YVONNE GONZALEZ ROGERS, UNITED STATES DISTRICT COURT JUDGE
Defendant Ubiquiti Networks, Inc. ("Ubiquiti") is a publicly traded company that makes broadband wireless devices and sells them worldwide, primarily in emerging markets such as South America. Plaintiffs are alleged purchasers of Ubiquiti stock who seek to represent a class of similarly situated individuals. The gravamen of their allegations is that Ubiquiti knew of a wide-ranging counterfeit operation producing knock-offs of Ubiquiti devices and thereby damaging Ubiquiti's standing in the market, but that Ubiquiti, in statements made in connection with its October 14, 2011 initial public offering of stock ("IPO"), as well as later statements connected to its announcement of quarterly financial results, downplayed the extent of the counterfeiting and concealed its impact on Ubiquiti's business. Plaintiffs allege that, once the market learned of the counterfeiting's true extent and impact, Ubiquiti's stock price fell, damaging them and the putative class.
All defendants move for dismissal of plaintiffs' Consolidated Amended Complaint (Dkt. No. 54 ("CAC")). The CAC groups the defendants in various sets and subsets, as set forth below:
The CAC asserts five counts of securities violations, as against the defendants indicated:
The Ubiquiti Defendants seek dismissal with prejudice of the entire CAC. (Dkt. No. 57 ("Ubiquiti MTD").) The Underwriter Defendants seek dismissal with prejudice of the two claims asserted against them, that is, plaintiffs' Section 11 and Section 12(a)(2) claims. (Dkt. No. 56 ("Underwriter MTD").) Both motions are joined by all defendants, and are fully briefed. (Dkt. Nos. 65 ("Opp'n"), 67 ("Ubiquiti Reply"), 69 ("Underwriter Reply").)
Having carefully considered the papers submitted and the pleadings in this action, and having had the benefit of oral argument, for the reasons set forth below the Court hereby
Located in San Jose, California, Ubiquiti designs, manufactures and sells broadband wireless solutions worldwide. It offers a portfolio of wireless networking products and solutions, including high performance radios, antennas, and management tools designed for wireless networking and other applications in the unlicensed radio frequency spectrum. Ubiquiti's business focuses on developing economies, such as those in South America, the Middle East, and Asia.
Plaintiffs allege that, from 2009 through 2012, unbeknownst to the company's investors but known internally to the Ubiquiti Defendants, Ubiquiti was the target of a widespread international counterfeiting scheme that was growing in size and materially affecting its business. At the center of the scheme were Kozumi USA Corp. ("Kozumi"), a former distributor of Ubiquiti products, and its owner, Shao Wei "William" Hsu. Hsu allegedly used a factory in Shenzhen, China, called the "Hoky" factory and owned by Kenny Deng, to manufacture counterfeit Ubiquiti products. Hsu then allegedly distributed the products through Kozumi or its subsidiaries to markets also served by Ubiquiti.
Ubiquiti completed its IPO on October 14, 2011. Plaintiffs allege that, in statements leading up to and after the IPO, Ubiquiti knowingly or recklessly misrepresented the risk that counterfeiting presented to its business. Specifically, plaintiffs identify six different allegedly
Seventeen days after this last statement, on May 18, 2012, Ubiquiti filed a trademark action in this Court against Hsu and Kozumi, seeking, among other things, a temporary restraining order halting Hsu and Kozumi's encroachment on Ubiquiti's intellectual property rights.
The Court will supply further details as pertinent in the analyses that follow.
A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in the complaint. Ileto v. Glock, Inc., 349 F.3d 1191, 1199-1200 (9th Cir. 2003). "Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.1990). All allegations of material fact are taken as true and construed in the light most favorable to the plaintiff. Johnson v. Lucent Techs., Inc., 653 F.3d 1000, 1010 (9th Cir.2011). 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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
The Court turns first to Counts 1 and 2 of the CAC, which arise under the Securities Act. The Court then skips to Count 4, brought under the Exchange Act. The Court addresses Counts 3 and 5 in tandem at the end of this opinion, because those counts require plaintiffs to plead an underlying
Section 11 "provides a cause of action to any person who buys a security issued under a materially false or misleading registration statement." In re Century Aluminum Co. Sec. Litig., 729 F.3d 1104, 1106 (9th Cir.2013). To state a claim under Section 11, plaintiffs must adequately plead "(1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment." Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1161 (9th Cir.2009) (quoting In re Daou Sys., Inc., 411 F.3d 1006, 1027 (9th Cir.2005)). Section 11 is a strict liability statute that does not require fraudulent intent. Daou, 411 F.3d at 1027. However, claims that lack the element of fraud are still subject to the heightened pleading requirements of Rule 9(b) if they "sound in fraud." Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-04 (9th Cir.2003); In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1404-05 (9th Cir.1996).
For purposes of the instant motion, the parties raise two fundamental issues regarding plaintiffs' Section 11 claim: (a) whether plaintiffs' allegations satisfy the Section 11 standing requirement that their shares be "traceable" back to the IPO; (b) assuming standing, whether the heightened pleading standing of Rule 9(b) applies to plaintiffs' Section 11 claim; and (c) whether plaintiffs have pled a prima facie Section 11 claim under the applicable pleading standard. As set forth below, the Court answers the first two questions in the affirmative and the last in the negative. Accordingly, the Court
To have standing to bring a Section 11 claim, plaintiffs must be able to trace their shares back to an allegedly misleading registration statement. Century Aluminum, 729 F.3d at 1106 (citing Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1080 (9th Cir.1999); Lee v. Ernst & Young, LLP, 294 F.3d 969, 978 (8th Cir.2002)). Century Aluminum outlined two types of situation in which the tracing issue arises, and explained what both require of a plaintiff seeking to allege standing. In the first situation, "all of a company's shares have been issued in a single offering under the same registration statement." Id. In such circumstances, the tracing requirement "generally poses no obstacle." Id. Simply pleading that the plaintiff's shares "are directly traceable to the offering in question states a claim `that is plausible on its face.'" Id. at 1107 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). "No further factual enhancement is needed because by definition all of the company's shares will be directly traceable to the offering in question." Id. (emphasis in original) (citing DeMaria v. Andersen, 318 F.3d 170, 176 (2d Cir.2003)).
The second situation occurs when "a company has issued shares in multiple offerings under more than one registration statement." Id. In such scenarios, "the plaintiff must prove that her shares were issued under the allegedly false or misleading registration statement, rather than some other registration statement." Id. at 1106. "Courts have long noted that tracing shares in this fashion is `often impossible,' because `most trading is done through
Here, plaintiffs adequately allege their statutory standing to bring a Section 11 claim. They allege the existence of, and the Court incorporates by reference, the Form S-1 Registration Statement that Ubiquiti filed in connection with its IPO. (CAC ¶ 107; Dkt. No. 58 ("Masuda Decl."), Ex. 1 ("Registration Statement").)
The Underwriter Defendants respond that the second Century Aluminum approach is the appropriate one because, they say, something less than all of Ubiquiti's shares were locked up. (Underwriter Reply at 4.) The Underwriter Defendants aver that, under the Prospectus, which the CAC incorporates by reference, some 26,000 shares out of 87 million were not subject to the lock-up agreement and that, moreover, it provided an exception to the lock-up agreement such that any holders of locked-up stock could dispose of their shares "if they received permission to do so." (Id.) The Underwriter Defendants' brief does not represent how many, if any, exceptions were granted, and at oral argument counsel acknowledged that the number is unknown. (Id.; Dkt. No. 74 ("Transcript") at 12:23-24.) Nevertheless, the Underwriter Defendants contend that plaintiffs lack standing because "[t]here is no way to know whether the shares plaintiffs purchased originated in the IPO." (Underwriter Reply at 4.)
If defendants' figures are true, then plaintiffs' allegations would not prove their standing to a certainty. Under Century Aluminum, however, the bar plaintiffs must clear to plead their claim is set only as high as "plausibility," not, as defendants would have it, certain knowledge. See 729 F.3d at 1107-08. Even assuming defendants are correct about the number of unrestricted shares available at the time plaintiffs purchased their shares, plaintiffs' theory of standing is straightforward, eminently plausible, and, indeed, highly likely. Defendants' alternate explanation — that plaintiffs chanced to purchase some of the 26,000 unrestricted shares buried in a haystack of over 87 million — is plausible, but not as plausible as plaintiffs' explanation. This case is not like Century Aluminum, where some 46 million shares were already available on the public market at the time plaintiffs bought in a secondary offering of 24.5 million shares. 729 F.3d at 1106. Rather, here, the CAC and documents incorporated therein allege that all or very nearly all the shares of stock available publically at the time plaintiffs bought in March 2012 were traceable to the registration statement for the only offering that had been made at that time, Ubiquiti's IPO. Under Century Aluminum, plaintiffs satisfactorily allege their standing to pursue a Section 11 claim. Accordingly, the Underwriter Defendant's motion is
"Although the heightened pleading requirements of the [Private Securities Litigation Reform Act
Here, plaintiffs' basis for their Section 11 claim is a set of representations made in the Registration Statement. (See CAC ¶¶ 107-14.) Language from the Registration Statement set forth in paragraph 110 of the CAC is illustrative:
(CAC ¶ 110 (quoting Reg. Stmt. at 20-21) (boldface in original; italicization supplied).)
Plaintiffs assert that their Section 11 claim does not sound in fraud because they do not allege a "unified course of fraudulent conduct" and do not make a "wholesale adoption" of their securities fraud allegations — that is, they do not rely on the exact same allegations for both a Section 10(b) claim and the subject Section 11 claim. (Opp'n at 7 (quoting Daou, 411 F.3d at 1027-28).) Plaintiffs point to paragraph 191 of the CAC, which states:
(CAC ¶ 191.) Plaintiffs also rely on the fact that, when pleading their Section 11 misrepresentation claim, they did not incorporate all of the allegations relied on for their Section 10(b) fraud claim. (Opp'n at 8; compare CAC ¶ 189 (first paragraph in Section 11 claim, pleading that "Plaintiff incorporates ¶¶ 1-13, 25-114 and 172-188 by reference") with id. ¶ 217 (first paragraph in Section 10(b) claim, pleading that "Plaintiff incorporates ¶¶ 14-54 and 115-188 by reference").)
While it is true that plaintiffs have not pled a unified course of fraudulent conduct or engaged in a "wholesale adoption" in a punctilious, hypertechnical sense, their Section 11 claim still sounds in fraud, for three reasons. First, alleging a unified course of fraudulent conduct is but one way that a Section 11 claim can sound in fraud, not, as plaintiffs state, the "only" way. (Opp'n at 7.) Daou, on which plaintiffs rely, stands for the proposition that a unified course of conduct is a sufficient condition for finding that a Section 11 claim sounds in fraud; it does not establish that a unified course of fraudulent conduct is necessary to plead a claim that sounds in fraud. 411 F.3d at 1027-28. Second, under Rigel Pharmaceuticals, plaintiffs' nominal effort to exclude allegations of fraud is unconvincing in light of their failure to articulate any other characterization of Ubiquiti's alleged wrongdoing. (See Opp'n at 10 (describing "international counterfeiting scheme" as "known" to Ubiquiti Defendants); Transcript at 7:3-15 (stating that plaintiffs have pled Ubiquiti Defendants' "knowledge" of the counterfeiting scheme).) Finally, plaintiffs' effort to plead around their own allegations of fraud is undermined by their use of allegations incorporated into their Section 11 claim alone when defending their Section 10(b) securities fraud claim. (See Opp'n at 20 (citing paragraphs 61-63, 83, 85, 115, 116, and 122 of the CAC in support of their Section 10(b) claim, which incorporates only paragraphs 14-54 and 115-188).)
A plaintiff states a prima facie Section 11 claim by pleading "(1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment." Daou, 411 F.3d at 1027 (quoting Stac, 89 F.3d at 1403-04). "No scienter is required for liability under section 11; defendants will be liable for innocent or negligent material misstatements or omissions." Id.
As explained above, plaintiffs' Section 11 claim sounds in fraud, so they are required to "set forth what is false or misleading about a statement, and why it is false." Rubke, 551 F.3d at 1161 (quoting Yourish v. Cal. Amplifier, 191 F.3d 983, 993 (9th Cir.1999)). "This requirement can be satisfied by pointing to inconsistent contemporaneous statements or information (such as internal reports) which were made by or available to the defendants." Id. (internal quotation marks omitted). Where "particular averments of fraud are insufficiently pled under Rule 9(b)," the Court will "`disregard' those averments or `strip' them from the claim" and "then examine the allegations that remain to determine whether they state a claim." Daou, 411 F.3d at 1028 (quoting Vess, 317 F.3d at 1105).
The Ubiquiti Defendants attack both the "omission or misrepresentation" and the "material" prongs of plaintiffs' Section 11 claim. As set forth below, plaintiffs fail to plead a false or misleading omission or representation and, accordingly, the Court need not address the Ubiquiti Defendants' attack on the element of materiality.
Plaintiffs base their Section 11 claim on statements contained in the "Risk Factors" section of the Registration Statement Ubiquiti initially filed with the SEC on June 17, 2011 and which came into its final form on October 14, 2011, the day of the IPO. (CAC ¶¶ 107-13; see also Registration Statement at 20-21, 24-26.) The crux of plaintiffs' claim is that the Registration Statement's "characterization of the counterfeiting scheme as a mere potential risk or contingency was misleading" because the counterfeiting scheme was an actual and growing problem. (Opp'n at 10-11; see also CAC ¶¶ 110-13 (enumerating ways defendants allegedly "misled investors".)
(Id. (emphasis supplied).) Similarly, at page 26, the Registration Statement stated:
(Id. ¶ 111 (quoting Reg. Stmt. at 26) (emphasis supplied).)
Not all of plaintiffs' cited passages from the Registration Statement contain reports of actual counterfeiting, however. Paragraph 112 of the CAC describes risks pertaining to limited intellectual property enforcement regimes abroad, but does not state that Ubiquiti had suffered actual difficulties with enforcement, only that "[m]any companies" had. (CAC ¶ 112 (quoting Reg. Stmt. at 26).) Likewise, paragraph 113 describes Ubiquiti's reliance on "a combination of patent, copyright, trademark[,] and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect [Ubiquiti's] proprietary rights," and states that (i) "effective patent, trademark, copyright[,] and trade secret protection may not be available in every country in which our services and products are available," (ii) "others may independently develop technologies that are competitive with ours or that infringe on our intellectual property," and (iii) Ubiquiti's enforcement of its intellectual property rights "depends on the success of [Ubiquiti's] legal actions against these infringers, but these actions may not be successful, even when [Ubiquiti's] rights have been infringed." (Id. ¶ 113 (quoting Reg. Stmt. at 12) (emphasis supplied).)
Plaintiffs do not establish with the requisite particularity why these statements are false or misleading. Plaintiffs argue that the statements are misleading because events described as contingencies had already occurred. But several of the statements acknowledge this fact, stating that counterfeit "Ubiquiti" goods already had been found in the marketplace and that Ubiquiti's intellectual property rights already had been infringed. This latter risk, of intellectual property infringement, is the same risk described in paragraphs 112 and 113, stating the risks attendant upon the difficulty of intellectual property enforcement in some foreign jurisdictions.
Plaintiffs' allegations of the scope of the counterfeiting scheme at the time the Registration Statement issued — October 14, 2011, concurrent with the IPO — do not establish with the requisite particularity why the statements in the Registration
In November 2009, Ubiquiti terminated a distribution agreement with Kozumi and its owner, Hsu. (CAC ¶ 65.) Through subsidiaries also controlled by Hsu, Kozumi had been a distributor of legitimate Ubiquiti products in Argentina, Paraguay, and Brazil, but Ubiquiti's Vice President of Business Development, Benjamin Moore, learned that Kozumi also "was offering copycat Ubiquiti products under the Kozumi name." (Id. ¶ 50, 67.) Plaintiffs allege that, after Ubiquiti terminated Kozumi's distributorship, Hsu then masterminded a worldwide scheme to sell counterfeit Ubiquiti products. (Id. ¶ 67-68.) Hsu's alleged partner in the scheme was a Chinese national called Kenny Deng, who owned the Hoky factory, a manufacturing facility in Shenzhen, China. (Id. ¶ 68.)
In early 2010, Moore received three emails from different Ubiquiti distributors indicating that Kozumi was selling products similar to Ubiquiti products and that Kozumi was trying to acquire Ubiquiti products through Ubiquiti distributors. (CAC ¶¶ 69-72.) Moore allegedly asked the distributors to refrain from doing business with Hsu and Kozumi. (Id. ¶ 73.) In the latter half of 2010, Hsu obtained the Argentine trademark for "UBIQUITI NETWORKS & Design from third-party Ditelco Informatica S.R.L...., which had registered the trademark in May 2008" (the "Argentine Trademark") and filed Argentine trademark applications for other marks associated with three Ubiquiti products. (Id. ¶¶ 74-75 (capitals in original).)
On January 1, 2011, armed with the Argentine Trademark, Shu represented to customs authorities in China that Hoky was authorized to "manufacture and export" Ubiquiti and other products. (CAC ¶ 76.)
In early 2011, Ubiquiti received two more emails from different Argentine distributors apprising of Kozumi products similar or identical to Ubiquiti products. (CAC ¶¶ 77, 78.) In March 2011, Ubiquiti hired a new vice president of operations, Yu Cheng Lin ("Lin"). (Id. ¶ 79.) Ubiquiti CEO and founder Pera told Lin of "a potential counterfeit issue in China" and tasked him with investigating counterfeit operations at the Hoky facility. (Id.) In "late March 2011 or early April 2011," Moore received word from a Chinese Ubiquiti distributor that "Hoky was manufacturing counterfeit Ubiquiti products at its factory and using the Ubiquiti brand on the products." (Id. ¶ 80.)
In April 2011, Moore and Pera traveled to Shenzhen to investigate the Hoky factory. (CAC ¶ 81.) On the taxi ride to Hoky, "the taxi driver called the factory and warned them that he was bringing two Americans," which led Moore and Pera to suspect Hoky's manufacture of counterfeit goods. (Id.) At the factory, Moore and Pera met Deng, the Hoky factory's owner, who denied making counterfeit goods but also stated that "everybody does it." (Id.)
Following the visit by Moore and Pera, Ubiquiti investigated further, sending "someone to the Hoky factory who reported that Hoky was making counterfeit Ubiquiti products." (CAC ¶ 82.) Ubiquiti then contrived to have persons in Argentina and China acquire Hoky-manufactured products bearing Ubiquiti's name, and, on August 30, 2011, confirmed through internal analysis that those products were counterfeit. (CAC ¶ 82.) Ubiquiti thereafter retained a law firm in China, which worked with Chinese authorities to shut down the Hoky factory in a raid that occurred a month on November 17, 2011, roughly one month after Ubiquiti's October 14, 2011 IPO. (CAC ¶ 86.) Later, Ubiquiti learned that, prior to the raid on Hoky, in September
It is on the strength of these allegations that plaintiffs argue that the Registration Statement was misleading because it failed to express the full magnitude of the counterfeiting problem the company faced from 2009 to the October, 14 2011 IPO. However, to plead a misleading statement under the securities laws, it is not enough merely to allege a failure to make a full disclosure. Brody v. Transitional Hospitals Corp., 280 F.3d 997, 1006 (9th Cir.2002); In re Cutera Sec. Litig., 610 F.3d 1103, 1109 (9th Cir. 2010). Rather, to be actionably misleading, an omission "must affirmatively create an impression of a state of affairs that differs in a material way from the one that actually exists." Brody, 280 F.3d at 1006 (citing McCormick v. The Fund American Cos., 26 F.3d 869, 880 (9th Cir. 1994)); see also Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985-88 (9th Cir. 2008) (where company chose to "tout" its backlogged projects as future revenue, company's failure to warn that stop-work orders had issued on certain backlogged projects and therefore likely never would produce revenues was misleading).
Here, the activities alleged in November 2009 through October 2011 amount to nothing more than what the Registration Statement ultimately warned of in synoptic form: a present problem with counterfeiting, against which Ubiquiti was taking action, and which could prove difficult to detect and combat for the reasons described in the Registration Statement. While it is true that the Registration Statement sometimes employs the subjunctive mood, which indicates possibility and other counterfactual states, the Registration Statement also reports that counterfeit goods had been found in the marketplace and that Ubiquiti's intellectual property rights had been infringed. The import of those statements is unmistakable, notwithstanding the statements of contingency beside which they sometimes appear. Read as a whole, the Registration Statement apprises the marketplace that counterfeiting and intellectual property violations have occurred and are expected to reoccur, that these slights to Ubiquiti's brand are difficult to police, and that they may prove deleterious to Ubiquiti's standing in the market. Plaintiffs offer no persuasive reason why the accused statements are false or misleading simply because they sometimes, though not always, described counterfeiting as a contingency rather than an actuality. See, e.g., In re Convergent Technologies Sec. Litig., 948 F.2d 507, 515-16 (9th Cir.1991) (finding adequate disclosure of risk that had already materialized to some extent where risk statement was "substantive" and "repeatedly emphas[ized] significant risk factors"; warning that the "securities laws do not require management to bury shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking" (internal quotation marks omitted)); In re LeapFrog Enterprises, Inc. Sec. Litig., 527 F.Supp.2d 1033, 1048 (N.D.Cal.2007) (holding that "defendants' cautionary statements and are not actionable to the extent plaintiffs contend defendants should have stated that the adverse factors [in their risk statements] `are' affecting financial results rather than `may' affect financial results"; collecting citations). Further, plaintiffs offer no persuasive reason why the accused statements are false or misleading in the absence of further detail. "Often, a statement will not mislead even if it is incomplete or does not include all relevant facts.... No matter how detailed and
For the foregoing reasons, the Court determines that plaintiffs have failed to plead adequately the "false or misleading" element of their Section 11 claim, and
The Underwriter Defendants challenge plaintiffs' statutory standing to bring a Section 12 claim, as well as plaintiffs' pleading of the "seller" prong of a prima facie Section 12(a)(2) claim. The Court dismisses this claim because plaintiffs concede that the CAC fails to allege their statutory standing for purposes of bringing a Section 12 claim.
A plaintiff establishes standing to sue under Section 12 by showing she purchased its shares in a public offering, as opposed to the secondary market. Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 577, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995); see also In re Levi Strauss & Co. Sec. Litig., 527 F.Supp.2d 965, 983 (N.D.Cal.2007) (explaining that "the majority of the cases appear to hold that, based on Gustafson, § 12 is limited to transactions purchased pursuant to a public offering and, therefore, does not extend to any after market transactions" (emphasis in original)). The Underwriter Defendants assert that plaintiffs fail to allege that they purchased their shares in the IPO directly. (Underwriter MTD at 5-7.) Plaintiffs concede the point by stating that they "can" allege standing if given leave to amend their complaint to add Gregory Osborn as plaintiff. (Opp'n at 18.) Plaintiffs aver that Osborn purchased his shares in the IPO. (Id.; Id. Ex. A. (Osborn certification of stock purchases).)
The Underwriter Defendants argue that it would be futile to permit plaintiffs to add Osborn to their complaint because Osborn's certificate establishes he did not buy his stock in the IPO. They argue that, first, his certificate indicates that bought stock the day before the IPO, and, second, his certificate says he bought shares at the price of $17.72, when the IPO price was set between $15.00 and $17.00. (Underwriter Reply at 5-6; see also Transcript at 12:1-14-18.) The Court concludes that the Underwriter Defendants raise, at most, the possibility that Osborn may not have standing for Section 12 purposes. However, their arguments range outside the pleading presently before the Court and marshal no judicially noticeable facts to support their challenge to Osborn's suitability as a Section 12 plaintiff. Accordingly, defendants have not made the "strong showing" of futility that would warrant denial of plaintiffs' request for leave to amend. See Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir.2003).
The Court
Section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b), makes it unlawful for any person to "use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). SEC Rule 10b-5 implements this provision by making it unlawful to, among other things, "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b).
In 1995, Congress enacted the PSLRA as a check against abusive litigation
Under the "total mix" approach of Basic, a statement is material "when there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available.'" Reese v. Malone, 747 F.3d 557, 568, 2014 WL 555911, at *6 (9th Cir. Feb. 13, 2014) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)). "To plead materiality, the complaint's allegations must `suffice to raise a reasonable expectation that discovery will reveal evidence satisfying the materiality requirement, and to allow the court to draw the reasonable inference that the defendant is liable.'" Id. (quoting Matrixx,
The CAC bases its Section 10(b) claim on five allegedly material misstatements. First, plaintiffs point once more to the very statements made in the Registration Statement, but this time to those set forth in (1) Ubiquiti's SEC Form 10-Q for 1Q12, filed on November 14, 2011, and (2) Ubiquiti's SEC Form 10-Q for 2Q12, filed on January 31, 2012. Next, plaintiffs identify (3) Ubiquiti CEO Pera's statement on a January 31, 2012, conference call with analysts that Argentina was a "big hitter" driving growth in Latin America, even though at some point in time Ubiquiti discovered that demand for Ubiquiti's products in Argentina had softened considerably. Plaintiffs also identify (4) Ubiquiti's May 1, 2012 press release, issued in conjunction with its 3Q12 report, which quoted Pera saying there was "solid momentum across all elements" of the company's product lines. Finally, plaintiffs identify (5) the statement of Ubiquiti CFO Ritchie on a May 1, 2012 conference call where Ritchie stated that Argentina, among other South American countries, "continue[d] to do well for" Ubiquiti. The thrust of plaintiffs' claim is that these statements are materially misleading (and, as discussed below, were made with scienter) because, on May 18, 2012, seventeen days after the last statements identified above, Ubiquiti filed suit in this Court against Kozumi and Hsu seeking to halt their counterfeiting activities and, as part of the lawsuit, Ritchie filed a declaration (CAC, Ex. 7 (the "Ritchie Declaration")) in which he testified to the negative impact that Kozumi and Hsu's counterfeiting activities were having on Ubiquiti, a negative impact felt particularly acutely in Argentina.
On November 14, 2011, Ubiquiti filed a Form 10-Q with the SEC which reported its financial its results for 1Q12, the quarter ending September 30, 2011 (the "1Q12 10-Q"). (CAC ¶ 117.) The 1Q12 10-Q included, plaintiffs allege, statements identical to those in the Registration Statement, which had the alleged effect of "perpetuat[ing] the false impression that counterfeiting was not a current problem." (Id. ¶¶ 117-18.)
The Registration Statement became effective the day of the Ubiquiti IPO, October 14, 2011. Plaintiffs identify no events that transpired between that date and the filing, one month later, of the Form 10-Q that would make the Court's analysis of the Registration Statement inapplicable here. Accordingly, for the same reasons applicable to the Registration Statement, plaintiffs fail to allege a material misstatement in Ubiquiti's Form 10-Q of November 14, 2012.
Ubiquiti filed its Form 10-Q for 2Q12 on January 31, 2012 (the "2Q12 10-Q"). The
Specifically, the following occurred. On November 17, 2011, three days after Ubiquiti filed the 1Q12 10-Q, Chinese custom authorities raided the Hoky factory in Shenzhen. (CAC ¶¶ 63, 122.) Following the raid, the doors of the Hoky facility were padlocked; the factory's owner, Deng, was taken into custody; and Ubiquiti learned the manner in which its intellectual property had been compromised: an engineer formerly employed by one of Ubiquiti's contract manufacturers had gone to work for Hoky. (Id. ¶ 123.)
About a month later, on December 22, 2011, Ubiquiti CEO Pera and Kozumi owner Hsu began an email colloquy that would last several weeks, the substance of which was, in essence, a negotiation in which Hsu offered to exchange the Argentine Trademark in exchange for Pera and Ubiquiti's withdrawal of legal action against Deng; a promise from Pera not to pursue later legal action against Hsu, Kozumi, or Deng; and a seven-digit payment from Pera/Ubiquiti to Hsu/Kozumi.
In the CAC, plaintiffs reprise their argument that the statements contained in the 2Q12 10-Q were misleadingly incomplete because they failed to characterize counterfeiting as an extant and worsening problem rather than a mere contingency. (CAC ¶ 137.) The Court rejects this argument with respect to the 2Q12 10-Q for the same reasons that it rejected it with respect to the Registration Statement and the 1Q12 10-Q. Ubiquiti's omission of the minutia of its struggle against counterfeiters did not render its statement of the risks counterfeiting posed either false or misleading, given Ubiquiti's disclosure that counterfeiting had occurred in the past and was expected to occur in the future.
The third statement plaintiffs challenge stems not from an SEC filing but rather a statement Pera made on a conference call with analysts held on January 31, 2012, concurrent with Ubiquiti's announcement of its 2Q12 financial results. Pera had the following exchange with an analyst:
(Masuda Decl., Ex. 17, at 52 of 71; see also CAC ¶ 13 3 (quoting in part).)
Plaintiffs allege that Pera's remarks were knowingly or recklessly misleading because they "conceal[ed] the international counterfeiting scheme's impact on sales orders in Argentina and stating that orders from Latin America, including Argentina, were consistent with the prior quarter." (CAC ¶¶ 133-34.) Plaintiffs' basis for this characterization is the Ritchie Declaration, filed in the Kozumi litigation on May 18, 2012, more than three months after Pera made the subject statement. Plaintiffs cite the Ritchie Declaration in alleging that, contrary to Pera's statements on the January 31 conference call:
(Id. ¶ 134 (citing Ritchie Decl. ¶¶ 5-11).)
Leaving aside for now what Pera knew of these facts and when he knew it, the Court must determine whether plaintiffs have adequately pled that the statements Pera made on the January 31 conference call were materially misleading. The Court concludes that one is: Pera's statement that all of the "big hitters" but Asia, a group which included Argentina, had seen growth from quarter to quarter. The analyst asked two questions, neither of which are models of clarity but which are reasonably intelligible in context: (1) which countries in "Asia Pac" — apparently Asia Pacific — and South America "drove the upside," that is, contributed to Ubiquiti's strong financial showing, and (2) whether "that" — apparently, the upside — stemmed from Ubiquiti's airMAX product only or also from "international orders for UniFi and AirVision" products. Pera stated that he would answer the second question first. He then apparently did so, answering question 2 by stating that all of Ubiquiti's product lines "drove the upside." He then answered question 1, which sought identification of the countries that were driving the upside. Pera identified those countries as all of the "big hitters" but Asia; represented that India's revenues had increased; and then said that the rest of the big hitters, including Argentina, had remained "consistent with the prior quarter."
Pera's statement does not expressly answer the obvious question: consistent with what? Plaintiffs assert that Pera was speaking of declining sales orders in Argentina. (CAC ¶¶ 133-34; Opp'n at 25.)
On May 1, 2012, Ubiquiti issued a press release that quoted Pera saying that Ubiquiti "saw solid momentum across all elements of our business, led by the AirMax platform which again posted double digit sequential growth." (Masuda Decl., Ex. 13, at 2 of 8; CAC ¶ 156 ("Press Release Statement").) Plaintiffs rest their Section 10(b) claim in part on the Press Release Statement, alleging that "there was not `solid momentum' in Argentina because sales orders from Argentina had declined substantially in 2Q12 and 3Q12." (CAC ¶ 158.) Plaintiffs support this assertion by citing the decline in sales orders and book-to-bill ratio set forth in the Ritchie Declaration. (See id.)
The Ubiquiti Defendants offer two alternative grounds for dismissal of the Section 10(b) claim, as premised on the Press Release Statement. They contend, first, that the Press Release Statement was non-actionable "puffing," or, second, that if it was not puffing, it was a true statement because the statement refers not to sales orders or revenues, only to the company's "technology platforms," that is, its product lines, and those indeed had "solid momentum." (Ubiquiti MTD at 19-20; Ubiquiti Reply at 10-11.) Plaintiffs rejoin that the statement is false because Pera "represented that there was solid momentum across all elements of [Ubiquiti's] business,
The Ubiquiti Defendants are correct. A claim of "solid momentum" across "all" elements of a business is the sort of vague, generalized statement of corporate optimism that courts in the Ninth Circuit have consistently held to be non-actionable "puffery." See City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., 880 F.Supp.2d 1045, 1063-64 (N.D.Cal.2012) (collecting cases). Plaintiffs' argument that Pera's reference to "all" elements makes the statement false is untenable: if Pera referred to "all" elements of the business, then his statement is too vague and generalized to be actionable, but if Pera referred only to product lines, plaintiffs have raised no challenge to the statement's accuracy. (See Opp'n at 27.) Plaintiffs do not argue that Pera meant, by "all elements," to refer to all the countries Ubiquiti reached (see id.), nor could the Court find that interpretation plausible, given the entirety of the press release's quotation of Pera.
The final statement on which plaintiffs base their Section 10(b) claim is an answer Ritchie gave to an analyst's question on the quarterly conference call announcing Ubiquiti's 3Q12 results. The statement of which plaintiffs complain is set forth in boldface type herein:
(Masuda Decl., Ex. 8, at 41-42 of 71; see also CAC ¶ 157 (quoting in part).)
Plaintiffs allege that the statement that Argentina "continue[d] to do well" for Ubiquiti is false or misleading because, as the Ritchie Declaration, executed 17 days later, reported, sales orders in Argentina had declined by 88 percent and the book-to-bill ratio for Ubiquiti's products in that nation had plummeted. The Ubiquiti Defendants contend that the statement is puffing. (Ubiquiti MTD at 18-19; Ubiquiti Reply at 9-10.) The Ubiquiti Defendants are correct. The context in which Ritchie proffered the representation that certain countries, Argentina among them, "continue to do well" for Ubiquiti was an answer to a question asking Ritchie to identify, not the countries that were continuing to perform well, but rather any "new markets" where Ubiquiti had "managed to add" distributors. Ritchie's answer was, essentially, that there were no new markets, but that the old markets were doing "well." As the Ubiquiti Defendants aptly note, Ritchie omitted any mention of "why, how, under what standard, or compared to what" those markets were doing well. (Ubiquiti Reply at 10.) No reasonable investor would rely on such a statement when considering the total mix of information available to her. Accordingly, the Court holds that Ritchie's May 1, 2012 conference call statement is non-actionable puffing.
With respect to Ubiquiti's 1Q12 10-Q form and 2Q12 10-Q form, Plaintiffs fail to plead a material misstatement or omission. Plaintiffs' Section 10(b) claim is therefore
With respect to Pera's representations of January 31, 2012 regarding consistent results that "drove the upside" in 2Q12, plaintiffs adequately plead a material misstatement because it is plausible that a reasonable listener could interpret Pera's statement to mean that sales orders in Argentina had remained consistent between 1Q12 and 2Q12 when, plaintiffs allege, they in fact had dropped. As set forth in the following Section of this Order, however, the Court ultimately concludes that plaintiffs fail to plead that Pera made the accused statement with scienter.
With respect to the accused statements in Ubiquiti's press release of May 1, 2012, as well as that allegedly made by Ritchie on the quarterly conference call held that same day, the Court concludes the statements are non-actionable puffing and thus, as a matter of law, may not form the basis of a Section 10(b) claim. Plaintiffs' Section 10(b) claim is therefore
Defendants challenge a second element of plaintiff's Section 10(b) claim, namely, scienter. (Ubiquiti MTD at 22-25; Ubiquiti Reply at 11-15.) Scienter is "a mental state embracing intent to deceive, manipulate, or defraud." See Tellabs, 551 U.S. at 319, 127 S.Ct. 2499. Under the PSLRA, a complaint of securities
In ruling on a motion to dismiss for failure to plead a strong inference of scienter, the Court must determine whether all the facts alleged, taken collectively, give rise to a strong inference of scienter. See Tellabs, 551 U.S. at 322-23, 326, 127 S.Ct. 2499 ("[T]he court's job is not to scrutinize each allegation in isolation but to assess all the allegations holistically."); S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir.2008) ("The Supreme Court's reasoning in Tellabs permits a series of less precise allegations to be read together to meet the PSLRA requirement."). "When conducting this holistic review ... [a court] must also `take into account plausible opposing inferences' that could weigh against a finding of scienter." Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1006 (9th Cir.2009) (quoting Tellabs, 551 U.S. at 323, 127 S.Ct. 2499). In the wake of the Supreme Court's decision in Matrixx, the Ninth Circuit has clarified that a court may conduct the requisite holistic review either (i) alone or (ii) as the second step of a "dual inquiry" wherein the court determines, first, "whether any of the plaintiff's allegations, standing alone, are sufficient to create a strong inference of scienter; [and] second, if no individual allegations are sufficient,... whether the insufficient allegations combine to create a strong inference of intentional conduct or deliberate recklessness." VeriFone, 704 F.3d at 702 (quoting Zucco, 552 F.3d at 992). Under either approach, to satisfy the scienter requirement, a plaintiff "must plead facts rendering an inference of scienter at least as likely as any plausible opposing inference." Tellabs, 551 U.S. at 328, 127 S.Ct. 2499 (emphasis in original). Here, the Court examines the CAC holistically and, for the reasons set forth below, concludes that plaintiffs fail to raise the necessary "cogent and compelling" inference of scienter. Id. at 324, 127 S.Ct. 2499.
Plaintiffs' primary basis for alleging scienter is the Ritchie Declaration. That declaration contains data purporting to quantify the harm to Ubiquiti's business in Argentina caused by Hsu and Kozumi's alleged encroachment on Ubiquiti's intellectual property rights. Plaintiffs contend that the data therein gives the lie to Ubiquiti's 1Q12 and 2Q12 10-Q statements describing (according to plaintiffs) counterfeiting as a mere risk, as well as to Pera's January 31, 2012 statement that Argentina was a "big hitter" driving Ubiquiti's growth, and the statements of Pera and Ritchie issued May 1, 2012, referring to "solid momentum across all elements" of the company's product lines and Argentina's "continu[ing] to do well" for the company.
The difficulty with plaintiffs' position is that the Ritchie Declaration was executed on May 18, 2012, after all of the accused statements issued. To plead scienter, however, "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." Metzler Inv. GMBH, 540 F.3d at 1066 (emphasis supplied) (quoting Ronconi v. Larkin, 253 F.3d 423, 432 (9th Cir.2001)); see also Yourish, 191 F.3d at 996 ("[A] complaint can establish that a statement was false when made by alleging a later statement by the defendant along the lines of `I knew it all along.'" (internal quotation marks and brackets omitted)). Here, the Ritchie Declaration contains no internal indicia of when Ritchie learned the information contained therein. Accordingly, it falls short of adequately pleading that Ritchie (or, for that matter, Pera) had the required state of mind at the time they made the accused statements. Any inference that they contemporaneously knew about declining sales or demand in Argentina strengthens as their statements approach the date Ritchie executed his declaration, May 18, 2012, but the Court has already held that the most recent statements, made May 1, 2012, are nonactionable puffery. The Ritchie Declaration does not support a strong inference that Ritchie, Pera, or other Ubiquiti Defendants made any of the accused statements with knowledge of their falsity or reckless disregard of the truth.
Neither does the Ritchie Declaration establish that the Ubiquiti Defendants knew "all along" of the troubles in Argentina. Ritchie specifically declared that he prepared his declaration at the request of counsel in the Kozumi litigation. (Ritchie Decl. ¶ 3.) Plaintiffs nowhere allege particular facts tending to establish that Ritchie knew the data contained in the Ritchie Declaration prior to being asked by his counsel, on an unstated date, to prepare it. Viewing the allegations regarding the Ritchie Declaration and the declaration itself "with a practical and common-sense perspective," S. Ferry, 542 F.3d at 784, the allegations support an inference that Ritchie knew of the details contained in his declaration at some point prior to its execution, be it days, weeks, or months. But plaintiffs proffer no answer the critical question: prior by how much?
Neither are plaintiffs materially aided by the core operations inference. That inference, which suggests that company executives must know about the important activities of their companies, may bolster a plaintiff's allegations of scienter "in three circumstances." Reese, 747 F.3d at 575, 2014 WL 555911, at *13 (citing S. Ferry, 542 F.3d at 786).
The circumstances of this case do not fit squarely within either the second or third circumstances described above: plaintiffs have not supplied "particular" allegations suggesting that defendants had "actual access" to the information in the Ritchie Declaration at the time they made the accused statements, nor are the allegations of the CAC such that it would be "absurd to suggest" that Pera and Ritchie lacked knowledge of a material impact on Ubiquiti's business, in Argentina or elsewhere, caused by counterfeiting. On the contrary, as the Ubiquiti Defendants point out, the company's 10Q forms for the first three quarters of fiscal year 2012 show Ubiquiti enjoying a positive overall financial situation in which it saw strong growth and exceeded its revenue projections on both gross and per-share bases. In that regard, this case is plainly distinguishable from Berson, where the adverse developments in the defendant's business were so prominent — indeed, crippling — that it would be absurd to suggest that management was ignorant of them. 527 F.3d at 987-88.
As to the "holistic" analysis, the core operations inference does not combine with other facts alleged in the CAC to raise a strong, compelling, and cogent inference of scienter. On the contrary, the Ubiquiti Defendants point to several allegations that undermine any inference of scienter, and plaintiffs fail adequately to respond to any of them. The Ubiquiti Defendants note, first, the lack of allegations of insider trading, allegations which the Ubiquiti Defendants describe as a normal or general manner of demonstrating a defendant's motive to make knowingly false statements. Plaintiffs respond that allegations concerning motive are not required to plead scienter and that courts have recognized a variety of other motivations for making false or misleading statements. (Opp'n at 30 (citing Tellabs, 551 U.S. at 325, 127 S.Ct. 2499; Daou, 411 F.3d at 1022; Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 710 (7th Cir.2008).) Plaintiffs accurately state the law but fail to articulate any of the other motivations which, they say, the law recognizes. This omission does nothing to support an inference of scienter stronger than other plausible inferences.
Next, the Ubiquiti Defendants cite allegations in the CAC and documents incorporated therein which establish that Ubiquiti's 1Q12, 2Q12, and 3Q12 financial results were, overall, positive. As the Court has discussed, these undermine the core operations inference: in light of the company's overall positive financial results and broad-based business, spanning multiple countries on multiple continents, any inference that the Officer Defendants must have known of poor performance in one country among many is weak. Plaintiffs do not meaningfully engage with the implications of Ubiquiti's overall positive
For all these reasons, the CAC fails to raise a "strong" inference of scienter, and, thus, plaintiffs, to the extent that they satisfy the requirement of alleging a false or misleading statement of fact, fail to plead the element of scienter. Accordingly, the Court
Sections 15 and 20(a) "control person" claims both require, among other things, "underlying primary violations of the securities laws." Rigel Pharm., 697 F.3d at 886 (citing 15 U.S.C. §§ 77o, 78t(a)). Here, then, to state a claim under Section 15, plaintiffs would have to state viable claims under Section 11 or Section 12(a), and to state a claim under Section 20(a), plaintiffs would have to state a viable claim under Section 10(b). Because the Court has determined that plaintiffs have not stated any of these underlying claims, the Court
For the foregoing reasons, the Court
Plaintiffs' claim under Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, as well as their claim under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), are
Plaintiffs have leave to file a second consolidated amended complaint within
Any claims set forth within any second consolidated amended complaint shall clearly, specifically, and consistently distinguish and incorporate by reference only those facts supporting that particular claim.
This Order terminates Docket Nos. 56 and 57.
(Masuda Decl., Ex. 13, Page 2 of 8.) Pera's statement, distilled to its essence, boasts of the strong performance of its three extant product lines (AirMax, Unifi, and AirVision); expresses optimism about the prospects of a fourth product line, AirFiber; and signals intent to announce another three product lines on a particular schedule. Pera's statement focuses entirely on Ubiquiti's product lines.
