Opinion
No. C-02-04497 RMW, [Re Docket No. 119].
February 22, 2005
ORDER GRANTING IN PART MOTION TO STRIKE ALLEGATIONS IN PLAINTIFF'S SECOND AMENDED COMPLAINT
Defendants ESS Technology, Inc. ("ESST"), Robert L. Blair ("Blair"), Patrick Ang ("Ang"), Frederick S.L. Chan ("Chan"), and James Boyd ("Boyd") (collectively "defendants") filed a motion to strike claims asserted on behalf of putative class members who purchased ESST stock between February 28, 2002 and September 9, 2002 (inclusive), in lead plaintiff Steve Bardack's ("plaintiff") Second Amended Complaint ("SAC"). Plaintiff opposes the motion. The court has reviewed the papers and considered the arguments of counsel. For the reasons discussed below, the court GRANTS IN PART defendants' motion by striking claims of alleged fraudulent conduct occurring before August 1, 2002 from plaintiff's second amended complaint.
I. BACKGROUND
A. Factual backgroundThis is a securities fraud action brought on behalf of a class of persons who purchased the publicly-traded securities of ESST between January 23, 2002 and September 12, 2002 (the "Class Period"). The underlying facts are discussed more fully in the court's December 1, 2004 Order denying in part and granting in part Defendants' Motion to Dismiss Plaintiff's Second Amended Complaint and Strike Portions Thereof ("December Order").
Defendant ESST is a designer, developer, and marketer of highly-integrated digital processor chips used in multimedia applications. SAC ¶ 13. ESST chips are the primary processors driving digital video and audio players including DVD, video CD, and MP3 players. Id. Defendant Chan is ESST's founder and chairman. Defendant Blair is ESST's president and chief executive officer. Defendant Boyd is ESST's chief financial officer, and defendant Ang is ESST's chief operating officer. SAC ¶¶ 14(a)-(d), 15.
1. Procedural background
Plaintiff filed a First Amended Complaint ("FAC") on May 20, 2003. The FAC alleged three causes of action: (1) violation of section 10 of the Securities Exchange Act of 1934 ("1934 Act") and Rule 10b-5 promulgated thereunder against all defendants ("Count I"); (2) violation of section 20(a) of the 1934 Act against the individual defendants ("Count II"); and (3) violation of section 20A of the 1934 Act against defendant Chan ("Count III"). The court granted defendants' motion to dismiss with thirty days leave to amend the complaint.
This was actually the second amended complaint filed by plaintiff.
Plaintiff filed a Second Amended Complaint ("SAC"). On December 18, 2003, defendants filed a motion to dismiss plaintiff's SAC or, in the alternative, to strike plaintiff's claims asserted on behalf of putative class members who purchased ESST stock between January 23 and February 27, 2002, inclusive, on the grounds that plaintiff failed to sufficiently allege any misleading or false statements made with scienter prior to February 28, 2002.
In the December Order the court denied in part and granted in part the motion to dismiss without leave to amend. Specifically, the court denied defendants' motion to dismiss Count I as to defendants Blair, Boyd and ESST except as to allegations of fraud committed prior to February 27, 2002, granted the motion to dismiss Count I as to defendants Ang and Chan, granted the motion to dismiss Count III as to defendant Chan, and denied the motion to dismiss Count II as to all defendants. Dec. Order at 19.
Defendants did not move to strike claims on behalf of class members who purchased ESST shares after February 27, 2002.
On December 22, 2004, defendants filed the present motion to strike further allegations in plaintiff's SAC. Specifically, defendants submit that, based on the December Order, all statements prior to September 9, 2002 should be stricken.
2. December Order
The December Order specified three statements made in a September 9, 2002 meeting with A.G. Edwards that may have been fraudulent: (1) the third quarter was progressing as expected; (2) third quarter pricing trends continued to play out as expected without material variance; and (3) the third quarter was tracking as expected. Dec. Order at 16-17. On September 10, 2002, A.G. Edwards published a report based on these three statements. SAC ¶ 35.
The December Order denied in part defendants' motion to dismiss after concluding that facts supporting a strong inference that defendants knew before September 12, 2002 that third quarter revenues and earnings were "not tracking according to expectations" included: (1) the admission by Boyd on October 23, 2002 that "by the late part in August it became obvious there was going to be a problem with the [third] quarter;" (2) the temporal proximity between the September 9, 2002 statement that ESST would meet its estimates and the September 12, 2002 disclosure that ESST would miss its forecast by $26 million; and (3) the August 2002 e-mail from Yeto to confidential witness 8 ("CW8") directing a 20% to 50% cutback in production of certain DVD chips representing over 30% of ESST's forecasted revenues. Dec. Order at 17.
In the same October 23, 2002 conference call, defendant Blair stated that sales did not ramp as expected in mid-August, and that the weak demand impacted all product lines and all geographies. Dec. Order at 10.
The SAC alleged, "in August 2002, CW8 received an e-mail from Yeto with instructions to cut back the production of certain DVD chips which represented over 30% of ESST's forecasted revenues and to have ESST's manufacturers reduce production of those DVD chips by 20 to 50 percent." Further, "CW8 states . . . that in August 2002 ESST's weekly sales flash reports indicated that ESST's sales were actually decreasing." SAC ¶ 16(h).
Based on the December Order, the following claims remain against defendants: (1) alleged violation of section 10(b) of the 1934 Act and Rule 10b-5 by defendants ESST, Blair, and Boyd as to class members who purchased ESST stock after February 27, 2002; and (2) alleged violation of section 20(a) of the 1934 Act by defendants Blair, Boyd, Ang, and Chan.
Defendants now move: (1) to strike three press releases dated February 28, March 27, and August 8, 2002, in plaintiff's complaint; and (2) to declare the class period as the three days between September 10, 2002 (the date of the A.G. Edwards report) and September 12, 2002 (the end of the class period), inclusive. Defendants submit that other claims and allegations have been rendered "immaterial" by the court's December Order and should be struck from the SAC pursuant to Fed.R.Civ.P. 12(f).
Fed.R.Civ.P. 12(f) provides in relevant part:"Upon motion made by a party before responding to a pleading . . . or upon the court's own initiative at any time, the court may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." FED. R. CIV. P. 12(f).
B. Alleged false or misleading statements
On February 28 and March 27, 2002 defendants issued press releases providing guidance for the financial performance of the first and second quarters of 2002. SAC ¶ 23-24. These forecasts were met. The February 28 press release updates guidance for the first and second quarter of 2002 and states in part:
ESS Technology Updates Guidance; Revenue and Earnings Expected to Exceed Previous Expectations.
* * *
ESS Technology, Inc. (Nasdaq: ESST), a leading provider of silicon solutions for digital video, home networking, and digital home systems, today announced updated guidance for the first and second quarters of 2002.
* * *
Robert Blair, president and CEO of ESS Technology said, "Shipments this quarter continue to surpass expectations. We attribute this growth in revenue to an exceedingly robust market for DVD and VCD players that began to accelerate in the fourth quarter of 2001 and to an increase in our market share in the DVD market. We believe the market for DVD players must be bigger and growing faster than previously estimated or that our market share is growing faster than we had previously thought."
SAC ¶ 23. The March 27 press release also updates guidance for the first and second quarter of 2002 and states in part:
ESS Technology Updates Guidance; Revenue and Earnings Expected to Exceed Previous Expectations.
* * *
Robert Blair, president and CEO of ESS Technology said, "Demand for our video products continues to surpass expectations. We attribute this growth in revenue to a very strong market for DVD and VCD players and to an increase in our market share in the DVD market. We believe the market for DVD players is larger and growing faster than previously estimated and that our market share is continuing to grow."
* * *
Mr. Blair continued, "When we gave our updated guidance for the first and second quarters, we were seeing strong demand for all of our video products. This demand has remained extremely strong as new customers ramp up their production. We believe our exceptional performance this quarter reflects our success in winning new designs in the DVD market.["]
SAC ¶ 24.
On April 24, 2002, ESST announced earnings for the first quarter and on July 24, 2002, ESST announced earnings for the second quarter. SAC ¶¶ 25, 30. The parties do not dispute that ESST's reported first and second quarter earnings were in line with the February 28, 2002 and March 27, 2002 press releases.
In an interview published on August 5, 2002, defendant Blair stated, "[a]s you do more integration of new products, the selling prices will go up, not down" in response to comments about the increased commodifying of ESST products and increased competition. SAC ¶ 32. In an August 8, 2002 press release ESST announced a share repurchase plan, made statements as to the value of its shares, and reiterated earnings guidance for its third quarter. The SAC alleges that the following statement by Blair was false or misleading: "[w]e are comfortable with the revenue and earnings guidance given in our July 24th conference call, when we reiterated our previous third quarter guidance of $86-$90 million." SAC ¶ 33.
II. ANALYSIS
A. Whether defendants may file a second Rule 12 motion
Plaintiff contends that defendants may not file a second motion to strike as Fed.R.Civ.P. 12(g) requires defendants to have raised all their available defenses in their first motion. In addition, plaintiff notes that defendants have failed to file a responsive pleading to the SAC.
Rule 12(g) provides in relevant part, "[i]f a party makes a motion under this rule but omits therefrom any defense or objection then available to the party which this rule permits to be raised by motion, the party shall not thereafter make a motion based on the defense or objection so omitted." FED. R. CIV. P. 12(g). The principle underlying Rule 12(g) is that "a series of motions should not be permitted because that results in delay and encourages dilatory tactics." Aetna Life Ins. Co. v. Alla Medical Servs., Inc., 855 F.2d 1470, 1475, n. 2 (9th Cir. 1988). Rule 12(g) does not completely bar all later raised defenses or objections, but only those that were available to the party at the time of the earlier motion. In addition, Rule 12(f) permits the court to strike any immaterial matter at any time. See In re Clearly Canadian Sec. Litig., 875 F. Supp. 1410, 1412, 1421 (N.D. Cal. 1995) (striking factual allegations not deemed actionable as redundant and immaterial). Although defendants did not seek to strike all claims asserted on behalf of the putative class members who purchased shares between February 28, 2002 and September 9, 2002 in their first motion to dismiss, the court is satisfied that defendants' motion should be addressed on the merits. Defendants could have framed their motion as one for judgment on the pleadings. The motion does not appear brought for dilatory purposes. Further, the court may strike immaterial matter at any time.
B. Motion to strike
Defendants move to strike any claim or allegation relating to the period prior to mid-August 2002 on the basis that plaintiff has failed to plead facts sufficient to show deliberate recklessness in making false or misleading statements prior to mid-August.
1. February 28 and March 27, 2002 press releases
The PSLRA Safe Harbor protects forward-looking statements if they are: (1) accompanied by "meaningful cautionary statements identifying important factors that could cause actual results to differ materially;" or (2) not made with actual knowledge of falsity. See 15 U.S.C. § 78u-5(c)(1)(A); 15 U.S.C. § 78u-4(b)(1)-(2). "A `forward-looking statement' is any statement regarding (1) financial projections, (2) plans and objectives of management for future operations, (3) future economic performance, or (4) the assumptions `underlying or related to' any of these issues." No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. West Holding Corp., 320 F.3d 920, 936 (9th Cir. 2003); 15 U.S.C. § 78u-5(i)(1)(A)-(D). On the other hand, statements concerning historical or current facts are not forward-looking. In re Splash Tech. Holdings, Inc. Sec. Litig., 160 F. Supp. 2d 1059, 1068 (N.D. Cal. 2001). "A present-tense statement can qualify as a forward-looking statement as long as the truth or falsity of the statement cannot be discerned until some point in time after the statement is made." Id. at 1067. In determining whether statements in a press release fall within the safe harbor, the statements are to be examined individually rather than as a whole. See Harris v. Ivax Corp., 182 F.3d 799, 804 (11th Cir. 1999).
However, the Ninth Circuit holds that forward-looking statements, even if accompanied by meaningful cautionary statements, may be actionable. "[I]f the challenged statement is forward-looking, the plaintiffs must have alleged facts that would create a strong inference that the defendants made the forecasts with `actual knowledge . . . that the statements were false or misleading' at the time made." Employers Teamsters Local Nos. 175 and 505 Pension Trust Fund v. The Clorox Co., 353 F.3d 1125, 1134 (9th Cir. 2004); accord In re Daou Sys., Inc. Sec. Litig., 2005 WL 237645, *10 (9th Cir. 2005) (certified for publication).
The February 28 and March 27, 2002 press releases report defendants' expected revenues and earnings for the first and second quarters of 2002, and provide the assumptions underlying the expected financial results. These press releases contain meaningful cautionary language disclaiming certainty, referring readers to additional cautions in filings on Forms 10-K and 10-Q. Regardless, even under the lower standard of deliberate recklessness, the forecasts in these press releases were met, and plaintiff fails to specify any false or misleading statements in the press releases. Dec. Order at 4. The court strikes the allegations concerning the February 28 and March 27, 2002 press releases as immaterial. See Dec. Order at 13-15.
2. August 8, 2002 press release
The August 8, 2002 press release is entitled, "ESS Technology Announces 5,000,000 Share Repurchase Program." SAC ¶ 33, Ex. 1. The release included a quote from Blair who stated, "We are comfortable with the revenue and earnings guidance given at our July 24th conference call, when we reiterated our previous third quarter guidance of $86-90 million." Id. ¶ 33. Although the statement is framed in the present tense, the actual third quarter earnings could not be discerned until some point in time after the statement was made. Therefore, this statement is a forward-looking prediction of future performance. Under the PSLRA, to be actionable, defendant Blair's forward-looking statements in the August 8 press release must have been made with actual knowledge of falsity.
As stated in the December Order, the facts showing a strong inference that defendants knew before September 12, 2002 that third quarter revenues and earnings were "not tracking according to expectations" include: (1) Boyd's October 23, 2002 admission that by the late part in August they knew the third quarter would be a problem; (2) the temporal proximity between the September 9, 2002 statement that ESST would meet its estimates and the September 12, 2002 disclosure that ESST would miss its forecast by $26 million; and (3) the August 2002 e-mail from Yeto to CW8 directing a 20% to 50% cutback in production of certain DVD chips. See Dec. Order at 8.
"[T]he temporal proximity of an allegedly fraudulent statement or omission and a later disclosure [may] bolster a complaint" that a defendant "intentionally or with deliberate recklessness made false or misleading statements to investors" if plaintiff's allegations otherwise comport with the PSLRA. Ronconi v. Larkin, 253 F.3d 423, 437 (9th Cir. 2001); see also Fecht v. The Price Co., 70 F.3d 1078, 1083 (9th Cir. 1995) (finding the "shortness in time" between positive statements on January 14-16 and later disclosure on April 2 constituted circumstantial evidence that the optimistic statements were false when made); Cooper v. Pickett, 137 F.3d 616, 626 (9th Cir. 1998) (en banc) (finding that three weeks constituted circumstantial evidence). In addition, circumstantial evidence provided by temporal proximity is given "more weight in view of the absence of any indication of an intervening catastrophic event." Fecht, 70 F.3d at 1083-84.
The October 23, 2002 statements that sales did not ramp as expected in mid-August, and that by the late part of August it became obvious that the third quarter would be a problem, support an allegation that defendants had actual knowledge of potential shortfalls for the third quarter as early as mid-August. Notably, Boyd also stated on October 23, 2002 that ESS stopped repurchasing stock under its repurchase program by late August 2002 when it became obvious there was going to be a problem with the third quarter. In addition, it appears that ESS stopped its repurchases without purchasing any shares from the repurchase program announced on August 8.
When ESS stopped its repurchases, there were 5,500,000 shares remaining in the repurchase program. SAC Ex. 4.
The August 2002 e-mail from Yeto, a vice president reporting directly to Blair, bolsters an inference of defendants' knowledge sometime in August of 2002, but does not otherwise specify when production cutbacks were ordered. As noted by CW8, it takes approximately three months once wafers are ordered for chips to be completed. SAC ¶ 16(h). Therefore, it remains unclear whether the August 2002 directive to cut back production of DVD chips supports a slow down in sales for the third quarter or a later quarter.
Taken separately and as a whole, plaintiff's allegations do not support a strong inference that defendants actually knew before August of 2002 that third quarter earnings forecasts would be missed. SAC ¶¶ 32-37, 38(i) . At best, the evidence supports an allegation that defendants knew of shortfalls sometime in August. However, the court will not attempt to pinpoint from the pleadings exactly when the defendants learned that they would not meet their third quarter earnings forecast. Therefore, the court strikes only those claims based on allegedly false and fraudulent statements made before August 2002.
III. ORDER
For the foregoing reasons, the court GRANTS IN PART defendants' motion by striking claims of alleged fraudulent conduct occurring before August 1, 2002 from plaintiff's second amended complaint.