Opinion
CASE NO. 10-cv-1673 - BEN (MDD)
03-28-2013
STEPHANIE MALLEN, individually and on behalf of all others similarly situated, Plaintiffs, v. ALPHATEC HOLDINGS, INC.; DIRK KUYPER; PETER C. WULFF; MORTIMER BERKOWITZ, III; HEALTHPOINT CAPITAL PARTNERS, LLP; HEALTHPOINT CAPITAL PARTNERS II, LLP; JOHN H. FOSTER; JAMES R. GLYNN; STEPHEN J. HOCHSCHULER; SIRI S. MARSHALL; R. IAN MOLSON; JEFFERIES & COMPANY, INC.; CANACCORD ADAMS INC.; COWEN AND COMPANY, LLC; LAZARD CAPITAL MARKETS, LLC; and STEPHEN E. O'NEIL, Defendants.
ORDER GRANTING MOTIONS
TO DISMISS
[Doc. Nos. 74, 75, 76]
This is a putative securities class action arising out of the acquisition by California-based Alphatec Holdings, Inc. ("Alphatec") of a French medical device company, Scient'x, S.A ("Scient'x"). Lead plaintiff is the Fresno County Employees' Retirement Association ("Plaintiff"). The defendants are split into three groups. The "Alphatec Defendants" are Alphatec, Dirk Kuyper, Peter Wulff, Stephen Hochschuler, James Glynn, and Siri Marshall. The "Healthpoint Defendants" are HealthpointCapital Partners, L.P.; HealthpointCapital Partners II, L.P.; Mortimer Berkowitz, III; John Foster; R. Ian. Molson; and Stephen O'Neil. The "Underwriter Defendants" are Canaccord Adams, Inc.; Jefferies & Company, Inc.; Cowen and Company, LLC; and Lazard Capital Markets. Each group has moved to dismiss the Second Amended Complaint ("SAC"). All three motions are pending. (Doc Nos. 74, 75, 76.)
The Court dismissed the last iteration of the complaint in March 2012. As before, the SAC asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act") and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"). Plaintiff seeks to bring this action on behalf of shareholders who acquired Alphatec common stock issued pursuant or traceable to documents issued in connection with an April 2010 secondary offering, and all those who acquired Alphatec common stock between April 16, 2010 and August 5, 2010 (the "Class Period").
Plaintiff accuses the defendants—Alphatec, certain of its officers and directors, major shareholders, and underwriters—of misleading investors by making statements about the benefits of integrating the companies while failing to disclose problems with newly acquired Scient'x inventory. The central thrust of the SAC is that defendants engaged in a scheme to: (1) inflate the price of Alphatec shares so that Scient'x's principal shareholders, HealthpointCapital Partners, L.P. and Healthpoint Capital Partners II, L.P. (together, "Healthpoint") could divest themselves of the company; (2) enable Alphatec and Healthpoint "to sell millions of Alphatec stock in the Offering at artificially inflated prices"; and (3) to enable, Berkowitz, Foster, Molson, O'Neil, and Hochschuler to personally benefit. (SAC ¶ 2.)
For the reasons set forth below, the Court again GRANTS the Defendants' motions to dismiss. Because the previous dismissal order addressed many of the same issues, significant portions are repeated below.
BACKGROUND
For purposes of resolving these motions to dismiss, the Court accepts as true all well-pleaded factual allegations in Plaintiff's Second Amended Complaint ("SAC"). See Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th Cir. 2002). This factual summary is taken in the light most favorable to Plaintiff. See No. 84 Emp'r-Teamster Joint Council Pension Trust Fundv. Am. W. Holding Corp., 320 F.3d 920, 925 n.2 (9th Cir. 2003). The Court also considers documents submitted by Defendants that are referenced in the SAC. Id.
Alphatec is a publicly traded, California-based company that designs, manufactures, and markets products for the surgical treatment of spine disorders. During the alleged class period, Kuyper was Alphatec's president and CEO. Wulff was Alphatec's vice president, CFO and treasurer. Berkowitz was the chairman of Alphatec's board. At all relevant times, these individuals, together with Glynn, O'Neil, Marshall, Hochschuler, Foster, and Molson, made up Alphatec's nine-member board of directors.
Healthpoint is a venture capital and private equity investor tied to Alphatec and, formerly, Scient'x. It is comprised of two limited partnerships, HealthpointCapital Partners L.P. and HealthpointCapital Partners II, L.P. Prior to the acquisition, Healthpoint owned approximately 38% of Alphatec and 95% of Scient'x. Alphatec directors Berkowitz, Foster, Molson, and O'Neil had various ties to Healthpoint, and each serve or served on the board of managers for Healthpoint LLC, Healthpoint's "ultimate parent." Hochschuler, another Alphatec director, was a medical consultant for Healthpoint during the alleged class period.
Plaintiff alleges that prior to the alleged class period, Scient'x was losing money, and Healthpoint wanted to divest itself of the company, even at a loss. Accordingly, Berkowitz and Foster used their positions at Alphatec to engineer a sale. On December 17, 2009, Alphatec announced that it had entered into a definitive agreement to acquire Scient'x for 24 million shares of Alphatec common stock, worth approximately $118 million. (See Decl. of Colleen C. Smith ISO Alphatec Defs.' MTD ("Smith Decl."), Exh. 7, at 182 [Doc. No. 74-3]; see also SAC ¶¶ 54-55.) Alphatec stated that, subject to shareholder approval, the transaction was expected to close by the end of the first quarter of 2010.
The value of Scient'x at acquisition was allegedly $53 million less than what Alphatec was prepared to pay for Scient'x in September 2006. (SAC ¶ 55.)
In a press release announcing the deal, Alphatec touted various benefits, such as an increased global presence; an expanded product portfolio; cross-selling opportunities; and cost synergies in distribution, marketing and administrative infrastructure. It also projected 2010 pro forma full-year revenues for the combined company in a range of $220 million to $225 million, and pro forma full-year 2010 adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA") in a range of $32 million to $35 million (the "2010 revenue guidance"). (Smith Decl., Exh. 7, at 182.) Plaintiff alleges that this forecast was "particularly aggressive" in light of the pricing pressures facing the U.S. and European spine markets. (SAC ¶ 61.) Nevertheless, Alphatec reiterated this forecast, which equated to 20% year-over year growth, on several occasions.
Plaintiff alleges that Alphatec effectively solicited investors through a secondary public offering (the "Offering") to finance the acquisition. Alphatec filed a Form S-3 registration statement ("Registration Statement") with the SEC on February 12, 2010, before the deal closed. On April 16, 2010 (the first day of the alleged class period), the company filed the offering's prospectus and prospectus supplement (the "Prospectus"). The Prospectus included two specific statements (identified with bold italic emphasis below) that Plaintiff challenges as materially false or misleading:
On March 26, 2010, we completed the acquisition of Scient'x S.A., or Scient'x, a global medical device company based in France that designs, develops and manufactures surgical implants to treat disorders of the spine. Scient'x distributes products through its direct sales force in(Smith Decl., Exh. 13, at 703.)
France, Italy and the U.K., and distributes products through independent distributors in more than 45 additional countries. . . .
. . . .
We have already begun to realize synergies from the Scient'x acquisition. Our OsseoFix Spinal Fracture Reduction System is now being sold in six countries and will be launched through Scient'x's direct sales organizations in France, Italy and the UK in the second quarter of 2010. We also expect to offer products in additional countries during 2010 as a result of our expanded international sales channel. As a result of the Scient'x acquisition we have also added 19 distribution agents in the U.S., which we believe represents an addition of approximately 40 sales representatives. In addition, we expect to achieve up to $5 million in cost savings in 2010 by reducing overlapping operations of the two companies.
The combined entity has unaudited pro forma combined 2009 revenue of $ 182.4 million, reflecting approximately 25% year-over-year growth. Based on preliminary financial data, we expect to report record consolidated quarterly revenues for Alphatec Holdings, Inc. of approximately $38.4 million for the first quarter of 2010, an increase of 2y.6% from the $30.6 million reported for the first quarter 2009, and a sequential increase of 5.0% over fourth quarter 2009 revenues of $36.6 million. These revenue results remain subject to review by our independent registered public accounting firm in accordance with Statement on Accounting Standards No. 100. We expect that our first quarter 2010 revenues will be the eleventh consecutive quarter of record revenues. In addition, we anticipate that our revenues throughout the balance of 2010 will continue to grow, driven by the inclusion of Scient'x revenues, cross-selling opportunities between Alphatec and Scient'x, the increased global scale of our distribution ana marketing efforts, and the approval and launch of up to 15 innovative products into the U.S. and/or E.U. markets.
The Court relies on the documents filed with the SEC for the surrounding language. See In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1405 n.4 (9th Cir. 1996) (proper to consider full text of the prospectus when ruling on a motion to dismiss, including portions not mentioned in the complaint).
The offering was completed on April 21, 2010. Alphatec and Healthpoint each sold 9.2 million shares (with over-allotments) for gross proceeds of $46 million. The following month, on May 10, 2010, Alphatec released first quarter results, which showed year-over-year revenue growth of nearly 26%. The company reaffirmed its 2010 revenue guidance (Smith Decl., Exh. 14, at 765, 767; SAC ¶ 89) and Kuyper, the CEO, told investors in a press release that he was "pleased with the progress we have made with the US integration of Scient'x into Alphatec Spine." He added: "[a]s of April 30th, Scient'x's US operations have been consolidated into Alphatec Spine, and we remain on track to realize at least $5 million of savings by eliminating redundancies in Scient'x's operating expenses ." (Smith Decl., Exh. 14, at 766; SAC ¶¶ 89-90.)
What Alphatec never disclsosed, according to Plaintiff, is that "[a]t least as early as the week of March 30-April 5, 2010, if not by the week of March 8-14, 2010," Defendants knew that Scient'x's products were "obsolete, defective, and/or lacked sufficient documentation for their legal sale in the U.S., making their integration with Alphatec's product line difficult, if not impossible." (SAC ¶¶ 9, 96.) The SAC contains statements from six former Alphatec and Scient'x employees that Plaintiff claims support this theory. The only named witness is Richard Reyes, an inventory control supervisor at Alphatec from 2006 through November 2010. The others are confidential witnesses ("CWs"), identified by position and dates of employment.
Reyes reported to the "manager of distribution and inventory control" who in turn reported to the "senior director of supply chain," who in turn reported to the "vice president of operations," who was "primarily in charge of the Scient'x acquisition." (SAC ¶ 37.)
According to CW2, a Scient'x logistics manager, and CW3, a Scient'x information technology advisor, Alphatec had access to Scient'x's computer systems and could view its inventory online by March 2010. Reyes purportedly visited Scient'x's East Coast facilities twice, on March 8-14, 2010 and March 30-April 5, 2010 to evaluate Scient'x's product inventory. He claims that a "substantial portion" of the inventory "he saw" was broken, rusted, or defective, while "[o]ther inventory" was missing paperwork required for its sale in the United States. (SAC ¶¶ 77-79.) Reyes states that "many" of the products had been quarantined—meaning that problems needed to be fixed before they could be released into regular inventory. Reyes claims that he relayed these observations to Alphatec executives during two conference calls during his visits. Kuyper, Alphatec's CEO, allegedly participated in the call during the week of March 30, 2010 in which Reyes suggested that the Scient'x inventory was not worth the cost of shipping it to California. Reyes claims that Scient'x's inventory was nevertheless shipped to Alphatec "beginning on or around April 12, 2010," but that at some point after he left the company, 70% was scrapped.
CW5, a facilities maintenance technician at Alphatec, stated that Scient'x's inventory "began" arriving in California in April 2010 and "from time to time, people from different departments within Alphatec would visit the warehouses to search for missing documentation." (SAC ¶ 82.) Similarly, CW1, a senior buyer for Alphatec, stated that "a huge amount" of the products that arrived from Scient'x "in 2010" lacked documentation, and that this issue was discussed "constantly" during weekly conference calls about the progress of the Scient'x integration. (SAC ¶ 73.) CW1 purportedly received an email at some point stating that Kuyper had suggested someone search for missing documentation in two palettes of paperwork.
Lastly, CW4, Alphatec's former regional sales manager for the Midwest Region, stated that much of Scient'x's inventory was never sold and that CW4's own request to sell a Scient'x product was rebuffed by a superior.
Plaintiff alleges that the "truth" emerged on August 5, 2010 when Alphatec announced lower than expected second quarter results. (SAC ¶ 93.) Alphatec cut its revenue guidance, projecting pro forma combined annual revenues of $188 million to $193 million, and pro forma combined adjusted EBITDA of $21 million to $24 million. (Smith Decl., Exh. 17, at 840.) Alphatec's stock price plunged 46% to close at $2.39 on August 6, 2010. Two months later, on October 11, 2010, Alphatec announced the removal of Wulff as Alphatec's CFO and treasurer and his transition to the newly created position of senior vice president, strategic initiatives.
In the August announcement, Alphatec management attributed the lower-than-expected growth rate to "US price pressure on our core products," "the unpredictability of product approvals by the FDA," and "the complexity of integrating an international organization into our operations." (Smith Decl., Exh. 17, at 838.) Elaborating on Scient'x, Alphatec stated:
We have made tremendous progress in integrating Scient'x into Alphatec Spine in the second quarter. As I previously stated, we completed the US consolidation, realizing significant cost savings, and have commenced initial integration of the international operations. It did take longer than anticipated to get Alphatec products loaded into Scient'x's international distribution system, and for us to get Scient'x's products loaded into Alphatec's US inventory.(SAC ¶ 94.) Plaintiff alleges that Alphatec began taking large inventory write-downs in 2011. Following the announcement of its 2011 year-end results, Alphatec acknowledged "significant inventory write-offs in 2011, which amounted to $8.2 million." The company explained: "Throughout the integration and after upgrading our senior management team, we uncovered several issues related to inventory in Europe and the U.S., which resulted in these write-offs." (SAC ¶ 101.)
There was a great deal of complexity involved in loading thousands of new SKU's into each respective format. And this process took longer than we previously anticipated. It has since been resolved and we are invoicing and shipping products across the entire organization.
II. Procedural background
The initial complaint was filed on August 10, 2010. On January 19, 2011, Fresno County Employees' Retirement Association was appointed lead plaintiff. A Corrected Amended Class Action Complaint ("CAC") was filed on February 22, 2011. The Court granted Defendants' motions to dismiss the CAC on March 22, 2012. Plaintiff filed the Second Amended Class Action Complaint ("SAC") on April 19, 2012.
The SAC asserts five claims for relief. First, it alleges that Alphatec, the individual defendants, and the Underwriter Defendants violated § 11 of the Securities Act. Second, it alleges that Alphatec and the Underwriter Defendants violated § 12(a)(2) of the Securities Act. Third, it alleges that Healthpoint and the individual defendants violated § 15 of the Securities Act (controlling person liability). Fourth, it alleges that Alphatec and Kuyper violated § 10(b) of the Exchange Act and Securities and Exchange Commission Rule 10b-5. Fifth, it alleges that Healthpoint and the individual defendants violated § 20(a) of the Exchange Act (controlling person liability).
The Alphatec Defendants, the Healthpoint Defendants, and the Underwriter Defendants each moved to dismiss the SAC on May 3, 2012. Plaintiff filed a consolidated opposition on June 4, 2012. Defendants filed three separate replies on June 11, 2012. Plaintiff filed a notice of recent authority on December 27, 2012, and the Alphatec Defendants filed a response, which the remaining defendants joined. The Court took the matter under submission and now resolves the motions pursuant to Civil Local Rule 7.1(d)(1).
LEGAL STANDARD
A motion to dismiss pursuant to Rule 12(b)(6) tests the legal sufficiency of the pleadings. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of "entitlement to relief.'"" Id. (internal citation omitted).
In ruling on a motion to dismiss, the Court must "accept all factual allegations in the complaint as true and construe the pleadings in the light most favorable to the nonmoving party." Knievel v. ESPN, 393 F.3d 1068, 1072 (9th Cir. 2005). The Court, however, need not accept "legal conclusions" as true. Iqbal, 556 U.S. at 678. Thus, "a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555. It is also improper for the Court to assume that plaintiff "can prove facts that it has not alleged." Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983). On the other hand, "[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Iqbal, 556 U.S. at 679.
A securities fraud complaint under § 10(b) of the Exchange Act and SEC Rule 10b-5 must satisfy the dual pleading requisites of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 700-01 (9th Cir. 2012). "These requirements present no small hurdle for the securities fraud plaintiff." Id. at 701. Rule 9(b) requires that the complaint "state with particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b). "The PSLRA mandates that 'the complaint shall specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading . . . .'" In re VeriFone Holdings, 704 F.3d at 701 (quoting 15 U.S.C. § 78u-4(b)(l)(B)). Further, the PSLRA "provides that a complaint 'state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Id. (quoting 15 U.S.C. § 78u-4(b)(2)(A)). "Thus, the misrepresentation claims pled [under the Exchange Act] must satisfy the 'particularity' requirement of Rule 9(b) of the Federal Rules of Civil Procedure, the 'plausibility' requirement of Iqbal, and the scienter requirement of the PSLRA." Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 690-91 (9th Cir. 2011).
The PSLRA does not apply to claims under the Securities Act, but a complaint that "sounds in fraud" must still comply with Rule 9(b). Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1161 (9th Cir. 2009). In order to comply with Rule 9(b), '"a plaintiff must set forth more than the neutral facts necessary to identify the transaction. The plaintiff must set forth what is false or misleading about a statement, and why it is false. In other words, the plaintiff must set forth an explanation as to why the statement or omission complained of was false or misleading.'" Yourish v. Cal. Amplifier, 191 F.3d 983, 993 (9th Cir. 1999) (quoting In re GlenFed Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) (en banc)). "This falsity requirement can be satisfied 'by pointing to inconsistent contemporaneous statements or information (such as internal reports) which were made by or available to the defendants."' Id. (quoting GlenFed, 42 F.3d at 1549).
The Court concluded that the last version of the complaint sounded in fraud, at least with respect to the claims against the Alphatec Defendants and the Healthpoint Defendants. Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111, 1123-25 (S.D. Cal. 2012). It is unnecessary to rehash that analysis here as the allegations in the SAC warrant the same conclusion. See Rubke, 551 F.3d at 1161 ("Where as here, however, a complaint employs the exact same factual allegations to allege violations of section 11 as it uses to allege fraudulent conduct under section 10(b) or the Exchange Act, we can assume that it sounds in fraud.")
DISCUSSION
The Court will take judicial notice of the SEC filings attached to the Alphatec Defendants' motion to dismiss because those documents were either referenced in the SAC or are not subject to reasonable dispute. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) (in ruling on a motion to dismiss, the court "must consider the complaint in its entirety," including "documents incorporated into the complaint by reference, and matters of which a court may take judicial notice"); Dreiling v. Am. Exp. Co., 458 F.3d 942, 946 n.2 (9th Cir. 2006) (SEC filings subject to judicial notice); In re Stac, 89 F.3d at 1405 n.4 (the court can properly consider documents "whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading" (citation and internal quotation marks omitted)).
I. Claim under section 10(b) and Rule 10(b)(5)
Plaintiff claims that Alphatec and Kuyper made false and misleading statements in violation § 10(b) of the Exchange Act and SEC Rule 10b-5. Section 10(b) makes it unlawful for "any person . . . [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulation as the Commission may prescribe as necessary or . . . for the protection of investors." 15 U.S.C. § 78j(b). "Commission Rule 10b-5 forbids, among other things, the making of any 'untrue statement of a material fact' or the omission of any material fact 'necessary in order to make the statements made ... not misleading.'" Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341 (2005) (quoting 17 C.F.R. § 240.10b-5(b)).
To plead a private damages action under this section, a plaintiff must allege: (1) a material misrepresentation or omission, (2) scienter, (3) a connection with the purchase or sale of security, (4) reliance, (5) economic loss, and (6) loss causation. Dura Pharms., 544 U.S. at 341-42. Defendants contend that the SAC fails to sufficiently allege a misrepresentation or omission and fails to sufficiently allege scienter. The Court agrees.
A. Misrepresentation or omission
To avoid dismissal, Plaintiff must adequately allege a material misrepresentation or omission. Broay v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002). Plaintiff alleges three misleading statements. Two were in the April 16, 2010 prospectus: (1) "We have already begun to realize synergies from the Scient'x acquisition"; and (2) "In addition, we anticipate that our revenues throughout the balance of 2010 will continue to grow, driven by the inclusion of Scient'x revenues, cross-selling opportunities between Alphatec and Scient'x, the increased global scale of our distribution and marketing efforts, and the approval and launch of up to 15 innovative products into the U.S. and/or E.U. markets." The third statement accompanied Alphatec's May 10, 2010 announcement of first quarter results: (3) "As of April 30th, Scient'x's US operations have been consolidated into Alphatec Spine, and we remain on track to realize at least $5 million of savings by eliminating redundancies in Scient'x's operating expenses."
Plaintiff does not challenge the literal truth of these statements. Instead, it asserts that Defendants' failure to disclose the inventory problems made the statements misleading. The Court is not persuaded.
"A statement or omission is misleading in the securities fraud context if it would give a reasonable investor the impression of a state of affairs that differs in a material way from the one that actually exists." Reese, 643 F.3d at 691 (internal citation and quotation marks omitted). "A securities fraud complaint based on a purportedly misleading omission must 'specify the reason or reasons why the statements made by [the defendant] were misleading or untrue, not simply why the statements were incomplete.'" Rubke, 551 F.3d at 1162 (quoting Brody, 280 F.3d at 1006); see also In re Cutera Sec. Litig., 610 F.3d 1103, 1109 (9th Cir. 2010) ("It is not enough for the investors to plead that Cutera failed to make a full disclosure about its sales force. . . . 'Often, a statement will not mislead even if it is incomplete or does not include all the relevant facts.'") "Allegations that are 'not necessarily inconsistent' with the allegedly false statement do not establish falsity." In re DotHill Sys. Corp. Sec. Litig., No. 06-CV-228 JLS (WMc), 2009 WL 734296, at *10 (S.D. Cal. Mar. 18, 2009) (citing Ronconi v. Larkin, 253 F.3d 423, 432-33 (9th Cir. 2001)).
Plaintiff has not shown that the purported inventory problems caused the challenged statements to be misleading. The first statement, for example, was that Alphatec had "already begun to realize synergies" from the Scient'x acquisition. This statement has to be read in conjunction with the surrounding language, not in a vacuum. As the Court noted in its previous dismissal order: "[T]his statement was literally true. In the Prospectus, immediately following the statement, Alphatec listed the following synergies that have already been realized from its acquisition of Scient'x: (1) 'Our OsseoFix Spinal Fracture Reduction System is now being sold in six countries,' and (2) 'As a result of the Scient'x acquisition we have also added 19 distribution agents in the U.S.'" Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111, 1129 (S.D. Cal. 2012) (emphasis in original). As before, Plaintiff does not contend that either of these synergies had not been realized when this statement was made or otherwise explain how the alleged inventory problems were inconsistent with Alphatec realizing these synergies. On the facts alleged, the Court is not persuaded this statement was misleading.
The Court also is not persuaded the second statement in the Prospectus painted a false portrait for investors. Plaintiff suggests that Alphatec's awareness of defective or unsalable inventory was inconsistent with Prospectus's statement about continued 2010 revenue growth. Not necessarily. "[A] company could experience 'serious operational problems,' 'substantial difficulties,' and 'difficult problems' and still have increasing revenues." See Ronconi, 253 F.3d at 434. In Yourish, the Ninth Circuit concluded that statements about strong international sales were not rendered false by the company's knowledge that "some very heavy shipments to Southeast Asia" would not repeat, because not repeating heavy shipments was not plainly inconsistent with having strong international sales. 191 F.3d at 996-97. The same is true here. Particularized facts that might establish the requisite inconsistency, such as the Scient'x inventory's place in the company's 2010 revenue plan, the type and value of the products affected, etc., are absent from the SAC. Put differently, Plaintiff has not made a sufficient showing that the challenged statement was misleading.
Lastly, the Court turns to Kuyper's statement that "[a]s of April 30th, Scient'x's U.S. operations have been consolidated into Alphatec Spine, and we remain on track to realize at least $5 million of savings by eliminating redundancies in Scient'x's operating expenses." Plaintiff again fails to allege sufficient facts demonstrating why the purported problems with Scient'x's inventory were inconsistent with the actual content of Kuyper's statement, namely that Scient'x's U.S. operations had been consolidated as of that time, and Alphatec was on track to achieve the projected $5 million of savings in their operating expenses.
In light of Plaintiff's failure to allege sufficient facts to show that the statements at issue were misleading, the Court need not consider whether any of the alleged misrepresentations were material. The claim is again dismissed.
B. Scienter
Even assuming that Plaintiff could establish falsity, the SAC fails to adequately plead that Alphatec and Kuyper possessed the requisite scienter when they made the challenged statements. Scienter is "a mental state embracing intent to deceive, manipulate, or defraud." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007) (internal quotation marks omitted). The PSLRA sets the pleading bar high for this element. A plaintiff must state with particularity facts giving rise to a "strong inference" that the defendant acted intentionally or with deliberate recklessness. In re Daou Sys., Inc., 411 F.3d 1006, 1014-15 (9th Cir. 2005). "The factual allegations must not only be particular, but also must strongly imply contemporaneous knowledge that the statement was false when made." In re Infonet Servs. Corp. Sec. Litig., 310 F. Supp. 2d 1080, 1102 (C.D. Cal. 2003) (quoting Read-Rite, 335 F.3d at 847). A strong inference exists "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, 551 U.S. at 324. Although a plaintiff's allegations of scienter should be examined holistically, id. at 325, a "dual analysis," which looks at the allegations individually and then in combination, is permissible, "so long as it does not unduly focus on the weakness of the individual allegations to the exclusion of the whole picture," In re VeriFone Holdings, 704 F.3d at 703. "Where pleadings are not sufficiently particularized or where, taken as a whole, they do not raise a 'strong inference' that misleading statements were knowingly or [with] deliberate recklessness made to investors, a private securites complaint is properly dismissed under Rule 12(b)(6)." Ronconi, 253 F.3d at 429.
Plaintiff contends that the following give rise to a strong inference of scienter: (1) witness accounts; (2) the defendants' "admissions" concerning inventory write downs; (3) the short time period between the challenged statements and the "revelation of the truth"; (4) the removal of Wulff as CFO and treasurer; (5) the company's small size; and (6) defendants' motive.
The Court is not convinced. Read carefully, the witness statements provide little evidence of fraudulent intent. The most that can be made of Reyes's statement is that he gave a negative assessment of Scient'x's inventory to some Alphatec executives during the week of March 8 and to Kuyper during the week of March 30. But Plaintiff must do more than allege defendants' general knowledge of problems—"[p]roblems and difficulties are the daily work of business people," Ronconi, 253 F.3d at 435. Reyes' imprecise comments provide no hint of whether anyone shared his assessment of inventory as "useless" or whether the problems he described were inconsistent with defendants' later statements about continued revenue growth, the realization of synergies, and the realization of cost savings from the elimination of redundancies. Given that Alphatec shipped the inventory to California and that employees continued to look for missing paperwork once it arrived (SAC ¶¶ 81-82), a more reasonable inference is that company officials thought some problems could be rectified.
The confidential witness statements do not add much to Plaintiff's scienter allegation. In the Ninth Circuit, "confidential witnesses whose statements are introduced to establish scienter must be described with sufficient particularity to establish their reliability and personal knowledge." Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 995 (9th Cir. 2009). In addition, "those statements which are reported by confidential witnesses with sufficient reliability and personal knowledge must themselves be indicative of scienter." Id.
The gist of CW1 's statement is that "a huge amount" of the Scient'x products that arrived at Alphatec "in 2010" lacked documentation and that it was an issue discussed during weekly conference calls. CW1 was a senior buyer for Alphatec from 2007 until August 2011 who "was involved" in the transfer of Scient'x inventory from Scient'x's East Coast facilities to Alphatec's headquarters. CW1 also apparently received an email (at some unspecified time) relaying Kuyper's suggestion that someone look for the missing documentation in two palettes of paperwork. Such allegations are far too vague to support a strong inference of scienter. CW1 does not indicate, for example, who else participated in these conference calls, when they occurred relative to the challenged statements, and what options were discussed. In the Court's view, the e-mail suggests that Kuyper viewed the documentation issues as a problem that could be solved.
The statements of CW2 and CW3 are not much help to Plaintiff either. Both former Scient'x employees, CW2 and CW3 claim that by March 2010, Alphatec had the ability to view Scient'x's inventory online. What is missing from these statements is the type of information that was available online and who at Alphatec was exposed to it. Without that type of particularized detail, the Court fails to see how either statement is suggestive of scienter. Along similar lines, CW5's assertion that "people" from different departments would visit the Alphatec warehouses "from time to time" to search for missing documentation is far too vague.
CW5 was a "Facilities Maintenance Technician" at Alphatec who helped unload the "truckloads" of Scient'x's product inventory that arrived at Alphatec. (SAC ¶ 42.)
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The only other statement is from CW4, a regional sales manager at Alphatec from April 2010 to November 2010. CW4 reportedly attended annual quarterly sales meetings run by Kuyper and the vice president of sales. CW4 claims that "Alphatec's sales force was never allowed to sell Scient'x products." This might assist an inference of scienter under certain circumstances. Here, though, there is no indication when there meetings occurred relative to the challenged statements. CW4's first month on the job appears to have been the same month that two of the three challenged statements were made. At this level of detail, CW4's statement does not support a strong inference that Kuyer and the others at the top of Alphatec's hierarchy had contemporaneous knowledge of issues inconsistent with their statements.
Plaintiff again alleges that defendants' personal profit motives support a strong inference of scienter. It explains: "Defendants each had strong financial incentives to inflate the price of Alphatec stock in anticipation of the Offering in April 2010" and "[t]hey accomplished this by means of materially false and misleading statements provided to and omissions kept from investors." (SAC ¶ 103.) The Court rejected this argument in its last order and sees no reasons to revisit that conclusion. See Glazer Capital Mgmt, LP v. Magistri, 549 F.3d 736, 748 (9th Cir. 2008) ("[E]vidence of a personal profit motive on the part of officers and directors contemplating a merger is insufficient to raise a strong inference of scienter."). Plaintiff suggests that stock sales by an Alphatec executive, Stephen Lubischer, who is not named in this action support its theory, but the sales activity of a non-party "is not relevant to the Court's determination of scienter." Callan v. Motricity Inc. No. CI 1-1340 TSZ, 2013 WL 195194, at *24 n.13 (W.D. Wash. Jan. 17, 2013).
Plaintiff next asserts that inventory write-offs in 2011, which Alphatec attributed to "issues related to inventory in Europe and the U.S." uncovered "throughout the integration" demonstrate Defendants' contemporaneous knowledge that the challenged statements were misleading. In the Court's view, this statement is far too general about what those "issues" were and when they were uncovered to strongly suggest that Defendants knowingly, or with deliberate recklessness, made misleading statements in April and May 2010 about synergies, cost savings, or revenue growth.
Plaintiff next asserts that Alphatec's small size—460 employees—supports a strong inference of scienter. Beyond a headcount, however, Plaintiff fails to allege specific facts about the company's operations that would suggest more than a minimal inference of scienter.
Plaintiff next asserts that the short time period between the challenged statements and the announcement of lowered earnings guidance in August 2010 and Wulff's subsequent resignation is suggestive of scienter. The Court disagrees. On the facts alleged, the most reasonable inference to draw from Wulff's transition to a senior vice president role is that he was removed in response to the negative earning, not because he had committed fraud. Further, the revised guidance, including Alphatec's explanation was not plainly inconsistent with the prior statements regarding synergies realized, cost savings projected, and a continued expectation of revenue growth, despite Plaintiff's characterization of the August announcement as "the disclosure of the truth." The timing is not strongly suggestive of fraud
Finally, the Court must consider all of these allegations holistically. See South Ferry LP, No. 2 v. Killinger, 542 F. 3d 776, 784 (9th Cir. 2008) ("The Supreme Court's reasoning in Tellabs permits a series of less precise allegations to be read together to meet the PSLRA requirement[.]") Even reading the aforementioned allegations as a whole, however, the Court concludes that the SAC fails to raise an inference of scienter that is cogent and compelling. Plaintiff's allegations lack the detail and specificity to clear the hurdles imposed by Federal Rule of Civil Procedure 9(b), the PSLRA, and Iqbal.
C. Conclusion
Because Plaintiff has failed to allege sufficient facts to show a misrepresentation or scienter, the claims brought under § 10(b) and Rule , 10b-5 against Alphatec and Kuyper are dismissed.
II. Claims under sections 11 and 12(a)(2)
Plaintiff also asserts claims under § 11 and § 12(a)(2) of the Securities Act. , Specifically, Plaintiff contends that the issues with Scient'x's inventory should have been disclosed in Alphatec's registration statement and prospectus. The § 11 claim is alleged against Alphatec, the individual defendants, and the Underwriter Defendants. The § 12(a)(2) claim is alleged against Alphatec and the Underwriter Defendants.
The Securities Act "was designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195 (1976). Section 11 "provides a cause of action to any person who buys a security issued under a materially false or misleading registration statement." In re Century Aluminum Co. Sec. Litig., 704 F.3d 1119, 1120 (9th Cir. 2013). A plaintiff must allege: "(1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment." Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir. 1994). Along the same lines, § 12(a)(2) provides for civil liability of securities sellers who use a prospectus containing untrue statements or material omissions. In re Levi Strauss & Co. Sec. Litig., 527 F. Supp. 2d 965, 980 (N.D. Cal. 2007).
Plaintiff asserts two bases for liability under the Exchange Act: (1) the facts related to Scient'x's inventory constituted "known trends or uncertainties" that Defendants had a duty to disclose under an SEC regulation; and (2) the same facts should have been disclosed to make other statements in the offering documents not misleading.
Defendants contend that the Exchange Act claims should be dismissed because Plaintiff fails to adequately plead a misrepresentation or omission. The Court agrees.
A. Omission of facts required to be disclosed
One potential basis for liability under §§11 and 12(a)(2) is "an omission in contravention of an affirmative legal disclosure obligation." Panther Partners, Inc. v. Ikanos Commc'ns, Inc., 681 F.3d 114, 120 (2d Cir. 2012). Such an obligation can arise under Item 303(a) of SEC Regulation S-K. See Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1296 (9th Cir. 1998). Item 303 requires that a registrant describe any "known trends or uncertainties" that the registrant "reasonably expects will have a material . . . unfavorable impact on net sales or revenues or income from continuing operations." 17 C.F.R. § 229.303(a)(3)(ii). To state a claim based on failure to comply with Item 303, a plaintiff "must allege facts showing defendants knew of an adverse trend, the material impact of that trend, and 'that the future material impacts are reasonably likely to occur from the present-day perspective.'" Belodoff v. Netlist, Inc., No. SACV 09-00677 DOC (MLGx), 2009 WL 2777320, at *9 (C.D. Cal. Sept. 1, 2009) (quoting Steckman, 143 F.3d at 1297).
Plaintiff contends that "Scient'x's poor product quality, its lack of proper documentation, and its ultimate unsalability" constituted a trend or uncertainty that Defendants were obligated to disclose in the Prospectus pursuant to Item 303. Defendants argue that Plaintiff fails to allege a "known trend," much less a "material" trend. More fundamentally, they argue, Item 303 only applies to "reports for full fiscal years," not prospectuses. See In re Metricom Secs. Litig., No. C 01-4085 PJH, 2004 WL 966291, at *19 (N.D. Cal. Apr. 29, 2004) ("It is not applicable to interim reports, to press releases, or to other communications with shareholders.")
Assuming, arguendo, that Item 303(a) applies to Alphatec's offering documents, Plaintiff fails to plausibly allege that the inventory issues known by April 16, 2010 constituted a known trend reasonably likely to have a material unfavorable impact on Alphatec's revenues. The most that can be made of the allegations in the SAC is that, the month prior to April 16, 2010, one Alphatec employee, Reyes, had conveyed to senior management a "substantial portion" of the inventory "he saw" at Scient'x was broken, rusted, or defective, "[o]ther inventory" was missing paperwork required for its sale in the United States, and that in his opinion, it was not worth the money to ship it to Alphatec. According to Reyes, the inventory arrived at Alphatec "beginning on or around April 12, 2010," only a few days before the Prospectus was issued. The Court is hard pressed to see how Alphatec's decision makers fully appreciated a "known trend" on April 16, 2010. Further, Plaintiff fails to allege sufficient facts to show that Defendants knew at that time the material impact of any inventory problems or that any future material impacts were reasonably likely to occur. Although CW1 indicates that he traveled to Scient'x "as early as 2008 or 2009" to evaluate the inventory, there is no indication of what he saw, or even whether the inventory was the same.
A close look at Panther Partners, the case relied on by Plaintiff, is telling. In Panther Partners, the Second Circuit held that a complaint plausibly alleged that customer reports of product defects and their potential impact on the seller constituted a known uncertainty that should have been disclosed in connection with a secondary offering of securities. 681 F.3d at 122. But much more was alleged in that case. In the weeks leading up to a secondary offering, the seller had received an increasing number of complaints about the defective products (semiconductor chips) from two of its largest customers. The Second Circuit designated as "critical" the allegations that: (1) those two customers accounted for 72% of the company's revenues; and (2) the company knew at the time that as a result of the defects, it might have to accept returns on all the chips that it had sold to those two customers. Id. at 121. Further, company officers regularly traveled to Japan to meet with those customers to discuss possible solutions. Id. The SAC in this case lacks equivalent "critical allegations." It describes a variety of inventory problems in broad terms. Without knowing more about Alphatec's specific expectations for Scient'x then-existing inventory, it is hard to infer anything about the potential impact of these issues on Alphatec's revenues, much less defendants' awareness of that potential impact. Accordingly, Plaintiff fails to plausibly allege that defendants violated a disclosure duty under Regulation S-K.
B. Omission of information necessary to make other statements not misleading.
In the alternative, Plaintiff argues that Defendants were obligated to disclose the inventory issues to make other statements in the offering documents not misleading. (SAC ¶¶ 125-27.) The "statements" at issue are two of the same three analyzed above, namely: "We have already begun to realize synergies from the Scient'x acquisition" and "[W]e anticipate that our revenues throughout the balance of 2010 will continue to grow. . . ." For similar reasons, the Court concludes that Plaintiff fails to plausibly allege that these statements were misleading in the context of the Exchange Act claims.
C. Conclusion
The SAC does not adequately allege a material misrepresentation or omission. Accordingly, Plaintiffs have failed to state a claim §§ 11 or 12(a)(2) of the Securities Act upon which relief can be granted. In light of the foregoing, claims one and two are dismissed.
III. Control Person Liability
Finally, Plaintiff asserts that Healthpoint and the individual defendants are liable as "control persons" under § 15 of the Securities Act and § 20(a) of the Exchange Act. There must be an underlying primary violation before "control person" liability can attach. See 15 U.S.C. § 77o (requiring a primary violation of § 11 or § 12(a)(2)), § 78t (requiring a primary violation of any provision of the Exchange Act or of any rule or regulation thereunder). Because the SAC fails to adequately plead a primary violation under the Securities Act or the Exchange Act, the claims brought under § 15 of the Securities Act and § 20(a) of the Exchange Act are dismissed.
CONCLUSION
For the foregoing reasons, the Court GRANTS the Healthpoint Defendants', the Underwriter Defendants', and the Alphatec Defendants' motions to dismiss. Because of Plaintiff's inability to cure the deficiencies in its pleading, the Court's dismissal is with prejudice. See Zucco, 552 F.3d at1007 ("[W]here the [party] has previously been granted leave to amend and has subsequently failed to add the requisite particularity to its claims, '[t]he district court's discretion to deny leave to amend is particularly broad.'" (quoting In re Read-Rite Corp., 335 F.3d 843, 845 (9th Cir. 2003)).
IT IS SO ORDERED.
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Honorable Roger T. Benitez
United States District Judge