Opinion ID: 769627
Heading Depth: 3
Heading Rank: 1

Heading: Misleading Omission

Text: 35 The Appellants contend that GT and its officers rendered its reported earnings and its accounting policy regarding royalty advances misleading by omitting the fact that they refused to expense royalty advances for a particular software title even after concluding that royalty advances for that title were unlikely to be recouped by future sales of the title. The Appellants argue that GT's failure to expense was so perverse that the royalty advances for the most poorly selling titles were the ones that remained capitalized. GT only expensed advances when such amounts could be charged against sales of the software title. If a title did not generate sufficient sales, the royalty advances remained in the asset column and were not expensed. Brief for Appellants at 9 (citations omitted). 36 To survive a motion to dismiss, Appellants' complaint must state with particularity all facts on which they formed this belief. 15 U.S.C. 78u-4(b)(1). Using GT's public financial statements, the Appellants sufficiently allege facts supporting the inference that GT did not expense any prior royalty advances during the first nine months of 1996 and the first nine months of 1997. According to GT's Form 10-K for the fiscal year ended December 31, 1996, GT recorded as assets royalty advances in the amount of $ 29,577,000, as of December 31, 1995. According to the Complaint, by the third quarter of 1996, GT had capitalized $ 57,357,000 in royalty advances. The Appellants argue that GT did not expense any prior royalty advances during the first nine months of 1996; this is an inference from the fact that the increase in the total amount of royalty advances treated as assets by the end of that period ($ 27,780,000) equaled the amount GT spent on royalty advances during that period ($ 27.8 million). If some of the previously capitalized royalties had been expensed, the increase in the total of capitalized royalties should have been somewhat less than the amount of newly advanced royalties. 37 Similarly, according to GT's Form 10-Q for the quarter ending on September 30, 1997, GT had recorded $ 69,202,000 in total royalty advances as assets as of December 31, 1996, and had recorded $ 87,542,000 in total royalty advances as assets as of September 30, 1997. According to the same Form 10-Q, however, during the first nine months of 1997, GT spent $ 18.3 million for royalty advances. The Appellants argue that GT did not expense any prior royalty advances during the first nine months of 1997, because the increase in the amount of total royalty advances treated as assets by the end of that period ($ 18,340,000) equaled the amount GT spent on royalty advances during that period ($ 18.3 million). 38 However, the Appellants must also sufficiently allege facts to support their belief that GT and its officers failed to expense royalty advances after concluding that they would be not be recouped through future sales. The Appellants base this belief on: (1) poor sales of most of GT's software titles during the GT Class Period, in comparison with the amount of royalties advanced; (2) GT's allegations in lawsuits seeking to recover royalty advances from particular software developers for failing to deliver technologically or commercially viable products; and (3) GT's $ 73.8 million write-off for the fourth quarter of 1997. This aspect of the Appellant's claim essentially combines the misrepresentation and scienter inquiries. In this respect, if the Appellants have sufficiently pled facts to support scienter, they have also met the pleading requirements for false representation or omission.