Opinion
Master File 00-2912, (Docket No. 72)
November 18, 2002
JUDGMENT IN A CIVIL CASE
Decision by Court. This action came to trial or hearing before the Court. The issues have been tried or heard and a decision has been rendered.
IT IS ORDERED AND ADJUDGED defendants' motion to dismiss is hereby GRANTED.
Accordingly, the Third Amended Complaint is hereby DISMISSED with prejudice.
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS; VACATING HEARING
Before the Court is defendants' motion to dismiss plaintiffs' Third Amended Complaint ("TAC") pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4. Plaintiffs have filed opposition, to which defendants have replied. Having considered the papers submitted in support of and in opposition to the motion, the Court deems the matter appropriate for decision on the papers, VACATES the hearing scheduled for November 15, 2002, and rules as follows.
I. BACKGROUND
Plaintiffs allege that Pinnacle Systems, Inc. ("Pinnacle"), Mark L. Sanders ("Sanders"), President and Chief Executive Officer, Arthur D. Chadwick ("Chadwick"), Chief Financial Officer, Patrick Burns ("Burns"), Vice President Marketing and Sales, Professional and Broadcast Products, and Robert Wilson ("Wilson"), Vice President and General Manager of the Broadcast Group, made false or misleading statements during Pinnacle's fourth quarter in the year 2000. The fourth quarter ran from April 1, 2000 through June 30, 2000. (See TAC Ex. 13.)
The allegedly false and misleading statements concern either the strength of demand for Pinnacle's MediaStream product and/or expectations that Pinnacle would finish the fourth quarter in line with analysts' published forecasts. Plaintiffs allege that Media Stream, a product described as a "family of video servers," was Pinnacle's "main profit-producing product" and defendants knew that in order to meet the analysts' forecasts for the fourth quarter, Pinnacle would have to increase sales of MediaStream. (See id. ¶ 3, 4.) According to plaintiffs, defendants also knew that sales of Media Stream had "declined dramatically and had not recovered." (See id. ¶ 32, 33.)
The statements, with one exception, were allegedly made by defendants to analysts.
II. DISCUSSION
On January 25, 2002, the Court granted defendants' motion to dismiss plaintiffs' Second Amended Complaint ("SAC") and afforded plaintiffs leave to amend. (See Order Granting Defs.' Mot. to Dismiss with Leave to Amend ("Order Dismissing SAC").) Plaintiffs subsequently filed a TAC, eliminating several Statements and all claims against two individual defendants. Defendants now seek dismissal of the TAC on the ground that, with respect to the remaining statements, plaintiffs have failed to cure the deficiencies previously identified by the Court. The Court will examine the remaining statements in turn to determine whether plaintiffs have cured the deficiencies.
Defendants argue that plaintiffs have failed to attribute statements to any defendant, have failed to allege that any statement was false or misleading when made, and have failed to allege that any speaker acted with the requisite scienter. In light of the Court's findings on the issue of attribution, discussed infra, the Court does not reach defendants' alternative arguments with respect to falsity and scienter.
A. Analyst Statements Made April 24, 2000
Plaintiffs allege the following statements made by a Hoak Breedlove Wesneski Co. ("Hoak Breedlove") analyst in a report dated April 24, 2000 were false and misleading: "The company's MediaStream and Thunder servers are rapidly gaining market acceptance by large broadcasters and other media industry participants. This is just the beginning of an enormous opportunity as video transitions to digital." (See TAC ¶ 40 (quoting Ex. 8).) Plaintiffs allege these statements were made to the analyst by "defendants, presumably Sanders and Chadwick," during a conference call held April 18, 2000 and during "follow-up conversations," and that the analyst "repeated" defendants' statements in the April 24, 2000 report. (See id.)
In its prior order, the Court found plaintiffs had failed to include sufficient allegations to attribute the analyst's statements to Sanders for two reasons: first, plaintiffs failed to identify any specific statements made by Sanders to the analyst and, second, plaintiffs failed to allege any facts to set forth the basis of plaintiffs' belief that Sanders had made any statements to the analyst. (See Order Dismissing SAC at 5-6, 10.) In so ruling, the Court noted that it was insufficient to simply quote an analyst's report and then assert that the analyst had "repeated" statements made by a defendant. (See id. at 5-6.)
In the SAC, plaintiffs had alleged that the Hoak Breedlove analyst had "repeated" statements made by Sanders. (See SAC ¶ 41.) As noted, plaintiffs now allege that the statements were made by Sanders and Chadwick.
Other than alleging that Sanders was "the primary spokesperson for the Company," (See TAC ¶ 13) plaintiffs have included no new factual allegations to support their assertion that the analyst "repeated" statements made by Sanders. With respect to the new allegation that the analyst was repeating statements made by Chadwick, plaintiffs state that "Confidential Witness 8" advised plaintiffs that Chadwick "typically dealt directly with analysts." (See TAC ¶ 15.) Plaintiffs, however, offer no facts to support the conclusion that either Sanders or Chadwick actually spoke to the Hoak Breedlove analyst who prepared the April 24, 2000 report or, assuming either or both of them did speak to that analyst, the content of any statement Sanders and/or Chadwick made to the analyst. Consequently, plaintiffs have failed to cure the deficiencies identified in the Court's prior order. See Suna v. Bailey Corp., 107 F.3d 64, 73 (1st Cir. 1997) (holding where plaintiff alleged defendant "fraudulently misled" analyst who then issued report, plaintiffs' identification of statement made by analyst, followed by allegation that "it was the company's practice to have top managers, namely Chief Financial Officer Heilman, communicate regularly with securities analysts," was insufficient to satisfy Rule 9 requirement that plaintiff identify statements made by defendant); In re Sun Healtheare Group, Inc. Sec. Litig., 181 F. Supp.2d 1283, 1293 (D. N.M. 2002) (holding where plaintiff specified statement made by analyst and then alleged analyst "repeated" statement made by defendant, plaintiff failed to satisfy PSLRA's requirement that plaintiff specify misleading statement made by defendant).
"Confidential Witness 8" is described by plaintiffs as "a former Marketing Communications Manager previously employed by [Hewlett Packard] who moved over to Pinnacle after the August 1999 acquisition of the VID Division of HP." (See id. ¶ 7(h).) According to the TAC, "CW8 was responsible for the management sales tools, public relations, drafting press releases and product promotions and reported directly to Vice President of Marketing and Sales, defendant Patrick Burns." (See id.)
Accordingly, plaintiffs fail to state a claim based on statements included in the Hoak Breed love analyst's report of April 24, 2000.
B. Analyst Statements Made May 26, 2000
Plaintiffs allege the following statements made by Thomas Weisel Partners LLC ("Thomas Weisel") analysts in a report dated May 26, 2000 were false and misleading: "June quarter is tracking on plan[;]" "Strong demand in Broadcast and Desktop sectors has been augmented by a slew of new products introduced at the National Association of Broadcasting (NAB) show in April[;]" "Pinnacle's June quarter is tracking in line with our expectations for $65 million in revenue and $0.17 EPS, excluding amortization. Pinnacle's streaming server business continues to be strong, running ahead of our expectations." (See TAC ¶ 53 (quoting Ex. 9).) Plaintiffs allege these statements were made to the analysts by "Sanders, Chadwick and the Company" on May 25, 2000, and that the analysts "repeated" defendants' statements in their report. (See id. ¶ 52.)
In its prior order, the Court found plaintiffs had failed to include sufficient allegations to attribute the analysts' statements to Sanders. (See Order Dismissing SAC at 13.) The only new factual allegations made in an effort to attribute the statements to Sanders or to Chadwick are the same allegations discussed above with respect to the Hoak Breedlove analyst's statements. Consequently, for the reasons discussed above, plaintiffs have failed to cure the deficiencies identified in the Court's prior order.
Accordingly, plaintiffs fail to state a claim based on statements included in the Thomas Weisel analysts' report of May 26, 2000.
C. Analyst Statements Made May 30, 2000
Plaintiffs allege the following statements made by a Ragen Mackenzie, Inc. ("Ragen MacKenzie") analyst in a report dated May 30, 2000 were false and misleading: "Weakness in stock viewed as unrelated to Company fundamentals[;]" "Visit to company showed business to be largely on track[;]" "Reiterating BUY rating." (See TAC ¶ 54 (quoting Ex. 10).) Plaintiffs allege these statements were made to the analyst by "Sanders, Chadwick and the Company" on May 25, 2000, and that the analyst "repeated" defendants' statements in his report. (See id. ¶ 52.)
As with the other statements discussed above, the Court in its prior order found that plaintiffs had failed to include sufficient allegations to attribute the analyst's statements to Sanders. (See Order Dismissing SAC at 13.) The new factual allegations made in an effort to attribute the statements to Sanders or to Chadwick are the new allegations discussed above which, for the reasons discussed above, are insufficient.
Plaintiffs, relying on the analyst's statement that "[o]n Thursday, May 25 we visited the Company and spoke extensively with management," (see TAC Ex. 10 at 1), argue that the analyst's statements should be "directly attributed to the Company." (See Pl.'s Opp. at 17:22-23.) The analyst, however, does not purport to quote a Pinnacle manager or anyone else. Even assuming that one reasonable inference is that the analyst did nothing but repeat what Pinnacle managers told him, such an inference does not suffice to defeat the motion because it is equally reasonable to infer that the analyst spoke to Pinnacle management, and perhaps others, and then formed and stated his own opinions. See Gompper v. VISX, Inc., 298 F.3d 893, 896-97 (9th Cir. 2002) (holding motion to dismiss properly granted under PSLRA where inferences unfavorable to the plaintiffs can be drawn from plaintiffs' allegations). Consequently, plaintiffs have failed to allege sufficient facts to warrant attribution of the analyst's statements to any defendant.
Accordingly, plaintiffs fail to state a claim based on statements included in the Ragen MacKenzie analyst's report of May 30, 2000.
D. Analyst Statements Made June 7, 2000
Plaintiffs allege the following statements made by a Ragen MacKenzie analyst in a report dated June 7, 2000 were false and misleading: "Weakness in stock viewed as unrelated to Company fundamentals[;]" "Spoke to Company management, who did not know the reason for the sell-off[;]" "Reiterating BUY rating[;]" "Shares of Pinnacle Systems traded lower in late trading on Tuesday, June 6. The stock traded down 3 points in the last 8 minutes of trading, on very low volume of about 20,000 shares. We checked with Company management, who said they know of no reason for the sell-off. We believe the Company is on track for the quarter." (See TAC ¶ 61 (quoting Ex. 11).) Plaintiffs allege that "the Company (again presumably Sanders and Chadwick) spoke with analysts from Ragen MacKenzie in early June 2000, which resulted in a June 7, 2000 analyst report." (See id. ¶ 61.)
In its prior order, the Court found plaintiffs had failed to include sufficient allegations to attribute the analyst's statements to Sanders. (See Order Dismissing SAC at 15.) Again, the only new factual allegations made in an effort to attribute the statements to Sanders or to Chadwick are the same new allegations discussed above which, for the reasons discussed above, are insufficient.
With respect to the analyst's statement that he spoke to "Company management," who provided certain information, plaintiffs now argue that where an analyst has reported that "Company management" has made a statement, "the Company. and its main spokesmen are liable." (See Pls.' Opp. at 17:4-5.) The cases plaintiffs cite in support of their argument, however, did not address the issue presented. The courts that have considered whether a plaintiff can proceed against an individual or corporate defendant based on an allegation of a statement attributed to the corporate defendant's "management" have held such allegations are insufficient to survive a motion to dismiss. See, e.g., Klein v. General Nutrition Cos., 186 F.3d 338, 345 (3rd Cir. 1999) (holding allegation that corporate defendant's "management" made statements to analyst insufficient to survive motion to dismiss because "[t]he complaint fails to attribute the statement to any specific member of [I management"]; In re Visual Networks. Inc. Sec. Litig., 217 F. Supp.2d 662, 668 (D. Md. 2002) (holding allegation that "senior management" made statement to analyst insufficient to survive motion to dismiss; observing "[p]laintiffs do not point to, and the court has been unable to find, a single case where statements to analysts from `senior management,' and not named individuals, provide the basis for a PSLRA claim"). The reasoning set forth in these decisions is persuasive.
Two of the three cases cited by plaintiff are pre-PSLRA cases that discuss the rule that where a defendant makes an intentionally misleading statement to an analyst, which the analyst then disseminates to the market, that defendant can be held liable or the false statement made to the analyst. See Cooper v. Pickett, 137 F.3d 616, 624 (9th Cir. 1998);Warshaw v. Xoma Corp., 74 F.3d 955, 959 (9th Cir. 1996). In the third case cited by plaintiffs, the court held that, under the PSLRA, where a plaintiff alleges named defendants made particular statements to an analyst on a particular date, the complaint sufficiently attributes the statements of the analyst to the named defendants. See In re HI/FN, Inc. Sec. Litig., 2000 WL 33775286, at *11 (N.D. Cal. August 9, 2000). None of the three cases holds, or even discusses whether, a corporate defendant and its "main spokesmen" be held liable for a statement attributed to unnamed "management" personnel.
Accordingly, plaintiffs fail to state a claim based on statements included in the Ragen MacKenzie analyst's report of June 7, 2000.
E. Analyst Statements Made June 9, 2000
Plaintiffs allege the following statements made by Thomas Weisel analysts in a report dated June 9, 2000 were false and misleading: "June quarter continues to track in line with our expectations, which are at the upper end of the Street consensus — EPS of $0.17, versus consensus of $0.16[;]" "The Company continues to experience strong demand for broadcast and desktop products (consumer products are normally seasonally weak in the June quarter), and we expect follow through into the September 2000 quarter[;]" "Pinnacle's June quarter appears to track in line with our expectations of $65 million in revenue and $0.17 EPS, excluding amortization. Demand for products in the broadcast sector, including the streaming server business (comprised of Thunder and Lightning servers and the MediaStream product line, acquired from Hewlett Packard last year) continues to be strong, running ahead of our expectations." (See TAC ¶ 62 (quoting Ex. 12).)
In the SAC, plaintiffs had alleged that in making the above statements, the Thomas Weisel analysts were "reiterating earlier forecasts made by defendants." (See SAC ¶ 62.) In its prior order, the Court found plaintiffs had failed to allege facts to support that conclusion and also had failed to identify which defendants had made any "earlier forecasts" to the analyst. (See Order Dismissing SAC at 15.)
In the TAC, plaintiffs have eliminated the allegation that the Thomas Weisel analysts were "reiterating earlier forecasts made by defendants." Instead, plaintiffs allege that one can reasonably infer from the analysts' report that the analysts had "checked with the Company who gave them information regarding status for the quarter and demand for products." (See TAC ¶ 63.) Assuming, arguendo, a reasonable inference can be drawn that the analysts were given "information" by some individual or individuals in Pinnacle management, because plaintiffs do not identify any such individual(s) or allege what statements were made by them, the allegations are insufficient. See Klein, 186 F.3d at 345;Visual Networks, 217 F. Supp.2d at 668. Consequently, plaintiffs have failed to cure the deficiencies identified in the Court's prior order.
Accordingly, plaintiffs fail to state a claim based on statements included in the Thomas Weisel analysts' report of June 9, 2000.
F. Sanders' Wall Street Transcript Interview
Plaintiffs allege that Sanders made false and misleading statements to the Wall Street Transcript ("TWIST") during an interview conducted by TWST at the end of April 2000 and thereafter published by TWST on June 15, 2000. (See TAC ¶ 30, 64.) Plaintiffs rely on the following statements by Sanders:
Mr. Sanders: Pinnacle continues to grow rapidly. I think you know that we are one of the Fast 50, as well as the Fast 500. These are the fastest growing companies in Silicon Valley and the entire nation over the last five years. In the last six months we've acquired five new companies, including the video server division from Hewlett-Packard; Puffin Designs, which is a software company; Hollywood FX, another software company; Montage, a software editing company (and the company that invented non-linear editing); and Digital Editing Systems (DES), a Florida outfit which is one of the leading sports editing systems available.
* * *
TWST: What kind of growth should investors expect from Pinnacle over the next two or three years?
Mr. Sanders: That's always a hard question because we have internal plans which are very aggressive, and then we have our public stance, which is more conservative (we enjoy beating the estimates every quarter). Historically, Pinnacle has been growing about tenfold every four years. That includes acquisitions, and analysts project our growth at 30% to 35% per year, and we have usually easily beaten that. So I would think that if we continue at the same rate, we should be a $1-billion-a-year company in a couple of years.
* * *
TWST: If you were sitting down with some potential investors, what two or three reasons would you give them to go out and buy your stock today?
Mr. Sanders: Again, with the uncertainty in the market, or even before the uncertainty in the market, I always point to our track record. Very few companies have a better track record in terms of growth or profitability than Pinnacle.
(See id. ¶ 64 (quoting Ex. 3); Pls.' Opp. at 17:9-14 (quoting TAC Ex. 3).)
In its prior order, the Court analyzed these statements under what appeared to be plaintiffs' theory, namely, that Sanders' expressions of optimism were misleading because he omitted to inform the market that certain of Pinnacle's new products had "severe technical problems." (See SAC ¶ 67.) The Court found plaintiffs failed to state a claim under that theory because plaintiffs did not allege that any such technical problems affected the timing of when the new products were released or had any effect on sales or earnings per share in the fourth quarter. (See Order Dismissing SAC at 16.) Plaintiffs now assert Sanders' statements to TWST were false and misleading under a different theory, specifically, that Sanders' statements "could only be interpreted by investors as public confirmation by Sanders that Pinnacle's `track record' for beating analyst estimates would continue." (See Pls.' Opp. at 17:6-18.) Plaintiffs further explain their theory as follows: "Sanders set the table for investors to rely on what securities analysts were projecting for fourth quarter earnings. Indeed, he regarded the Company's `public stance' as that reported by analysts and boasted of how he `enjoyed beating the analysts estimates every quarter.' Sanders thereby entangled the Company with analysts and Company projections given to them and repeated by them." (See TAC ¶ 64.)
Plaintiffs' new theory of adoption and/or entanglement fares no better than their previously asserted theory. Sanders made the above statements to TWST in late April 2000. Plaintiffs do not allege that any analyst made projections as to Pinnacle's performance in the fourth quarter until May 26, 2000 and thereafter. (See id. ¶ 53, 54, 62, 66.) Consequently, when Sanders made the statements, there were no projections for Sanders to adopt or with which to become entangled. Moreover, Sanders did not refer to any specific projections, let alone projections for the fourth quarter. Cf. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1415, 1428-29 (3rd Cir. 1997) (holding where plaintiffs alleged defendant stated he was "comfortable" with specific fiscal year estimates made by analyst, plaintiffs sufficiently alleged defendant adopted and endorsed analyst's estimate as defendant's own estimate for fiscal year).
Accordingly, plaintiffs fail to state a claim based on Sanders' statements made to TWST.
G. Analyst Statements Made June 15, 2000
Plaintiffs allege the following statements made by a U.S. Bancorp Piper Jaffray ("Piper Jaffray") analyst in a report dated June 15, 2000 were false and misleading: "Company is comfortable with Street estimates for June quarter on track to meet Street high $65 million in revenue. . . . EPS tracking to meet $0.16 EPS. Highlighted opportunity in streaming products in next four quarters. Trying to triple production of STREAMGENIE product this quarter. Company highlighted it will be making acquisition. Expect 10 more acquisitions in the next four quarters." (See TAC ¶ 66 (quoting Ex. 4).) Plaintiffs allege that the analyst was "repeating the Company's (and presumably Sanders' and Chadwick's) statements" made to the analyst on an undisclosed date. (See id.)
As the Court noted in its prior order, while it is reasonable to assume some individual at Pinnacle had provided information to the analyst, plaintiffs fail to include sufficient allegations to attribute the analyst's statements to Sanders. (See Order Dismissing SAC at 16.) As discussed above, the new factual allegations made in an effort to attribute the statements to Sanders or to Chadwick are insufficient and, consequently, plaintiffs have failed to cure the deficiencies identified in the Court's prior order.
Accordingly, plaintiffs fail to state a claim based on statements included in the Piper Jaffray analysts' report of June 15, 2000.
CONCLUSION
For the reasons stated above, defendants' motion to dismiss is hereby GRANTED. Because plaintiffs previously were afforded leave to amend on two occasions, and do not indicate in their opposition that further amendment could cure the deficiencies noted, further leave to amend is not warranted. Accordingly, the Third Amended Complaint is hereby DISMISSED with prejudice.
Pursuant to 15 U.S.C. § 78u-4 (c)(1), the Court has conducted an independent review of the record, and is satisfied that there is no cause for sanctions pursuant to Rule 11(b) of the Federal Rules of Civil Procedure.