Brodsky et al v. Yahoo! Inc. et al

MOTION to Dismiss PLAINTIFFS' CONSOLIDATED AMENDED COMPLAINT; SUPPORTING MEMORANDUM OF POINTS AND AUTHORITIES

N.D. Cal.June 20, 2008

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ NOTICE OF MOTION, MOTION & MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW sf-2534796 JORDAN ETH (BAR NO. 121617) JEth@mofo.com JUDSON E. LOBDELL (BAR NO. 146041) JLobdell@mofo.com MARK R.S. FOSTER (BAR NO. 223682) MFoster@mofo.com MORRISON & FOERSTER LLP 425 Market Street San Francisco, California 94105 Telephone: 415-268-7000 Facsimile: 415-268-7522 ANNA ERICKSON WHITE (BAR NO. 161385) AWhite@mofo.com MORRISON & FOERSTER LLP 755 Page Mill Road Palo Alto, California 94304 Telephone: 650-813-5600 Facsimile: 650-494-0792 Attorneys for Defendants YAHOO! INC., TERRY S. SEMEL, SUSAN L. DECKER, DANIEL L. ROSENSWEIG, and FARZAD NAZEM UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA OAKLAND DIVISION IN RE: YAHOO! INC. ELLEN ROSENTHAL BRODSKY, on Behalf of Herself and All Others Similarly Situated, Plaintiffs, v. YAHOO! INC., TERRY S. SEMEL, SUSAN L. DECKER, FARZAD NAZEM, and DANIEL ROSENSWEIG, Defendants. . This Document Relates To: All Actions CLASS ACTION Case No. CV-08-2150-CW DEFENDANTS’ NOTICE OF MOTION AND MOTION TO DISMISS PLAINTIFFS’ CONSOLIDATED AMENDED COMPLAINT; SUPPORTING MEMORANDUM OF POINTS AND AUTHORITIES Hearing: September 18, 2008 Time: 2:00 p.m. Courtroom: 2, 4th Floor Judge: Hon. Claudia Wilken Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 1 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW i sf-2534796 TABLE OF CONTENTS Page INTRODUCTION .......................................................................................................................... 1 BACKGROUND ............................................................................................................................ 2 I. THE PARTIES.................................................................................................................... 2 II. PLAINTIFFS’ ALLEGATIONS ........................................................................................ 2 A. Yahoo!’s Search Marketing Business ..................................................................... 2 B. Securities Fraud Allegations ................................................................................... 3 1. Financial reporting ...................................................................................... 3 a. revenue recognition......................................................................... 3 b. reserves............................................................................................ 4 2. Defendants’ optimistic statements about Yahoo! ....................................... 4 3. Project Panama............................................................................................ 5 ARGUMENT .................................................................................................................................. 6 I. PLAINTIFFS MUST SATISFY “EXACTING PLEADING REQUIREMENTS.” .......... 6 II. PLAINTIFFS FAIL TO STATE A SECTION 10(b) CLAIM. .......................................... 7 A. Plaintiffs Fail To Plead A Material Misrepresentation Or Omission...................... 7 1. Plaintiffs fail to support their accusation that Yahoo! issued false financial statements..................................................................................... 8 a. Plaintiffs do not support their revenue recognition allegations with facts....................................................................... 8 b. Plaintiffs do not support their reserve allegations with facts. ....... 10 2. Plaintiffs fail to plead that Defendants’ expressions of enthusiasm, dedication, and optimism were false......................................................... 10 3. Plaintiffs fail to plead that Yahoo!’s estimates for the Panama rollout lacked a reasonable basis when made. .......................................... 13 B. Plaintiffs Also Fail To Plead A “Strong Inference” Of Scienter. ......................... 16 1. Plaintiffs’ CWs do not support an inference of scienter. .......................... 17 2. Plaintiffs’ stock-sale allegations do not support an inference of scienter. ..................................................................................................... 19 Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 2 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC ii MASTER FILE NO. CV-08-2150-CW sf-2534796 C. The Forward-Looking Statements Are Not Actionable For Additional Reasons. ................................................................................................................ 21 D. Plaintiffs Also Fail To Plead Loss Causation. ...................................................... 23 III. PLAINTIFFS FAIL TO STATE A SECTION 20(a) CLAIM.......................................... 24 IV. PLAINTIFFS FAIL TO STATE A SECTION 20A CLAIM. .......................................... 25 CONCLUSION............................................................................................................................. 25 Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 3 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC iii MASTER FILE NO. CV-08-2150-CW sf-2534796 TABLE OF AUTHORITIES Page(s) CASES Alaska Elec. Pension Fund v. Adecco S.A., 434 F. Supp. 2d 815, 825 (S.D. Cal. 2006), aff’d, 256 F.App’x 74 (9th Cir. 2007) .................................................................................... 10 Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007) ............................................................ 6 Berger v. Ludwick, No. C-97-0728-CAL, 2000 U.S. Dist. LEXIS 12756 (N.D. Cal. Aug. 17, 2000) .................. 25 Berson v. Applied Signal Tech., Inc., No. 06-15454, --- F.3d---, 2008 U.S. App. LEXIS 11982 (9th Cir. June 5, 2008) ................................................... 23 n.16 DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385 (9th Cir. 2002)............................................................................................. 19 n.9 Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) ............................................................................................................ 6, 23 Employers Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Clorox Co., 353 F.3d 1125 (9th Cir. 2004)........................................................................................... 22, 23 Glen Holly Entm’t, Inc. v. Tektronix, Inc., 352 F.3d 367 (9th Cir. 2003)................................................................................................... 11 Howard v. Everex Sys., 228 F.3d 1057 (9th Cir. 2000)................................................................................................. 19 In re Apple Computer, Inc. Sec. Litig., 243 F. Supp. 2d 1012 (N.D. Cal. 2002), aff’d 127 F.App’x 296 (9th Cir. 2005)............................................ 11, 17 & n.8, 19 & nn.9, 10 In re Buca Inc. Sec. Litig., No. 05-1762-DWF-AJB, 2006 U.S. Dist. LEXIS 75224 (D. Minn. Oct. 16, 2006)............... 21 In re Convergent Techs. Sec. Litig. 948 F.2d 507 (9th Cir. 1991)............................................................................................. 13 n.5 In re CornerStone Propane Partners, L.P., Sec. Litig. 355 F. Supp. 2d 1069 (N.D. Cal. 2005) ............................................................................ 11 n.4 In re CornerStone Propane Partners, L.P. Sec. Litig., 416 F. Supp. 2d 779 (N.D. Cal. 2005) .............................................................................. 17 n.8 Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 4 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC iv MASTER FILE NO. CV-08-2150-CW sf-2534796 In re Credit Acceptance Corp. Sec. Litig., 50 F. Supp. 2d 662 (E.D. Mich. 1999).................................................................................... 21 In re Daou Sys., Inc., 411 F.3d 1006 (9th Cir. 2005)..................................................................... 7, 14, 15 n.6, 21, 23 In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994) (en banc) .................................................................... 6, 7, 10, 13 In re Hansen Natural Corp. Sec. Litig., 527 F. Supp 2d 1142 (C.D. Cal. 2007) ..................................................................... 18, 21 n.13 In re Juniper Networks, Inc. Sec. Litig., No. C-02-0749-SI, 2004 U.S. Dist. LEXIS 4025 (N.D. Cal. Mar. 11, 2004)......................... 15 In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248 (N.D. Cal. 2000) .................................................................................. 12 In re Metawave Commc’ns Corp. Sec. Litig., 298 F. Supp. 2d 1056 (W.D. Wash. 2003).............................................................................. 25 In re Northpoint Commc’ns Group, Inc. Sec. Litig., 221 F. Supp. 2d 1090 (N.D. Cal. 2002) .................................................................................... 8 In re Pixar Sec. Litig., 450 F. Supp. 2d 1096 (N.D. Cal. 2006) .................................................................................. 11 In re Read-Rite Corp. Sec. Litig., No. C-03-03148-RMW, 2004 U.S. Dist. LEXIS 19319 (N.D. Cal. Sept. 14, 2004) .............. 15 In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999)................................................................... 7, 17, 19 n.10, 20 n.12 In re Silicon Storage Tech., Inc. Sec. Litig., No. C-05-0295-PJH, 2006 U.S. Dist. LEXIS 14790 (N.D. Cal. Mar. 10, 2006)................ 9, 14 In re Splash Tech. Holdings, Inc. Sec. Litig., No. C-99-00109-SBA, 2000 U.S. Dist. LEXIS 15369 (N.D. Cal. Sept. 29, 2000) .......... 10, 24 In re Splash Tech. Holdings, Inc. Sec. Litig., 160 F. Supp. 2d 1059 (N.D. Cal. 2001) .................................................................................. 24 In re Stac Elecs. Sec. Litig., 89 F.3d 1399 (9th Cir. 1996)................................................................................................... 11 In re Syntex Corp. Sec. Litig., 95 F.3d 922 (9th Cir. 1996)......................................................................................... 11, 15, 16 In re The Vantive Corp., 283 F.3d 1079 (9th Cir. 2002)....................... 6-7, 10, 13, 15 n.7, 18, 19 & n.10, 20 & n.12, 21 Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 5 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC v MASTER FILE NO. CV-08-2150-CW sf-2534796 In re Tibco Software, Inc. Sec. Litig., No. C-05-2146-SBA, 2006 U.S. Dist. LEXIS 36666 (N.D. Cal. May 24, 2006) ................... 14 In re U.S. Aggregates, Inc. Sec. Litig., 235 F. Supp. 2d 1063 (N.D. Cal. 2002) .............................................................................. 9, 18 In re VeriFone Sec. Litig., 11 F.3d 865 (9th Cir. 1993)..................................................................................... 6, 12, 14, 25 In re Versant Object Tech. Corp. (Versant I), No. C-98-00299-CW, 2000 U.S. Dist. LEXIS 22333 (N.D. Cal. May 18, 2000) aff’d, 56 F.App’x 322 (9th Cir. 2003)..................................................................................... 11 In re Versant Object Tech. Corp. (Versant II), No. C-98-00299-CW, 2001 U.S. Dist. LEXIS 25010 (N.D. Cal. Mar. 30, 2001), aff’d, 56 F.App’x 322 (9th Cir. 2003)..................................................................................... 13 In re Versant Object Tech. Corp. (Versant III), No. C-98-00299-CW, 2001 U.S. Dist. LEXIS 25009 (N.D. Cal. Dec. 4, 2001), aff’d, 56 F.App’x 322 (9th Cir. 2003)....................................................................... 12, 21 n.13 Johnson v. Aljian, 394 F. Supp. 2d 1184 (C.D. Cal. 2004), aff’d, 490 F.3d 778 (9th Cir.2007).......................... 25 Kane v. Madge Networks N.V., No. C-96-20652-RMW, 2000 U.S. Dist. LEXIS 19984 (N.D. Cal. May 25, 2000), aff’d, 32 F. App’x. 905 (9th Cir. 2002)................................................................. 10, 11 n.4, 12 Kuehbeck v. Genesis Microchip, Inc., No. C-02-05344-JSW, 2005 U.S. Dist. LEXIS 20213 (N.D. Cal. July 27, 2005).................... 9 Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147 (2d Cir. 2007).................................................................................................... 24 Lentell v. Merrill Lynch & Co. 396 F.3d 161 (2d Cir. 2005).............................................................................................. 23, 24 Limantour v. Cray, Inc., 432 F. Supp. 2d 1129 (W.D. Wash. 2006)................................................................................ 8 Lipton v. Pathogenesis Corp., 284 F.3d 1027 (9th Cir. 2002)............................................................................... 7, 19 n.11, 24 Paracor Fin., Inc. v. GE Capital Corp., 96 F.3d 1151 (9th Cir. 1996)................................................................................................... 25 Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001)......................................................................... 12, 15, 20, 21 n.13 Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 6 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC vi MASTER FILE NO. CV-08-2150-CW sf-2534796 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007) ........................................................................................................ 6, 21 Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998) .............................................................................. 11 n.4 STATUTES & RULES 15 U.S.C. § 78j(b) ............................................................................................................................ passim § 78t(a) ............................................................................................................................... 2, 24 § 78t-1 ................................................................................................................................ 2, 25 § 78u-4(b)..................................................................................................................... 7, 11, 17 § 78u-5(c) ......................................................................................................................... 18, 22 17 C.F.R. § 240.10b-5 ........................................................................................................... passim Fed. R. Civ. Pro. 8.............................................................................................................................................. vii 9(b) ..................................................................................................... vii, 6, 13, 15 n.7, 23 n.16 12(b)(6) .................................................................................................................................. vii Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 7 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW sf-2534796 vii NOTICE OF MOTION AND MOTION TO ALL PARTIES AND THEIR COUNSEL OF RECORD: PLEASE TAKE NOTICE THAT on Thursday, September 18, 2008, at 2:00 p.m., or as soon thereafter as the matter may be heard, in the courtroom of the Honorable Claudia Wilken, located at 1300 Clay Street, Oakland, California, Courtroom 2, Fourth Floor, Defendant Yahoo! Inc. (“Yahoo!”) together with Terry S. Semel, Susan L. Decker, Daniel L. Rosensweig, and Farzad Nazem (the “Individual Defendants”) shall, and hereby do, move pursuant to Federal Rules of Civil Procedure 8, 9(b), and 12(b)(6), and the Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 (Dec. 22, 1995) (the “Reform Act”), codified in relevant part at 15 U.S.C. § 78u-4 et seq., to dismiss Plaintiffs’ Consolidated Amended Complaint for Violation of the Federal Securities Laws as filed on December 11, 2007 (the “Complaint” or “CAC”). This Motion is based on this Notice; the supporting Memorandum of Points and Authorities; the Appendix attached to this Motion (cited as “App.__”); the accompanying Declaration of Mark R.S. Foster (“Foster Decl.”) and exhibits attached thereto (“Ex. __”); the Declaration of Matthew H. Rice (“Rice Decl.”); the accompanying Request for Judicial Notice of documents attached to the Foster Declaration; the papers and pleadings on file with this Court; and such other written or oral argument and other materials as may be presented before this Court takes the Motion under submission. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 8 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC viii MASTER FILE NO. CV-08-2150-CW sf-2534796 ISSUES TO BE DECIDED False Statement of Material Fact [Section 10(b)] 1. Whether Plaintiffs plead that Defendants made a material misrepresentation or omission, as required to state a claim under Section 10(b), where the CAC does not plead particularized facts to support Plaintiffs’ conclusory allegations that Defendants (a) caused Yahoo! to issue false financial statements, or (b) made overly optimistic statements about Yahoo!’s business prospects, or (c) predicted the upgrade date of Yahoo!’s advertising platform with no reasonable basis for doing so. Scienter [Section 10(b)] 2. Whether Plaintiffs satisfy the additional element of scienter by pleading particularized facts giving rise to a “strong inference” that Defendants made a material misrepresentation or omission with intent to deceive or with deliberate recklessness, where Plaintiffs plead no facts showing that any Defendant knew or recklessly disregarded that any class period statement was false and Plaintiffs identify nothing suspicious about Defendants’ stock sales. Safe Harbor [Section 10(b)] 3. Whether the Reform Act’s Safe Harbor and the “bespeaks caution doctrine” protect Defendants from liability with regard to their optimistic statements about Yahoo!’s future and the timing of a product upgrade, where those statements were identified as forward-looking and accompanied by meaningful cautionary language. Loss Causation [Section 10(b)] 4. Whether Plaintiffs plead the element of loss causation for their claim that Yahoo!’s class-period financial statements were false, where Plaintiffs do not allege that the accuracy of these financial statements has ever been questioned outside this litigation, much less that a disclosure regarding the accuracy of these financial statements caused a drop in Yahoo!’s stock price. 5. Whether Plaintiffs plead the element of loss causation for their claim based on a delay in the upgrade of Yahoo!’s advertising platform, where Yahoo! had previously disclosed the risk to its business of delays in system upgrades. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 9 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC ix MASTER FILE NO. CV-08-2150-CW sf-2534796 Control-Person Liability [Section 20(a)] 6. Whether Plaintiffs state a claim for control-person liability against any Defendant, where the CAC does not plead a primary violation of the securities laws and where Plaintiffs fail to plead particularized facts showing that the Individual Defendants exercised control over the subject matter of the alleged fraud. Contemporaneous Inside Trading [Section 20A] 7. Whether Plaintiffs state a claim against any Individual Defendant for unlawful contemporaneous trading, where the CAC fails to plead a primary violation of the securities laws and where Plaintiffs have failed to allege with particularity any material, nonpublic information in the possession of any Individual Defendant at the time of any allegedly contemporaneous stock sales. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 10 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 1 sf-2534796 INTRODUCTION In late 2003, Yahoo! entered the internet search marketing business by acquiring Overture Services, Inc. Plaintiffs contend that, by April 2004, four of Yahoo!’s most senior executives knew that the new business was doomed to fail and that Yahoo!’s principal competitor, Google, was destined to dominate the industry. Plaintiffs assert that Defendants responded by launching a 27- month fraudulent scheme designed to conceal Yahoo!’s allegedly inevitable decline by (1) inflating its revenue, (2) disingenuously expressing enthusiasm for its prospects, and (3) predicting that an upgrade to its search marketing platform called “Panama” would launch earlier than it eventually did. Alleging gossip and innuendo is not enough. A complaint must be supported by “particularized facts” pled “in great detail.” The Consolidated Amended Complaint (“CAC”) is devoid of the required factual support. Plaintiffs assert that Defendants inflated revenue by turning a “dial” on Yahoo!’s click fraud filters. But Plaintiffs provide no facts to support this allegation, relying instead on speculation and rumors, such as a “running joke” recounted by a former sales representative. Plaintiffs attack statements about the prospects of Yahoo!’s search marketing business generally, and Panama in particular, as deceptive based on the accounts of confidential witnesses (“CWs”) who Plaintiffs claim are former employees of Yahoo! and/or Overture. These CWs recount “problems” Yahoo! faced after the Overture acquisition, such as a “culture clash” between the two organizations and strains on systems from an increase in traffic. The obvious fact that Yahoo!’s employees faced “problems” after the Overture acquisition and during the development of Panama does not, however, show that Defendants knew all along that Yahoo!’s plans were doomed to fail. Plaintiffs rely on Defendants’ stock sales to support the required strong inference of scienter. There was nothing suspicious about these sales, however: they are large because Plaintiffs select a 27-month class period to sweep in as many sales as possible; the amount of sales declines as the class period progresses; and Plaintiffs nowhere link the sales to any alleged misstatements or to Yahoo!’s stock price performance. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 11 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 2 sf-2534796 Plaintiffs also fail to plead loss causation because they do not show that Yahoo!’s share price fell significantly after the “truth” became known. No one except for these Plaintiffs has ever questioned Yahoo!’s reported historical revenues, and the modest delay in launching Panama was a materialization of a disclosed risk that cannot establish loss causation. A company that employs tens of thousands of people, generates billions of dollars in annual revenue, serves hundreds of millions of customers a day from around the globe, and operates at the frontiers of technology will, inevitably, face challenges. Plaintiffs do not show that Yahoo!’s challenges were insurmountable, much less that Defendants knew them to be so during the class period. For these reasons and others discussed below, Plaintiffs fail to state a Section 10(b) claim for securities fraud against any Defendant. Plaintiffs’ related claims under Sections 20(a) and 20A fail for the same and additional reasons. BACKGROUND I. THE PARTIES Yahoo! is a global internet services company headquartered in Sunnyvale. Ex. 14 at 1. Plaintiffs purport to represent a class of investors who purchased Yahoo!’s common stock between April 8, 2004 and July 18, 2006 (the “Class Period”). CAC ¶ 1. Plaintiffs name as defendants Yahoo! and four Individual Defendants: Terry S. Semel, former Chairman and Chief Executive Officer; Susan L. Decker, who is currently Yahoo!’s President, and who was Chief Financial Officer and Executive Vice President of Finance and Administration during the Class Period; Farzad Nazem, former Chief Technology Officer; and Daniel L. Rosensweig, former Chief Operating Officer. Id. ¶¶ 15-18. II. PLAINTIFFS’ ALLEGATIONS A. Yahoo!’s Search Marketing Business Before 2003, Yahoo! generated the vast majority of its revenue by displaying advertisements on its network of web properties. In October 2003, Yahoo! acquired Overture Services, Inc. (“Overture”), which was engaged in a second kind of internet advertising called “search marketing” or “pay per click” advertising. CAC ¶ 3. Yahoo! integrated Overture’s operations into a separate division. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 12 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 3 sf-2534796 Yahoo!’s search marketing division places “text-based links” on Yahoo! properties and on sites operated by other companies (called Affiliates) who belong to the Yahoo! Search Network. “Text-based links” are short strings of advertising copy that hyperlink to the advertiser’s own site. Placement of the links is determined by: (1) a Yahoo! search algorithm that reads the content of the page being viewed (or, in the case of a user searching the web, the user’s search terms) and selects the most relevant links; and (2) the amount the advertiser agrees (through a bidding process) to pay Yahoo! per click. Advertisers pay only when a user clicks on the link. CAC ¶ 88. When a user clicks on a link appearing on an Affiliate’s page, Yahoo! pays that Affiliate a percentage of the advertiser’s payment to Yahoo!. Id. The CAC contains extensive allegations about “click fraud.” This term applies to activity undertaken for the sole purpose of causing Yahoo!, Google, or other search marketing businesses to log a click. CAC ¶ 92. Click fraud may be committed by an Affiliate seeking to generate a payment for itself, or by an advertiser’s competitor seeking to impose a cost on the advertiser. Id. During the Class Period, Yahoo! filtered clicks to avoid charging advertisers for fraudulent clicks. Id. ¶ 22(d); Ex. 43 at 1. B. Securities Fraud Allegations Plaintiffs allege that Defendants are responsible for 114 Class Period investor communications allegedly containing material misrepresentations. These alleged misrepresentations fall into three categories: (1) Yahoo!’s financial statements; (2) statements of enthusiasm and optimism about Yahoo!; and (3) statements about the expected launch of Panama. 1. Financial reporting a. revenue recognition Plaintiffs allege that “defendants implemented a method to change the ‘dial’ on the Company’s click-fraud detection system at the end of the quarter to allow non-billable click activity to be passed on to customers, thereby increasing the Company’s revenues at the end of the quarter.” CAC ¶¶ 56(f), 60(f), 73(f), 79(f), 90(f), 102(f), 113(g), 123(f), 131(i), 139(g). The allegations are contained in one boilerplate text block identical for each of the ten quarters. See id. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 13 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 4 sf-2534796 Plaintiffs allege that the reason “defendants” turned down the “dial” was to meet Wall Street’s expectations. See id. The boilerplate does not identify which “defendants” turned down the “dial,” describe the “dial,” describe the “method” that was “implemented,” identify any dates on which the “dial” was turned up or down, or identify any of the people involved in the process. Plaintiffs assert that by turning the “dial,” Yahoo! inflated its revenue at least 10% during each of the ten quarters in the Class Period. CAC ¶¶ 56(g), 73(g), 79(g), 90(g), 102(g), 113(h), 123(g), 131(d), 139(b), 144(a), 203. b. reserves Plaintiffs also allege that Yahoo! failed to maintain adequate reserves on its balance sheet for expected refunds to advertisers complaining of click fraud. Id. ¶¶ 56(h), 73(h), 79(h), 90(h), 101(h), 113(a), 123(h), 131(e), 139(c), 144(a), 213. Plaintiffs do not allege the amount of Yahoo!’s refund reserves, how they were calculated, or what they should have been at any time during the Class Period. 2. Defendants’ optimistic statements about Yahoo! Plaintiffs assert that during the first 15 months of the Class Period - from April 2004 through July 2005 - Defendants Semel, Decker, and Rosensweig made various statements expressing enthusiasm about Yahoo! and its future business prospects, describing the challenges facing Yahoo!, and pledging the dedication of Yahoo!’s leadership to achieving success. See CAC ¶¶ 49-56, 57-60, 61-72, 75-79, 81-90, 91-102, 103-13. As support, Plaintiffs paste in large blocks of text copied from Yahoo! press releases, SEC filings, quarterly conference calls, and analyst reports from April 2004 through July 2005. Id. Plaintiffs assert that “Defendants’ statements” were false and misleading because “Defendants knew, or recklessly disregarded, but failed to disclose” the following litany of “problems”: “Yahoo! was actually ‘bursting at the seams’” because of high traffic volume, Yahoo! “refused to provide adequate resources” to search marketing, the Overture integration was hampered by a “culture clash,” Yahoo! fired knowledgeable engineers, Yahoo! did not provide adequate resources for “solving the blob,” and Yahoo!’s Content Match product was performing poorly. Id. ¶¶ 56, 60, 70, 72, 79, 90, 102. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 14 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 5 sf-2534796 3. Project Panama The third and final category of alleged misrepresentations in the CAC consists of statements concerning when Yahoo! expected to launch a series of technological upgrades that became known as “Project Panama.” CAC ¶ 3.1 The Panama initiatives were designed to better “monetize” Yahoo!’s search capability by delivering an improved search marketing product to advertisers. Id. On July 19, 2005, Yahoo! publicly announced that it had an internal plan for rolling out these “long-term initiatives.” Id. ¶ 104. Between August 2005 and January 2006, Yahoo! reported that some new initiatives had rolled out, that testing of others would begin in the first half of 2006, that there would be a “broader rollout thereafter,” and that financial benefit would begin to accrue after a “full rollout of the initiatives,” predicted to be in late 2006 and early 2007. Id. ¶¶ 109, 117, 125. On April 18, 2006, Mr. Semel said that Yahoo! was planning on a three-phase rollout of its remaining monetization initiatives. The first phase, which was building a data platform, was “almost complete”; the second phase was a new on-line application for advertisers to manage ad campaigns; and the third phase was the introduction of a new system for ranking advertising links by quality as well as bid price. Ex. 30 at 18; CAC ¶ 138. Mr. Semel did not predict when these phases would be launched; he said only that Yahoo! expected “testing in the first half of 2006” and “rolling out the service beginning in the second half of this year.” Ex. 30 at 18. On May 17, 2006, Yahoo! held a conference with analysts. A Deutsche Bank report issued the next day stated: “‘Yahoo! management indicated that search monetization is on track for a late 3Q/4Q launch.’” CAC ¶ 143; Ex. 36 at 1. A Jefferies report stated that phase two would “become available to advertisers in 3Q06” and that “Phase 3 is expected in 4Q06.” CAC ¶ 143; Ex. 37 at 2. On July 18, 2006, Yahoo! announced its 2Q 2006 results. While the results were within the range Yahoo! had projected, they fell short of the more optimistic expectations of stock analysts. Yahoo!’s stock price fell $7.04 following the announcement. CAC ¶ 232. 1 Project Panama was a name used internally at Yahoo! during the Class Period, but was not referenced in any of the documents cited in the CAC until after its public use at the May 17, 2006 analyst day. See Ex. 31 at 11. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 15 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 6 sf-2534796 In an analyst conference call that day addressing a wide array of issues, Mr. Semel stated that the second and third phases of Panama would roll out in the fourth quarter of 2006 and the first quarter of 2007 respectively (rather than in the third quarter and fourth quarter of 2006). See CAC ¶ 150; see also Ex. 32 at 4. Mr. Semel explained that it was “prudent to add some extra time to our original estimates for the commercial launch” and that the extra time would be used for testing and “to collect feedback from our advertisers on the timing and cause them as little disruption as possible” given “the complexity and importance of going to market with an application of this scale.” Ex. 32 at 4. On October 17, 2006 - less than three weeks after the end of 3Q 2006 - Yahoo! announced that phase two of Panama, the advertising platform, was “live.” Ex. 33 at 2. In February 2007, Yahoo! announced the launch of phase three of Panama. Ex. 44. ARGUMENT I. PLAINTIFFS MUST SATISFY “EXACTING PLEADING REQUIREMENTS.” To state a Section 10(b) claim, a plaintiff must allege facts showing, inter alia, that the defendant made a material misrepresentation or omission, with scienter, that caused the plaintiff’s loss. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). To survive a motion to dismiss, a complaint must plead “enough facts to state a claim for relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007). “Conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss.” In re VeriFone Sec. Litig., 11 F.3d 865, 868 (9th Cir. 1993). Heightened pleading standards apply to securities fraud class actions. Plaintiffs must satisfy Fed. R. Civ. P. 9(b), which “requires particularity as to the circumstances of the fraud,” including the “time, place, persons, statements made, [and] explanation of why or how such statements are false or misleading.” In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) (en banc). Plaintiffs also must satisfy the “[e]xacting pleading requirements” imposed by the Reform Act. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499, 2504 (2007). The Reform Act “significantly altered pleading requirements in private securities fraud litigation by requiring that a complaint plead with particularity both falsity and scienter.” In re The Vantive Corp., Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 16 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 7 sf-2534796 283 F.3d 1079, 1084 (9th Cir. 2002). Plaintiffs “must therefore allege facts reflecting ‘the who, what, when, where, and how’ with respect to the facts underlying [a] claim.” In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 998 (9th Cir. 1999) (citations omitted). These facts and circumstances must be pleaded in “great detail.” Id. at 974. Plaintiffs attempting to meet these exacting pleading standards typically rely on internal documents prepared contemporaneously with the allegedly false statements and on witness statements of former employees possessing personal knowledge of the alleged fraud. See In re Daou Sys., Inc., 411 F.3d 1006, 1015 (9th Cir. 2005); Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1035-36 (9th Cir. 2002). Here, Plaintiffs cite no internal Yahoo! documents. Instead, Plaintiffs rely on statements that they attribute to fifteen anonymous former employees whom they refer to as CWs. A complaint relying on CW statements must meet a two-part burden. Daou, 411 F.3d at 1015. First, the complaint must plead facts with “sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged.” Id. (citations omitted). Second, the complaint must plead facts sufficient to establish that each CW is reliable, taking into account the totality of circumstances, including “the coherence and plausibility of the allegations, the number of sources, the reliability of the sources, and similar indicia.” Id. (citations omitted). II. PLAINTIFFS FAIL TO STATE A SECTION 10(b) CLAIM. A. Plaintiffs Fail To Plead A Material Misrepresentation Or Omission. To plead falsity, Plaintiffs must “‘specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, . . . the complaint shall state with particularity all facts on which that belief is formed.’” Vantive, 283 F.3d at 1085 (quoting 15 U.S.C. § 78u-4(b)(1)). Facts that must be pleaded with particularity include the “who, what, when, where, and how” of the alleged fraud. GlenFed, 42 F.3d at 1548. The CAC fails this test. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 17 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 8 sf-2534796 1. Plaintiffs fail to support their accusation that Yahoo! issued false financial statements. a. Plaintiffs do not support their revenue recognition allegations with facts. The CAC does not contain particularized facts to support Plaintiffs’ allegation that Defendants inflated Yahoo!’s revenue by turning a “dial” on Yahoo!’s click-fraud filters to achieve Wall Street expectations. Plaintiffs and their CWs do not identify the “defendants” involved, do not describe the “dial” or where it was located, say nothing about the “method” defendants allegedly “implemented,” do not identify any day or week when this occurred, and do not describe the revenue recognition process or how it was affected on any occasion by the “dial” being turned. The fact that Plaintiffs rely on the same boilerplate throughout the 27-month Class Period confirms that these “dial” allegations are generic rather than particularized. Plaintiffs cite no internal documents to support their conclusory “dial” allegations, relying exclusively on two CWs. CW8 allegedly stated that “there was an effort inside Yahoo! to relax the click-fraud detection standards.” CAC ¶ 27. CW8, however, did not say when the standards were relaxed, who exerted the “effort,” whether it succeeded, or whether a Defendant was involved. CW12, a former sales manager, allegedly said that there was a “running joke” at Yahoo! about a revenue dial. CAC ¶ 31(l). Pleading a joke among the sales staff does not plead accounting fraud under the Reform Act. See In re Northpoint Commc’ns Group, Inc. Sec. Litig., 221 F. Supp. 2d 1090, 1098 (N.D. Cal. 2002) (rejecting confidential witness’s allegation based on “second hand rumor” because it was not based on personal knowledge); see also Limantour v. Cray, Inc., 432 F. Supp. 2d 1129, 1141 (W.D. Wash. 2006) (rejecting confidential witness reports based on “gossip and innuendo”). Furthermore, Plaintiffs’ “dial” theory is inconsistent with Plaintiffs’ allegation that Yahoo! missed investor expectations (while meeting its own guidance) on four occasions during the Class Period: 2Q 2004, 2Q 2005, 4Q 2005, and 2Q 2006. CAC ¶¶ 67, 108, 130, 150. Also, Plaintiffs provide no support for their accusation that, by turning the “dial,” Defendants inflated Yahoo!’s revenue at least 10% each quarter. See CAC ¶¶ 56(g), 73(g), 79(g), Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 18 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 9 sf-2534796 90(g), 102(g); 112(g); 131(d); 139(b); The 10% figure comes not from internal company documents, but rather from magazine articles estimating the prevalence of click-fraud industry- wide. CAC ¶¶ 203-08. These sources say nothing about Yahoo!’s recognition of revenue. See Exs. 45-49.2 Plaintiffs try to corroborate their 10% inflation allegation through two confidential witnesses: CW3, who allegedly served as an Engineering Manager at Overture until October 2004; and CW6, who allegedly was a sales representative. CAC ¶¶ 22, 25, 203. Neither of these confidential witnesses is alleged to have had any role in or knowledge of Yahoo!’s revenue recognition practices; neither, therefore, is a reliable source. See In re U.S. Aggregates, Inc. Sec. Litig., 235 F. Supp. 2d 1063, 1074 (N.D. Cal. 2002) (accounting fraud claim not corroborated where “none of the confidential witnesses have any first-hand knowledge of [defendant’s] accounting decisions”); see also Kuehbeck v. Genesis Microchip, Inc., No. C-02-05344-JSW, 2005 U.S. Dist. LEXIS 20213, at *18-19 (N.D. Cal. July 27, 2005) (same). CW3, moreover, was not even a Yahoo! employee during most of the Class Period, and lacks reliability for this additional reason. In re Silicon Storage Tech., Inc. Sec. Litig., No. C-05-0295-PJH, 2006 U.S. Dist. LEXIS 14790, at *24-25, *32-33 (N.D. Cal. Mar. 10, 2006).3 In short, Plaintiffs’ revenue recognition allegations are 2 Plaintiffs imply that Yahoo!’s announcement on June 29, 2006, that it had settled a consumer class action lawsuit by advertisers relating to click fraud supports Plaintiffs’ claims of accounting fraud. See CAC ¶¶ 10, 147, 154, 210, 254. Nothing in that settlement, however, provides any particularized facts about the alleged accounting fraud. Indeed, the settlement includes Yahoo!’s assertion that its “click protection system has filtered clicks in a total amount which exceeds a reasonable estimate with respect to the quantity of clicks which are Challenged Clicks . . . .” Ex. 51 ¶ 32(v). The settlement is not “an admission, concession or indication by or against Yahoo! of any fault, wrongdoing or liability whatsoever.” Id. ¶ 27. Plaintiffs also state that, in March 2007, “Yahoo! agreed that it would no longer bill advertisers 12%-15% of the clicks on its ads.” CAC ¶ 154. This description is terribly misleading. The March 2007 news report states that both Yahoo! and Google publicly disclosed the rates at which they had already been filtering invalid clicks. Ex. 50. Plaintiffs also allege that Yahoo! admitted that it benefited from click fraud (see CAC ¶¶ 10, 150, 233), but provide no support for the conclusory allegation. 3 For the same reason, this Court can disregard the statements attributed to CW5, who allegedly left Yahoo! in June 2004. CAC ¶ 24. In any event, CW5 offers no relevant or corroborating facts. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 19 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 10 sf-2534796 devoid of the factual support necessary to state a claim for accounting fraud. See Vantive, 283 F.3d at 1091 (affirming dismissal where “allegations of improper recognition of revenues . . . contain no specifics or corroborating details of time, persons, places, and subjects”); Alaska Elec. Pension Fund v. Adecco S.A., 434 F. Supp. 2d 815, 825 (S.D. Cal. 2006) (dismissing complaint that did “not plead sufficient facts to support its allegation [that defendant’s] financial statements overstated revenues ”), aff’d, 256 F.App’x 74 (9th Cir. 2007). b. Plaintiffs do not support their reserve allegations with facts. Plaintiffs also fail to plead particularized facts showing that Yahoo!’s refund reserves were inadequate. CAC ¶¶ 211-13. Plaintiffs do not allege the size of Yahoo!’s refund reserves or the size that they should have been for any quarter during the Class Period, much less for all ten. Plaintiffs do not show that Yahoo! was contractually bound to provide refunds or that it had a policy or practice of doing so. Plaintiffs have not, therefore, pled a factual basis for their conclusory allegations of inadequate reserves. See Kane v. Madge Networks N.V., No. C-96-20652-RMW, 2000 U.S. Dist. LEXIS 19984, at *18 n.8 (N.D. Cal. May 25, 2000) (allegation that company misstated reserves for accounts receivable inadequate where complaint failed to identify the specific customers who refused to pay their bills and did not plead facts that any customer “would renege on their legal obligation to pay”), aff’d, 32 F.App’x. 905 (9th Cir. 2002). 2. Plaintiffs fail to plead that Defendants’ expressions of enthusiasm, dedication, and optimism were false. Most of the CAC consists of block quotations taken from statements by Defendants and securities analysts, which Plaintiffs declare to have been false in light of various “problems” discussed in one boilerplate paragraph. See CAC ¶ 49-56, 57-60, 61-72, 75-79, 81-90, 91-102, 103-13. Here again, Plaintiffs fail to plead falsity with the required particularity. First, Plaintiffs fail to identify with particularity the statements they contend are false. The Ninth Circuit has long criticized complaints, like the CAC, that “ramble[] through long stretches of material quoted from defendants’ public statements (many of which seem innocuous enough even by plaintiffs’ own recounting) unpunctuated by any specific ‘reasons for falsity’ - which, indeed, prove difficult to locate in the surrounding area.” GlenFed, 42 F.3d at 1553-54. It is insufficient to Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 20 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 11 sf-2534796 leave “it up to defendants and the court to try to figure out exactly what the misleading statements are, and to match the statements up with the reasons they are false or misleading.” In re Splash Tech. Holdings, Inc. Sec. Litig., 160 F. Supp. 2d 1059, 1074 (N.D. Cal. 2001) (citation omitted). For this reason, Plaintiffs fail to satisfy the Reform Act’s requirement of “identifying with particularity what statements are false and misleading.” In re Pixar Sec. Litig., 450 F. Supp. 2d 1096, 1100-01 (N.D. Cal. 2006) (citing 15 U.S.C. § 78u-4(b)(1)). Second, much of the block text consists of statements by securities analysts. CAC ¶¶ 51, 53, 64, 65, 67, 70, 77, 83, 97, 98, 99, 105, 106, 107, 108, 119, 120, 128, 129, 130, 134, 138. A defendant can be held liable for statements by analysts only if the defendant expressly or impliedly adopts or endorses the statements or provides information to the analysts with the intent that they will communicate it to the market. In re Syntex Corp. Sec. Litig., 95 F.3d 922, 934 (9th Cir. 1996); In re Versant Object Tech. Corp. (Versant I), No. C-98-00299-CW, 2000 U.S. Dist. LEXIS 22333, at *22-23 (N.D. Cal. May 18, 2000), aff’d, 56 F.App’x 322 (9th Cir. 2003). Plaintiffs, however, plead no such facts. Third, “generalized, vague and unspecific assertions” by executives that they are confident their business will succeed, such as the expressions of enthusiasm, dedication, and optimism that Plaintiffs attribute to Defendants Semel, Decker, and Rosensweig, are not actionable as a matter of law. Glen Holly Entm’t, Inc. v. Tektronix, Inc., 352 F.3d 367, 379 (9th Cir. 2003) (citations omitted). As this Court has explained, “investors . . . know how to devalue the optimism of corporate executives, who have a personal stake in the future success of the Company.” In re Apple Computer, Inc. Sec. Litig., 243 F. Supp. 2d 1012, 1026 (N.D. Cal. 2002) (quotations omitted), aff’d, 32 F. App’x. 905 (9th Cir. 2003); Versant I, 2000 U.S. Dist. LEXIS 22333, at *21 (same).4 4 The statements of optimism include statements regarding (a) growth, development, and strategy (see CAC ¶¶ 49-52, 61, 62, 64-66, 75, 76, 81, 82, 85-87, 93, 94, 103, 104, 109, 114-118, 137; (b) the expected successful integration of Overture personnel and technology (see id. ¶¶ 49, 50, 57); (c) the strength of Yahoo!’s management team (see id. ¶ 85); and (d) anticipated successes. See id. ¶¶ 49, 50, 61, 62, 65, 66, 76, 82, 85, 94, 103, 104, 109, 114, 115-118. Numerous courts have held that similar optimistic statements are not actionable. See, e.g., In re CornerStone Propane Partners, L.P., 355 F. Supp. 2d 1069, 1087 (N.D. Cal. 2005); Kane, 2000 U.S. Dist. LEXIS 19984, at *8-9; Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231, 1245-46 (N.D. Cal. 1998). Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 21 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 12 sf-2534796 Fourth, the facts set out in the boilerplate paragraph are not inconsistent with the text blocks Plaintiffs quote. The existence of a post-merger “culture clash,” for example, does not render statements about Yahoo!’s operations or strategic plan false. Kane, 2000 U.S. Dist LEXIS 19984, at *21-23 (complaint dismissed where plaintiffs did not plead particularized facts to support claim that departments were “in conflict and upheaval” after corporate merger); see also Ronconi v. Larkin, 253 F.3d 423, 434 (9th Cir. 2001). Fifth, many of the statements in the text blocks consist of opinions and statements about the future. To plead that an expression of opinion is “false,” a plaintiff must plead particular facts showing “why the statement of opinion was objectively and subjectively false,” that is that the defendant did not genuinely hold the opinion and that there was no reasonable basis for the opinion at the time. In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1265 (N.D. Cal. 2000). To plead that a forward-looking statement is false, a plaintiff must plead contemporaneous facts showing that “one of three implied factual assertions is inaccurate: (1) that the statement is genuinely believed, (2) that there is a reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement.” VeriFone, 11 F.3d at 870 (quotations omitted); In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1409 (9th Cir. 1996) (same). The boilerplate cites several CWs, but none present facts sufficient to demonstrate that any statement lacked a reasonable basis when made, or that any opinion was not genuinely believed. At best, Plaintiffs have alleged that Yahoo! faced challenges during the Class Period, which is hardly surprising. “Problems and difficulties are the daily work of business people. That they exist does not make a lie out of any of the alleged false statements.” Ronconi, 253 F.3d 423 at 434. To plead lack of a reasonable basis because of problems requires pleading “specific facts that show how these ‘problems’ and ‘difficulties’” could not have been solved. Id.; In re Versant Object Tech. Corp. (Versant III), No. C-98-00299-CW, 2001 U.S. Dist. LEXIS 25009, at *20 (N.D. Cal. Dec. 4, 2001), aff’d, 56 F.App’x 322 (9th Cir. 2003). The grievances of fifteen former employees do not show that Defendants did not genuinely hold their enthusiasm, that they were not genuinely Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 22 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 13 sf-2534796 dedicated to Yahoo!’s success, or that there was no reasonable basis to believe that Yahoo! would succeed. 3. Plaintiffs fail to plead that Yahoo!’s estimates for the Panama rollout lacked a reasonable basis when made. Plaintiffs’ assertion that Defendants falsely predicted dates on which Panama would launch at a May 17, 2006 analyst day is not supported by facts. CAC ¶¶ 143-44. Plaintiffs rely entirely on the reports of two analysts that “‘Yahoo! management indicated that search monetization is on track for a late 3Q/4Q launch.’” CAC ¶ 143; Exs. 36 at 1, 37 at 2.5 This reliance is misplaced because the reports do not indicate that the speaker was a Defendant, what in particular he or she indicated and how he or she indicated it, whether his or her prediction was accompanied by cautionary language, whether the he or she was aware of facts inconsistent with his or her prediction, or whether he or she acted with scienter. These are the most basic requirements of Rule 9(b) and the Reform Act. Vantive, 283 F.3d at 1085; GlenFed, 42 F.3d at 1548. As this Court has previously recognized, where plaintiffs rely upon analyst reports to attribute a false statement to a defendant, the plaintiffs must “plead with particularity all facts supporting their belief” that the particular defendant made the allegedly false statement to the analyst. In re Versant Object Tech. Corp. (Versant II), No. C-98-00299-CW, 2001 U.S. Dist. LEXIS 25010, at *6 (N.D. Cal. Mar. 30, 2001), aff’d, 56 F.App’x 322. It is not enough, as here (CAC ¶ 143), for a complaint to quote analyst reports saying “Management believes” something, as these statements “are not direct statements by Defendants.” Versant II, 2001 U.S. Dist. LEXIS 25010, at *23. Such allegations fail to plead falsity with particularity. Id.; see also Vantive, 283 F.3d at 1085; GlenFed, 42 F.3d at 1548. 5 Plaintiffs quote numerous forward-looking statements made before May 2006 concerning Yahoo!’s plans to improve the monetization of its search technology. CAC ¶¶ 104, 109, 115, 117, 118, 125. None of these statements include a prediction by a Defendant about the date on which any monetization initiative would launch. And Plaintiffs do not allege that any of these pre-May 2006 predictions did not come true. See In re Convergent Techs. Sec. Litig., 948 F.2d 507, 514 (9th Cir. 1991) (predictions that come true cannot support liability under Section 10(b)). Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 23 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 14 sf-2534796 This case provides a perfect example of why these pleading requirements are in effect. As is clear from the transcript of the analyst day presentation (see Ex. 31 at 40), which Plaintiffs ignore, the Panama prediction was not made by one of the Individual Defendants, the speaker’s statements were accompanied by cautionary language (id. at 1, 90), the speaker is not a person Plaintiffs allege was aware of any facts inconsistent with his statements, and he is not a person Plaintiffs allege to have acted with scienter. Additionally, pleading that Yahoo! predicted a launch that was later delayed does not plead that the forecast was “false” when made. Rather, Plaintiffs must plead facts showing that (1) the forecast was not genuinely believed, (2) there was not a reasonable basis for that belief, or (3) the speaker was aware of undisclosed facts tending to seriously undermine the accuracy of the forecast. VeriFone, 11 F.3d at 870; Stac, 89 F.3d at 1409. Plaintiffs attempt to meet this standard through reliance on CWs 1, 2, 4, 7, 10, 11, 12, and 15. Plaintiffs’ allegations, however, are inadequate for several independent reasons. The first Daou criterion disposes of the statements attributed to CWs 7, 10, 11, 12, and 15. Plaintiffs do not plead particularized facts to support the probability that any of these individuals would possess the information about Panama attributed to them. Daou, 411 F.3d at 1015. CWs 7 and 12 had sales and customer service roles. CAC ¶¶ 26, 31(a). Neither is alleged to have had any information about the development of Panama, and their job descriptions do not support an inference that they did. See In re Tibco Software, Inc. Sec. Litig., No. C-05-2146-SBA, 2006 U.S. Dist. LEXIS 36666 (N.D. Cal. May 24, 2006), at *70 (finding that IT Operations Manager was not a reliable source concerning the company’s allegedly fraudulent sales). CWs 10 and 11 left Yahoo! in December 2004 and January 2005 - months before Yahoo! issued any prediction about Panama. CAC ¶ 29. A confidential witness who was not employed at the time of an allegedly false statement cannot provide contemporaneous facts showing the statement was false when made. Silicon Storage, 2006 U.S. Dist. LEXIS 14790, at *24, 32-33.6 6 CW11 allegedly became a Yahoo! customer after his/her departure in December 2004, and opined that Panama’s algorithm was not “ready” in the second quarter of 2006 (CAC ¶¶ 30, 139(a)), but offers no facts to support that opinion, as required by Daou. CW15 is described as an (Footnote continues on next page.) Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 24 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 15 sf-2534796 Plaintiffs point to statements from five confidential witnesses who identified various “problems” with Panama components and related “back end systems.”7 Allegations about the existence of “problems,” however, are insufficient because Plaintiffs do not describe the “problems” with factual particularity, or explain why they could not have been timely solved. Plaintiffs do not even assert that these “problems” were not timely solved or that they had anything to do with postponing Panama’s launch. The Ninth Circuit has repeatedly held that pleading “problems” is insufficient absent a showing that the problems were insurmountable at the time the projection was issued. Ronconi, 253 F.3d at 434; In re Syntex Corp. Sec. Litig., 95 F.3d 922, 930 (9th Cir. 1996) (“[T]he company could have known of problems in the testing procedures, planned to remedy those deficiencies, and still thought it would achieve FDA approval by the estimated date.”); In re Read-Rite Corp. Sec. Litig., No. C-03-03148-RMW, 2004 U.S. Dist. LEXIS 19319, at *16 (N.D. Cal. Sept. 14, 2004) (dismissing complaint because “plaintiffs do not allege why defendants could not have believed that these defects were minor or solvable”); In re Juniper Networks, Inc. Sec. Litig., No. C-02-0749-SI, 2004 U.S. Dist. LEXIS 4025, at *8 (N.D. Cal. Mar. 11, 2004) (complaint failed to “plead specific (Footnote continued from previous page.) “employee” who sat in on some meetings where Project Panama was discussed. CAC ¶ 34. The CAC, however, does not mention CW15’s job title, or job responsibilities, or anything about the meetings that CW15 may have attended. The lack of these facts is fatal. Daou, 411 F.3d at 1015. 7 The CWs vaguely report that there were “hardware readiness issues,” and “integration testing issues,” that the “code” for Panama was not written as of December 2005, that projects called “Cheetah” and “solving the blob” were not complete in February 2006, and that “Project Symphony” was delayed and ultimately “scratched.” CAC ¶¶ 20(a), 23, 26, 29, 31(i), 56(c), 60(c), 79(c), 102(c), 113(c), 131(b), 139(a), 139(a), 158, 163, 164. Plaintiffs provide no details about these projects or the “issues,” and thus do not satisfy Rule 9(b) or the Reform Act. Plaintiffs also point to CW statements about “internal disagreements,” a “culture clash” among engineers at Yahoo! and Overture, and terminations of some engineers. Id. ¶¶ 20, 29, 113(a), 123(a). The CAC, however, does not offer a single fact regarding those disagreements, a culture clash, or terminations, as required. Vantive, 283 F.3d at 1086-87 (allegations that company “‘was suffering serious problems’ with its management teams, who ‘were distracted’ . . . because of ‘continual disagreements and in-fighting’” did not support falsity allegations). Further, Yahoo! evidently overcame these “problems.” Plaintiffs’ documents show that the Panama code was complete in May 2006, and that advertisers gave positive feedback on the system during testing. Ex. 31 at 40-41; Ex. 32 at 4, 10; Ex. 37 at 2, 3. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 25 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 16 sf-2534796 facts demonstrating how the problems being experienced translated into the need for [the company] to alter or reduce its publicly issued projections”). Plaintiffs make no such showing here. Plaintiffs allege that CW1, who was in charge of Panama “after October 2005,” expressed his opinion to Mr. Nazem in April 2006 that “the August 2006 launch was not going to happen.” CAC ¶ 20(a). This allegation is inadequate for several reasons. First, Mr. Nazem is not alleged to have made any public prediction about Panama’s launch date (or about anything else). Plaintiffs assert that Mr. Nazem communicated CW1’s opinion to other Defendants in weekly meetings, but Plaintiffs do not plead with particularity what, if anything, Mr. Nazem said on this point. Second, CW1’s opinion is not inconsistent with the phase two launch date of “late 3Q,” which Plaintiffs allege Yahoo! publicly predicted in May. Third, the CAC does not allege that CW1 held his opinion in May, when the projection was allegedly made. Fourth, the CAC pleads no facts showing that CW1’s opinion was definitive or that a contrary opinion would lack a reasonable basis. Fifth, Plaintiffs do not plead how Mr. Nazem responded to CW1’s opinion - whether Mr. Nazem agreed, disagreed, or devoted additional resources to meet the alleged August date. Significantly, the “problems” with Panama did not prevent Yahoo! from releasing phase two on October 17, 2006, less than three weeks after the end of the third quarter of 2006. Ex. 33 at 2. The barely missed rollout shows that Defendants had a reasonable basis to believe the rollout was on target and could overcome any problems or glitches. Syntex, 95 F.3d at 930-31 (prediction not actionable where it was wrong by three weeks). Plaintiffs are required to show that a difference between what was predicted and what occurred is “not merely the difference between two permissible judgments, but rather the result of a falsehood.” Id. at 929 (quotations omitted). They have not done so here. In summary, Plaintiffs fail to plead the most basic element of a securities fraud case - a false or misleading statement of material fact. On this ground alone, the entire CAC should be dismissed. B. Plaintiffs Also Fail To Plead A “Strong Inference” Of Scienter. Under the Reform Act, Plaintiffs also have the burden to “‘state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind’” when Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 26 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 17 sf-2534796 making allegedly false or misleading statements. Tellabs, 127 S. Ct. at 2508 (quoting 15 U.S.C. § 78u-4(b)(2)). A statement is made with scienter if it is made with an intent to deceive investors or with “deliberate recklessness,” a “degree of recklessness that strongly suggests actual intent” to deceive investors. Silicon Graphics, 183 F.3d at 977, 979. It is not enough for a complaint “to allege facts from which an inference of scienter rationally could be drawn.” Tellabs, 127 S. Ct. at 2510. Rather, the particularized factual allegations must give rise to an inference that is “cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Id. “A defendant corporation is deemed to have the requisite scienter for fraud only if the individual corporate officer making the statement has the requisite level of scienter.” Apple, 243 F. Supp. 2d at 1023 (citations omitted). Plaintiffs cannot, therefore, meet their burden by pleading that one person made a false statement at the same time that another officer knew the statement to be false. See id. Plaintiffs’ circumstantial allegations of scienter are based on (1) statements of CWs and (2) the Individual Defendants’ stock sales. Neither gives rise to any inference of scienter. 1. Plaintiffs’ CWs do not support an inference of scienter. Plaintiffs’ CWs do not support a “strong inference” that any Defendant made any allegedly false statement with scienter. None of the CWs on whom Plaintiffs rely to show scienter for the accounting-fraud claim - CWs 3, 6, 8, 9, 10, 14 (CAC ¶¶ 169, 170, 171, 173, 175-78) - is alleged to have had any responsibility for or knowledge about Yahoo!’s accounting decisions generally or revenue recognition specifically. See Part II.A.1.a supra. Moreover, none of these CWs is alleged to have ever met or communicated with Ms. Decker or Mr. Semel, the only two Individual Defendants alleged to have endorsed Yahoo!’s financial results. See CAC ¶ 224.8 These allegations 8 Mr. Nazem and Mr. Rosensweig are not alleged to have made or endorsed any of the allegedly false financial statements (CAC ¶ 224), so they could not have acted with scienter with regard to them and cannot be liable for them. In re CornerStone Propane Partners, L.P. Sec. Litig., 416 F. Supp. 2d 779, 783, 788 (N.D. Cal. 2005); Apple, 243 F. Supp. 2d at 1028. CW3 allegedly told Plaintiffs that “Yahoo!’s management” decided to “relax” the click-fraud detection system, but did not say who in “management” made that decision or that s/he ever told Ms. Decker or Mr. Semel (or any other executive) about it. CAC ¶¶ 170, 171, 175, 176. CW8 allegedly told Plaintiffs that Ms. Decker “definitely was aware of the issue” of click fraud. This (Footnote continues on next page.) Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 27 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 18 sf-2534796 are thus deficient “because they show neither knowledge nor participation by Defendants in the alleged accounting improprieties.” U.S. Aggregates, 235 F. Supp. 2d at 1075. Plaintiffs do not dispute that Yahoo!’s financial reports were audited throughout the Class Period by PriceWaterhouseCoopers (“PWC”), which found them to have been prepared in conformance with Generally Accepted Accounting Principles (“GAAP”). Plaintiffs do not allege that Defendants lied to PWC or that PWC was complicit in the allegedly fraudulent scheme. Plaintiffs thus present no explanation, much less a “cogent” and “compelling” explanation, for how Defendants were able to obtain a clean audit opinion from PWC while overstating Yahoo!’s revenues by “at least 10%” for ten quarters in a row. The absence of such an explanation is “highly probative of an absence of scienter.” In re Hansen Natural Corp. Sec. Litig., 527 F. Supp. 2d 1142, 1158 (C.D. Cal. 2007) (internal quotations omitted). Plaintiffs’ CWs also do not provide any support for Plaintiffs’ claims relating to the optimistic statements made between April 2004 and July 2005, or any of the predictions about Panama that were made between July 2005 and May 2006. Plaintiffs just recycle their allegations about “problems” described by CWs 4, 7, 10, 11, and 12 (CAC ¶¶ 162-65, 174), which do not give rise to even a reasonable inference of falsity as discussed above (Part II.A supra), much less a “strong inference” that any forward-looking statement was made “with ‘actual knowledge . . . that the statement was false or misleading’” or that any opinion was made with deliberate recklessness towards investors. Vantive, 283 F.3d at 1085 (quoting 15 U.S.C. § 78u-5(c)(1)(B)(i)). Plaintiffs’ remaining scienter allegations relate to Panama and CW1’s alleged statement to Mr. Nazem that Panama would not launch in August. CAC ¶¶ 21, 31(i), 32, 34, 160, 161, 166, 167, 168. As discussed above (Part II.A.3), the allegation about CW1’s communication with Mr. Nazem does not give rise to an inference of falsity, much less a strong inference that any Defendant predicted a Panama launch date “knowing” it would not be met. Furthermore, Mr. Nazem is not (Footnote continued from previous page.) allegation adds nothing because Yahoo! described click fraud in its public filings throughout the Class Period. See, e.g., Ex. 10 at 65. CW8 does not purport to say that Ms. Decker knew about the alleged “dial,” 10% revenue overstatement, or reserves. Id.¶¶ 18, 27, 177. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 28 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 19 sf-2534796 alleged to have made or participated in making any of the alleged statements listed in the CAC. This shortcoming is fatal to pleading a Section 10(b) claim against Mr. Nazem. Howard v. Everex Sys., 228 F.3d 1057, 1061 n.5 (9th Cir. 2000). It is also fatal to pleading a Section 10(b) claim against Yahoo!, because a corporation cannot have scienter unless one of its officers made a false statement with scienter. Apple, 243 F. Supp. 2d at 1023.9 2. Plaintiffs’ stock-sale allegations do not support an inference of scienter. Plaintiffs’ allegations of stock sales by Individual Defendants do not support an inference (and certainly not a “strong inference”) that any Individual Defendant made a false statement with scienter. CAC ¶¶ 180-97.10 “Insider stock sales are not inherently suspicious; they become so only when the level of trading is ‘dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside information.’” Vantive, 283 F.3d at 1092 (quoting Ronconi, 253 F.3d at 435). As demonstrated in Charts 1-4 included in Appendix A, no such pattern of trading exists here. First, as is clear from Charts 1-4, there is no correlation between the timing of the allegedly false statements and the timing of any Individual Defendant’s sales. See App. A. In Vantive, the Ninth Circuit found that stock sales were not suspicious and affirmed dismissal because the complaint failed to “connect [a defendant’s] sales with any particular allegedly misleading statements” or otherwise demonstrate that sales were timed to take advantage of misleading statements. 283 F.3d at 1094. Plaintiffs have made no such showing here, either.11 9 Plaintiffs’ generic argument that the Individual Defendants had scienter given their “positions” and alleged “access” to unspecified adverse information (CAC ¶¶ 15-18, 155-56, 169-70, 172- 73, 175) has been consistently rejected. DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385, 390 (9th Cir. 2002); Apple, 243 F. Supp. 2d at 1012. 10 Mr. Nazem’s sales are irrelevant because he did not make any of the allegedly false statements. Silicon Graphics, 183 F.3d at 987-88 (where defendant does not make any of the allegedly misleading statements, his “stock sales do not give rise to a strong inference of deliberate recklessness”); Vantive, 283 F.3d at 1094 (same); Apple, 243 F. Supp. 2d at 1028. 11 At most, Plaintiffs allege that the Individual Defendants sold stock after Yahoo!’s quarterly earnings announcements (CAC ¶ 180), which is when corporate officers “commonly make stock transactions.” Lipton, 284 F.3d at 1037. The timing of such sales is normal, not suspicious. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 29 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 20 sf-2534796 Second, Plaintiffs’ observation that Class-Period sales were large in dollar terms ($879 million) and exceeded pre-Class period sales (see CAC ¶¶ 181-88) does not render the Class Period sales “suspicious” for the simple reason that Plaintiffs selected the Class Period to “sweep as many stock sales into their totals as possible, thereby making the stock sales appear more suspicious than they would be with a shorter class period.” Vantive, 283 F.3d at 1092. As in Vantive, “the class period alleged is so long, and the virtually identical allegations recycled throughout the complaint so many times, that it becomes difficult to see how particular stock sales would strengthen allegations that particular statements were uttered with deliberate recklessness at the times they were made.” Id. at 1093.12 The Class Period here is almost twice as long as the period criticized by the court in Vantive. Third, Plaintiffs have not alleged facts demonstrating that the stock sales were designed to “maximize the personal benefit” of any Individual Defendant. Ronconi, 253 F.3d at 435. None of the Individual Defendants sold stock immediately before any of the four earnings announcements during the Class Period in which Yahoo! missed analyst expectations, and they continued to sell shares after those announcements were made. Rice Decl. ¶¶ 9-12. If the Individual Defendants were committing fraud to maximize personal benefit, one would expect sales before, not after, negative earnings announcements and associated stock declines. In fact, all of the Individual Defendants sold their stock at average prices far below the Class Period high of $43.66, and three of the four sold at an average price that was below the average daily closing price of $33.77 during the Class Period. CAC ¶¶ 11, 182, 184, 186, 188; Rice Decl. ¶ 7. There is no strong inference of 12 Plaintiffs distort their presentation of the Individual Defendants’ stock sales in many other ways. For example, Plaintiffs exclude vested options in calculating the percentage of shares sold, even though the Ninth Circuit has repeatedly ruled that vested options must be included. Vantive, 283 F.3d at 1092 n.12; Silicon Graphics, 183 F.3d at 986. When vested options are included, the accurate percentages are: 49.3% for Semel; 68.1% for Rosensweig; 58.1% for Nazem; and 35.6% for Decker (Rice Decl. ¶¶ 3(e), 4(e), 5(e), 6(e)) rather than the significantly higher percentages listed by Plaintiffs. See CAC ¶¶ 15-18. Plaintiffs also use charts that illustrate the “dollar volume” of sales as opposed to the number of shares sold. Id. Their charts make it look as though the Individual Defendants sold more stock as Yahoo!’s price increased. Charts 1-4, which accurately illustrate the amount of shares sold, show that the Individual Defendants’ trading patterns were consistent during the Class Period, and not tied to an increasing stock price. See Appendix A. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 30 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 21 sf-2534796 scienter where, as here, executives “miss the boat” by selling stock at prices far below the class period high. Vantive, 283 F.3d at 1094.13 Fourth, as illustrated in Charts 1-4, there was no coordinated selling of stock by Individual Defendants - they generally sold at different times throughout the Class Period. The absence of a pattern further undermines Plaintiffs’ theory (see CAC ¶¶ 2-3) that the Individual Defendants conspired to inflate Yahoo!’s stock price to sell at the highest price possible. See, e.g., Vantive, 283 F.3d at 1093 (no strong inference of scienter where “other equally (or more) knowledgeable defendants” did not sell at the same time); cf. Daou, 411 F.3d at 1024 (stock sales “highly suspect and indicative of coordinated selling among defendants” where complaint alleged that “98% of all insider sales . . . took place on only two trading days”). Finally, more than half of the Class Period stock sales occurred in 2004. Rice Decl. ¶ 8. Such early class period sales made long before an alleged fraud is revealed do not support an inference of scienter. See Vantive, 283 F.3d at 1093; accord In re Buca Inc. Sec. Litig., No. 05- 1762-DWF-AJB, 2006 U.S. Dist. LEXIS 75224, at *41-42 (D. Minn. Oct. 16, 2006); In re Credit Acceptance Corp. Sec. Litig., 50 F. Supp. 2d 662, 677 (E.D. Mich. 1999). In sum, the alleged stock sales exhibit no unusual or suspicious pattern that, when viewed in concert with all facts pled in the CAC, supports a “cogent” and “compelling” inference that any Defendant intended to defraud investors. Tellabs, 127 S. Ct. at 2510. The CAC should, therefore, also be dismissed for failure to plead a strong inference of scienter. C. The Forward-Looking Statements Are Not Actionable For Additional Reasons. The forward-looking statements in the CAC cannot support a Section 10(b) claim for the additional reason that they are protected by the Reform Act’s Safe Harbor, which provides that forward-looking statements are not actionable where they are identified as forward-looking and 13 All of the Individual Defendants maintained substantial Yahoo! holdings at the end of the Class Period. Rice Decl. ¶¶ 3(c), 4(c), 5(c), 6(c). The value of three Individual Defendants’ holdings increased over the course of the Class Period. Id. ¶¶ 3(b), (d); 5(b), (d); 6(b), (d). They, like any other owner of Yahoo! stock, suffered “losses” as Yahoo!’s stock declined, a fact “negating” scienter. Ronconi, 253 F.3d at 435-36; see also Hansen, 527 F. Supp. 2d at 1160 (quoting Vantive, 283 F.3d at 1092); Versant III, 2001 U.S. Dist. 25009, at *16-17. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 31 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 22 sf-2534796 accompanied by meaningful cautionary language. Employers Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Clorox Co., 353 F.3d 1125, 1132 & n.3 (9th Cir. 2004) (citing 15 U.S.C. § 78u-5(c)). These statements also are protected by the bespeaks-caution doctrine. See id. Defendants’ optimistic statements about the prospects of Yahoo!’s search marketing business were made in written press releases (see, e.g., CAC ¶¶ 49, 61, 103, 114), and orally in conference calls with analysts. See, e.g., id. ¶¶ 50, 62, 76, 82, 95, 104, 115. The press releases identified the statements as forward-looking, and warned that actual results might differ because of risks and uncertainties, including “performance of the Company’s recently acquired businesses”; “risks related to the integration of recent acquisitions”; and “the ability to adjust to changes in personnel, including management changes.” See, e.g., Exs. 39-42 at 3. The conference call moderators invoked the Safe Harbor and referred investors to Yahoo!’s SEC reports for risk factors.14 Yahoo!’s SEC reports, in turn, advised investors that the acquisition of Overture’s search marketing business could result in problems and harm Yahoo!’s business. These problems included “the difficulty of assimilating the operations and personnel of [] acquired companies with and into Yahoo!’s operations”; “the failure to further successfully develop acquired technology”; “the impairment of relationships with employees of the acquired companies”; and the potential loss of “key employees from Overture.”15 The statement about the predicted launch of Project Panama made at the May 17, 2006 analyst day (CAC ¶ 143) was identified as forward-looking and pointed investors to SEC reports that contained meaningful cautionary language. Ex. 31 at 1, 90. Those SEC reports warned investors that “significant changes to our architectures, including moving to completely new architectures and systems,” could be “technologically challenging to develop and implement.” Ex. 14 at 27; Ex. 16 at 44. Yahoo!’s SEC reports also cautioned investors that system “upgrades and improvements will require a dedication of resources and in some cases are likely to be complex. If we are unable to adapt our systems in a timely manner to accommodate our growth, our business 14 Ex. 22 at 132; Ex. 23 at 119; Ex. 24 at 106; Ex. 25 at 91; Ex. 26 at 77; Ex. 27 at 61; Ex. 28 at 1. 15 Ex. 7 at 31-32, 36; Ex. 8 at 34, 38; Ex. 9 at 36, 41; Ex. 10 at 17-18; Ex. 11 at 38-39; Ex. 12 at 36-37; Ex. 13 at 35-36; Ex. 14 at 24. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 32 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 23 sf-2534796 may be adversely affected.” Ex. 14 at 23-24; Ex. 16 at 44. Under the Safe Harbor and the bespeaks-caution doctrine, these warnings protect Defendants from liability relating to forward-looking statements about Project Panama. See Clorox, 353 F.3d at 1133 (affirming dismissal where “sufficient warnings accompanied the timetable estimate”). D. Plaintiffs Also Fail To Plead Loss Causation. Plaintiffs also fail to plead loss causation, i.e. the “causal connection between the material misrepresentation and the loss” alleged, for all their claims. Dura, 544 U.S. at 342. To plead loss causation, a complaint must plead facts showing “that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security.” Lentell v. Merrill Lynch & Co., 396 F.3d 161, 175 (2d Cir. 2005). This can be done by showing a “corrective disclosure regarding the falsity” or the “materialization of a risk” that was previously concealed. Id. at 173, 175.16 Plaintiffs’ accounting-fraud claim contrasts sharply with the loss causation allegations approved by the Ninth Circuit in Daou, where the stock dropped after the company disclosed that it had improperly recognized revenue. 411 F.3d at 1026. Here, there has been no such disclosure. Aside from Plaintiffs, nobody (including PWC) has ever questioned Yahoo!’s Class-Period financial results. Plaintiffs thus fail to plead a “causal connection between the material misrepresentation and the loss” alleged. Dura, 544 U.S. at 342. Plaintiffs try to indirectly plead loss causation by pointing to Yahoo!’s stock drop after reports on January 18 and July 18, 2006, of increasing traffic acquisition costs associated with Yahoo!’s replacement of “poor traffic affiliates.” CAC ¶¶ 10, 231(a), 233. Plaintiffs, however, never link these rising costs to their “dial” allegations and overlook that Yahoo! had repeatedly advised investors throughout the entire Class Period that these costs were rising and would continue 16 The Ninth Circuit has assumed, “without deciding - that Rule 9(b) governs” the pleading of loss causation allegations. Berson v. Applied Signal Tech., Inc., No. 06-15454, --- F.3d---, 2008 U.S. App. LEXIS 11982, at *18-19 (9th Cir. June 5, 2008). Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 33 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 24 sf-2534796 to rise.17 A complaint cannot show loss causation where, as here, a stock drop allegedly follows the materialization of a previously disclosed and known risk. Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 158 (2d Cir. 2007); Lentell, 396 F.3d at 177. For the same reasons, Plaintiffs do not plead loss causation for their Panama fraud theory. Plaintiffs allege that their losses were caused by the stock drop following Yahoo!’s disclosure that it “was delaying the implementation of Project Panama.” CAC ¶ 231(b). There was no such announced delay before the January 18, 2006 stock drop. With regard to the delay of Panama announced on July 18, 2006, Yahoo! explained that it was “prudent to add some extra time to our original estimates for the commercial launch . . . to collect feedback from our advertisers on the timing and cause them as little disruption as possible” “given the complexity and importance of going to market with an application of this scale.” Ex. 32 at 4-5. In the annual report that it filed on March 3, 2006, Yahoo! warned that its business could be adversely affected if its upgrades were not “adequately tested,” and if Yahoo! failed to “adapt [its] systems in a timely manner.” Ex. 14 at 23; Part II.C supra. Yahoo!’s risk disclosures thus provided “substantial indicia” of the risks that ultimately materialized. The CAC, therefore, fails to plead loss causation. Lattanzio, 476 F.3d at 158; Lentell, 396 F.3d at 177. III. PLAINTIFFS FAIL TO STATE A SECTION 20(a) CLAIM. Plaintiffs also fail to plead a claim for control-person liability under Section 20(a) of the Exchange Act for two independent reasons. First, Plaintiffs do not plead a valid Section 10(b) claim against any Defendant, so there can be no secondary liability for any Defendant under Section 20(a). Lipton, 284 F.3d at 1035 n.15. Second, Plaintiffs fail to “plead the circumstances of the control relationship with particularity.” In re Splash Tech. Holdings, Inc. Sec. Litig., No. C-99-00109-SBA, 2000 U.S. Dist. LEXIS 15369, at *83-84 (N.D. Cal. Sept. 29, 2000). Plaintiffs allege no facts showing that Mr. Nazem, the CTO, or Mr. Rosensweig, the COO, had any responsibility for financial statements or accounting. Rather, Plaintiffs rely on titles and on conclusory allegations 17 See, e.g. Ex. 5 at 31; Ex. 10 at 34; Ex. 14 at 41 Stock analysts repeated that information. See, e.g., Ex. 29 at 37-38; Ex. 31 at 77; Ex. 34 at 2; Ex. 35 at 2. Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 34 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW 25 sf-2534796 about “involvement in the day-to-day operations.” CAC ¶ 258. This is insufficient. Paracor Fin., Inc. v. GE Capital Corp., 96 F.3d 1151, 1162-63 (9th Cir. 1996); In re Metawave Commc’ns Corp. Sec. Litig., 298 F. Supp. 2d 1056, 1091 (W.D. Wash. 2003) (control-person liability not pleaded where defendant’s position was not alleged to involve revenue recognition, inventory accounting, or issuance of financial statements). IV. PLAINTIFFS FAIL TO STATE A SECTION 20A CLAIM. Plaintiffs’ claim against the Individual Defendants for contemporaneous insider trading under Section 20A (see CAC ¶¶ 260-70) fails for at least two independent reasons. First, Plaintiffs do not plead a predicate violation of the Exchange Act. VeriFone, 11 F.3d at 872. Plaintiffs also fail to plead a wrongful contemporaneous trade. Plaintiffs identify seven contemporaneous trades in the CAC, but fail to identify any specific “material nonpublic information” in the possession of any Individual Defendants at the time of those specific trades (VeriFone, 11 F.3d at 872) and plead no facts showing that they “knowingly” used that information in making the decision to sell. Johnson v. Aljian, 394 F. Supp. 2d 1184, 1198-99 (C.D. Cal. 2004), aff’d, 490 F.3d 778 (9th Cir. 2007). Plaintiffs’ Section 20A claim, therefore, fails as a matter of law. Id.; VeriFone, 11 F.3d at 872; Berger v. Ludwick, No. C-97-0728-CAL, 2000 U.S. Dist. LEXIS 12756 (N.D. Cal. Aug. 17, 2000). CONCLUSION For all of the foregoing reasons, Defendants respectfully request that this Court dismiss the CAC without leave to amend. Dated: June 20, 2008 MORRISON & FOERSTER LLP By: /s/ Judson Lobdell [e-filing signature] Attorneys for Defendants Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 35 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANTS’ MPA I/S/O MTD CAC MASTER FILE NO. CV-08-2150-CW sf-2534796 ECF ATTESTATION I, Mark R.S. Foster, am the ECF User whose ID and Password are being used to file: DEFENDANTS’ NOTICE OF MOTION AND MOTION TO DISMISS PLAINTIFFS’ CONSOLIDATED AMENDED COMPLAINT; SUPPORTING MEMORANDUM OF POINTS AND AUTHORITIES In compliance with General Order 45, X.B., I hereby attest that Judson Lobdell has concurred in this filing. Dated: June 20, 2008 MORRISON & FOERSTER LLP By:/s/ Mark R.S. Foster [e-filing signature] Case 4:08-cv-02150-CW Document 14 Filed 06/20/2008 Page 36 of 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 APP. A: DEF. STOCK SALE CHARTS MASTER FILE NO. CV-08-2150-CW sf-2532656 A-1 APPENDIX A CHARTS OF INDIVIDUAL DEFENDANT STOCK SALES∗ ∗ See Foster Decl. ¶ 40. Case 4:08-cv-02150-CW Document 14-2 Filed 06/20/2008 Page 1 of 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 APP. A: DEF. STOCK SALE CHARTS MASTER FILE NO. CV-08-2150-CW sf-2532656 A-2 C ha rt 1 D ec ke r: S ha re s So ld & S to ck P ric e B y M on th $0$5$1 0 $1 5 $2 0 $2 5 $3 0 $3 5 $4 0 $4 5 $5 0 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Stock Price -10 0, 00 0 20 0, 00 0 30 0, 00 0 40 0, 00 0 50 0, 00 0 60 0, 00 0 70 0, 00 0 80 0, 00 0 90 0, 00 0 1, 00 0, 00 0 # Shares Sold Sh ar es S ol d St oc k Pr ic e C la ss P er io d C la ss P er io d (A pr il 8, 2 00 4 - J ul y 18 , Case 4:08-cv-02150-CW Document 14-2 Filed 06/20/2008 Page 2 of 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 APP. A: DEF. STOCK SALE CHARTS MASTER FILE NO. CV-08-2150-CW sf-2532656 A-3 C ha rt 2 N az em : S ha re s So ld & S to ck P ric e B y M on th $0$5$1 0 $1 5 $2 0 $2 5 $3 0 $3 5 $4 0 $4 5 $5 0 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Stock Price -50 ,0 00 10 0, 00 0 15 0, 00 0 20 0, 00 0 25 0, 00 0 30 0, 00 0 35 0, 00 0 40 0, 00 0 45 0, 00 0 50 0, 00 0 # Shares Sold Sh ar es S ol d St oc k Pr ic e C la ss P er io d C la ss P er io d (A pr il 8, 2 00 4 - J ul y 18 , Case 4:08-cv-02150-CW Document 14-2 Filed 06/20/2008 Page 3 of 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 APP. A: DEF. STOCK SALE CHARTS MASTER FILE NO. CV-08-2150-CW sf-2532656 A-4 C ha rt 3 R os en w ei g: S ha re s So ld & S to ck P ric e B y M on th $0$5$1 0 $1 5 $2 0 $2 5 $3 0 $3 5 $4 0 $4 5 $5 0 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Stock Price -50 ,0 00 10 0, 00 0 15 0, 00 0 20 0, 00 0 25 0, 00 0 30 0, 00 0 35 0, 00 0 40 0, 00 0 45 0, 00 0 50 0, 00 0 # Shares Sold Sh ar es S ol d St oc k Pr ic e C la ss P er io d C la ss P er io d (A pr il 8, 2 00 4 - J ul y 18 , Case 4:08-cv-02150-CW Document 14-2 Filed 06/20/2008 Page 4 of 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 APP. A: DEF. STOCK SALE CHARTS MASTER FILE NO. CV-08-2150-CW sf-2532656 A-5 C ha rt 4 Se m el : S ha re s So ld & S to ck P ric e B y M on th $0$5$1 0 $1 5 $2 0 $2 5 $3 0 $3 5 $4 0 $4 5 $5 0 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Stock Price 050 0, 00 0 1, 00 0, 00 0 1, 50 0, 00 0 2, 00 0, 00 0 2, 50 0, 00 0 3, 00 0, 00 0 3, 50 0, 00 0 4, 00 0, 00 0 4, 50 0, 00 0 5, 00 0, 00 0 # Shares Sold Sh ar es S ol d S to ck P ric e C la ss P er io d C la ss P er io d (A pr il 8, 2 00 4 - J ul y 18 , s Case 4:08-cv-02150-CW Document 14-2 Filed 06/20/2008 Page 5 of 5