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DEFENDANT LIANG’S FRCP 12(B)(6) MOTION TO DISMISS PLAINTIFF’S COMPLAINT
MANATT, PHELPS & PHILLIPS, LLP
JOHN F. LIBBY (Bar No. CA 128207)
Email: jlibby@manatt.com
COLIN M. MCGRATH (Bar No. CA 286882)
Email: cmcgrath@manatt.com
MOLLY K. WYLER (Bar. No. CA 299881)
Email: mwyler@manatt.com
11355 West Olympic Boulevard
Los Angeles, CA 90064-1614
Telephone: (310) 312-4000
Facsimile: (310) 312-4224
Attorneys for Defendant
WILLIAM LIANG
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
vs.
THOMAS MILLER and WILLIAM
LIANG,
Defendants.
Case No. 2:17-cv-00897 CBM-RAO
Hon. Consuelo B. Marshall
DEFENDANT WILLIAM LIANG’S
NOTICE OF MOTION AND MOTION TO
DISMISS PURSUANT TO FEDERAL
RULES OF CIVIL PROCEDURE 12(B)(6)
AND 9(B); MEMORANDUM OF POINTS
AND AUTHORITIES IN SUPPORT
THEREOF; [PROPOSED] ORDER
Date: June 27, 2017
Time: 10:00 a.m.
Ctrm: First Street Courthouse, 8B
Complaint Filed: February 3, 2017
Trial Date: None Set
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DEFENDANT LIANG’S FRCP 12(B)(6) MOTION TO DISMISS PLAINTIFF’S COMPLAINT
TABLE OF CONTENTS
Page
I. INTRODUCTION AND SUMMARY OF ARGUMENT ................................................... 1
II. SUMMARY OF RELEVANT FACTUAL ALLEGATIONS .............................................. 3
III. LEGAL STANDARD ........................................................................................................... 4
A. General Pleading Standards for Motions to Dismiss. .............................................. 4
B. Claims Brought Under Section 13 of the Exchange Act Are Subject To Heightened
Pleading Requirements Under Rule 9(b). ................................................................ 5
IV. THE SEC FAILS TO STATE A CLAIM AGAINST LIANG. ............................................ 6
A. The “Lying to Auditors” Claim Against Liang Fails ............................................... 6
1. The SEC Fails to Allege Scienter. ............................................................... 7
2. The SEC Fails to Allege Liang’s Purported Omission Was Material. ......... 8
B. The Circumvention of Internal Controls/Falsifying Books and Records Claim
Fails. ......................................................................................................................... 9
C. The Aiding and Abetting Claim Against Liang Fails. ........................................... 10
1. The SEC Fails to Allege That Liang Had Actual Knowledge of Ixia’s
Primary Violation Or His Role in Furthering It. ........................................ 10
2. The SEC Fails to Allege That Liang “Substantially Assisted” Ixia’s
Violation of the Securities Laws. ............................................................... 11
V. CONCLUSION ................................................................................................................... 13
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TABLE OF AUTHORITIES
Page
i
CASES
Ashcroft v. Iqbal,
556 U.S. 662 (2009) ....................................................................................................................4
Balistreri v. Pacifica Police Dep't.,
901 F.2d 696 (9th Cir. 1990) .......................................................................................................4
Basic Inc. v. Levinson,
485 U.S. 224 (1988) ....................................................................................................................8
Bell Atlantic Corp. v. Twombly,
550 U.S. 544 (2007) ....................................................................................................................4
Cooper v. Pickett,
137 F.3d 616 (9th Cir. 1997) .......................................................................................................5
Gonzales v. Lloyds TSB Bank, PLC,
532 F. Supp. 2d 1200 (C.D. Cal. 2006).......................................................................................5
Howard v. SEC,
376 F.3d 1136 (D.C. Cir. 2004) ................................................................................................12
In re GlenFed, Inc. Sec. Litig.,
42 F.3d 1541 (9th Cir. 1994) .......................................................................................................4
Kaplan v. Rose,
49 F.3d 1363 (9th Cir. 1994) .......................................................................................................5
Ponce v. S.E.C.,
345 F.3d 722 (9th Cir. 2003) ....................................................................................................10
S.E.C. v. Autocorp Equities, Inc.,
292 F. Supp. 2d 1310 (D. Utah 2003) ...................................................................................6, 10
S.E.C. v. Baxter,
No. C-05-03843 RMW, 2007 WL 2013958 (N.D. Cal. July 11, 2007) ............................4, 6, 11
S.E.C. v. Berry,
580 F. Supp. 2d 911 (N.D. Cal. 2008) ........................................................................................5
S.E.C. v. Espuelas,
579 F.Supp.2d 461 (S.D.N.Y. 2008) .....................................................................................9, 10
S.E.C. v. Espuelas,
905 F.Supp.2d 507 (S.D.N.Y. 2012) .........................................................................................11
S.E.C. v. Fraser,
No. CV-09-00443-PHX-GMS, 2010 WL 5776401 (D. Ariz. Jan. 28, 2010) .............................5
S.E.C. v. Leslie,
2010 WL 2991038 (N.D. Cal. July 29, 2010), clarified on denial of
reconsideration, 2010 WL 3259375 (N.D. Cal. Aug. 18, 2010) ............................................8, 9
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TABLE OF AUTHORITIES
(continued)
Page
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S.E.C. v. Nacchio,
438 F. Supp. 2d 1266 (D. Colo. 2006) ..................................................................................8, 10
S.E.C. v. Nacchio,
614 F.Supp.2d 1164 (D. Colo. 2009) ........................................................................................11
S.E.C. v. Retail Pro, Inc.,
673 F. Supp. 2d 1108 (S.D. Cal. 2009) ...............................................................................6, 8, 9
S.E.C. v. Todd,
642 F.3d 1207 (9th Cir. 2011) .....................................................................................................6
S.E.C. v. Treadway,
430 F.Supp.2d 293 (S.D.N.Y 2006) ..........................................................................................11
SEC v. Peretz,
317 F. Supp. 2d 58 (D. Mass. 2004) .........................................................................................12
SEC v. Zwick,
No. 03 Civ. 2742, 2007 WL 831812 (S.D.N.Y. Mar. 16, 2007) ...............................................11
Semegen v. Weidner,
780 F.2d 727 (9th Cir. 1985) .......................................................................................................5
U.S. ex rel. Lee v. SmithKline Beecham, Inc.,
245 F.3d 1048 (9th Cir. 2001) .....................................................................................................5
U.S. S.E.C. v. Power,
525 F. Supp. 2d 415 (S.D.N.Y. 2007) .........................................................................................5
U.S. v. Reyes,
577 F.3d 1069 (9th Cir. 2009) .....................................................................................................9
United States v. Goyal,
629 F.3d 912 (9th Cir. 2010) .......................................................................................................6
Vess v. Ciba-Geigy Corp. USA,
317 F.3d 1097 (9th Cir. 2003) .................................................................................................4, 5
Woodward v. Metro Bank of Dallas,
522 F.2d 84 (5th Cir. 1975) .......................................................................................................11
Wright v. Schock,
571 F. Supp. 642 (N.D. Cal. 1983), aff'd, 742 F.2d 541 (9th Cir. 1984) ..................................11
STATUTES
15 U.S.C. § 78m(b)(2)(A) .................................................................................................................2
15 U.S.C. § 78m(b)(2)(B) .................................................................................................................2
15 U.S.C. § 78m(b)(5) ..................................................................................................................2, 9
Securities Exchange Act § 13 ...................................................................................................2, 4, 5
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TABLE OF AUTHORITIES
(continued)
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Securities Exchange Act § 13(b)(2)(A).............................................................................................2
Securities Exchange Act § 13(b)(2)(B) .........................................................................................2, 9
OTHER AUTHORITIES
17 C.F.R. § 240.13b2-1 .................................................................................................................2, 9
17 C.F.R. § 240.13b2-2 .................................................................................................................2, 6
RULES
F.R.C.P. 9(b) .....................................................................................................................1,2, 4, 5, 7
F.R.C.P. 12(b)(6) ...........................................................................................................................1, 4
F.R.C.P. 13b2-1 ............................................................................................................................2, 9
F.R.C.P. 13b2-2 ....................................................................................................................2, 5, 6, 8
F.R.C.P. 13b2-2(a) ...........................................................................................................................6
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DEFENDANT LIANG’S FRCP 12(B)(6) MOTION TO DISMISS PLAINTIFF’S COMPLAINT
NOTICE OF MOTION AND MOTION TO DISMISS PURSUANT TO F.R.C.P. 12(b)(6)
TO PLAINTIFF AND HIS ATTORNEYS OF RECORD:
PLEASE TAKE NOTICE that this motion will be heard on June 27, 2017 at 10:00 a.m.,
or as soon thereafter as the matter may be heard in Courtroom 8B of the United States District
Court, Central District of California, 1350 West 1
st
Street, Los Angeles, California 90012.
Defendant William Liang (“Liang”) hereby moves this Court for an order dismissing the
Complaint filed by plaintiff Securities and Exchange Commission (“SEC”) pursuant to Federal
Rule of Civil Procedure 12(b)(6) and Rule 9(b) on the grounds that the SEC’s first, third and
fourth causes of action, alleging violations of the Securities Exchange Act of 1934, each fail to
state a plausible claim upon which relief may be granted against Liang.
This Motion is based upon this Notice, and the Memorandum of Points and Authorities,
filed concurrently, all other pleadings and papers on file in this action, and upon such other
evidence and arguments as may be presented at the hearing.
This motion is made following the conference of counsel pursuant to L.R. 7-3 which took
place via telephone on April 3, 2017.
Dated: April 10, 2017
MANATT, PHELPS & PHILLIPS, LLP
John F. Libby
By: /s/ John F. Libby
John F. Libby
Attorneys for Defendant
WILLIAM LIANG
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DEFENDANT LIANG’S FRCP 12(B)(6) MOTION TO DISMISS PLAINTIFF’S COMPLAINT
MEMORANDUM OF POINTS AND AUTHORITIES
I. INTRODUCTION AND SUMMARY OF ARGUMENT
For all of the SEC’s lengthy allegations in the Complaint describing Ixia’s CEO-driven
practice of splitting purchase orders (“Split PO”) in order to avoid deferral of revenue, the
Complaint contains almost no specific facts regarding Defendant William Liang (“Liang”). The
few specific details the SEC does allege portray Liang as at most a tangential, non-authority
figure, with no direct involvement in Ixia’s alleged Split PO practice. The only specific
allegations regarding Liang are that (1) Liang was copied on one email from Ixia’s previous CEO
Victor Alston (“Alston”) in April 2013 instructing “key sales executives” (i.e., not Liang, who
worked in Ixia’s accounting department) regarding Alston’s Split PO directive (Complaint, ¶ 66);
and (2) an alleged conversation in which Ixia’s revenue manager expressed concern to Liang
regarding Ixia’s alleged practice of splitting purchase orders, during which Liang allegedly
responded non-specifically, “we have to do this.” (Id., ¶ 65.) As the SEC acknowledges,
however, whether a particular transaction was reflected on a single purchase order or multiple
purchase orders was irrelevant for revenue recognition purposes under both generally accepted
accounting principles (“GAAP”) and Ixia’s revenue recognition policy. (Id., ¶ 61.) The SEC
does not allege any specific facts to show that Liang knew that any purchase orders were in fact
split pursuant to this supposed directive or that any revenue was actually improperly deferred.
Accordingly, the SEC fails to adequately allege scienter as to Liang, which is fatal to each of the
SEC’s claims against Liang in the Complaint.
Based on these few allegations and various other entirely conclusory allegations regarding
Liang, the SEC claims that Liang intentionally failed to inform Ixia’s auditors of the Split PO
directive in violation of Rule 13b2-2 (17 C.F.R. § 240.13b2-2); knowingly circumvented Ixia’s
internal accounting controls in violation of Section 13(b)(5) (15 U.S.C. § 78m(b)(5)) and Rule
13b2-1 (17 C.F.R. § 240.13b2-1); and aided and abetted Ixia in violating its internal controls in
violation of Section 13(b)(2)(A) and (B) of the Securities Act, 15 U.S.C. § 78m(b)(2)(A) and (B).
The SEC’s allegations do not meet the heightened pleading requirements of Rule 9(b) with
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DEFENDANT LIANG’S FRCP 12(B)(6) MOTION TO DISMISS PLAINTIFF’S COMPLAINT
respect to these claims and they therefore must be dismissed.
Each of these causes of action have the same fatal deficiency - the SEC has failed to
sufficiently allege scienter, particularly under the heightened pleading requirements under Rule
9(b) for securities fraud claims brought under Section 13 (as all three claims are). Also, as to the
“lying to auditors” claim brought against Liang, the SEC fails to plead that Liang’s failure to
inform the auditors of the alleged Split PO directive was material. The SEC alleges no specific
facts whatsoever regarding the amount of revenue allegedly restated due to the Split PO directive,
thus there is no way to determine whether a “reasonable investor” would consider the Split PO
directive to be a significant issue.
Finally the SEC’s aiding and abetting cause of action fails because the SEC fails to allege
actual knowledge by Liang of Ixia’s purported use of the Split PO directive to falsify its books
and records, and the SEC alleges no specific facts showing that Liang provided any active role in
Ixia’s alleged violations of securities laws.
Accordingly, each of the SEC’s claims against Liang fail as a matter of law and should be
dismissed with prejudice.
II. SUMMARY OF RELEVANT FACTUAL ALLEGATIONS
Liang began working at Ixia in 2007, and during the timeframe at issue in the Complaint,
Liang served as Ixia’s director of accounting. (Complaint, ¶ 12.) The SEC alleges that Liang was
“responsible for Ixia’s revenue recognition accounting” and helped author the revenue
recognition policy. (Id., ¶¶ 25-26.) Ixia’s internal revenue recognition policy provided that:
If evidence of fair value (or [vendor specific objective evidence
(“VSOE”)]) cannot be established for an undelivered element
within the software group or software arrangement, we defer
revenue on the entire order until the earlier of (i) delivery of all
elements or (ii) establishment of VSOE of the undelivered element.
(Id., ¶ 22.)
The SEC alleges that on October 26, 2012, Ixia’s vice president of sales sent an email to
his sales executives instructing the sales force to “separate product and service on different
quotations” for multi-element arrangements involving professional services. (Id., ¶ 53.) The
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DEFENDANT LIANG’S FRCP 12(B)(6) MOTION TO DISMISS PLAINTIFF’S COMPLAINT
SEC does not allege that Liang received this email, or otherwise knew of it or was involved in the
decision. On April 21, 2013, Alston sent an email to “key sales executives”, along with Liang,
allegedly to “reiterate[] the importance of his [Split PO] directive.” (Id., ¶ 66.)
Although the SEC alleges that Liang “took no steps to halt the [Split PO] practice” (id., ¶
64), the SEC also acknowledges that “Liang understood that even if professional services and
software are reflected on a purportedly separate purchase order, GAAP and Ixia’s revenue
recognition policy still required deferral of that software revenue whenever sold in a multi-
element arrangement along with undelivered professional services.” (Id., ¶ 61.) The SEC also
alleges that Ixia’s revenue manager told Liang, at some unspecified time, that the Split PO
practice was violating Ixia’s revenue recognition policy and placing the company’s revenue at
risk, and that Liang responded that, “we have to do this.” The Complaint contains no allegations
as to what Liang was referring to. (Id., ¶ 65.) Importantly, the SEC does not allege any specific
facts to indicate that Liang had any involvement in or control over the Split PO directive or what
he did in response.
On three occasions Liang allegedly participated in in-person meetings with Ixia’s auditors.
(Id., ¶ 99.) The SEC alleges that in each of these meetings revenue recognition for multi-element
arrangements was a focus of discussion, yet Liang allegedly failed to disclose the Split PO
mandate, or that Ixia was actually splitting purchase orders on purpose, to Ixia’s auditors in any
of these meetings. (Id., ¶¶ 99-103.) The SEC also alleges that Liang “took no steps to halt the
practice even though he had responsibility for Ixia’s revenue recognition and was the auditors’
point of contact on those issues.” (Id., ¶ 64.)
III. LEGAL STANDARD
A. General Pleading Standards for Motions to Dismiss.
A motion to dismiss a claim under Federal Rule of Civil Procedure 12(b)(6) is granted
when the plaintiff fails to state a claim upon which relief can be granted, including where the
plaintiff fails to allege sufficient facts to support a cognizable legal theory. Vess v. Ciba-Geigy
Corp. USA, 317 F.3d 1097, 1107 (9th Cir. 2003); Balistreri v. Pacifica Police Dep't., 901 F.2d
696, 699 (9th Cir. 1990). A plaintiff’s “obligation to provide the grounds of his entitlement to
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DEFENDANT LIANG’S FRCP 12(B)(6) MOTION TO DISMISS PLAINTIFF’S COMPLAINT
relief requires more than labels and conclusions, and a formulaic recitation of the elements of a
cause of action will not do.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations
omitted). Rather, to survive a motion to dismiss, “a complaint must contain sufficient factual
matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009). “The plausibility standard is not akin to a ‘probability requirement,’
but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a
complaint pleads facts that are ‘merely consistent with’ a defendant's liability, it stops short of the
line between possibility and plausibility of ‘entitlement to relief.’” Id. (citations and internal
quotations omitted).
B. Claims Brought Under Section 13 of the Exchange Act Are Subject To
Heightened Pleading Requirements Under Rule 9(b).
When, as here, a party alleges fraud, that party must state with particularity the
circumstances constituting fraud or mistake. Fed. R. Civ. P. 9(b); Vess v. Ciba-Geigy Corp. USA,
317 F.3d 1097, 1103 (9th Cir. 2003). Where claims sound in fraud, including those in Section 13
of the Exchange Act, the Rule 9(b) standard also applies. S.E.C. v. Baxter, No. C-05-03843
RMW, 2007 WL 2013958, at *8 (N.D. Cal. July 11, 2007); see also In re GlenFed, Inc. Sec.
Litig., 42 F.3d 1541, 1545 (9th Cir. 1994) (stating that this court has repeatedly recognized,
implicitly or explicitly, that Rule 9(b) applies to actions brought under the federal securities
laws); U.S. S.E.C. v. Power, 525 F. Supp. 2d 415, 424 (S.D.N.Y. 2007) (applying the heightened
standard of Rule 9(b) to claims under Section 13 of the Exchange Act); S.E.C. v. Fraser, No. CV-
09-00443-PHX-GMS, 2010 WL 5776401, at *3 (D. Ariz. Jan. 28, 2010) (“Securities fraud
actions are also subject to the heightened pleading standard of [FRCP] 9(b), which requires a
plaintiff to state with particularity the circumstances constituting fraud.”) (internal quotations
omitted).
To comply with Rule 9(b), allegations of fraud must be “specific enough to give
defendants notice of the particular misconduct which is alleged to constitute the fraud charged so
that they can defend against the charge and not just deny that they have done anything wrong.”
U.S. ex rel. Lee v. SmithKline Beecham, Inc., 245 F.3d 1048, 1051–52 (9th Cir. 2001) (internal
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quotations omitted). In other words, the pleadings must “state precisely the time, place, and
nature of the misleading statements, misrepresentations, and specific acts of fraud.” Kaplan v.
Rose, 49 F.3d 1363, 1370 (9th Cir. 1994). “Averments of fraud must be accompanied by ‘the
who, what, when, where, and how’ of the misconduct charged.” Vess, 317 F.3d at 1106 (quoting
Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)). Conclusory allegations that a defendant's
conduct was fraudulent or in violation of federal securities laws are insufficient. Semegen v.
Weidner, 780 F.2d 727, 731 (9th Cir. 1985).
Allegations of aiding and abetting section 13 claims are also subject to Rule 9(b). Where
claims sound in fraud the particularity requirements of Rule 9(b) apply. S.E.C. v. Berry, 580 F.
Supp. 2d 911, 924 (N.D. Cal. 2008) (applying Rule 9(b) pleading requirements to aiding and
abetting claims grounded in fraud); Gonzales v. Lloyds TSB Bank, PLC, 532 F. Supp. 2d 1200,
1207 (C.D. Cal. 2006) (applying Rule 9(b) to a claim of aiding and abetting breach of fiduciary
duty and fraud).
IV. THE SEC FAILS TO STATE A CLAIM AGAINST LIANG.
A. The “Lying to Auditors” Claim Against Liang Fails.
Rule 13b2–2 provides, in pertinent part:
(a) No director or officer of an issuer shall, directly or indirectly:
(1) Make or cause to be made a materially false or misleading statement to an accountant
in connection with; or
(2) Omit to state, or cause another person to omit to state, any material fact necessary in
order to make statements made, in light of the circumstances under which such statements
were made, not misleading, to an accountant in connection with:
(i) Any audit, review or examination of the financial statements of the issuer required to
be made pursuant to this subpart; or
(ii) The preparation or filing of any document or report required to be filed with the
[Securities and Exchange] Commission pursuant to this subpart or otherwise.
17 C.F.R. § 240.13b2–2; S.E.C. v. Retail Pro, Inc., 673 F. Supp. 2d 1108, 1142 (S.D. Cal. 2009).
Here, the SEC has failed to allege that Liang knowingly omitted a material fact from the
auditors.
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DEFENDANT LIANG’S FRCP 12(B)(6) MOTION TO DISMISS PLAINTIFF’S COMPLAINT
1. The SEC Fails to Allege Scienter.
In the Ninth Circuit, Rule 13b2-2 requires a showing of scienter. S.E.C. v. Todd, 642 F.3d
1207, 1219 (9th Cir. 2011) (“To be liable [under Rule 13b2-2(a)], one must ‘knowingly’ make
false statements . . . ‘Knowledge requires that the defendant was aware of the falsification and did
not falsify through ignorance, mistake or accident.’”), quoting United States v. Goyal, 629 F.3d
912, 916 (9th Cir. 2010) (proving “knowingly,” requires proof the defendant “was aware of the
falsification and did not falsify through ignorance, mistake, or accident”); see also S.E.C. v.
Baxter, No. C-05-03843 RMW, 2007 WL 2013958, at *8 (N.D. Cal. July 11, 2007) (stating that
Rule 13b2-2 imposes a scienter requirement); S.E.C. v. Autocorp Equities, Inc., 292 F. Supp. 2d
1310, 1332 (D. Utah 2003) (“Rule 13b2–2 makes it illegal for an officer to mislead auditors and
accountants. . .The SEC has articulated no legal basis for finding that scienter is not required to
prevail under this rule, and in every opinion this court found that considered 17 C.F.R. §
240.13b2–2, the violation was knowing or reckless.”)
The SEC alleges in conclusory fashion that Liang failed to disclose the Split PO directive
to Ixia’s auditors, even though he allegedly “understood that it presented a risk that Ixia’s
reported software revenue would be inaccurate.” (Complaint, ¶ 99.) However, the only
particularized, non-conclusory allegations in the Complaint regarding Liang’s actual knowledge
of Ixia’s Split PO “practice” are that: (1) Liang received an April 2013 email from Ixia CEO
Alston which stated “Ixia cannot deliver the quarter or meet revenue recognition any longer if we
continue to book orders” on a single purchase order (id, ¶ 66.); and (2) Liang was told by Ixia’s
revenue manager that the Split PO practice was violating Ixia’s revenue recognition policy, and
“Liang simply responded that, ‘we have to do this,’ and then allowed the practice to continue.”
(Id., ¶ 65.)
The alleged April 2013 email, addressed to “key sales executives,” is not sufficient to
show Liang’s knowledge that the Split PO directive presented a change in Ixia’s revenue
recognition policy or practices. As pled, there is nothing in the email to indicate that Ixia was
changing its actual revenue recognition policy, which required deferral of revenue recognition on
multi-element transactions with undelivered professional services (with no connection to the
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method by which such transactions were invoiced). (Id., ¶¶ 61-62.) Importantly, the SEC alleges
that Liang helped author Ixia’s revenue recognition policy (id., ¶¶ 25-26), but the SEC does not
specifically allege that Liang was involved in the decision to issue the Split PO directive. (See,
e.g., id., ¶¶ 53-54.)
Further, the SEC pleads no facts to show that Liang was aware that Ixia employees were
in fact splitting purchase orders in response to the alleged Split PO directive. The SEC alleges
that certain Ixia employees split purchase orders for a large transaction in December 2012 (id., ¶¶
39-49), but the only allegation regarding Liang’s knowledge of either the existence of this
transaction or that the purchase orders were split is a single conclusory allegation that “Liang
[was] involved in and knew of the decision to Split POs for this significant transaction.” (Id., ¶
50.) This conclusory allegation does not meet the heightened pleading standards of Rule 9(b).
There are no other allegations in the Complaint that Liang knew or was aware that Ixia employees
were actually splitting purchase orders in response to the alleged Split PO directive.
The allegations in the Complaint are not sufficient to show Liang’s knowledge of the
existence of the Split PO directive, or the occurrence of purchase orders being split, or a change
in revenue recognition practices. Accordingly, the Complaint fails to allege that Liang lied to
Ixia’s auditors in failing to bring up the Split PO issue.
2. The SEC Fails to Allege Liang’s Purported Omission Was Material.
Rule 13b2-2 “explicitly require[s] a showing that the misstatement was material.” S.E.C.
v. Leslie, 2010 WL 2991038, at *28 (N.D. Cal. July 29, 2010), clarified on denial of
reconsideration, 2010 WL 3259375 (N.D. Cal. Aug. 18, 2010); see also S.E.C. v. Nacchio, 438 F.
Supp. 2d 1266, 1285 (D. Colo. 2006) (requiring the SEC to allege materiality). A statement is
material if a reasonable auditor would conclude that it would significantly alter the total mix of
information available to him. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); accord SEC v.
Retail Pro, Inc., 673 F. Supp. 2d 1108, 1142 (S.D. Cal. 2009).
The SEC alleges that the failure to inform the auditors of the Split PO directive was a
material omission because “according to Ixia’s auditor, any competent accountant would have
brought Split POs to the auditors’ attention” and Liang nevertheless failed to do so. (Complaint,
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¶ 100.) But one Ixia auditor’s opinion regarding what a “competent accountant” would have done
is irrelevant for the purposes of materiality under 13b2-2.
The allegations in the Complaint with respect to Liang do not allege anywhere near
sufficient detail to determine whether a “reasonable auditor would conclude” that the Split PO
directive “would significantly alter the total mix of information available” to him or her. Basic,
485 U.S. at 231-32. Although Ixia restated its first and second quarter 2013 financial statements
(Complaint, ¶ 80), nowhere does the SEC allege the specific amount of revenue that was restated,
much less the specific amount of revenue restated due to the alleged Split PO directive or whether
the restated amounts were material to Ixia’s financial statements for those time periods. Nor does
the Complaint allege any specific facts to connect the Split PO directive to any specific
prematurely recognized revenue. Without such alleged facts, there is no way to determine in
more than a conclusory fashion whether a “reasonable investor” would have considered the Split
POs to be a material issue.
Accordingly, the SEC’s “lying to auditors” claim against Liang fails as a matter of law.
B. The Circumvention of Internal Controls/Falsifying Books and Records Claim
Fails.
To state a claim for circumvention of internal controls and falsifying books and records in
violation of Section 13b-5 and Rule 13b2-1, the SEC must allege that a defendant “knowingly
circumvent[ed] or knowingly fail[ed] to implement a system of internal accounting controls or
knowingly falsif[ied] any book, record, or account.” 15 U.S.C. § 78m(b)(5). “Section 13(b)(5)
requires a showing of scienter.” S.E.C. v. Retail Pro, Inc., 673 F. Supp. 2d 1108, 1141 (S.D. Cal.
2009); see also S.E.C. v. Leslie, 2010 WL 2991038, at *17 (N.D. Cal. July 29, 2010), clarified on
denial of reconsideration, 2010 WL 3259375 (N.D. Cal. Aug. 18, 2010) (“to establish a claim
under Section 13(b)(5) . . ., the plain language of the statute requires that a defendant act
‘knowingly.’”). To satisfy the “knowingly” requirement under Section 13(b)(5), the SEC must
show that the defendant “was aware of the falsification and did not falsify through ignorance,
mistake, or accident.” U.S. v. Reyes, 577 F.3d 1069, 1080-81 (9th Cir. 2009).
For the same reasons the SEC has failed to allege scienter with respect to the lying to
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auditors claim, the SEC also fails to allege scienter here. Otherwise, the SEC alleges only one
conclusory allegation regarding Liang’s purported falsification of books or records. (Complaint,
¶ 130: Liang “directly or indirectly falsified sales documentation relating to the Split POs,
including quotes, purchase orders, invoices, and Ixia’s related-revenue account entries for those
transactions.”) This allegation is plainly insufficient.
Similarly, the SEC fails to allege any specific facts to support a claim for falsification of
any book, record or account in violation of Rule 13b2-1. 17 C.F.R. § 240.13b2-1 (“[n]o person
shall directly or indirectly, falsify or cause to be falsified, any book, record or account subject to
section 13(b)(2)(A) of the Securities Exchange Act.”) Liability under Rule 13b2-1 is predicated
on “standards of reasonableness.” S.E.C. v. Espuelas, 579 F.Supp.2d 461, 486 (S.D.N.Y. 2008).
In the complete absence of any specific facts in the Complaint to show that the Split PO directive
had an effect on revenue recognition, there is no basis to find that Liang acted unreasonably with
regard to the Split POs.
C. The Aiding and Abetting Claim Against Liang Fails.
1. The SEC Fails to Allege That Liang Had Actual Knowledge of Ixia’s
Primary Violation Or His Role in Furthering It.
To satisfy the actual knowledge prong, the SEC must show that defendants acted with
knowledge of the primary violation and their own role in furthering it. Ponce v. S.E.C., 345 F.3d
722, 737 (9th Cir. 2003); see also S.E.C. v. Nacchio, 438 F.Supp.2d 1266, 1285 (D. Colo. 2006)
(SEC must allege facts to establish scienter, “that is, with knowledge or recklessness as to
whether the Defendant was aiding or abetting [the primary] violation”). Factual allegations that
give rise only to an inference of recklessness are insufficient as a matter of law. S.E.C. v.
Espuelas, 579 F. Supp. 2d 461, 484 (S.D.N.Y. 2008) (“[T]he allegations against [defendant] . . .
raise a strong inference that [defendant] was reckless. The fact that actual knowledge is the
standard for aiding and abetting, however, compels the Court to dismiss the claims . . . .”)
(emphasis added); S.E.C. v. Autocorp Equities, Inc., 292 F. Supp. 2d 1310, 1332 (D. Utah 2003)
(finding that the SEC must establish knowledge or reckless disregard of the fact that the
defendant was aiding or abetting a violation of securities law).
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DEFENDANT LIANG’S FRCP 12(B)(6) MOTION TO DISMISS PLAINTIFF’S COMPLAINT
The SEC’s Complaint fails to meet this high burden.
The SEC alleges that Liang “knowingly and recklessly provided substantial assistance to,
and thereby aided and abetted Ixia in its violations of Section 13(b)(2)(A) and 13(b)(2)(B)
[regarding failure to keep accurate books, records, and accounts, and failure to maintain adequate
internal accounting controls].” (Complaint, ¶ 53.) Like their other claims, the SEC’s failure to
allege scienter is fatal to this claim as well. As explained above, the Complaint does not allege
any specific facts to demonstrate that Liang had actual knowledge of the Split PO “directive,” or
that the Split PO directive constituted a change in Ixia’s actual revenue recognition policy or
practices. At most, the allegations regarding Liang’s statement in response to the concerns raised
by Ixia’s revenue recognition manager give rise to a mere inference of recklessness, which is not
sufficient. Espuelas, 579 F. Supp. 2d at 484.
2. The SEC Fails to Allege That Liang “Substantially Assisted” Ixia’s
Violation of the Securities Laws.
“‘[M]ere awareness and approval of the primary violation is insufficient to make out a
claim for substantial assistance’ and inaction is insufficient ‘unless it was designed intentionally
to aid the primary violator or it was in conscious or reckless violation of a duty to act.’” S.E.C. v.
Baxter, No. C-05-03843 RMW, 2007 WL 2013958, at *9 (N.D. Cal. Jul. 11, 2007), quoting
S.E.C. v. Treadway, 430 F.Supp.2d 293, 339 (S.D.N.Y 2006). Substantial assistance requires a
“significant and active, as well as knowing participation” in the fraud. Wright v. Schock, 571 F.
Supp. 642, 663 (N.D. Cal. 1983), aff'd, 742 F.2d 541 (9th Cir. 1984). “To satisfy the substantial
assistance prong of aiding and abetting, the SEC must show that the defendant in some sort
associated himself with the venture, that he participated in it as something that he wished to bring
about, and that he sought by his action to make it succeed.” S.E.C. v. Espuelas, 905 F.Supp.2d
507, 525 (S.D.N.Y. 2012) (internal citations omitted). In other words, the complaint must allege
that the aider and abettor's conduct was “a substantial causal factor in the perpetration” of the
underlying fraud. SEC v. Zwick, No. 03 Civ. 2742, 2007 WL 831812, at *16 (S.D.N.Y. Mar. 16,
2007).
Here, aside from the few specific allegations already discussed, the SEC asserts mere
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conclusory allegations that Liang “directly participated” in splitting POs and “knowingly
participated in Split POs, [and] lied about or concealed the practice from Ixia’s outside auditors
and audit committee.” (Complaint, ¶ 154.) Courts have read the actual knowledge and
substantial assistance requirements as inversely linked. S.E.C. v. Nacchio, 614 F.Supp.2d 1164,
1173-74 (D. Colo. 2009) (“the ‘knowledge’ and ‘substantial assistance’ elements of the aiding
and abetting test [are linked] in an inverse relationship, such that the more acute a party’s
knowledge of the ongoing fraudulent scheme, the less substantial the acts constituting substantial
assistance need be, and vice-versa”); citing Woodward v. Metro Bank of Dallas, 522 F.2d 84, 96
(5th Cir. 1975). Because the SEC has failed to allege with specificity that Liang was involved in
the decision to issue the Split PO directive, or that he knew that the April 2013 email was a
“directive” regarding recognition of revenue from Split POs, or that revenue actually was being
improperly recognized as a result of the Split PO directive, the allegations in the Complaint are
plainly insufficient to state that Liang intended to assist Ixia in falsifying its books and records.
See Howard v. SEC, 376 F.3d 1136, 1142 (D.C. Cir. 2004) (finding that a broker did not aid and
abet a securities violation where he did not know that his conduct was part of an overall
impropriety); SEC v. Peretz, 317 F. Supp. 2d 58, 64 (D. Mass. 2004) (no aiding and abetting
liability in absence of proof that defendant knew of fraud and intended to assist it). The few
specific allegations as to Liang in the Complaint do not come close to meeting this standard.
Accordingly, the SEC’s aiding and abetting claim against Liang fails as a matter of law.
///
///
///
///
///
///
///
///
///
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DEFENDANT LIANG’S FRCP 12(B)(6) MOTION TO DISMISS PLAINTIFF’S COMPLAINT
V. CONCLUSION
For these reasons, the SEC’s First, Second, and Fourth Claims against Liang should be
dismissed with prejudice.
1
Dated: April 10, 2017
MANATT, PHELPS & PHILLIPS, LLP
John F. Libby
By: /s/ John F. Libby
John F. Libby
Attorneys for Defendant
WILLIAM LIANG
318448012.6
1
The SEC should not be given leave to amend any of its claims against Liang. The SEC has
already conducted a multi-year investigation, received hundreds of documents, and has taken
Liang’s sworn testimony as well as, presumably, the testimony of numerous other Ixia employees
and outside auditors, yet the only allegation of Liang’s knowledge of the Split PO practice and its
effect on revenue recognition is a single email and a vague and ambiguous statement made by
another employee. The SEC’s failure to sufficiently allege scienter as to Liang after such an
extensive investigation leads to the inescapable conclusion that it cannot do so.
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[PROPOSED] ORDER GRANTING DEFENDANT LIANG’S 12(B)(6) MOTION TO DISMISS
MANATT, PHELPS & PHILLIPS, LLP
JOHN F. LIBBY (Bar No. CA 128207)
Email: jlibby@manatt.com
COLIN M. MCGRATH (Bar No. CA 286882)
Email: cmcgrath@manatt.com
MOLLY K. WYLER (Bar. No. CA 299881)
Email: mwyler@manatt.com
11355 West Olympic Boulevard
Los Angeles, CA 90064-1614
Telephone: (310) 312-4000
Facsimile: (310) 312-4224
Attorneys for Defendant
WILLIAM LIANG
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
vs.
THOMAS MILLER and WILLIAM
LIANG,
Defendants.
Case No. 2:17-cv-00897 CBM-RAO
Hon. Consuelo B. Marshall
[PROPOSED] ORDER GRANTING
DEFENDANT LIANG’S MOTION TO
DISMISS COMPLAINT OF PLAINTIFF
SECURITIES EXCHANGE COMMISSION
[Fed R. Civ. P. 12(b)(6) and 9(b)]
Date: June 27, 2017
Time: 10:00 a.m.
Ctrm: First Street Courthouse, 8B
Complaint Filed: February 3, 2017
Trial Date: None Set
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[PROPOSED] ORDER GRANTING DEFENDANT LIANG’S 12(B)(6) MOTION TO DISMISS
[PROPOSED] ORDER
The Motion to Dismiss pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) of
Defendant William Liang (“Liang”) came on regularly for hearing before this Court on June 27,
2017 at 10:00 a.m. All parties were represented by their respective counsel of record.
Appearances were stated on the record.
Having considered the Motion to Dismiss, the memorandum filed in support thereof,
Plaintiff’s Opposition, Defendant’s Reply, as well as all other documents and pleadings filed in
this case and all argument submitted on this matter, IT IS HEREBY ORDERED THAT the
Motion to Dismiss is GRANTED as follows:
1. The Court dismisses with prejudice the First Count in Plaintiff’s Complaint for alleged
violation of Rule 13b2-2 (17 C.F.R. § 240.13b2-2), pursuant to Rule 12(b)(6), on the
ground that the Complaint fails to allege and cannot plausibly allege under the heightened
pleading requirements of Rule 9(b) that Liang knowingly made an omission to auditors or
that the omission was material. S.E.C. v. Todd, 642 F.3d 1207, 1219 (9th Cir. 2011);
United States v. Goyal, 629 F.3d 912, 916 (9th Cir. 2010).
2. The Court dismisses with prejudice the Third Count in Plaintiff’s Complaint for alleged
violation of Section 13(b)(5) (15 U.S.C. § 78m(b)(5)) and Rule 13b2-1 (17 C.F.R. §
240.13b2-1) pursuant to Rule 12(b)(6), on the ground that the Complaint fails to allege
and cannot plausibly allege under the heightened pleading requirements of Rule 9(b) that
Liang knowingly circumvented failed to implement a system of internal accounting
controls or knowingly falsified any book, record, or account, or that Liang acted
unreasonably under Rule 13b2-1. S.E.C. v. Retail Pro, Inc., 673 F. Supp. 2d 1108, 1141
(S.D. Cal. 2009); U.S. v. Reyes, 577 F.3d 1069, 1080-81 (9th Cir. 2009); S.E.C. v.
Espuelas, 579 F.Supp.2d 461, 486 (S.D.N.Y. 2008).
3. The Court dismisses with prejudice the Fourth Count in Plaintiff’s Complaint for
allegedly aiding and abetting Ixia’s alleged violations of Section 13(b)(2)(A) and (B) of
the Securities Act, 15 U.S.C. § 78m(b)(2)(A) and (B), on the ground that the Complaint
fails to allege and cannot plausibly allege under the heightened pleading requirements of
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[PROPOSED] ORDER GRANTING DEFENDANT LIANG’S 12(B)(6) MOTION TO DISMISS
Rule 9(b) that Liang had actual knowledge of Ixia’s alleged securities violation or that
Liang substantially assisted Ixia’s violation. Ponce v. S.E.C., 345 F.3d 722, 737 (9th Cir.
2003); S.E.C. v. Nacchio, 438 F.Supp.2d 1266, 1285 (D. Colo. 2006); S.E.C. v. Baxter,
No. C-05-03843 RMW, 2007 WL 2013958, at *9 (N.D. Cal. Jul. 11, 2007); S.E.C. v.
Espuelas, 905 F.Supp.2d 507, 525 (S.D.N.Y. 2012).
IT IS SO ORDERED.
Dated: ___________________
Honorable Consuelo B. Marshall
United States District Court Judge
318502002.3
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