available, defendants knew, or were reckless in not knowing, and failed to disclose that patient demand for TOBI was flat (and not increasing) during the Class Period. But again, this allegation does not give rise to a strong inference that defendants acted with deliberate or conscious recklessness. Although plaintiffs refer to the existence of the IMS data and make a general assertion about what they think the data shows, plaintiffs do not allege with particularity any specific information showing that prescription data informed defendants that patient demand for TOBI was flat. Plaintiffs do not mention a specific IMS document relied on by defendants such as a particular IMS report, graph or chart. Nor do they detail with particularity the content of such data. Rather, plaintiffs merely allege that PathoGenesis tracked patient demand using data provided by IMS and that this data supposedly indicated that patient demand was flat. As we held in Silicon Graphics, negative characterizations of reports relied on by insiders, without specific reference to the contents of those reports, are insufficient to meet the heightened pleading requirements of the PSLRA. 16 See id at 985. We hold that plaintiffs' allegations of negative internal reports and IMS data are insufficient to demonstrate deliberate or conscious recklessness.
21 Plaintiffs also allege in their complaint that securities fraud may be inferred from Gantz's sale of 10,000 shares of PathoGenesis shortly after the company announced its 4Q98 earnings. They contend that Gantz's sale of PathoGenesis stock gives rise to a strong inference that defendants knew that their public forecasts during the class period were knowingly false when made because Gantz: (1) had not previously sold any shares of PathoGenesis common stock; (2) intended to sell more shares of PathoGenesis common stock than the 10,000 actually sold; and (3) sold his shares after he and Meyer allegedly made inaccurate and misleading forecasts. 22 We have previously held that a strong inference of fraudulent intent may occur when an insider owning much of a company's stock make[s] rosy characterizations of company performance to the market while simultaneously selling large percentages of his holdings. Ronconi, 253 F.3d at 434. But that did not occur here. The insider sales are not substantial in the aggregate compared to the market, only Gantz and not other insiders sold during the class period, and the sales by Gantz were only a small part of his total holdings. Gantz's sales of 10,000 shares of stock, a tiny percentage of his holdings, does not support any inference of impropriety or fraud. As we explained in Silicon Graphics: 23 [I]nsider trading is suspicious only when it is dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed information ... Among the relevant factors to consider are: (1) the amount and percentage of shares sold by insiders; (2) the timing of the sales; and (3) whether the sales were consistent with the insider's prior trading history. 24 183 F.3d at 986 (citations and internal quotations omitted). In this case, Gantz's sale of 10,000 shares constituted only 1.4% of his total PathoGenesis holdings. The sale of such a small percentage of total holdings does not give rise to the strong inference of scienter required by the PSLRA. See Ronconi, 253 F.3d at 435 (suggesting that sales of 10% and 17% of an individual's holdings were not suspicious); Silicon Graphics, 183 F.3d at 986-87 (transactions of four of six corporate officers who each sold less than 8% of their total holdings were not suspicious). 17 Gantz's sales as alleged can equally or more likely support the inference that he was engaging in modest diversification. 25 We also conclude that the timing of Gantz's stock transactions was not suspicious. Officers of publicly traded companies commonly make stock transactions following the public release of quarterly earnings and related financial disclosures. That Gantz would sell an extremely small portion of his total holdings following the positive announcement of PathoGenesis' year-end and fourth quarter earnings does not support an inference that Gantz knew or should have known that the optimistic reports of TOBI's projected growth were false. See In re FVC.COM Sec. Litig., 136 F.Supp.2d 1031, 1040 (N.D.Cal.2000) (officers' sale of shares following press release announcement of anticipated increase in quarterly revenues is not suspicious and does not support inference of scienter). 26 That no inference of fraudulent intent arises from the timing of Gantz's modestly proportioned sales is further reinforced by the fact that Gantz was the only insider to sell PathoGenesis common stock during the class period. All other directors and officers fully retained their holdings, and Gantz retained 98.6%, while the price of PathoGenesis common stock fell from $51 to $34 during the class period. As we held in Ronconi, [o]ne insider's well timed sales do not support the `strong inference' required by the [PSLRA] where the rest of the equally knowledgeable insiders act in a way inconsistent with the inference that the favorable characterizations of the company's affairs were known to be false when made. 253 F.3d at 436. See also In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1424-25 (9th Cir.1994) (finding no scienter because defendants held onto most of their [company's] stock and incurred the same large losses as plaintiffs). Gantz had never before sold PathoGenesis stock and thus we cannot compare the two challenged stock transactions to prior trading history. But we do not hesitate to conclude, under the circumstances alleged, that the sale of such a small percentage of Gantz's holdings during a period when no other insider was selling stock does not here give rise to a strong inference of deliberate or conscious recklessness. 27
28 Plaintiffs allege that PathoGenesis concealed knowledge of flat patient demand to enhance opportunity (1) to secure a line of credit from its lender and (2) to gain regulatory approval abroad. These generalized assertions of motive, without more, are inadequate to meet the heightened pleading requirements of Silicon Graphics. 29 If scienter could be pleaded merely by alleging that officers and directors possess motive and opportunity to enhance a company's business prospects, virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions. Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir.1995). PathoGenesis' alleged desires to obtain favorable financing and to expand abroad are in themselves ordinary and appropriate corporate objectives. Such routine business objectives, without more, cannot normally be alleged to be motivations for fraud. To hold otherwise would be to support a finding of fraudulent intent for all companies that plan to lower costs and expand sales. 30
31 We now 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. 32 Taken as a whole, plaintiffs do not meet the stringent pleading standard of Silicon Graphics. None of plaintiffs' allegations provide the critical details necessary to support an inference that defendants knew that wholesaler purchases of TOBI in 4Q98 would lead to overstocking and result in fewer 1Q99 sales. Nor do any of plaintiffs' allegations allege particularized facts that could lead us to infer that defendants knew wholesalers' purchases exceeded patient demand. See Ronconi, 253 F.3d at 437 (the pleading has to state particularized facts that, taken as a whole, raise a strong inference of scienter). We hold that plaintiffs' allegations, taken together, do not constitute a pleading giving rise to a strong inference of deliberate or conscious recklessness.