Court Opinion

ID: 4115501
Source: CourtListenerOpinion
Date Created: 2017-01-12 21:01:24.976595+00
Date Added: 2024-06-11T07:45:46.772128
License: Public Domain

FILED
                           NOT FOR PUBLICATION
                                                                             JAN 12 2017
                     UNITED STATES COURT OF APPEALS                      MOLLY C. DWYER, CLERK
                                                                          U.S. COURT OF APPEALS

                            FOR THE NINTH CIRCUIT

KHALIL ZAGHIAN, Individually and on              No.   15-55335
Behalf of All Others Similarly Situated,
                                                 D.C. No.
              Plaintiff,                         2:12-cv-05227-R-JEM

 and
                                                 MEMORANDUM*
MIKE HERNANDEZ,

              Plaintiff-Appellant,

 v.

BRIAN J. FARRELL; PAUL J. PUCINO,

              Defendants-Appellees.

                    Appeal from the United States District Court
                       for the Central District of California
                     Manuel L. Real, District Judge, Presiding

                      Argued and Submitted December 5, 2016
                               Pasadena, California

Before: REINHARDT, W. FLETCHER, and PAEZ, Circuit Judges.

       *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
      In this securities fraud class action, Plaintiff Mike Hernandez (“Hernandez”)

appeals the dismissal of his claims against Brian J. Farrell and Paul J. Pucino

(collectively, “Defendants”) under §§ 10(b) and 20(a) of the Securities Exchange

Act of 1934. Defendant Farrell was Executive Chairman, Chief Executive Officer,

and President of THQ, Inc. (“THQ”), a videogame software and hardware

company that is now bankrupt. Defendant Pucino was Chief Financial Officer and

Executive Vice President of THQ. In the First Amended Complaint, Hernandez

alleges that in the months leading up to THQ’s release of a videogame device

called the “uDraw” for Sony PlayStation3 (“PS3”) and Microsoft Xbox 360

(“Xbox 360”), Defendants knowingly misrepresented that the uDraw would be

successful among users of those consoles.

      The district court granted Defendants’ motion to dismiss for failure to state a

claim. We review the dismissal de novo. Ariz. Students’ Ass’n v. Ariz. Bd. of

Regents, 824 F.3d 858, 864 (9th Cir. 2016).

      1.     Defendants argue that their forward-looking statements are protected

under the Private Securities Litigation Reform Act (“PSLRA”) safe harbor on two

grounds: the providing of meaningful cautionary language, and a lack of actual

knowledge that the statements were false. See 15 U.S.C. § 78u-5(c). As to the first

ground, to be “meaningful,” the cautionary language must have “identif[ied]

                                          2
important factors that could cause actual results to differ materially from those in

the forward-looking statement[.]” 15 U.S.C. § 78u-5(c)(1)(A)(i). The cautionary

language also must have consisted of non-boilerplate warnings that were tailored to

the forward-looking statements. See H.R. REP. NO. 104-369, 1995 U.S.C.C.A.N.

730, 742.

      2.     In contrast to cases in which we have applied the safe harbor,

Defendants’ cautionary language did not sufficiently address the harm that

resulted. Compare with In re Cutera Sec. Litig., 610 F.3d 1103, 1112 (9th Cir.

2010) (“Cutera affirmatively warned that its ability to compete and perform in the

industry depended on the ability of its sales force to sell products to new customers

and upgraded products to current customers, and that failure to attract and retain

sales and marketing personnel would materially harm its ability to compete

effectively and grow its business.”); Police Ret. Sys. of St. Louis v. Intuitive

Surgical, Inc., 759 F.3d 1051, 1056 (9th Cir. 2014) (“The report warned that an

economic downturn ‘may have significant impact on the ability of our customers to

secure funding to buy our products or might cause purchasing decisions to be

delayed, which may result in decreased revenues and also allow our competitors

additional time to develop products that may have a competitive edge, making

future sales of our products more difficult.’”) (alteration and brackets omitted).

                                            3
Indeed, Hernandez alleges that Defendants were aware—as a result of feedback

from a senior vice president and an independent study that THQ

commissioned—that the uDraw would likely fail because PS3 and Xbox 360

“hardcore gamers” were uninterested in child-focused games. Defendants, with

such knowledge, did not disclose that risk. Instead, their most relevant risk

disclosure warned of the uDraw’s potential failure to “achieve . . . sales

expectations[.]” Read in context, however, that boilerplate warning pertained to a

discussion regarding potential product defects and supply chain disruption, neither

of which occurred in this instance. Without an evidentiary record, we cannot

discern whether those risks were sufficiently “important” to warrant application of

the safe harbor. See 15 U.S.C. § 78u-5(c)(1)(A)(i).

      3.     Nor does Defendants’ alternative basis for invoking the safe harbor

fare any better. “[S]tatements fall outside the safe harbor if the plaintiff can allege

facts that would create a strong inference that the defendants made the forecast(s)

at issue with ‘actual knowledge . . . that the statement was false or misleading.’” In

re Cutera, 610 F.3d at 1112 (quoting 15 U.S.C. § 78u-5(c)(1)(B)(i)). Here,

Hernandez alleges with particularized facts that Defendants were involved in

crafting the uDraw sales forecasts, and that those forecasts were built to

                                           4
accommodate a desired but unachievable financial outcome.1 Hernandez further

alleges that Defendants knew of reliable information indicating that the uDraw was

unlikely to succeed among PS3 and Xbox 360 users. These factual allegations

raise a strong inference that Defendants knew their uDraw projections were false or

misleading.

      4.      In the absence of the safe harbor, Defendants argue that the statements

were immaterial puffery, and that Hernandez failed to adequately plead scienter.

As to whether the statements were immaterial puffery, the alleged

misrepresentations did not vaguely describe THQ’s financial health, but instead

addressed a particular product and the anticipated profitability of that product. See

In re Cutera, 610 F.3d at 1111; Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774
F.3d 598, 606 (9th Cir. 2014). Accordingly, the statements were material.

      5.      As to scienter, under the PSLRA a plaintiff must “allege sufficiently

particular facts to demonstrate a strong inference of scienter—a mental state that

not only covers intent to deceive, manipulate, or defraud, but also deliberate

recklessness[.]” Schueneman v. Arena Pharm., Inc., 840 F.3d 698, 705 (9th Cir.

      1
        To the extent Hernandez’s allegations rely on confidential witnesses, the
allegations are sufficiently particular “to support the probability that a person in the
position occupied by [the confidential witness] would possess the information
alleged.” Zucco Partners, LLC v. Digimar Corp., 552 F.3d 981, 995 (9th Cir.
2009).
                                           5
2016) (citations and internal quotation marks omitted). “A complaint will

survive . . . only if a reasonable person would deem the inference of scienter cogent

and at least as compelling as any opposing inference one could draw from the facts

alleged.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007).

Once Defendants made statements reflecting confidence that the uDraw would

succeed in the PS3 and Xbox 360 markets, “they were bound to do so in a manner

that wouldn’t mislead investors as to potentially negative information within their

possession.” Schueneman, 840 F.3d at 707-08 (brackets and internal quotation

marks omitted). In turn, Defendants’ “failure to inform the market about the risk”

that PS3 and Xbox 360 users would be uninterested in the uDraw raises a strong

inference of scienter. Id. at 708.

      6.     The district court order dismissing Hernandez’s claim under § 10(b)

must therefore be reversed. “[B]ecause we reverse the district court and hold that

[Hernandez] has sufficiently pleaded . . . his section 10(b) claim, we similarly

reverse, without analysis, the district court’s dismissal of the section 20(a) claim.”

Id. at 704 n.6.

      REVERSED and REMANDED.

                                           6