City of Ann Arbor Employees' Retirement System v. Accuray Incorporated et al

MOTION to Dismiss and Memorandum of Points and Authorities in Support Thereof

N.D. Cal.February 8, 2010

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’ MOTION TO DISMISS Master File No. 09-cv-03362-CW BORIS FELDMAN, State Bar No. 128838 boris.feldman@wsgr.com IGNACIO E. SALCEDA, State Bar No. 164017 isalceda@wsgr.com DIANE M. WALTERS, State Bar No. 148136 dwalters@wsgr.com DOMINIQUE-CHANTALE ALEPIN, State Bar No. 241648 dalepin@wsgr.com BRYAN J. KETROSER, State Bar No. 239105 bketroser@wsgr.com WILSON SONSINI GOODRICH & ROSATI Professional Corporation 650 Page Mill Road Palo Alto, CA 94304-1050 Telephone: (650) 493-9300 Facsimile: (650) 565-5100 Attorneys for Defendants Accuray Inc., Euan S. Thomson, Robert E. McNamara, Wade B. Hampton, Ted Tu, Wayne Wu, John R. Adler, Jr., and Robert S. Weiss UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA OAKLAND DIVISION In re ACCURAY INC. SECURITIES LITIGATION, This Document Relates To: ALL ACTIONS. ) ) ) ) ) ) ) ) ) ) ) ) ) ) Master File No. 09-cv-03362-CW CLASS ACTION DEFENDANTS’ NOTICE OF MOTION AND MOTION TO DISMISS; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF Date: None per Oct. 26, 2009 Order Before: Hon. Claudia Wilken Case4:09-cv-03362-CW Document72 Filed02/08/10 Page1 of 31 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’ MOTION TO DISMISS Master File No. 09-cv-03362-CW TABLE OF CONTENTS Page NOTICE OF MOTION AND MOTION ........................................................................................1 STATEMENT OF ISSUES (Civil L.R. 7-4(a)(3)) .........................................................................1 MEMORANDUM OF POINTS AND AUTHORITIES ................................................................1 INTRODUCTION...........................................................................................................................1 STATEMENT OF FACTS AND PROCEDURAL BACKGROUND ...........................................3 ARGUMENT ..................................................................................................................................6 I. LEGAL STANDARDS.......................................................................................................6 II. PLAINTIFFS FAIL TO PLEAD AN ACTIONABLE MISREPRESENTATION ............7 A. Plaintiffs Fail to Allege Falsity with respect to the Backlog Statements ................8 1. Registration Statement Definition of Backlog. ...........................................8 2. Change in the Definition of Backlog...........................................................9 3. “[Q]uality and makeup of backlog.” ...........................................................9 4. Reasons for the Reductions in Backlog.....................................................11 B. Plaintiffs’ Falsity Allegations Regarding Deposits Are Insufficient ....................12 1. Receipt of Deposits. ..................................................................................12 2. Recognition of Deposits as Revenue.........................................................12 C. Plaintiffs’ Falsity Allegations with respect to International Sales Also Fail ........12 III. THE FORWARD-LOOKING STATEMENTS ARE NOT ACTIONABLE...................14 A. Many of the Challenged Statements Were Forward-Looking ..............................14 B. The Company Provided Meaningful Cautionary Language .................................16 IV. PLAINTIFFS FAIL TO PLEAD A STRONG INFERENCE OF SCIENTER ................17 A. Plaintiffs Provide No Direct Evidence of Scienter................................................17 1. The Complaint Does Not Plead Facts Demonstrating Each Defendant’s Awareness of Contemporaneous Internal Information Contradicting the Challenged Public Statements. .....................................17 2. The Confidential Witnesses’ Allegations Do Not Overcome Plaintiffs’ Failure to Allege Contemporaneous Facts Known to the Defendants.................................................................................................18 Case4:09-cv-03362-CW Document72 Filed02/08/10 Page2 of 31 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 ii DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW B. Plaintiffs’ Motive Allegations Are Insufficient to Raise a Strong Inference of Scienter .............................................................................................................19 1. The Stock Sale Allegations Fail to Provide the Missing Inference of Scienter......................................................................................................19 2. The Compensation Allegations Add Little to the Analysis.......................22 3. The Company’s Share Repurchase Negates Scienter. ..............................22 C. Plaintiffs’ Reliance on the “Core Operations Inference” Is Unavailing ...............23 D. Plaintiffs Cannot Counter the Strong, Competing Inference Raised by the Repeated Voluntary Disclosures of Negative Information ...................................23 E. Plaintiffs Have Not Pleaded Corporate Scienter ...................................................24 F. The Claims Against the Outside Directors Should Be Dismissed ........................24 V. PLAINTIFFS’ “RULE 10(b)”/“RULE 10(b)(5)(1)” CLAIM IS UNINTELLIGIBLE ..........................................................................................................25 VI. PLAINTIFFS’ SECTION 20(a) CLAIM SHOULD BE DISMISSED.............................25 CONCLUSION .............................................................................................................................25 Case4:09-cv-03362-CW Document72 Filed02/08/10 Page3 of 31 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 iii DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW TABLE OF AUTHORITIES Page(s) CASES Alaska Elec. Pension Fund v. Adecco S.A., 434 F. Supp. 2d 815 (S.D. Cal. 2006), aff’d, 256 Fed. Appx. 74 (9th Cir. 2007) ............................................................................................................. 10, 18 Arthur Children’s Trust v. Keim, 994 F.2d 1390 (9th Cir. 1993)........................................................................................... 25 Berson v. Applied Signal Tech., Inc., 527 F.3d 982 (9th Cir. 2008)....................................................................................... 15, 16 Brodsky v. Yahoo! Inc., 592 F. Supp. 2d 1192 (N.D. Cal. 2008) ...................................................................... 10, 24 Brodsky v. Yahoo! Inc., 630 F. Supp. 2d 1104 (N.D. Cal. 2009) ................................................................ 12, 14, 21 Davis v. SPSS, Inc., 385 F. Supp. 2d 697 (N.D. Ill. 2005) ................................................................................ 24 Employers Teamsters Local Nos. 175 and 505 Pension Plan Trust Fund v. Clorox Co., 353 F.3d 1125 (9th Cir. 2004)..................................................................................... 14, 16 Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736 (9th Cir. 2008)............................................................................................. 24 Harris v. IVAX, 182 F.3d 799 (11th Cir. 1999)........................................................................................... 16 Howard v. Everex Sys., Inc., 228 F.3d 1057 (9th Cir. 2000)........................................................................................... 25 In re 2007 Novastar Fin., Inc., Sec. Litig., 2008 WL 2354367 (W.D. Mo. June 4, 2008), aff’d, 579 F.3d 878 (8th Cir. 2009) ............................................................................................................. 23, 24 In re Downey Sec. Litig., 2009 WL 2767670 (C.D. Cal. Aug. 21, 2009) ........................................................ 7, 11, 24 In re ESS Tech., Inc. Sec. Litig., 2004 WL 3030058 (N.D. Cal. Dec. 1, 2004) .................................................................... 16 In re Medicis Pharma. Corp. Sec. Litig., 2009 WL 4755406 (D. Ariz. Dec. 2, 2009)....................................................................... 19 In re Metawave Communications Corp. Sec. Litig., 298 F. Supp. 2d 1056 (W.D. Wash. 2003) ....................................................................... 18 In re Portal Software, Inc. Sec. Litig., 2006 WL 2385250 (N.D. Cal. Aug. 17, 2006).................................................................. 14 Case4:09-cv-03362-CW Document72 Filed02/08/10 Page4 of 31 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 iv DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW In re Rackable Sys., Inc. Sec. Litig., 2010 WL 199703 (N.D. Cal. Jan. 13, 2010) .......................................................... 9, 18, 20, 22 In re Seracare Life Scis., Inc., 2007 WL 935583 (S.D. Cal. Mar. 19, 2007)..................................................................... 13 In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999).................................................................................. 7, 19, 20, 21 In re Splash Tech. Holdings, Inc. Sec. Litig., 160 F. Supp. 2d 1059 (N.D. Cal. 2001) ............................................................................ 16 In re Tibco Software, Inc. Sec. Litig., 2006 WL 1469654 (N.D. Cal. May 25, 2006) ............................................................ 22, 24 Iron Workers Local 16 Pension Fund v. Hilb Rogal & Hobbs Co., 432 F. Supp. 2d 571 (E.D. Va. 2006)................................................................................ 20 Karacand v. Edwards, 53 F. Supp. 2d 1236 (D. Utah 1999) ................................................................................. 17 Lipton v. PathoGenesis Corp., 284 F.3d 1027 (9th Cir. 2002)..................................................................................... 21, 25 McCasland v. FormFactor, Inc., 2009 WL 2086168 (N.D. Cal. July 14, 2009) ............................................................. 18, 23 Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049 (9th Cir. 2008)................................................................................ 7, 17, 18, 20 Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993)................................................................................................. 25 Phillips v. LCI Int’l, Inc., 190 F.3d 609 (4th Cir. 1999)............................................................................................. 17 Pittleman v. Impac Mortgage Holdings, Inc., 2009 WL 648983 (C.D. Cal. Mar. 9, 2009) ...................................................................... 24 Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001)......................................................................................passim South Ferry LP, No. 2 v. Killinger, 542 F.3d 776 (9th Cir. 2008)............................................................................................. 23 Stack v. Lobo, 903 F. Supp. 1361 (N.D. Cal. 1995) ................................................................................. 24 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) .................................................................................................. 6, 7, 23 Case4:09-cv-03362-CW Document72 Filed02/08/10 Page5 of 31 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 v DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW Tripp v. IndyMac Fin. Inc., 2007 WL 4591930 (C.D. Cal. Nov. 29, 2007) .................................................................. 20 Weiss v. Amkor Techn., Inc., 527 F. Supp. 2d 938 (D. Ariz. 2007)................................................................................... 9 Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009)..................................................................................... 6, 7, 19 STATUTES 15 U.S.C. § 78u-4(b)(1) .................................................................................................................. 6 15 U.S.C. § 78u-4(b)(1)(B) ............................................................................................................. 7 15 U.S.C. § 78u-4(b)(2) ............................................................................................................ 7, 17 15 U.S.C. § 78u-4(b)(3) .................................................................................................................. 6 15 U.S.C. § 78u-5(c)(1)................................................................................................................. 14 15 U.S.C. § 78u-5(c)(1)(A) ........................................................................................................... 15 15 U.S.C. § 78u-5(c)(1)(A)(i) ....................................................................................................... 16 15 U.S.C. § 78u-5(c)(1)(B) ............................................................................................................. 7 15 U.S.C. § 78u-5(c)(2)(B)(i)........................................................................................................ 16 15 U.S.C. § 78u-5(h)(i)(1)............................................................................................................. 15 15 U.S.C. § 78u-5(h)(i)(1)(A) ....................................................................................................... 15 MISCELLANEOUS Donald E. Kieso, et al., INTERMEDIATE ACCOUNTING (10th Ed. 2001) .......................................... 4 H.R. Conf. Rep. No. 104-369, 1995 U.S.C.C.A.N. 730 (1995).................................................... 14 Case4:09-cv-03362-CW Document72 Filed02/08/10 Page6 of 31 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 1 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW NOTICE OF MOTION AND MOTION Defendants Accuray, Inc. (“Accuray” or the “Company”), Euan S. Thomson, Robert E. McNamara, Wade B. Hampton, Ted Tu, Wayne Wu, John R. Adler, Jr. and Robert S. Weiss (collectively, “Defendants”) move pursuant to the Private Securities Litigation Reform Act of 1995 (“Reform Act” or “PSLRA”), and Federal Rules of Civil Procedure 12(b)(6), 8 and 9(b), for an order dismissing the [Corrected] Consolidated Class Action Complaint (“Complaint” or “¶ _”). The Court’s October 26, 2009 Order stated that the motion would be taken under submission on the papers. Defendants respectfully believe oral argument would be appropriate. Defendants move to dismiss the Complaint on the grounds that plaintiffs have failed to satisfy the stringent pleading requirements of the Reform Act. This motion is based upon this Notice and Motion; the Memorandum of Points and Authorities; the Request for Judicial Notice; the Declaration of Diane Walters and attached exhibits; the pleadings, records, and papers filed in this action; oral argument of counsel; and any other matters properly before the Court. STATEMENT OF ISSUES (Civil L.R. 7-4(a)(3)) 1. Have plaintiffs alleged with sufficient particularity the existence of an actionable misrepresentation or omission? 2. Have plaintiffs alleged with sufficient particularity facts giving rise to a strong inference that each of the Defendants acted with scienter? 3. Have plaintiffs stated a Section 10(b) claim against certain Defendants for statements they did not make? 4. Have plaintiffs pleaded a cause of action for control person liability? MEMORANDUM OF POINTS AND AUTHORITIES INTRODUCTION Imagine that you have been diagnosed with brain cancer. You have two treatment options. Option One: the surgeon cuts your skull open and excises the tumorous portions of the brain. After recovering from surgery, you undergo prolonged treatment with chemotherapy and/or radiation. Option Two: the CyberKnife® System (“CyberKnife”), a non-invasive radiosurgery system. You go into a local hospital or out-patient center. A computer-controlled Case4:09-cv-03362-CW Document72 Filed02/08/10 Page7 of 31 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 2 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW robot delivers beams of pain-free radiation to the tumor site with pinpoint accuracy. No cutting or anesthesia. No nausea or hair loss. Little or no recovery time. Which would you prefer? Founded in 1990, Accuray develops and sells the CyberKnife, which provides patients with an alternative to traditional surgery for the treatment of tumors. In 1999, Accuray received FDA clearance for the treatment of tumors in the head and neck, and in August 2001, it received clearance to treat tumors anywhere in the body where radiation treatment is indicated. Accuray’s growth accelerated dramatically in the ensuing years. In the two years prior to its February 2007 initial public offering (“IPO”), Accuray’s revenues increased 136%, from $22.4 million in fiscal 2005 to $52.9 million in fiscal 2006. Revenues continued to increase following the IPO, with fiscal 2007 revenues increasing to $140.5 million (a 166% increase over fiscal 2006) and fiscal 2008 revenues increasing to $210.4 million (a 50% increase over fiscal 2007). Although revenues were growing, Accuray encountered difficulties as a newly public company in a difficult economic and regulatory environment. As with any new medical device or treatment, CyberKnife sales are affected by many factors outside the Company’s control, including, among others, FDA rules and regulations, a labyrinth of federal, state and third party payor requirements regarding insurance coverage and reimbursement, and market acceptance. In addition, given the several million dollar cost of each CyberKnife, the ability of customers to obtain financing is critical. Accuray provided detailed and extensive warnings regarding these risks in the IPO Registration Statement, subsequent SEC filings and other public statements. Unfortunately, certain of the identified risks became realities. The uncertain economic environment, and in particular, tightening credit markets, began to impact customers’ ability to obtain financing. In addition, uncertainty regarding proposed regulatory changes led to a slowdown in Accuray’s free-standing center market segment. The Complaint seeks to transform the difficulties that Accuray encountered into securities fraud. The gravamen of the Complaint is that during the Class Period, February 7, 2007 through August 19, 2008, Accuray and seven of its current and former officers and directors deliberately misrepresented the Company’s financial condition, and in particular, its backlog, as part of a scheme to artificially inflate the price of Accuray’s stock to allow certain of Case4:09-cv-03362-CW Document72 Filed02/08/10 Page8 of 31 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 3 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW the individual defendants to sell stock at inflated prices. Plaintiffs’ allegations suffer from numerous fatal defects. First, plaintiffs fail to plead sufficiently the existence of a material misrepresentation or omission – an essential element of a Section 10(b) claim. The Reform Act requires plaintiffs to plead, with particularity, each statement alleged to have been misleading, the reasons why the statement was misleading, and all facts on which the allegations are based. Although plaintiffs cite a plethora of public statements, they fail to plead the requisite particularized facts necessary to establish falsity. Second, many of the challenged statements were forward-looking in nature and accompanied by meaningful risk disclosures. Such statements are immunized from liability under the Safe Harbor for forward-looking statements. As the Complaint and its exhibits reveal, Accuray repeatedly cautioned investors about the potential negative impact of financing difficulties and proposed regulatory changes and promptly disclosed negative information. Third, plaintiffs fail to plead particularized facts giving rise to a strong inference of scienter as to any of the Defendants. Indeed, plaintiffs do not plead any facts indicating what each individual defendant allegedly knew and when. Unable to plead facts to establish scienter directly, plaintiffs instead rely on “motive and opportunity” stock sale and executive compensation allegations. Plaintiffs’ motive allegations, however, are equally deficient and fail to provide the requisite strong inference of fraudulent intent. In sum, plaintiffs’ allegations fail to withstand the formidable pleading requirements of the Reform Act, and the Complaint should therefore be dismissed. STATEMENT OF FACTS AND PROCEDURAL BACKGROUND Founded in 1990, Accuray designs, develops, and sells the CyberKnife, an image-guided robotic radiosurgery system designed to treat solid tumors. ¶ 2; see Ex. 1 to Plaintiffs’ Appendix of Exhibits to the Complaint (“Pl. Ex. _”), at 1. The CyberKnife received clearance from the Food and Drug Administration (“FDA”) for the treatment of tumors in the head and neck in July 1999, and in August 2001, it received clearance to treat tumors anywhere in the body where radiation treatment is indicated. Pl. Ex. 1 at 1. Key benefits of the CyberKnife include: (1) it can be used to treat tumors that cannot be treated through surgery due to their location, number, Case4:09-cv-03362-CW Document72 Filed02/08/10 Page9 of 31 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 4 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW size, shape or proximity to vital organs, or because of the age or health of the patient; (2) the procedure can be performed on an outpatient basis and does not involve any cutting or anesthesia; and (3) the procedure requires little or no recovery time. Id. at 3. Each CyberKnife costs several million dollars. ¶ 2. The sales and installation cycle is lengthy and often requires well over one year from negotiations to installation. Pl. Ex. 1 at 42. In the years preceding its IPO, Accuray grew rapidly, with revenues increasing to $52.9 million in fiscal 2006 (“FY06”) from $22.4 million in FY05, an increase of 136%. Pl. Ex. 1 at F-4. On February 7, 2007, Accuray conducted its IPO. ¶ 50. In its Registration Statement, Accuray provided extensive disclosures detailing the risks related to its business. Among other risk factors, Accuray disclosed the following: Because of the high unit price of the CyberKnife system, and the relatively small number of units installed each quarter, each installation of a CyberKnife system can represent a significant component of our revenue for a particular quarter. Therefore, if we do not install a CyberKnife system when anticipated, our operating results may vary significantly and our stock price may be materially harmed. * * * Events beyond our control may delay installation and the satisfaction of contingencies required to receive cash inflows and recognize revenue, such as: . . . customer funding or financing delay. . . . Therefore, delays in the installation of CyberKnife systems or customer cancellations would adversely affect our cash flows and revenue, which would harm our results of operations and could cause our stock price to decline. * * * If third-party payors do not continue to provide sufficient coverage and reimbursement to healthcare providers for use of the CyberKnife system, our revenue would be adversely affected. Pl. Ex. 1 at 12-13 (emphasis added); see id. at 11-30. Accuray also disclosed the amount of business it had in backlog, and explained that the figure included only “deferred revenue and future payments that our customers are contractually committed to make, but which we have not yet received.” ¶ 6; Pl. Ex. 1 at 44.1 Accuray further cautioned that it “may be unable to convert 1 Backlog typically is not reported in corporate financial statements and is not subject to Generally Accepted Accounting Principles (“GAAP”). See Donald E. Kieso, et al., INTERMEDIATE ACCOUNTING, at 4 (10th Ed. 2001), attached as Ex. H to the Declaration of Diane Walters (“Walters Decl., Ex. _”). Thus, companies have discretion in selecting a methodology to calculate backlog. Case4:09-cv-03362-CW Document72 Filed02/08/10 Page10 of 31 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 5 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW all of this backlog into recognized revenue due to factors outside our control.” Pl. Ex. 1 at 44.2 On May 1, 2007, in a press release concerning its 3Q07 results, Accuray disclosed that it would begin including contracts containing contingencies in backlog. ¶¶ 11, 61. On August 16, 2007, Accuray announced its FY07 financial results (¶ 77), reporting revenues of $140.5 million, a 166% increase over FY06. Pl. Ex. 11. During a call with analysts the same day, Accuray provided revenue guidance for FY08 of $250-270 million. ¶ 78. On September 4, 2007, Accuray filed its SEC Form 10-K for FY07 (¶ 89; Pl. Ex. 17 at 30), which provided detailed risk disclosures and also specifically cautioned that: in connection with the release of proposed Medicare reimbursement rates for calendar 2008, CMS has also proposed significant amendments to the regulations under the federal Ethics in Patient Referrals Act, which is more commonly known as the Stark Law. These proposed regulations would, among other things, impose additional limitations on the ability of physicians to refer patients to medical facilities in which the physician has an ownership interest for treatment. Physician owned entities have increasingly become involved in the acquisition of medical technologies, including the CyberKnife. In many cases, these entities enter into arrangements with hospitals that bill Medicare for the furnishing of medical services, and the physician owners are among the physicians who refer patients to the entity for services. The proposed regulations, if adopted, would limit these arrangements and could require the restructuring of existing arrangements between physician owned entities and hospitals and may also discourage physicians from participating in the acquisition and ownership of medical technologies. As a result, these proposed regulations, if enacted, could have an adverse impact on our product sales and therefore on our business and results of operations. On November 7, 2007, Accuray issued a press release announcing record quarterly revenues of $48.6 million for 1Q08, representing a 48% increase over 1Q07. Pl. Ex. 20. On January 30, 2008, Accuray announced revenues of $52 million for 2Q08, representing a 98% increase over 2Q07 revenues. ¶ 105; Pl. Ex. 26. Accuray, however, cautioned that, due to economic conditions, and specifically the tightening credit markets, it was adjusting its revenue guidance for FY08 to $210-230 million, which would represent revenue growth of 50-64% over FY07. Pl. Ex. 26. During an analyst conference call that same day, Accuray disclosed that a number of contracts were being removed from backlog and explained that the freestanding center 2 Accuray continued to provide detailed risk disclosures in its quarterly and annual filings throughout the Class Period. See, e.g., Pl. Exs. 3 at 29-46, 17 at 26-46, 25 at 30-47. Case4:09-cv-03362-CW Document72 Filed02/08/10 Page11 of 31 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 6 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW market segment had been negatively impacted by proposed regulatory changes and tightening credit markets. Pl. Ex. 27 at 4-5. On April 29, 2008, Accuray announced revenues of $58.8 million for 3Q08, representing a 57% increase over 3Q07. ¶ 113; Pl. Ex. 32. Accuray also disclosed that additional contracts were being removed from backlog due to, among other factors, the tightening economy and uncertain regulatory environment. Pl. Ex. 33. On August 19, 2008, Accuray announced its 4Q08 and FY08 results. ¶ 119. Accuray reported FY08 revenues of $210.4 million, a 50% increase over FY07. Id. Accuray also disclosed that additional contracts were being removed from backlog due to various factors, including proposed regulatory changes, the general economy and the credit environment. ¶ 120. Nearly a full year later, on July 22, 2009, the first of three class action complaints was filed in this Court challenging Accuray’s statements regarding backlog. The Court consolidated the actions, and on December 17, 2009, plaintiffs filed the instant Complaint. The Complaint asserts causes of action for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and generally alleges that the Defendants made false and misleading statements regarding Accuray’s business and financial performance. ARGUMENT I. LEGAL STANDARDS To state a Section 10(b) claim, a plaintiff must plead: “‘(1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss.’” Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009) (citation omitted). The Reform Act imposes rigorous pleading requirements for plaintiffs alleging securities fraud and provides that complaints that do not satisfy these requirements “shall” be dismissed. 15 U.S.C. § 78u-4(b)(1)-(3); see Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007). Among other requirements, 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 … state with particularity all facts Case4:09-cv-03362-CW Document72 Filed02/08/10 Page12 of 31 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 7 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1)(B). Plaintiffs also must plead particularized facts “evidencing scienter, i.e., the defendant’s intention ‘to deceive, manipulate, or defraud.’” Tellabs, 551 U.S. at 313 (citation omitted); 15 U.S.C. § 78u-4(b)(2) (plaintiffs must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”). In the Ninth Circuit, the requisite mental state for a Section 10(b) claim is “deliberately reckless or conscious misconduct.” In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 974 (9th Cir. 1999) (“SGI”). With respect to claims based on “forward-looking” statements, actual knowledge of falsity is the required state of mind. 15 U.S.C. § 78u-5(c)(1)(B). Where, as here, plaintiffs rely on statements from confidential witnesses (“CWs”) to plead their claims, they “must pass two hurdles to satisfy the PSLRA[:]” (1) “the confidential witnesses whose statements are introduced to establish scienter must be described with sufficient particularity to establish their reliability and personal knowledge;” and (2) “those statements which are reported by confidential witnesses with sufficient reliability and personal knowledge must themselves be indicative of scienter.” Zucco, 552 F.3d at 995. II. PLAINTIFFS FAIL TO PLEAD AN ACTIONABLE MISREPRESENTATION Plaintiffs allege four general categories of purportedly false or misleading statements: (1) “the definition, quality, and makeup of backlog;” (2) “the receipt of and accounting for customer deposits;” (3) “the Company’s revenue and earnings forecasts for FY08;” and (4) “revenue recognition processes on CyberKnife system sales to international customers.” ¶ 5.3 “A litany of alleged false statements, unaccompanied by the pleading of specific facts indicating why those statements were false, does not meet [the PSLRA] standard.” Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1070 (9th Cir. 2008). Rather, “facts supporting falsity must be pled with particularity, including the ‘who, what, when, where, and how[.]’” In re Downey Sec. Litig., 2009 WL 2767670, at *4 (C.D. Cal. Aug. 21, 2009) (citation omitted). As set forth below, because plaintiffs fail to plead with particularity material misrepresentations or omissions, the Complaint fails to state a claim under Section 10(b). 3 Forward-looking statements regarding (1) and (3) are discussed in Section III, infra. Case4:09-cv-03362-CW Document72 Filed02/08/10 Page13 of 31 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 8 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW A. Plaintiffs Fail to Allege Falsity with respect to the Backlog Statements Most of the statements challenged in the Complaint pertain to the manner in which the Company defined and reported backlog during the Class Period. Plaintiffs’ allegations – which rely heavily on CWs – fail to meet the stringent requirements of the Reform Act. 1. Registration Statement Definition of Backlog. Plaintiffs claim that the “definition” of backlog used in the Registration Statement and subsequent SEC filings was false and misleading (¶¶ 5, 6, 53) because, although Accuray represented that “backlog consisted of CyberKnife sales and revenues with no contingencies, that customers were contractually committed to make” (¶ 7), Accuray had switched from Letters of Intent (“LOIs”) to “Term Agreements” which “contained language allowing for contingencies to be self-satisfying[.]” ¶ 68. Plaintiffs further allege that self-satisfying contingencies resulted in backlog being inflated because the “customers need not do anything for a contingency to be satisfied, resulting . . . [in] deals being reported as non-contingent or having a substantially high probability of being converted into revenue when this was not the case.” ¶ 68.4 Plaintiffs appear, however, to be mixing concepts, as the challenged statements do not make any reference to “LOIs” or “Term Agreements,” nor do Plaintiffs explain how “self-satisfying” contingencies made conversion to revenue less likely. Instead, plaintiffs rely heavily on opinions purportedly offered by CW1, allegedly a regional sales director from 2004 to 2007. ¶¶ 43(a), 68(a). CW1’s personal opinion regarding the use of “Term Agreements,” however, has no bearing on the accuracy of the backlog definition. CW1 does not purport to have been involved in the development of the definition, nor does CW1 claim to have been involved in determining which deals would be included in backlog. Moreover, CW1 concededly had no communications with executives regarding the use of Term Agreements. ¶ 68(a) (“CW1 said that the Company executives did not explain to sales staff why this change was being made[.]”). CW1’s opinion that the language of the Term 4 Plaintiffs also contend that the inclusion of contracts with self-satisfying contingencies in backlog after May 1, 2007 rendered statements regarding backlog false and misleading. See e.g. ¶ 104. For the same reasons as articulated below, this claim also fails. Case4:09-cv-03362-CW Document72 Filed02/08/10 Page14 of 31 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 9 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW Agreements “seemed geared to allow far more speculative, contingent deals to be added to the order backlog” (id.) is nothing more than speculation. See, e.g., Weiss v. Amkor Techn., Inc., 527 F. Supp. 2d 938, 954 (D. Ariz. 2007) (finding CW allegation that “inflated forecasts occurred because senior management failed to implement a centralized and effective forecasting system” insufficient because it was “simply CW1’s purported opinion”). In any event, plaintiffs’ allegations regarding “self-satisfying contingencies” make no sense. The use of agreements with self-satisfying contingencies – a practice that is far from unusual – does not render the statement that backlog included only non-contingent contracts false. If the contingencies in a contract were satisfied, whether by act or time, and the customer was thus legally obligated to purchase a CyberKnife, the contract would be “non-contingent.” 2. Change in the Definition of Backlog. Plaintiffs further contend that Accuray’s statements on May 1, 2007 regarding the decision to now include contingent contracts in backlog (e.g., ¶¶ 60-62) were false and misleading because Accuray “falsely stated that the change in the definition of backlog was driven by the increased demand for the CyberKnife and new contracts with customers[.]” ¶ 62.5 Nowhere in the Complaint, however, do plaintiffs provide particularized facts demonstrating that demand for the CyberKnife was not increasing in May 2007 or that the number of new contracts was not growing. Nor can plaintiffs plead falsity as to this and later statements reiterating the new definition based on Accuray’s subsequent reductions in backlog or the later decision to exclude contingent contracts from backlog. ¶ 128. As this Court recently explained, “[p]laintiffs cannot simply rely on a ‘fraud by hindsight’ theory to demonstrate falsity.” In re Rackable Sys., Inc. Sec. Litig., 2010 WL 199703, at *5 (N.D. Cal. Jan. 13, 2010) (citation omitted). 3. “[Q]uality and makeup of backlog.” Plaintiffs also challenge a number of statements regarding what plaintiffs characterize as 5 To the extent that plaintiffs also allege that the statements regarding the definitional change were misleading because Accuray “falsely told investors that the new backlog figures were the best indicator of future revenue results” (¶¶ 60, 62), such statements are clearly forward-looking and thus inactionable under the Reform Act’s Safe Harbor. See infra at Section III. Case4:09-cv-03362-CW Document72 Filed02/08/10 Page15 of 31 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 10 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW the “quality and makeup” of backlog and allege that they were false and misleading because backlog included contracts for which Accuray had not received a deposit and contracts that had been “cancelled” or were “suspect.” E.g., ¶¶ 5, 6, 13-14, 60, 74, 80, 87. With respect to the deposit claim, as explained infra at 12, the allegations are based on a mischaracterization of Accuray’s statements and also fail to show that depositless deals were inherently “suspect.” Likewise, plaintiffs’ allegations regarding “cancelled” contracts lack the requisite specificity. Plaintiffs again rely on CW1, who allegedly reported that: the time between Accuray receiving notice that a customer wanted to cancel and the time that Accuray would actually remove the items from backlog depended on how much the Company needed the deal in backlog. The Company would receive letters from customers requesting that Accuray de-book a deal and the Company would not remove the deal from backlog, sometimes for months. ¶ 74. These allegations fail to support plaintiffs’ claims for several reasons. As explained supra at 8-9, plaintiffs do not allege that CW1, a regional sales director, had any involvement in corporate level backlog decisions. The allegation is also vague as to time and as to the purported impact on backlog; it is unclear how the alleged cancellations impacted the figures or definitions reported by the Company. Cf. Alaska Elec. Pension Fund v. Adecco S.A., 434 F. Supp. 2d 815, 828 (S.D. Cal. 2006), aff’d, 256 Fed. Appx. 74 (9th Cir. 2007) (noting failure of CWs to “provide any allegations quantifying the impact of the[] alleged improprieties on [the company’s] revenues, or . . . year-end financial results”). More importantly, CW1 left the Company in 2007 (¶ 43(a)) and thus was not even employed at Accuray for much, if not most, of the Class Period. See Brodsky v. Yahoo! Inc., 592 F. Supp. 2d 1192, 1200-01 (N.D. Cal. 2008) (“Yahoo! I”) (where class period extended until 2006 but CW stopped working at company in 2004, the “temporal gap belies the credibility of Plaintiffs’ allegation”). CW5’s allegations also add little to the analysis. CW5, allegedly a Director of Marketing and Placement, reported that cancelled orders were not “de-book[ed]” if the cancellation was shortly before the end of the quarter and reported seeing cancelled orders in a “list of pending installations.” ¶ 74(b). Plaintiffs, however, fail to specify how CW5, as a marketing employee, would have had access to corporate backlog reports or how a “list of pending installations” and “de-book[ings]” bore on the figures reported by Accuray. See supra at 10. CW2’s information Case4:09-cv-03362-CW Document72 Filed02/08/10 Page16 of 31 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 11 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW is even weaker as it concededly is based on purportedly “hear[ing] that the Company would delay taking a sale off the books even after a customer would ask to have it cancelled, resulting in inflated backlog figures.” ¶ 74(c) (emphasis added); Downey, 2009 WL 2767670, at *9 (“[T]he statements of a confidential witness are disregarded if lacking in specificity or based on hearsay, rumor, or speculation.”). Thus, the allegations regarding cancelled contracts are insufficient to plead falsity. Plaintiffs further contend that backlog was inflated because it included “suspect” contracts that did not have a high probability of being converted into revenue. ¶ 73. Once again, however, the CW allegations lack specificity and are based on speculation and rumor as opposed to personal knowledge. E.g., ¶ 73(f) (“CW5 . . . stated that Nash was the salesperson known for having the highest percentage of cancelled contracts[.]”); ¶ 73(d) (reporting hearsay of Snarsky); ¶ 73(l) (“CW9 was told by employees”) (emphasis added); see supra at 10-11.6 Likewise, the personal opinions of CWs as to whether and which contingent contracts should have been included in backlog cannot substitute for particularized facts. For example, CW11 opines that “no contingent orders of any kind should have been included in the backlog.” ¶ 73(m). CW11’s personal opinion, however, fails to demonstrate that the reported numbers were false when made. See supra at 8-9. 4. Reasons for the Reductions in Backlog. Plaintiffs allege that the “reason for the withdrawal of millions from backlog” was not “associated with the tightening credit markets,” as Defendants indicated, but rather was because “backlog was full of deals with no real likelihood of ever resulting in a system install[.]” ¶¶ 105- 06. As explained supra at 9-11, however, plaintiffs fail to plead particularized facts supporting this contention. Moreover, plaintiffs fail to allege facts showing that the tightening credit market did not affect Accuray’s business. Indeed, such a contention defies credulity, given the sweeping impact that the credit crisis has had on companies worldwide. 6 The Complaint also fails to specify how CW1 and CW11’s statements regarding the issues with the Oncuris deal affected reported backlog. ¶ 73(h)-(i). Case4:09-cv-03362-CW Document72 Filed02/08/10 Page17 of 31 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 12 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW B. Plaintiffs’ Falsity Allegations Regarding Deposits Are Insufficient 1. Receipt of Deposits. Plaintiffs allege that the Registration Statement falsely stated that: [Accuray] typically receive[s] a deposit at the time the CyberKnife system purchase contract is executed, and the remaining balance for the purchase of the CyberKnife system upon installation[.] ¶ 8; see id. ¶ 70. Plaintiffs allege that this was false because Accuray did not always receive a deposit. ¶ 70. Merely alleging that Accuray did not receive deposits for all deals, however, does not demonstrate the falsity of the challenged statement. To the contrary, as plaintiffs’ allegations make clear, Accuray simply stated that a deposit “typically” was received; it did not state that a deposit was received in every instance. See ¶ 8. 2. Recognition of Deposits as Revenue. Plaintiffs further contend that the Registration Statement falsely stated that: [i]n the event that a customer does not, for any of the reasons above or other reasons, proceed with installation of the system after entering into a purchase contract, we would only recognize the deposit portion of the purchase price as revenue. . . . ¶ 8; see id. ¶ 70. Plaintiffs allege that this was false because “deposits were almost always refunded back to the customers in the event that customers cancelled the contracts.” ¶ 70. This statement, however, says nothing about whether Accuray had a policy of always keeping deposits upon cancellation. To the contrary, the statement simply clarifies that where a deposit was kept after cancellation, Accuray would recognize it as revenue. ¶ 8. Regardless, the allegations are once again based on information provided by CWs (CW1, CW10, CW11), none of whom is alleged to have been in a finance or accounting position. ¶ 70. Thus, none of the CWs can speak to revenue recognition practices. See, e.g., Brodsky v. Yahoo! Inc., 630 F. Supp. 2d 1104, 1115 (N.D. Cal. 2009) (“Yahoo! II”) (“Plaintiffs must describe with particularity the CW’s personal knowledge of [the Company’s] revenue recognition process.”). C. Plaintiffs’ Falsity Allegations with respect to International Sales Also Fail Plaintiffs also challenge statements in the Registration Statement pertaining to recognition of revenue for international sales. Plaintiffs allege that the statement that Accuray Case4:09-cv-03362-CW Document72 Filed02/08/10 Page18 of 31 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 13 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW “typically recognized revenue when the system is delivered to the end user’s site” (¶ 55) was false and misleading because Accuray actually recognized revenue upon shipment to the distributor (as opposed to the end-user). ¶ 95. In support of this contention, plaintiffs point only to a statement made by Robert McNamara during a conference call on November 7, 2007, which plaintiffs claim “revealed” the truth regarding international sales revenue recognition: [i]t kind of depends – it depends whether our distributor has the capability of installing, or as part of the contract, we are meant to install it. If we are meant to install it then we have to install it before we recognize revenue. If the distributor has the capability to install or we’ve fulfilled sort of our obligation, if you will, then we would recognize revenue. So in some cases, we would recognize it upon shipment, but it really depends on that particular distributor and their capabilities. Typically, it is a ship through to the customer though. Pl. Ex. 21 at 14. This is hardly a “revelation” and certainly does not negate Accuray’s prior statements. Mr. McNamara simply stated the obvious: revenue recognition depended on the terms of the contract. If the contract required Accuray to install the product, revenue could only be recognized upon installation. If Accuray’s contractual obligation was limited to shipping the system to the distributor, revenue could be recognized upon shipment. The statement that revenue was “typically” recognized upon delivery to the end user does not preclude recognition upon shipment to the distributor where the contract specified that Accuray’s obligations terminated upon shipment. Because the statement by Mr. McNamara is not inconsistent with the prior representation by Accuray, plaintiffs have failed to demonstrate falsity. Ronconi v. Larkin, 253 F.3d 423, 434 (9th Cir. 2001) (“The circumstances are not inconsistent with the statements so as to show that the statements must have been false or misleading when made.”). In any event, plaintiffs fail to allege even the basic details of accounting fraud, including, among others, the amounts by which the financials purportedly were overstated, the dates of the transactions, or the identity of the individuals involved. See, e.g., In re Seracare Life Scis., Inc., 2007 WL 935583, at *8 (S.D. Cal. Mar. 19, 2007) (finding CWs’ allegations that “[the company] habitually shipped products out before customers wanted the product at the end of quarters so that they could recognize revenue during that quarter” insufficient “because they fail to allege the specific products that were involved . . . when they were shipped, how much revenue was recorded on [the] financial statements . . . and how [it] violated GAAP”). Nor do plaintiffs Case4:09-cv-03362-CW Document72 Filed02/08/10 Page19 of 31 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 14 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW allege – as they must – the cited CWs’ (¶ 99) “roles in [the] revenue recognition process and that they had personal knowledge of Defendants’ accounting decisions.” Yahoo! II, 630 F. Supp. 2d at 1114. Plaintiffs’ revenue recognition allegations thus fail to withstand scrutiny. III. THE FORWARD-LOOKING STATEMENTS ARE NOT ACTIONABLE The Complaint challenges three categories of forward-looking statements: (a) FY08 revenue projections;7 (b) statements concerning the likelihood that backlog would be converted to revenue; and (c) publicly announced backlog figures. The “Safe Harbor” immunizes forward- looking statements if they are either (i) identified as forward-looking and accompanied by meaningful cautionary language “or” (ii) made without actual knowledge of falsity. 15 U.S.C. § 78u-5(c)(1) (emphasis added).8 The provision is in the disjunctive; thus, protection is not lost merely because a complaint alleges the defendants knew their statements were false: “[t]he first prong of the safe harbor requires courts to examine only the cautionary statement accompanying the forward-looking statement. Courts should not examine the state of mind of the person making the statement.” H.R. Conf. Rep. No. 104-369, at 44, 1995 U.S.C.C.A.N. 730 (1995).9 Where, as here, the challenged forward-looking statements were accompanied by meaningful cautionary statements, they cannot give rise to liability under the first prong of the Safe Harbor. The forward-looking statements are also separately immunized under the second prong, as plaintiffs fail to plead facts showing actual knowledge. See infra at 17-19, 24. A. Many of the Challenged Statements Were Forward-Looking Forward-looking statements include: (A) “a projection of revenues . . . or other financial 7 Although plaintiffs also allege that Defendants provided false and misleading earnings guidance, a review of the cited documents reveals that Defendants did not give any earnings guidance, thus the non-existent earnings guidance could not have been false or misleading. See, e.g., Pl. Ex. 12 at 6 (“We are not giving earnings guidance for FY ’08 at this time[.]”). 8 The Safe Harbor effectively codified the judicially created “bespeaks caution” doctrine, which also protects forward-looking statements accompanied by cautionary language. See Employers Teamsters Local Nos. 175 and 505 Pension Plan Trust Fund v. Clorox Co., 353 F.3d 1125, 1132 (9th Cir. 2004). Defendants also seek dismissal pursuant to this doctrine. 9 See In re Portal Software, Inc. Sec. Litig., 2006 WL 2385250, at *12 (N.D. Cal. Aug. 17, 2006) (“‘[I]f a statement is accompanied by meaningful cautionary language, the defendants’ state of mind is irrelevant.’”) (citation omitted). Case4:09-cv-03362-CW Document72 Filed02/08/10 Page20 of 31 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 15 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW items;” (B) “the plans and objectives of management for future operations;” (C) “a statement of future economic performance;” and (D) “any statement of the assumptions underlying or relating to any statement described in subparagraph (A), (B), or (C).” 15 U.S.C. § 78u-5(h)(i)(1). The challenged FY08 revenue forecast10 clearly is “a projection of revenues.” 15 U.S.C. § 78u-5(h)(i)(1)(A).11 Likewise, Accuray’s statements that it believed there was a “substantially high probability” of converting the contingent contracts in backlog into future revenue,12 as well as statements that it was “confident” or “believed” that 90% of the total backlog would ultimately be converted to revenue,13 were forward-looking since they contained predictions about the future. 15 U.S.C. § 78u-5(c)(1)(A).14 Accuray’s statements concerning its backlog figures15 were forward-looking for similar reasons. Indeed, plaintiffs’ own Complaint claims that the backlog figures were interpreted by investors as predictions of the future. See, e.g., ¶ 30 (“The Company’s reported backlog was . . . the metric that the Company used to measure . . . future financial performance.”).16 10 ¶ 88; see also id. ¶¶ 16, 20, 78, 85, 93, 97, 106. 11 Accuray also identified these statements as forward-looking in its public statements. See, e.g., Pl. Ex. 12 at 2 (“I need to remind you that, except for historical information, the matters presented in this conference call, including statements as to financial guidance . . . are forward- looking statements and within the meaning of the Safe Harbor[.]”); Pl. Ex. 20. 12 E.g., ¶¶ 6-7, 11, 16, 26, 61, 62, 66, 68, 77-78, 87, 93, 103, 105, 119, 120. 13 E.g., ¶¶ 14, 16, 31, 62, 68, 76, 78. 14 The statements were also specifically identified as forward-looking in press releases, SEC filings and conference calls. See, e.g., note 11, supra. 15 E.g., ¶¶ 11, 13, 26, 60-61, 64, 77-79, 84, 87, 93-94, 96-97, 100, 105, 115. 16 Berson v. Applied Signal Tech., Inc., 527 F.3d 982 (9th Cir. 2008), is not to the contrary. Plaintiffs in Berson alleged that Applied Signal’s statements regarding its backlog were rendered misleading by the failure to disclose that it had received “stop-work orders” on orders it included in backlog. Id. at 984. The defendants argued that the statements about backlog were forward- looking. Id. at 990. The company, however, had explicitly stated that its backlog was “subject only to the cancellation and modification provisions contained in our contracts.” Id. at 985-86 (emphasis added). In holding that the statements were not forward-looking, Berson found that, “as Applied Signal uses the term, ‘backlog’ isn’t a ‘projection’ of earnings or a ‘statement’ about ‘future economic performance,’” but was instead analogous to accounts receivable in that it “represents Applied Signal’s contractual entitlement to perform certain work[.]” Id. at 990 (emphasis added; citation omitted). Unlike Applied Signal, Accuray disclosed the inclusion of “contingent” contracts in its backlog, based on its estimation of whether or not those contracts would be converted to revenue in the future. Thus, as Accuray used the term, backlog was a (continued...) Case4:09-cv-03362-CW Document72 Filed02/08/10 Page21 of 31 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 16 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW A statement’s use of the present, past, or future tense does not determine whether it is forward-looking; rather, the salient inquiry is whether truth or falsity can be discerned until some point after the statement is made. See, e.g., Harris v. IVAX, 182 F.3d 799, 805 (11th Cir. 1999); In re Splash Tech. Holdings, Inc. Sec. Litig., 160 F. Supp. 2d 1059, 1067-68 (N.D. Cal. 2001). Here, Accuray’s actual realization of revenue from backlog could not be determined until long after those statements were made.17 B. The Company Provided Meaningful Cautionary Language To qualify for the Safe Harbor, a defendant must also identify “important factors that could cause actual results to differ materially from those in the forward-looking statements.” 15 U.S.C. § 78u-5(c)(1)(A)(i). A company need not list all important factors or even the particular factor that caused the forward-looking statement to be an inaccurate prediction. See, e.g., Clorox, 353 F.3d at 1133; IVAX, 182 F.3d at 807. Accuray repeatedly warned that its results could differ from its forward-looking statements.18 Lengthy risk disclosures in SEC filings identified specific risks that directly related to the forward-looking statements. See, e.g., Pl. Ex. 17 at 26-44; Pl. Ex. 25 at 30-45. Indeed, although these disclosures need not have warned of the precise risks that came to pass for the (...continued from previous page) projection. See Pl. Ex. 17 at 58 (defining contingent contracts as those that have a “substantially high probability” of being converted into revenue). Indeed, Accuray further disclosed to its investors that on a quarterly basis, it would review “whether customer engagement and progress toward satisfaction of contingencies warrants continued inclusion of the contract within backlog.” Id. (emphasis added). Where plaintiffs in Berson contended that the backlog figure was a present figure that was falsely represented, here plaintiffs argue that Defendants’ projection of future revenue to be achieved from backlog was false. 17 Even if the figures were viewed as “mixed” statements consisting of both historical and forward-looking information, the Safe Harbor would apply. See, e.g., IVAX, 182 F.3d at 806 (“[W]hile the statute does not tell us exactly what to do with a mixed statement, extrinsic sources of congressional intent point strongly toward treating the entire list as forward-looking.”). 18 See, e.g., Pl. Ex. 11 at 4 (identifying specific factors and referring investors to the detailed risk disclosures in the Form 10-Q); Pl. Ex. 12 at 2-3; Pl. Ex. 20. Risk disclosures can be incorporated by reference. See, e.g., In re ESS Tech., Inc. Sec. Litig., 2004 WL 3030058, at *9 (N.D. Cal. Dec. 1, 2004) (applying safe harbor where press releases directed readers to SEC filings containing cautionary language); Clorox, 353 F.3d at 1133 (oral forward-looking statements do “not require that the cautions physically accompany oral statements”) (citing 15 U.S.C. § 78u-5(c)(2)(B)(i)). Case4:09-cv-03362-CW Document72 Filed02/08/10 Page22 of 31 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 17 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW Safe Harbor to apply, they did so here. For instance, Accuray warned that it “may be unable to convert all of this backlog into recognized revenue due to factors outside our control[.]” Pl. Ex. 17 at 59; Pl. Ex. 25 at 23. Accuray explained that “customer funding [and] financing delay” were among “[e]vents beyond our control [that] may delay installation and the satisfaction of contingencies required to receive cash inflows and recognize revenue[.]” Pl. Ex. 17 at 28; Pl. Ex. 25 at 32. Accuray also disclosed that “[c]ontingencies associated with contingent contracts that are included within backlog may include . . . establishment of financing and legal entities by purchasers of systems.” Pl. Ex. 17 at 58. Accuray further cautioned that its results could “vary significantly” if it was unable to “install a CyberKnife system when anticipated” due to “a change in a customer’s financial condition or ability to obtain financing.” Pl. Ex. 17 at 27-28; Pl. Ex. 25 at 31-32. Thus, the forward-looking statements are protected by the Safe Harbor. IV. PLAINTIFFS FAIL TO PLEAD A STRONG INFERENCE OF SCIENTER As an initial matter, plaintiffs cannot show scienter where, as here, they fail to plead falsity, because “a fortiori they have not established that defendants knew those statements were false.” Karacand v. Edwards, 53 F. Supp. 2d 1236, 1252 (D. Utah 1999); accord Phillips v. LCI Int’l, Inc., 190 F.3d 609, 621 (4th Cir. 1999). Even assuming that plaintiffs had sufficiently pleaded falsity, plaintiffs’ scienter allegations are deficient. The Reform Act requires plaintiffs to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2) (emphasis added). Courts “must consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs.” Metzler, 540 F.3d at 1061 (citation omitted). A. Plaintiffs Provide No Direct Evidence of Scienter 1. The Complaint Does Not Plead Facts Demonstrating Each Defendant’s Awareness of Contemporaneous Internal Information Contradicting the Challenged Public Statements. To plead scienter, “the complaint must contain allegations of specific contemporaneous statements or conditions that demonstrate the intentional or the deliberately reckless false or misleading nature of the statements when made.” Ronconi, 253 F.3d at 432 (emphasis added; citation omitted); Metzler, 540 F.3d at 1066 (same). Plaintiffs fail to plead facts identifying Case4:09-cv-03362-CW Document72 Filed02/08/10 Page23 of 31 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 18 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW contemporaneous material information known to any Defendant that contradicted public statements at the time they were made. Plaintiffs’ failure to plead such details is fatal to their claim. See, e.g., Alaska Elec. Pension Fund, 434 F. Supp. 2d at 823 (“Plaintiffs must allege facts showing Defendants knew, when preparing the year-end financials … that the receivables should have been written off, but they fraudulently chose to delay the write-down.”). 2. The Confidential Witnesses’ Allegations Do Not Overcome Plaintiffs’ Failure to Allege Contemporaneous Facts Known to the Defendants. As explained supra at 8-12, plaintiffs’ CW allegations suffer from numerous deficiencies and are thus neither cogent nor compelling. Indeed, these allegations have no probative value at all with respect to six of the seven individual defendants (Messrs. McNamara, Thomson, Wu, Tu, Adler, and Weiss) because none of the CWs purports to have had any personal interaction with these individuals.19 Thus, no CW is in a position to speak to what any of these individuals did or did not know at the time each of the challenged statements was made. See, e.g., Rackable, 2010 WL 199703, at *8 (“The two remaining CWs … are not alleged ‘to have had any interaction or communication with any of the defendants, or to have provided any defendant with information, or to have heard or read any statement by any defendant, that contradicted or even cast doubt on a public statement[.]’”) (citation omitted); McCasland v. FormFactor, Inc., 2009 WL 2086168, at *5 (N.D. Cal. July 14, 2009) (CWs failed to provide “any specific information to defendants,” including emails, internal memos or reports, that “contradict[ed] any public statement made,” and failed to show “that any CW heard or read any specific private statement by a defendant that contradicted a public statement”). With respect to Mr. Hampton, three of the CWs allegedly reported that the sales staff told 19 Although CW4 claims that “all of the senior executives,” including Dr. Thomson, attended sales presentations that “typically took place in the first quarter” where they allegedly would hear John Nash’s “outrageous forecasts” (¶ 73(e)), the allegations once again are based on personal opinion, innuendo and gossip. See supra at 10-11. Moreover, CW4 does not claim to have had any communications with Dr. Thomson at these meetings or at any other time, much less discussed Mr. Nash with him. See, e.g., In re Metawave Communications Corp. Sec. Litig., 298 F. Supp. 2d 1056, 1073-74 (W.D. Wash. 2003) (holding that CW allegations were not sufficiently specific where they did not include where and when meetings took place, who attended or what was specifically discussed). Case4:09-cv-03362-CW Document72 Filed02/08/10 Page24 of 31 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 19 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW him that there was “no way” that they could sell 100 CyberKnifes (¶¶ 17, 88). As explained supra at 8-12, however, the allegations attributed to CW2, CW3, and CW4 suffer from numerous weaknesses: (1) CW2 and CW4 allegedly were regionally based (¶ 43) and thus did not have personal knowledge of day-to-day activities at Accuray’s corporate headquarters; (2) none of these CWs purports to have been involved in determining corporate level backlog or preparing revenue forecasts; (3) two of the three CWs ceased working at Accuray in 2007 – long before the end of the Class Period in 2008; and (4) much of the information attributed to these CWs is based on hearsay, opinion and gossip. Moreover, and fatal to the claim against Mr. Hampton, this alleged sales target was purely internal. Although plaintiffs allege that “multiple CWs report that the [$250-270 million revenue forecast] was based on” Mr. Hampton’s sales targets (¶ 88), not one of the CWs claims to have been involved in preparing the revenue forecast and thus cannot claim to have personal knowledge about such forecasts.20 See Zucco, 552 F.3d at 996 (where CWs “were simply not positioned to know the information alleged,” such allegations are insufficient to raise a strong inference of scienter). B. Plaintiffs’ Motive Allegations Are Insufficient to Raise a Strong Inference of Scienter 1. The Stock Sale Allegations Fail to Provide the Missing Inference of Scienter. Plaintiffs rely heavily on allegations of insider trading in an attempt to establish a motive to commit securities fraud. Mere allegations of stock sales, however, do not give rise to a strong inference of scienter. To the contrary, the Ninth Circuit has held that “insider trading is suspicious only when it is dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside information.” SGI, 183 F.3d at 986 20 Although CW11 allegedly participated in backlog meetings attended by representatives from the Finance, Legal and Sales departments, including Mr. Hampton, and separately claims that the “J.L. Parrott deals were definitely included in the Watch List during the backlog meetings” (¶ 73(m)), CW11 does not claim to have discussed these deals with Mr. Hampton (or any other defendant) at any time. See, e.g., In re Medicis Pharma. Corp. Sec. Litig., 2009 WL 4755406, at *12 (D. Ariz. Dec. 2, 2009) (finding CW allegations regarding alleged interaction with CFO failed “to support a conclusion that [the CW] had personal knowledge about the Defendants’ improper state of mind” where the complaint failed to “specify when alleged conversations . . . took place” or to “provide details about the content of those conversations”). Case4:09-cv-03362-CW Document72 Filed02/08/10 Page25 of 31 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 20 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW (citation omitted). To analyze these allegations, courts must examine: “(1) the amount and percentage of shares sold by insiders; (2) the timing of the sales; and (3) whether the sales were consistent with the insider’s prior trading history.” Id. An analysis of these factors reveals that the stock sale allegations fall far short of providing the requisite strong inference of scienter. Amount and Percentage Sold. Plaintiffs do not allege that Messrs. McNamara, Weiss, or Hampton sold any stock during the Class Period. The absence of sales by these individuals contradicts plaintiffs’ claim that they were committing securities fraud because they sought to profit from insider stock sales. Ronconi, 253 F.3d at 436 (“One insider’s . . . sales do not support the ‘strong inference’ required by the statute where the rest of the equally knowledgeable insiders act in a way inconsistent with the inference that the favorable characterizations of the company’s affairs were known to be false when made.”) (footnotes omitted); see Metzler, 540 F.3d at 1067 (same). Further refuting an inference of scienter is the fact that two of these individuals purchased Accuray shares during the Class Period. Mr. Weiss purchased 100,000 shares (Ex. F) and Mr. Hampton purchased 9,000 shares (Ex. C). See, e.g., See Iron Workers Local 16 Pension Fund v. Hilb Rogal & Hobbs Co., 432 F. Supp. 2d 571, 594 (E.D. Va. 2006) (“The fact that a defendant acquires stock . . . further negates any idea that Defendants had a motive to commit fraud.”) (citations omitted). With respect to the individual defendants who did sell stock,21 the percentages were not unusual or suspicious: Dr. Thomson sold 10.5%, and outside directors Wayne Wu and Dr. John Adler sold 8.2% and 17.2%, respectively.22 See, e.g., Metzler, 540 F.3d at 1067 (finding CEO’s stock sales of “only 37%” of total holdings insufficient to support scienter). Moreover, plaintiffs omit several important facts that further weaken any inference of scienter. For example, 21 The alleged stock sales by Messrs. Lindquist and Raanes, who are not defendants, are irrelevant. “Plaintiffs have not alleged how these sales [by non-defendants] impute scienter to Defendants.” Rackable, 2010 WL 199703, at *9; see Tripp v. IndyMac Fin. Inc., 2007 WL 4591930, at *4 n.1 (C.D. Cal. Nov. 29, 2007) (“Any sales by a non-defendant are irrelevant.”). 22 See Walters Decl, Exs. A, B, D, G. Exercisable options are included in total stockholdings. See, e.g., SGI, 183 F.3d at 986-87 (“Actual stock shares plus exercisable stock options represent the owner’s trading potential more accurately[.]”) Case4:09-cv-03362-CW Document72 Filed02/08/10 Page26 of 31 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 21 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW plaintiffs’ allegations fail to reflect that Mr. Wu also purchased 30,000 shares during the Class Period. Walters Decl., Ex. G. With respect to Mr. Tu, the Forms 4 for the cited transactions reveal that the shares sold were not his personal holdings, but rather, the holdings of President (BVI) International Investment Holdings Ltd., for which he worked. Id. Ex. E.23 Timing of the Sales and Trading Patterns. All but one of the challenged stock sales were in the IPO, a fact that is far from unusual or suspicious, since that was the first day on which there was a public market for the shares. See, e.g., Ronconi, 253 F.3d at 436 (“Silicon Graphics suggests that restrictions on an insider’s ability to trade are important in determining whether the trading pattern is suspicious.”). Moreover, plaintiffs’ contention that the individual defendants “sold millions of shares of Accuray stock at artificially inflated prices of more than $28.00 per share” is simply erroneous. ¶ 10. All of the IPO sales were at the offering price of $18,24 and the lone non-IPO sale was at $15.91. Id. In fact, although Accuray stock traded “as high as $29.25 per share” (¶ 134), all of the sales were at or below the $18 IPO price. “When insiders miss the boat this dramatically, their sales do not support an inference that they are preying on ribbon clerks who do not know what the insiders know.” Ronconi, 253 F.3d at 435. Nor is the timing of the lone non-IPO stock sale suspicious. Dr. Adler’s November 12, 2007 sale was made following the November 7, 2007 announcement of financial results (¶¶ 10, 93). See Lipton v. PathoGenesis Corp., 284 F.3d 1027, 1036-37 (9th Cir. 2002) (timing not suspicious where insider sold stock following positive announcement of results); Yahoo! II, 630 F. Supp. 2d at 1118 (selling stock “following earnings releases” is “common practice among corporate executives”). Moreover, as with the other challenged sales, plaintiffs fail to provide any information regarding Dr. Adler’s holdings, the percentage sold, or any other contextual information. Absent such facts, the stock sales cannot support an inference of scienter. Ronconi, 23 The allegations regarding the number of shares sold also are inaccurate. ¶ 10. As is shown in the Forms 4, the 3,953,191 number reflects a correction of the 4,084,450 number. See Ex E. 24 The price reflected in the chart (¶ 10) for the February 13, 2007 transaction attributed to Mr. Tu is inaccurate. This transaction was made in connection with the exercise of the IPO overallotment option and was made at the offering price of $18. Walters Decl., Ex. E. Case4:09-cv-03362-CW Document72 Filed02/08/10 Page27 of 31 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 22 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW 253 F.3d at 436-37 (plaintiffs “must allege sufficient context of insider trading”). 2. The Compensation Allegations Add Little to the Analysis. Plaintiffs allege that “Defendants were incentivized to enter into term agreements and grow backlog,” and that Messrs. Thomson and Hampton, in particular, were motivated to include “bogus deals” in backlog because of the executive bonus structure. ¶ 89. Plaintiffs allege that Accuray changed its bonus structure for FY08 to make backlog “the single largest financial metric for determining the bonuses of certain senior executives,” including Messrs. Thomson and Hampton. Id. As plaintiffs’ allegations, however, make clear, backlog accounted for just 20% of Dr. Thomson’s bonus and a mere 6.5% of Mr. Hampton’s bonus. Id. Although plaintiffs also allege that “85% of [Mr. Hampton’s] bonus” was to be “based primarily on achievement of quarterly sales quotas,” plaintiffs fail to plead any details regarding the quarterly sales quotas. Moreover, the SEC Form 10-K upon which plaintiffs rely clearly states that: In establishing the bonus metrics and target bonus percentages for fiscal 2008, the [Compensation] Committee considered the Radford [executive compensation survey] select data as well as advice from [compensation consulting firm] Watson Wyatt regarding appropriate metrics that were both consistent with industry practice and would serve to align the interests of management with those of stockholders. Pl. Ex. 17 at 116. Plaintiffs fail to plead any facts suggesting that the compensation structure was somehow unusual or inconsistent with industry practice. See, e.g., Rackable, 2010 WL 199703, at *9 (“Compared to the industry norms, there is nothing remarkable about the type or amount of compensation paid to Defendants.”). 3. The Company’s Share Repurchase Negates Scienter. Plaintiffs allege that Defendants engaged in a scheme to inflate the price of Accuray stock. ¶ 49. What plaintiffs fail to acknowledge, however, is that Accuray also entered into a stock repurchase program during the Class Period and thus was purchasing its own shares in the open market. Pl. Ex. 25 at 16. It makes no sense for Accuray to purchase its own stock if, in fact, Defendants were knew the stock was inflated at the time. The stock repurchase program thus negates an inference of scienter. See, e.g., In re Tibco Software, Inc. Sec. Litig., 2006 WL 1469654, at *21 (N.D. Cal. May 25, 2006) (“Plaintiffs fail to respond to the authorities Defendants Case4:09-cv-03362-CW Document72 Filed02/08/10 Page28 of 31 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 23 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW cited . . . showing that stock repurchase programs actually negate a finding of scienter.”). C. Plaintiffs’ Reliance on the “Core Operations Inference” Is Unavailing Apparently recognizing that the Complaint fails to raise a strong inference of scienter as to any of the Defendants, plaintiffs attempt to invoke a “core operations” inference.25 See, e.g., Complaint at 11 & ¶ 30. The core operations inference, however, does not alter the stringent requirements of the Reform Act, nor does it change the standards articulated in Tellabs. The Complaint remains deficient under both. Regardless, the core operations inference, which applies only in rare circumstances, has no application here. As the Ninth Circuit has acknowledged, where, as here, the “complaint relies on allegations that management had an important role in the company but does not contain additional detailed allegations about the defendants’ actual exposure to [the disputed] information, it will usually fall short of the PSLRA standard.” South Ferry, 542 F.3d at 784 (emphasis added); McCasland, 2009 WL 2086168, at *6 (“[T]he complaint still does not (1) identify any specific information that was either received or communicated by any defendant, that (2) contradicts any public statement at the time it was made.”). D. Plaintiffs Cannot Counter the Strong, Competing Inference Raised by the Repeated Voluntary Disclosures of Negative Information Under Tellabs, an “inference of scienter must be more than merely ‘reasonable’ or ‘permissible’ – it must be cogent and compelling, thus strong in light of other explanations.” 551 U.S. at 324. Although plaintiffs portray Defendants as concealing adverse information, plaintiffs’ own allegations support the competing inference that Defendants promptly disclosed adverse information as it became known. Accuray repeatedly disclosed the negative changes affecting its business throughout the Class Period. See, e.g., ¶¶ 105-06, 113-16. Those factors, which included the tightening credit markets and regulatory matters, were outside of the Defendants’ control. The situation was thus far “more consistent with a company and executives confronting a deterioration in the business and finding itself unable to prevent it than [it is] with a company and executives recklessly deceiving the investing community.” Cf. In re 2007 Novastar Fin., Inc., Sec. Litig., 25 See generally South Ferry LP, No. 2 v. Killinger, 542 F.3d 776 (9th Cir. 2008). Case4:09-cv-03362-CW Document72 Filed02/08/10 Page29 of 31 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 24 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW 2008 WL 2354367, at *4 (W.D. Mo. June 4, 2008), aff’d, 579 F.3d 878 (8th Cir. 2009). E. Plaintiffs Have Not Pleaded Corporate Scienter Because plaintiffs fail to plead scienter as to any individual defendant, they cannot impute scienter to Accuray. See, e.g., Pittleman v. Impac Mortgage Holdings, Inc., 2009 WL 648983, at *3 (C.D. Cal. Mar. 9, 2009) (“Because Plaintiff fails to plead scienter on the part of [the CEO or COO], Plaintiff cannot successfully plead scienter on the part of Impac.”); Davis v. SPSS, Inc., 385 F. Supp. 2d 697, 717-18 (N.D. Ill. 2005) (dismissing §10(b) claim against company where plaintiff failed to plead scienter against CEO or CFO). Although the Ninth Circuit has not foreclosed the possibility of “collective scienter,” those circumstances are not present here. See Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736, 744-45 (9th Cir. 2008). F. The Claims Against the Outside Directors Should Be Dismissed Plaintiffs do not properly attribute any statement to four Defendants: Messrs. Tu, Wu, Adler, and Weiss. Indeed, other than certain stock sales (discussed in Section IV, supra), the only purportedly wrongful act attributed to any of these non-employee directors is that they signed the Registration Statement. ¶¶ 42(c)-(f), 51. Merely alleging that an individual signed a registration statement is insufficient to impose Section 10(b) liability. Plaintiffs do not allege any facts showing that these individuals were involved in the preparation or drafting of the Registration Statement, much less that they knowingly made a false statement. Cf. Yahoo! I, 592 F. Supp. 2d at 1205 (“Without any supporting allegations that Defendants made false accounting entries or inflated revenues, Defendants’ signatures on the SEC certificates do not create a strong inference of scienter.”). Because plaintiffs do not allege that the outside directors made any statements other than the Registration Statement and have failed to plead a claim as to that document, the Section 10(b) claim against these Defendants should be dismissed.26 26 The discredited group pleading doctrine does not save the claims against these individuals. See, e.g., Downey 2009 WL 2767670, at *4 n.1 (“group pleading doctrine did not survive the PSLRA”); Tibco, 2006 WL 1469654, at *27 (“[C]ourts in this district are increasingly finding that the group pleading doctrine is contrary to the PSLRA.”). Indeed, even before the Reform Act, an outside director could not be held liable for a public filing simply because he signed it. See, e.g., Stack v. Lobo, 903 F. Supp. 1361, 1376 (N.D. Cal. 1995) (“[A]n outside director does not become liable for the contents of a group published document merely by signing it.”). Case4:09-cv-03362-CW Document72 Filed02/08/10 Page30 of 31 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 25 DEFENDANTS’ MOTION TO DISMISS Master File No. 09-cv-03362-CW V. PLAINTIFFS’ “RULE 10(B)”/“RULE 10(B)(5)(1)” CLAIM IS UNINTELLIGIBLE Plaintiffs include a separate cause of action for “Insider Trading Violations of Rule 10(b) and SEC Rule 10(b)(5)(1)” against all “Defendants.” Complaint at 82. Although it is unclear from the two sentences provided in support of this cause of action (¶ 161), plaintiffs appear to be asserting an insider trading claim under Section 10(b) and SEC Rule 10b5-1. To pursue an insider trading claim, however, among other requirements, plaintiffs must have traded “contemporaneously” with the defendant. Neubronner v. Milken, 6 F.3d 666, 670 & n.5 (9th Cir. 1993). Because plaintiffs do not allege that they traded contemporaneously with any defendant, and because plaintiffs have not stated a Section 10(b)/Rule 10b-5 claim, this claim also fails. VI. PLAINTIFFS’ SECTION 20(a) CLAIM SHOULD BE DISMISSED Because the Complaint does not adequately allege an underlying primary violation, the Section 20(a) control person claim should also be dismissed. See Lipton, 284 F.3d at 1035 n.15. In addition, plaintiffs must plead “that the defendant exercised actual power or control over the primary violator[.]” Howard v. Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000). To establish control, a plaintiff must allege specific facts showing that the defendant participated “in the day-to-day affairs of the corporation and [possessed the] power to control corporate actions.” Id. (citation omitted). The complaint fails to plead any such facts with respect to the outside director defendants and Mr. Hampton. See Arthur Children’s Trust v. Keim, 994 F.2d 1390, 1396-97 (9th Cir. 1993) (“A director is not automatically liable as a controlling person.”). CONCLUSION For the foregoing reasons, Defendants respectfully request that the Court dismiss the Complaint. Dated: February 8, 2010 WILSON SONSINI GOODRICH & ROSATI Professional Corporation By: /s/Ignacio E. Salceda Ignacio E. Salceda Attorneys for Defendants Case4:09-cv-03362-CW Document72 Filed02/08/10 Page31 of 31