Opinion
Civil No. 01-CV-0649 K (AJB), [Doc. No. 96, 87, 88, 103]
October 3, 2002
ORDER
(1) GRANTING IN PART, DENYING IN PART PLAINTIFF'S MOTION TO STRIKE;
(2) DENYING DEFENDANTS' RULE 12(b)(6) MOTION TO DISMISS;
(3) DENYING DEFENDANTS' MOTION TO STRIKE;
(4) DENYING DEFENDANTS' RULE 11 MOTION TO DISMISS
This is a securities fraud class-action suit brought pursuant to the Securities Exchange Act of 1934, Rule 10-b5 promulgated thereunder, and the Private Securities Litigation Reform Act of 1995 ("PLSRA"). Lead plaintiff Florida State Board of Administration ("Plaintiff"), an institutional investor of the pension funds of the State of Florida, filed the consolidated complaint on January 22, 2002, which the Court dismissed without prejudice on May 8, 2002. Plaintiff filed an amended complaint on June 21, 2002; Defendants filed a motion to dismiss on August 8, 2002. Plaintiff filed an opposition on September 9, 2002, and Defendants filed their reply on September 16, 2002.
In conjunction with the motion to dismiss, Plaintiff filed a motion to strike on August 26, 2002, to which Defendants opposed on September 9, 2002, and Plaintiff replied on September 13, 2002. Additionally, Defendants filed a motion to strike on August 8, 2002, which Plaintiff opposed on September 9, 2002, and Defendants replied on September 16, 2002. Lastly, Defendants filed a motion to dismiss pursuant to Fed.R.Civ.P. 11 on August 29, 2002, which Plaintiff opposed on September 9, 2002, and Defendants replied on September 16, 2002.
I. BACKGROUND
The background is taken from the amended complaint and other papers of the parties and does not constitute findings of fact by this Court.
Applied Micro Circuits Corp. produces switching equipment for voice and data fiber optic networks. AMCC saw soaring sales, and an even higher flying stock price, in the late 1990s, selling to such telecom companies as Nortel, Cisco, Lucent, and JDSU as they quickly built fiber optic networks. The individual defendants ("insider defendants"), senior officers of AMCC, had extensive holdings in and much of their personal wealth tied up in their company's stock. In the fall of 2000, AMCC and the public received warnings that demand was falling rapidly for fiber optic products. By the end of October 2000, the entire telecom industry was in the doldrums, and AMCC's shares were down significantly.
It is then that the actionable conduct is alleged to have occurred, specifically from November 13, 2000 to February 5, 2001 (the "Class Period"). Essentially, Plaintiff alleges that Defendants intentionally issued false and misleading statements to prop up AMCC's stock price, while simultaneously unloading their inside shares. The gist of the alleged misleading statements is that AMCC's sales were growing in line with previous forecasts and AMCC was not experiencing the same problems — reduced demand and canceled orders — as their competitors and customers. At the same time that Defendants were publicly making such rosy statements and squelching rumors that AMCC was experiencing these industry-wide problems, Defendants knew that substantial amounts of AMCC's customer contracts were being canceled or delayed, and the company's customers were warning that future prospects were quite poor. During the Class Period (November 13, 2000 to February 5, 2001), the stock price of AMCC doubled back to its highs, while the insider Defendants sold over $100 million of their own holdings. Less than one day after the last of these insider sales, AMCC suddenly reversed course in its public pronouncements and the stock rapidly declined, causing massive losses to the misled investors.
II. PLAINTIFF'S MOTION TO STRIKE
Plaintiff moves this Court to strike materials Defendants have submitted in support of their motion to dismiss because they are outside of the pleadings and are not subject to judicial notice. Specifically, Plaintiff moves to strike the following: declarations made by several persons; a videotape and transcript of a meeting; and AMCC's service application products ("SAP") reports. Defendants argue that all of the above-mentioned materials are either incorporated by reference in the amended complaint or are subject to judicial notice and therefore should not be stricken. The Court agrees with the Plaintiff and therefore GRANTS Plaintiff's motion to strike. Plaintiff also moves to strike irrelevant and improper assertions in Defendants' motion to dismiss, which the Court DENIES.
A. Legal Standard
Federal Rule of Civil Procedure 12(f) provides that "the court may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." Fed.R.Civ.P. 12(f). "Generally, a district court may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion." Hal Roach Studio, Inc. v. Richard Feiner Co., 896 F.2d 1542, 1555 n. 19 (9th Cir. 1990). When "matters outside the pleadings are presented to and not excluded by the court," a Rule 12(b)(6) motion is to be "treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by rule 56." Fed.R.Civ.P. 12(b). "However, material which is properly submitted as part of the complaint may be considered" on a motion to dismiss. Hal Roach Studios, 896 F.2d at 1555 n. 19. The Ninth Circuit holds that a document is not "outside" the complaint if the complaint refers to the document and if its authenticity is not questioned. Townsend v. Columbia Operations, 667 F.2d 844, 848-49 (9th Cir. 1982). The court may also consider matters properly subject to judicial notice. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001).
B. Analysis
1. Declarations
Plaintiff alleges that Defendants have submitted declarations by the following persons in their Rule 12(b)(6) motion to refute part of Plaintiff's claim: Dennis Zulkowski ("Zulkowski"), a former AMCC engineer; Sharon Hagberg ("Hagberg"), a former AMCC buyer; Kathy Sullivan ("Sullivan"), an AMCC employee; David M. Rickey ("Rickey"), President, CED of Chairman of the Board for AMCC; Greg Winner ("Winner"), Vice President of Engineering of AMCC; and Daniel Silverman ("Silverman"), appointed counsel for AMCC's Special Litigation Committee. Plaintiff contends that the declarations were not referenced in the amended complaint, nor where they attached to the complaint. In fact, Plaintiff avers that the declarations did not exist at the time the amended complaint was drafted, and thus were not relied on by Plaintiff. Defendants do not refute this in their opposition, but simply state that the declarations are relevant to the Rule 11 motion. Plaintiff correctly states in its reply that Defendants ignore the fact that Plaintiff is only seeking to strike these declarations from the Rule 12(b)(6) motion and not the Rule 11 motion.
If the Court were to consider this extrinsic evidence, it would in fact convert this motion to dismiss into a motion for summary judgment, and the Court is not willing to do so. The declarations are obviously not referenced in, and therefore fall outside of, the amended complaint. Because the declarations are extrinsic materials to the Rule 12(b)(6) motion to dismiss, the Court GRANTS Plaintiff's motion to strike the declarations of Zulkowski, Hagberg, Sullivan, Rickey, Winner and Silverman in Defendants' Rule 12(b)(6) motion.
2. Videotape and Transcript of AMCC Meeting, and Supporting Declaration
Defendants submitted a videotape of a meeting, a transcript of that meeting as well as a declaration by Juliane Howes ("Howes") an AMCC employee relating to that meeting. Defendants argue that since Plaintiff made reference to the AMCC meeting, the videotape and transcript are therefore incorporated by reference. First, Plaintiff questions the authenticity of the tape and the accuracy of the same. Further, Plaintiff contends that it references the meeting in relation to what two identified sources allege Rickey stated at that meeting. Plaintiff also argues that even if it made reference to the meeting, it did not refer to the videotape or the transcript or even identify their existence. Defendants argue in their opposition that Plaintiff expressly acknowledges the existence of the videotape in its amended complaint, and since Plaintiff quotes portion of Rickey's speech, it is in fact incorporated by reference. Plaintiff argues in its reply that it never acknowledges the existence of a videotape or transcript and never refers to it in the amended complaint. The Court agrees. Because the videotape and transcript were not mentioned in the amended complaint, nor was it relied upon in drafting the amended complaint it is not incorporated by reference. Moreover, the authenticity and accuracy of the tapes are questioned, so the Court declines to take judicial notice of them. Likewise, Howes is not mentioned in the complaint, nor were her statements relied upon in drafting the amended complaint. Therefore, the Court GRANTS Plaintiff's motion to strike the videotape, the transcript and the declaration of Howes attached thereto.
3. Declaration and SAP Report Attached Thereto
Defendant has submitted in the Rule 12(b)(6) motion summary SAP reports and a declaration of Richard A. Sanford ("Sanford"), an AMCC employee. Plaintiff argues in its motion to strike that this material is not incorporated by reference because it disputes the authenticity of the reports since it was within the Defendants' control and there is no way to verify the information. Furthermore, Plaintiff contends it relies on statements by ex-employees who reference the information in the SAP database and not the reports submitted by the Defendants. Defendants argue in their opposition that Plaintiff refers to the data no fewer than ten times in the amended complaint, but Defendants do not claim that these former employees referenced the actual report they are seeking to incorporate by reference. Plaintiff replies that the distinction between relying on the SAP data and the SAP reports submitted by the Defendants is the crux of their motion to strike this material. Because the Defendants do not show that Plaintiff in fact quoted or relied on the SAP report they have proffered, this material has not been incorporated by reference and is outside of the amended complaint. As such, the Court GRANTS Plaintiff's motion to strike this material from Defendants' Rule 12(b)(6) motion. The Court also GRANTS Plaintiff's motion to strike Sanford's declaration because this person was not referenced in the amended complaint.
4. Irrelevant and Improper Assertions in Defendants Rule 12(b)(6) Motion:
a. Hiring Slowdown, Production Slowdown
In response to Plaintiff's allegation that there was a hiring freeze because of massive order cancellations, and there was a production slowdown, Defendants submitted an SEC filing which purports to offer other reasonable inferences for Plaintiff's allegations. Plaintiff argues in its motion to strike that Defendants are asking the court to consider the material for the truth of the matter. Defendants, citing In re Silicon Graphics, Inc., 183 F.3d 970 (9th Cir. 1999), argue that Plaintiff relies on the SEC it its amended complaint, and therefore the SEC filing should be incorporated by reference. Defendants further citeGomper v. VISX, Inc., 298 F.3d 893 (9th Cir. 2002), which holds that a court must "consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs" (emphasis in original).
Plaintiff counters this argument, also citing Silicon Graphics, by stating that it referenced the SEC filing for figures relating to inventory, and not employment or production. Plaintiff argues that while the Silicon Graphics court held that if a party basis their allegations on the SEC filings, that party cannot complain when the other side uses the same information for their defense, the case likewise did not hold the party must concede the truth of every statement in the filing relied upon. The Court is unpersuaded by Plaintiff's argument. The Plaintiff does refer to the SEC filings in its amended complaint, and it cannot therefore selectively argue that Defendants' cannot rely on the same material. The Court therefore DENIES Plaintiff's motion to strike this material.
b. Mischaracterization of Plaintiff's Allegations
Plaintiff argues that Defendants mischaracterized it's allegation when Defendants state that Plaintiff is relying on the sale of stock to establish the element of scienter. Plaintiff argues it is referencing the sale of stock not for scienter but for a violation of insider trading. Plaintiff argues that it is a mischaracterization and should therefore be stricken, but does not provide any case law to support this contention. Defendants argue that this issue should be dealt with in Plaintiff's opposition to the Rule 12(b)(6) motion and not a motion to strike, since it relates to counsel's argument. Plaintiff replies by again explaining how Defendants have mischaracterized the argument. The Court agrees with Defendants. If Plaintiff so believed, it should have argued this point in its opposition to Defendants' Rule 12(b)(6) motion. A motion to strike is not the appropriate venue for this argument. The Court, therefore, DENIES Plaintiff's motion to strike this argument.
III. DEFENDANTS' MOTION TO DISMISS PURSUANT TO FED.R.CIV.P. 12(b)(6)
The Court now turns to Defendants' Rule 12(b)(6) motion. The Court notes that in reaching its decision, it has stricken all of the declarations, the videotape and transcript, and the SAP reports referenced in Defendants motion, in accordance with the above Order.
A. Legal Standard
Rule 12(b)(6) allows a court to dismiss a complaint for failure to state a claim upon which relief can be granted. Such a dismissal can be based on either the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). In applying this standard, the court must treat all of plaintiff's factual allegations as true. Experimental Eng'g, Inc. v. United Technologies Corp., 614 F.2d 1244, 1245 (9th Cir. 1980). However, the court does not have to accept as true conclusory allegations that contradict facts which may be judicially noticed or which are contradicted by documents referred to in the complaint. See, e.g., Steckman v. Hart Brewing Inc., 143 F.3d 1293, 1295-1296 (9th Cir. 1998). The court, likewise, is not bound to assume the truth of legal conclusions simply because they are stated in the form of factual allegations. See Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981), cert. denied, 454 U.S. 1031 (1981). To dismiss with prejudice, it must appear to a certainty that the plaintiff would not be entitled to relief under any set of facts that could be proven. See Reddy v. Litton Indus., 912 F.2d 291, 293 (9th Cir. 1990), cert. denied, 502 U.S. 921 (1991).
2. Rule 10b-5
A claim under Rule 10b-5 has five elements: (1) a misrepresentation or material omission; (2) materiality; (3) scienter; (4) reliance; and (5) causation. Ambassador Hotel Co. v. Wei-Chuan Inv., 189 F.3d 1017, 1025 (9th Cir. 1996). The Reform Act sets a heightened pleading standard for the element of scienter. The dispositive issue in the instant motion to dismiss is whether Plaintiff has sufficiently pled facts giving rise to a strong inference of scienter, i.e. that the Defendants knew that their statements were false/misleading when made.
3. Rule 9(b) and the PLSRA
Rule 9(b) requires that "the circumstances constituting fraud or mistake . . . be stated with particularity." A plaintiff must plead (1) the time, place, and content of all alleged misrepresentations and (2) "an explanation as to why the statement or omission . . . was false or misleading". In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1547-48 (9th Cir. 1994) (en banc).
The Reform Act raises the pleading bar yet further, in part by requiring particularized pleading of scienter: "the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(a) (emphasis added). The Ninth Circuit has construed this statutory provision in a particularly stringent manner, holding that "a private securities plaintiff proceeding under the PLSRA must plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct. . . ." In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970, 974 (9th Cir. 1999). The requisite "strong inference" is a high standard, to be distinguished from "a mere speculative inference . . . or even a reasonable inference." Id. at 985. Where the allegations of the complaint, "taken as a whole", do not raise the requisite strong inference that misleading statements were knowingly or with deliberate recklessness made to investors, a private securities fraud action is properly dismissed. Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001).
Congress in enacting the PLSRA, and the Ninth Circuit in construing it, were concerned with "pleading by hindsight": a company issues rosy proclamations which do not come to fruition, followed by lawsuits contending that fraud must be the reason. The Ninth Circuit has sought to prevent such pleading by hindsight: "Honest optimism followed by disappointment is not the same as lying or misleading with deliberate recklessness." Ronconi, 235 F.3d at 432. The holding of Silicon Graphics, the seminal Ninth Circuit case interpreting the PLSRA, is worth quoting at length:
[The Plaintiff's] complaint does not create a strong inference of deliberate recklessness or knowing misrepresentation on the part of the defendants. . . . Her assertions in the complaint differ very little from the conjectures of many concerned and interested investors. At one time, an immensely successful company and its officers state publicly that the company will continue to succeed. The officers then sell a noticeable quantity of shares at a considerable profit. Shortly thereafter, the company takes a turn for the worse and suddenly, suspicion abounds. In the absence of greater particularity and more incriminating facts, we have no way of distinguishing Brody's allegations from the countless "fishing expeditions" which the PLSRA was designed to deter.Silicon Graphics, 183 F.3d at 988.
B. Analysis
In the May 8, 2002 Order ("May Order"), this Court held:
Taking the complaint as a whole, the Court finds that there is not the requisite strong inference of scienter. The allegations from the two unidentified sources would support a strong inference of scienter, but as noted above Plaintiff has not plead sufficient "corroborating detail" concerning the two anonymous sources for the Court to weigh the allegations. The data regarding "work in progress" and raw materials provides some circumstantial evidence that the company was experiencing a decline in current and future demand; this supports a reasonable, but not strong, inference of scienter because the data is subject to conflicting reasonable interpretations. Plaintiff's "must have known" allegations, relying on generic reports of general corporate reporting practices or on difficulties experienced by other companies, as well as the insider trading data and "motive" allegations provide virtually no support. A "strong inference" of scienter is a higher standard than a "reasonable inference" (Silicon Graphics, 183 F.3d at 985); Plaintiff has not met that higher standard. The Court accordingly grants Defendants' motion to dismiss as to Plaintiff's 10b-5 causes of action.
Defendants argue in their Rule 12(b)(6) motion that Plaintiff still fails to meet the heightened pleading standard of the PSLRA, and has not established a strong inference of scienter. Furthermore, Defendants argue that Plaintiff fails to adequately alleged the falsity of any statements. Additionally, Defendants contend that the PSLRA's safe harbor provision requires dismissal. Plaintiff opposes each of these arguments. The Court will examine each argument in turn.
1. Scienter
Defendants argue that Plaintiff has failed to show that there was: (a) a motive to commit fraud; (b) inconsistent contemporaneous statements; (c) knowledge of massive cancellations; and (d) circumstantial allegations concerning manufacturing reallocations do now show scienter. As such, Defendants argue, taken as a whole the allegations to not meet the heightened pleading standard. The Court will now look to each element of scienter as alleged in Plaintiff's amended complaint.
a. Motive to Commit Fraud
Defendants argue that Plaintiff simply re-alleges the same issues in its amended complaint, and therefore has not complied with the May Order. Specifically, Defendants contend that Plaintiff re-argues that the sale of stock by the Defendants as well as the motive to inflate stock to facilitate mergers and attract talented employees, have already been dealt with by this Court in the May Order. Plaintiff argues in its opposition, that the allegations relating to sale of stock to do not go to scienter but to the violation of their duty under § 10(b) of the Securities Exchange Act of 1934. Plaintiff, however, fails to address in its opposition how the allegations about inflated stock as the motive for facilitating mergers and attracting employees differs from those allegations in the original complaint. Taken alone, this allegation does not meet the heightened pleading standard to support a strong inference of scienter.
b. Inconsistent Contemporaneous Statements
Defendants argue that Plaintiff failed to meet the requirements set forth in the May Order by showing corroborating details of the inconsistent contemporaneous statements. In the amended complaint, Plaintiff now provides the names of sources who had remained anonymous in the original complaint, as well as providing more specific information as to these persons positions in the company, and how it is that they were in a position to receive such information. Specifically, Plaintiff provided the name of Stacyi Ann Barth ("Barth"), an employee that was present at the AMCC meeting, and Dennis Zulkowski ("Zulkowski"), a former AMCC engineer who supposedly had a phone conversation with Rickey. Defendants state that Barth's statements regarding the "all-hands meeting" are unreliable and Zulkowski's statements are "inherently implausible." Defendants have not, however, provided any basis for this argument. Reviewing the amended complaint, the Court finds that Plaintiff has provided sufficient corroborating evidence to indicate those "in the position occupied by the source would possess the information alleged." In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp.2d 1248, 1271 (N.D. Cal. 2000). More precisely, the Plaintiff has provided the name of the source and the circumstances under which the inconsistent statements were made. The Court therefore holds that Plaintiff has plead sufficient corroborating details to support a strong inference of scienter.
c. Knowledge of Massive Cancellations
Defendants contends that in arguing this point, Plaintiff relies on three former employees to establish that Defendants were experiencing order cancellations, but attacks these employees as being unreliable. First, Defendants argue that Barth, a secretary, is unreliable because there is no information as to how this person would be capable of interpreting the data. Second, Hagberg also is an unreliable source for the same reasons as Harth. And third, Sullivan is unreliable because this employee did not begin her employment until after the class period ended. Plaintiff argues in its opposition that Barth had knowledge of the data because she personally handled the information. Plaintiff does not provide more information in its opposition regarding Hagberg and Sullivan, but points to several other sources cited in the amended complaint who support the allegation that Defendants were aware of the massive cancellations. Defendants do not provide any meaningful counter-argument in their reply to refute the additional sources named in Plaintiff's amended complaint. As such, the Court finds that the amended complaint names sufficient additional sources regarding the massive cancellations to support a strong inference of scienter.
d. Circumstantial Evidence of Manufacturing Slowdown
Defendants argue that Plaintiff, in its amended complaint, provided the names of two former employees who allegedly witnessed a production slowdown, but attack these sources on the basis that they describe events that were insular and discrete and could not support a finding that the overall company was experiencing a manufacturing slowdown. Defendants contend that the slowdown was due in fact to outsourcing of its manufacturing. Plaintiff argues in its opposition that it provides much more than these two sources. It alleges five individually named former employees, including a production manager, noticed a decrease of about two-thirds, as well as a decrease in orders from Defendants' largest distributor and one of its largest clients. Plaintiff cites to one source who learned that the primary customers had cut their unfinished orders by 80%. Plaintiff additionally points to statements made by the Defendants, and those familiar with the customs and practices of the company that indicated that senior management would become aware of the "red flags." Defendants argue in their reply that Plaintiff has still not shown that any particular defendant knew of the slowdown at a particular facility, or that the slowdown would impair the company from making its numbers.
The May Order found that:
Without allegations of specific reports containing particular information that did or would have normally come to the attention of the individual defendants, the Court has no basis to infer that the individual defendants had actual or constructive knowledge of the alleged decline in orders and other problems. The Court therefore finds that the complaint's "must have known" allegations do not support a strong inference of scienter.
The Court finds that with allegations concerning the combination of many employees in the production department, including a manager, the reduction in demand from Defendants' major clients, as well as the customs and practices of the company, Plaintiff has sufficiently plead a strong inference that management was aware of the manufacturing slowdown.
e. Scienter Allegation Taken as a Whole
The May Order stated that as a whole, the allegations did not establish a strong inference of scienter. In its amended complaint, Plaintiff has flushed out the facts and has provided additional sources of information. The Court holds that Plaintiff has satisfied the heightened pleading requirement. The additional names, sources, and information provide a strong inference of scienter and as such, the Court DENIES Defendants motion to dismiss the complaint.
2. Falsity
Defendants argues that Plaintiff has failed to provide evidence that Defendants' statements were false when made. The Court disagrees. The PSLRA requires the Plaintiff to "specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-(4)(b)(1). Upon review of the amended complaint, the Plaintiff has met this requirement by identifying each statement claimed to be misleading and has provided the reasons why the statements are alleged to be misleading. The Court finds the Plaintiff has met the pleading requirement to survive a motion to dismiss, and therefore DENIES Defendants motion.
3. PSLRA Safe Harbor Provision
Defendants argue that because most of the statements made were projections, they were protected under PSLRA's safe harbor provision. In order to invoke the safe harbor provision, the statements at issue must be: (i) forward looking; (ii) identified as such; and (iii) accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement. 15 U.S.C. § 78u-5(c)(1). As Plaintiff correctly points out "knowingly false predictive statements are not protected." 15 U.S.C. § 78u-5(c)(1)(B)(i). The very crux of Plaintiff's allegations are that Defendants made misleading statements knowing that they were misleading. Defendants' request to dismiss on the basis that these statements were true is asking this Court to find that the statements were in fact true. Such request is premature as this is a motion to dismiss under Rule 12(b)(6) which looks only to the causes of actions as they are alleged, and does not inquire as to the veracity of the allegations. The Court, therefore, DENIES Defendants' motion to dismiss on the basis that the statements fall within the PSLRA safe harbor provision.
4. Claims Against Individual Defendants for Insider Trading
Defendants move this Court to dismiss the complaint against the individual defendants stating that liability under 20(a) of the Securities Exchange Act of 1934 cannot exist in the absence of a primary securities law violation. The May Order granted Defendants motion to dismiss on the grounds that Plaintiff's failed to adequately plead a Rule 10b-5 claim. Because the Court finds that Plaintiff has met the pleading requirement to survive a Rule 12(b)(6) motion on the Rule 10b-5 claim, the Court DENIES Defendants motion to dismiss the complaint against the individual defendants for insider traiding.
IV. DEFENDANTS' MOTION TO STRIKE
A. Legal Standard
Federal Rule of Civil Procedure 12(f) provides that "the court may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." Fed.R.Civ.P. 12(f).
B. Analysis
The Defendant moves this court to strike paragraphs 97-112 because: (1) the statements were made outside of the class period and therefore impertinent and irrelevant to Plaintiff's fraud claim; and (2) the statements would unfairly prejudice the Defendants. Plaintiff opposes first by distinguishing the case law cited by Defendant, and secondly by claiming that the statements contained therein are relevant to the materiality of the misrepresentations, as well as contain party admissions. Defendant responds by arguing that the statements are not admissions, but a classic example of "fraud by hindsight."
Defendants argue that statements made outside of the class period are not actionable and should therefore be stricken. Citing In re Seagate Tech. II Sec. Litig., 1995 WL 66841, at *4 (N.D.Cal. Feb. 8, 1995) and In re Clearly Canadian Sec. Litig., 875 F. Supp. 1410, 1420 (N.D.Cal, 1995). While Clearly Canadian does support this position, Plaintiff argues it is not seeking to introduce the statements for purposes of liability, but as relevant to the issues of scienter and falsity. This is supported by case law which holds that statements made outside of the class period "may have evidentiary relevance to the issue of scienter and falsity because they may provide insight into what the defendants knew during the class period" and are therefore not excluded. DeMarco v. DepoTech Corp., 149 F. Supp.2d 1212 n. 6 (S.D.Cal. 2001).
Plaintiff also argues that some of the statements are admissions by Defendants, and are therefore admissible. In re Scholastic Corp. Sec. Litig. , 252 F.3d 63, 72 (2d Cir. 2001) (admissions made after the class period are allowed). Defendants simply argue that the statements are not admissions, but provide no case law opposing Plaintiff's posture. Plaintiff has sufficiently alleged that the statements are either admissions by the Defendants or relevant to the issue of scienter and falsity. As such, the Court DENIES Defendants' motion to strike paragraphs 97-112.
V. DEFENDANTS' MOTION TO DISMISS PURSUANT TO FED.R.CIV.P. 11
A. Legal Standard
Rule 11 requires an attorney's conduct to be well grounded in fact, not presented for an improper purpose, and warranted by existing law. Rule 11 sanctions are merited in at least three instances: 1) when a party files a pleading that has no reasonable factual basis; 2) when a party advances a legal theory that has no reasonable chance of success and that cannot be advanced as reasonable; and 3) when a party files a pleading for improper purposes. United States v. Milam, 855 F.2d 739, 742 (11th Cir. 1988). In deciding Rule 11 sanctions requests, the court applies an objective standard of reasonableness under the circumstances. Jackson v. Law Firm of O'Hara, Ruberg, Osborne and Taylor, 875 F.2d 1224, 1229 (6th Cir. 1989). "Once a district court finds that an attorney has violated Rule 11, it is required to impose some sanction." Id. Where a court finds a violation of Rule 11, the court may in its discretion impose sanctions which are sufficient to deter such conduct. See Simon Debartolo Group, L.P. v. The Richard E. Jacobs Group, Inc., 186 F.3d 157 (2nd Cir. 1999).
B. Analysis
Defendants move this Court to dismiss the amended complaint on the basis of Fed.R.Civ.P. 11. Defendants allege that evidence submitted demonstrates that Plaintiff "engaged in an aggravated campaign to distort evidence, [and] to manipulate materials subject to judicial notice." Specifically, Defendants allege that the videotape and transcript, the SAP reports, and the declarations of certain sources demonstrate the "sham" of Plaintiff's complaint. This Court has already GRANTED Plaintiff's motion to strike reference to the videotape and transcript, as well as the SAP reports because the Court finds they have not been incorporated by reference. Furthermore, Plaintiff provides a plausible explanation as to why sources are now contradicting themselves; Plaintiff claims the change occured after having been contacted by Defendants' attorneys. This boils down to an issue of credibility to be determined by a trier of fact, and therefore is not appropriate for a Rule 11 motion. As such, the Court DENIES the motion.
VI. CONCLUSION
For the foregoing reasons, the Court holds as follows:
(1) The Court GRANTS Plaintiff's motion to strike the declarations of Zulkowski, Hagberg, Sullivan, Rickey, Winner and Silverman; the videotape, the transcript and the declaration of Howes attached thereto; and the SAP reports and Sanford's declaration attached thereto; the Court DENIES Plaintiff's motion to strike the SEC reports and Defendants' mischaracterization of Plaintiff's allegation.
(2) The Court DENIES Defendants Rule 12(b)(6) motion to dismiss.
(3) The Court DENIES Defendants' motion to strike paragraphs 97-112 of the amended complaint.
(4) The Court DENIES Defendants' Rule 11 motion to dismiss.
IT IS SO ORDERED.