IN RE DDI CORPORATION SECURITIES LITIGATION

Full title: In re DDi CORPORATION SECURITIES LITIGATION. This Document Relates To: ALL…

Court: United States District Court, C.D. California

Date published: Jan 7, 2005

Master File No. CV 03-7063 NM (SJHx), Consolidated with No. CV 03-7883., CV 03-7999, CV 03-8344, CV 04-0735 (C.D. Cal. Jan. 7, 2005)

Opinion

Master File No. CV 03-7063 NM (SJHx), Consolidated with No. CV 03-7883., CV 03-7999, CV 03-8344, CV 04-0735.

January 7, 2005

ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS' MOTIONS TO DISMISS THE CONSOLIDATED AMENDED COMPLAINT

NORA MANELLA, District Judge

I. INTRODUCTION

This is a consolidated securities class action by those who purchased DDi Corporation ("DDi" or "Company") common stock between December 19, 2000 and April 29, 2002 ("the Class Period"), including those who acquired DDi common stock in DDi's February 14, 2001 public offering.

On July 26, 2004, lead plaintiffs Paul Poppe, LeRoy Schneider, and Rand Skolnick ("Lead Plaintiffs"); representative plaintiff the Municipal Employees' Retirement System of Louisiana ("MERSL"); and Jason T. Sunderland (collectively, "Plaintiffs") filed an 88-page Consolidated Amended Complaint ("CAC").

The CAC names three different groups of Defendants. First, it names the following Individual Defendants: Charles Dimick, Chairman of the Board of Directors of DDi ("Dimick"); Bruce D. McMaster, President and Chief Executive Officer of DDi ("McMaster"); Joseph P. Gisch, Vice President and Chief Financial Officer of DDi ("Gisch"); Gregory Halvorson, Vice President of Operations of DDi until September 2001 ("Halvorson"); and John Peters, Vice President of Sales and Marketing of DDi ("Peters") (collectively, the "Individual Defendants").¹ Second, the CAC names: Bain Capital, Inc., a shareholder of DDi during the Class Period ("Bain"); David Dominik, a director of DDi until December 31, 2002 and a managing director of Bain until March 2000 ("Dominik"); Stephen G. Pagliuca, a director of DDi and a managing director of Bain ("Pagliuca"); Stephen M. Zide, a director of DDi and a principal at Bain ("Zide"); and Edward W. Conrad, a director of DDi and a principal at Bain ("Conrad") (collectively, the "Bain Defendants").² Third, the CAC names the following Defendants for their role as underwriters in the February 2001 public offering: Credit Suisse First Boston Corporation ("CSFB");³ FleetBoston Financial Corporation ("Fleet"), the successor-in-interest to Robertson Stephens, Inc. ("Robertson"); J.P. Morgan Securities, Inc. ("JP Morgan"); and Needham Company, Inc. ("Needham") (collectively, the "Underwriter Defendants"). DDi is not named as a defendant because it has filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code.

1 Mark R. Benham, a director of DDi from November 1998 to December 31, 2002 ("Benham"), is also named as a "Director Defendant" and joins the Individual Defendants' Motion to Dismiss. CAC ¶¶ 30-31.

2 The CAC alleges that five of DDi's nine directors in 2000 and 2001 were managing directors or principals of Bain. Id. ¶ 25. Bain, citing to documents quoted in the CAC, asserts that it was affiliated with only three of DDi's directors during the Class Period. Bain Defendants Mot. ("Bain Mot.") at 5 n. 6.

3 Credit Suisse First Boston LLC is the successor to CSFB. Underwriter Defendants Mot. ("UW Mot.") at 1.

The CAC asserts causes of action under: (1) section 11 of the Securities Act of 1933 ("Securities Act"); (2) section 12(a)(2) of the Securities Act; (3) section 15 of the Securities Act; (4) section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder; and (5) section 20(a) of the Exchange Act.

On September 9, 2004, each of the three groups of defendants filed a separate motion to dismiss. These three motions, totaling 81 pages, frequently refer to and incorporate each others' arguments. Plaintiffs opposed these three Motions with two cross-referencing oppositions totaling 55 pages. Each of the three groups of defendants then filed separate replies, aggregating another 45 pages. Because of the interconnectedness — and occasional repetitiveness — of the different parties' arguments, the court finds it appropriate to address the three pending motions in a single order.

II. BACKGROUND ⁴

4 Facts taken from the CAC are assumed true for purposes of this motion only.

On April 11, 2000, DDi became a public company with an initial public offering of 12 million shares at $14 per share. CAC ¶ 2. DDi's principal line of business involved creating prototype Printed Circuit Board ("PCBs") on an expedited basis — often within 24 hours. Id. ¶¶ 2, 3, 44, 45. This was known as "quick-turn prototyping." Id. ¶ 3. Because a typical customer used DDi's production lines "only for a few days, . . . DDi [had to] constantly seek new users." Id. ¶ 125 (quoting Sept. 25, 2000 article). Therefore, DDi was "'sensitive to variability in demand from customers.'" Id. (quoting Sept. 25, 2000 article (quoting DDi documents filed with the Securities and Exchange Commission ("SEC"))). DDi also participated in "value-added services," which included "[f]ast-track assembly services . . ." and "[p]re-production volume services. . . ." Id. ¶ 45.

During its heyday, DDi's client list included Marconi, Ericsson, IBM, Intel, 3Com, and Alcatel. Id. ¶¶ 4, 43.⁵ In fact, shortly before the Class Period, Electronic Buyers News rated DDi the "Best Managed Company" within the Contract Electronics Manufacturers market in the revenue category of $1 billion or less, and many analysts rated DDi's stock a "strong buy." Id. ¶¶ 3, 122-27. Plaintiffs contend, however, that DDi's business began to sour in October 2000. Id. ¶ 4. According to Plaintiffs, what followed was a steady stream of fraudulent conduct perpetrated by Defendants to hide DDi's ailing condition and artificially inflate its stock price. Id.

5 Alcatel represented 8-10% of DDi's sales prior to the Class Period. CAC ¶¶ 4, 43.

A. Statements Made Between December 19, 2000 and February 14, 2001 ⁶

6 These statements — and all of the statements provided in the Background section of this order — provide the basis for Plaintiffs' Exchange Act claims.

Between December 19, 2000 and February 14, 2001, DDi issued a series of statements and press releases wherein it announced: (1) its financial results for the fourth quarter of 2000 and how those results "outperformed expectations"; (2) that demand for its services was "strong" and "robust"; (3) that it was maintaining and expanding its customer base; (4) that its market segment had historically "been more insulated from the volatility of market slowdowns"; (5) that it was "realizing escalating demand for [its] Value Added operations" and was strategically expanding those services; and (6) that, although recognizing macro-economic indicators suggesting an economic slowdown, it was "targeting increases in net sales and earnings per share in excess of 25%" for 2001. Id. ¶¶ 5, 174-94. Between December 21, 2000 and December 27, 2000, DDi's stock rose 18% to $24.88 per share. Id. ¶ 177. By January 25, 2001, it had risen to $32.50 per share. Id. ¶ 189.

Plaintiffs claim that these statements were materially false or misleading on several grounds, which appear throughout the CAC and provide the basis for Plaintiffs' contention that every statement uttered by Defendants during the Class Period was either false or misleading.

1. Accounting Fraud

Plaintiffs allege that DDi's financial data was skewed because Defendants engaged in accounting fraud in violation of Generally Accepted Accounting Principles ("GAAP") and DDi's own revenue recognition policies. Id. ¶¶ 10, 75-87, 147. In particular, Plaintiffs allege that Defendants wrongfully inflated DDi's revenues by prematurely shipping and booking orders. Id. ¶¶ 10, 75-87. Plaintiffs provide accounts from confidential witnesses in support of this contention.⁷

7 W-8, a salesperson/account manager for DDi's Virginia facility from 2000 through 2003, "recalled that it was routine for the company to ship goods to customers (e.g., Watkins Johnson, Marconi) before the agreed upon ship-date in order to boost DDi's quarterly earnings." Id. ¶ 76. According to W-8, "at the end of every quarter, John Chellburg, the facility manager and director of operations, would tell employees [to] 'get stuff out the door.'" Id. W-8 "estimated that the Virginia facility prematurely shipped 'hundreds of thousands' of dollars worth of merchandise each quarter." Id.
Meanwhile, W-5, a former sales manager for the Virginia facility throughout the Class Period, "stated that by the third quarter of 2001 and throughout 2002[,] such improper revenue recognition was a 'common practice'" at the Virginia facility. Id. ¶ 77. Id. ¶¶ 77-78. W-5 asserted that the Virginia facility "would choose to prematurely ship out between $600,000 and $1,200,000 in pending orders" "each quarter." Id. ¶ 78. This "represented between 4% and 8% of the Virginia facilities['] quarterly revenues." Id.
W-9, a credit supervisor and member of the accounting department at DDi's Virginia facility from 1999 through 2003, "confirmed that Virginia prematurely shipped goods to boost monthly and quarterly revenue numbers . . . and that such practice was in violation of DDi's revenue recognition policy." Id. ¶¶ 80-81. W-9 recalled that the Virginia facility "often" prematurely shipped orders and that it was a "common occurrence."Id. ¶¶ 82, 84. W-9 "estimated that approximately 25 percent of monthly sales were shipped prematurely." Id. ¶ 84.
W-7, a program manager for DDi's Texas facility from 1999 through November 2001, "confirmed that DDi's Dallas facility" also engaged in this practice. Id. ¶ 87.

2. Misrepresentation of DDi's Demand and Customer Base

Plaintiffs allege that Defendants also misrepresented that DDi's demand was "strong" and "robust," that it was maintaining and expanding its customer base, that it was insulated from downturns in the technology market, and that it expected future growth. According to Plaintiffs, the reality was that DDi had been sluggish since October 2000 when demand for its services allegedly dropped and it began losing its core customers. Plaintiffs contend that this made Defendants' representations misleading and that Defendants had a duty to disclose this "known trend." See id. ¶¶ 89, 98-100 (citing 17 C.F.R. § 229.303). Plaintiffs proffer statements from a number of confidential witnesses in support of their allegations.Id. ¶¶ 52-62.⁸ Plaintiffs also employ certain post-Class Period statements in support of their claims.⁹

3. Deceptive Acquisition and Expansion Scheme

Plaintiffs also allege that Defendants engaged in a deceptive scheme of acquiring and expanding DDi's value-added services. Id. ¶¶ 9, 132-46. According to Plaintiffs, "DDi engaged in [this] campaign solely to generate a quick spike in revenues and give the appearance of growth with knowledge that the campaign generated redundant manufacturing capacity and unsustainable future revenue potential." Id. ¶ 132; see also id. ¶ 9. Plaintiffs offer confidential witnesses' testimonials in support of this allegation.¹⁰

B. Statements Made In Connection with the February 2001 Offering ¹¹

11 These statements provide the basis for Plaintiffs' Securities Act claims. Id. ¶¶ 103-21. They also make up a portion of Plaintiffs' Exchange Act claims. Id. ¶ 173.

On February 14, 2001, DDi and certain "selling shareholders" issued and sold 6 million shares of DDi common stock at $23.50 per share in a follow-on public offering. Id. ¶¶ 6, 65.¹² CSFB, Robertson, JP Morgan, and Needham underwrote the offering, which was registered with the SEC and executed pursuant to a Form S-1 and a prospectus filed with the SEC on February 14, 2001 (collectively, the "Prospectus"). Id. ¶¶ 6, 32-35, 65.¹³

The Prospectus reported DDi's "record financial and operating results" for the fourth quarter of 2000. Id. ¶¶ 67, 68, 71. For example, it stated that DDi's "[n]et sales for the quarter . . . increased 118% to $171.3 million, from $78.7 million for the same period in 1999." Id. ¶ 67. It further provided: "Due to strong fourth quarter demand, significant revenue contributions from recent acquisitions and overall operating leverage, [DDi] achieved net sales, net income and a gross profit margin that outperformed [its] expectations for the quarter and the year." Id. ¶ 68.

Discussing DDi's client list, the Prospectus stated:

We currently have over 2,000 customers. Our largest original equipment manufacturer customers in terms of net sales are Alcatel, Ericsson, IBM, Intel and Marconi Communications. . . . We have achieved a net increase of approximately 200 customers since January 1, 2000, excluding increases resulting from acquisitions.

Bain Mot., Ex A (Prospectus) ("Prospectus") at 4.¹⁴ The Prospectus also asserted that DDi had "been successful at retaining customers and [had] worked with [its] three largest customers since 1991." CAC ¶ 70.

14 The court takes judicial notice of this document. See In re Stac Elec. Sec. Litig., 89 F.3d 1399, 1405 n. 4 (9th Cir. 1996) ("[D]ocuments whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss.") (quotation marks and citation omitted).

Looking forward, the Prospectus provided:

Outlook. We announced on January 25, 2001 that, while acknowledging recent macro-economic indicators suggesting an economic slowdown, we remain comfortable with our performance estimates for 2001. Unlike many volume printed circuit board manufacturers, we specialize in providing prototype and low-quantity manufacturing services for research and development programs and new product development, with production lead times that can be as short as 24 hours. We believe this focus provides higher margins and lower performance volatility by insulating us from large order cancellation or deferment decisions made in light of softening market forecasts. We believe that our large and diverse customer base also makes us less vulnerable to individual customer shifts in demand. We announced that for 2001 we are targeting increases in net sales and earnings per share in excess of 25% over our 2000 results. A number of factors including those described below in "Risk Factors," will affect our ability to achieve these goals, and there can be no assurance that we will do so.

Prospectus at 4.

These "Risk Factors" included the following:

• This offering involves a high degree of risk. . . . If any of the following risks . . . actually occur, our business, financial condition and operating results would likely suffer. In that event, the market price of our stock could decline, and you could lose all or part of the money you paid to buy our common stock.

• A downturn in the communications or networking equipment industries would likely negatively impact our revenues.

• A majority of our customers are in the communications and networking equipment industries, which are characterized by intense competition, relatively short product life-cycles and significant fluctuations in product demand. In addition, these industries are generally subject to rapid technological change and product obsolescence. Furthermore, these industries are subject to economic cycles and have in the past experienced, and are likely in the future to experience, recessionary periods. A recession or any other event leading to excess capacity or a downturn in the communications or networking equipment industries would likely negatively impact our revenues.

• Our operating results have fluctuated in the past because we sell on a purchase-order basis rather than pursuant to long-term contracts. We are therefore sensitive to variability in demand by our customers. . . . Because of these factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.

• Because we depend on a core group of significant customers, our results of operations may be negatively impacted if key customers discontinue the use of our services.

• As a result of our level of debt and the terms of our debt instruments . . . our vulnerability to adverse general economic conditions is heightened.

Prospectus at 9-14.

Plaintiffs allege that the Prospectus was materially false or misleading due to: (1) the accounting fraud and (2) the decline in demand and loss of customers that DDi started experiencing in October 2000. CAC ¶ 74.

C. Statements Made Between February 2001 and June 4, 2001

Plaintiffs allege that DDi made a host of false or misleading statements between February 2001 and June 4, 2001. In these statements, which included SEC filings and press releases, Defendants: (1) announced DDi's recent financial results; (2) stated that DDi's demand "remain[ed] strong" and that DDi had maintained and increased its customer base; and (3) touted steps made in DDi's acquisition and expansion campaign. Id. ¶¶ 198, 200, 203, 204, 205, 206. Plaintiffs allege that these statements were materially false or misleading because of: (1) the accounting fraud; (2) their failure to disclose that demand for DDi's services stated declining in October 2000; and (3) the deceptive acquisition and expansion campaign. Id. ¶¶ 199, 200, 202, 205, 207.

D. Statements Made Between June 27, 2001 and January 2002

Plaintiffs allege that, between June 27, 2001 and January 2002, Defendants made a number of statements that, although beginning to shed light on DDi's troubles, remained false or misleading.

1. June 27, 2001 Press Release

On June 27, 2001, DDi reported a "slow down" in business "due to general economic weaknesses and the resulting softening of end-market demand." Id. ¶ 208. Consequently, DDi reduced its anticipated results for the second quarter of 2001. Id. In the announcement, DDi's President and CEO, McMaster, stated that DDi's "strong customer relationships continue to reflect the value of [its] quick-turn services, allowing [DDi] to maintain healthy gross margins in excess of 30% despite lower revenue." Id. Plaintiffs allege that McMaster's statements "mitigated" DDi's disclosures. Id. ¶ 209.¹⁵ Plaintiffs also allege that the announcement was "incomplete and, thus, misleading because [it] failed to advise investors that DDi's business had declined precipitously for the 9 months leading up to the June 27 release; DDi [had] lost business from numerous clients including several of its largest; and both of these factors yielded a bleak outlook for the Company." Id. ¶ 210.

15 DDi's stock value rose nearly 30% to $20 per share between June 27 and June 29, 2001. Id. ¶ 209.

2. July 26, 2001 Press Release

On July 26, 2001, DDi announced results for the second quarter of 2001 in line with its projections and recognized a "slowing in sales momentum." Id. ¶¶ 212-13. McMaster stated, however, that DDi was maintaining "margins within [its] target range, . . . reflect[ing] [its] sound and efficient operations" and "relatively stable pricing levels."Id. McMaster also represented that DDi had "increased [its] customer base by more than 275 during the first 6 months of 2001, [and] delivered sound results. . . ." Id. Finally, McMaster touted DDi's acquisitions. Id. ¶ 214.

Plaintiffs claim that this release was false or misleading because of: (1) the accounting fraud; (2) the release's failure "to . . . completely notify investors of the adverse business trends . . . affecting the company" since October 2000; and (3) the deceptive acquisition and expansion campaign. Id. ¶ 215.¹⁶

16 On August 14, 2001, DDi filed a Form 10-Q reporting DDi's results for the second quarter of 2001. Id. ¶ 216. The Form 10-Q confirmed the contents of the June 26, 2001 press release. Id. Plaintiffs allege that the Form 10-Q was false or misleading for the same reasons. Id. ¶ 217.

3. October 9, 2001 Press Release

On October 9, 2001, DDi issued a press release announcing it expected to report revenue of approximately $70 million and cash losses per share of $0.03 to $0.05 for the third quarter of 2001. Id. ¶ 218. In the release, McMaster recognized that "end-market demand is continuing to impact our operating momentum" and that the Company would have to reduce its capacity to "align with softer production levels." Id. McMaster stated that DDi's approach, however, "kep[t] [it] in a strong position to respond aggressively when economic conditions improve." Id.

Plaintiffs allege that this release was false or misleading because "the undisclosed . . . deterioration that had plagued DDi for more than one year rendered incomplete and misleading McMaster's assurance that DDi was in a 'strong position' going forward." Id. ¶ 219. Plaintiffs contend that "[i]f anything, DDi's deceptive acquisition and expansion campaign saddled the Company with redundant manufacturing capacity that diminished the Company's future prospects." Id.

4. October 25, 2001 Press Release

On October 25, 2001, DDi announced results for the third quarter of 2001 in line with its projections. Id. ¶ 220. It reported net sales of $70.6 million and diluted cash losses of $0.03 per share. Id. McMaster explained that DDi was experiencing "a continuation of the effects of the current economic environment on end-market demand within [the] industry."Id. ¶ 222. He noted, however, that "despite weak market conditions, approximately two-thirds of [DDi's] customer base placed orders during [the] quarter. . . ." Id. McMaster predicted "a relatively flat quarter to close 2001, with some signs of expanded [customer] spending . . . possible for the second quarter of 2002." Id. ¶ 221. McMaster also stated that DDi was "expecting fourth quarter revenue of $60 million to $70 million and a cash loss per share before restructuring charges of $0.04 to $0.10." Id.

Plaintiffs claim that this release was false or misleading for the same reasons that the July 26, 2001 release was false or misleading. Id. ¶ 224.¹⁷

17 On November 14, 2001, DDi filed a Form 10-Q reporting its results for the third quarter of 2001. Id. ¶ 223. The Form 10-Q confirmed the contents of the October 25, 2001 press release. Id. Plaintiffs allege that it was false or misleading for the same reasons. Id. ¶ 224.

5. November 8, 2001 Press Release

On November 8, 2001, DDi issued a press release announcing the opening of a new "fast-track assembly facility" located in San Jose, California.Id. ¶ 225. DDi's President of Value Added Operations stated that this was necessary in light of "growing demand for time-critical new product assemblies and full system integration." Id. Plaintiffs allege, however, that this was simply another step in the deceptive acquisition and expansion campaign. Id. ¶ 227.

6. January 2, 2002 Press Release

On January 2, 2002, DDi issued a press release reporting it had successfully reached an agreement with its bank loan syndicate to amend its revolving credit. Id. ¶ 226. McMaster stated that "the amendments to the agreement provide the Company with strong liquidity and added financial flexibility to support [its] current operating initiatives and growth objectives pending the recovery in the electronics manufacturing service industry." Id. Plaintiffs allege that this release was misleading because "the undisclosed . . . deterioration that had plagued DDi [since October 2000] rendered incomplete and misleading McMaster's positive statements. . . ." Id. ¶ 227.

7. January 29, 2002 Press Release

On January 29, 2002, DDi issued a press release announcing its results for the fourth quarter of 2001. Id. ¶ 229. DDi reported net sales of $64.5 million and net losses of $0.07 per share. Id. Commenting on the results, McMaster stated: "While [DDi's] quarterly results reflected continued economic pressures, [it] [was] encouraged by signs of stabilization in [its] order and shipment rates which could be indicative of demand resurgence in future quarters." Id. ¶ 230. McMaster stated that DDi was "expecting a flat first quarter 2002, with revenue and cash loss comparable to fourth quarter 2001 results before restructuring charges." Id.

Plaintiffs contend that this release was false or misleading because of: (1) the accounting fraud; (2) its failure to "completely notify investors of the adverse business trends . . . affecting" DDi since October 2000; and (3) the deceptive acquisition and expansion campaign.Id. ¶ 232.

8. January 2002 Interview

Sometime in January 2002, McMaster gave an interview to the Wall Street Transcript Corporation. Id. ¶ 231. During the interview, McMaster stated that DDi had "over 2,000 customers[,] . . . includ[ing] Alcatel [and] Marconi . . ." Id. He also stated that DDi's "business model continues to remain very, very sound and robust." Id. McMaster touted the acquisition campaign and asserted that DDi's outlook included "sales growth of 20% or better . . . [and] return on invested capital of greater than [a] 20% range." Id. Finally, McMaster stated: "[A]s we look at DDi going forward . . ., . . . we're continuing to add more customers [and] we're very, very diversified." Id.

Plaintiffs contend that McMaster's statements were false or misleading because of: (1) the accounting fraud; (2) his failure to "completely notify investors of the adverse business trends . . . that had been affecting" DDi since October 2000; (3) "Alcatel and Marconi [had] stopped purchasing DDi products in 2001"; (4) the deceptive acquisition and expansion campaign; and (5) McMaster's lack of "basis on which to assure investors that DDi expected to realize 20% growth in business. . . ."Id. ¶ 232.

E. Statements Made Between March 19, 2002 and the End of the Class Period

In a section of the CAC entitled "The Truth Begins to Emerge," Plaintiffs allege that, although continuing to reveal the extent of DDi's problems, Defendants also continued to issue material false or misleading statements until the Class Period ended on April 29, 2002.

1. March 19, 2002 Press Release

On March 19, 2002, DDi issued a press release announcing the possibility of a "slight" fall in sales against plan. Id. ¶ 233. McMaster stated that this decline was "largely the result of a lengthening of average order lead times. . . ." Id. Plaintiffs allege that this release was misleading not only for the three main reasons mentioned throughout this order, but also because it "conceal[ed] the true reasons for DDi's failing finances." Id. ¶¶ 233, 237.

2. March 25, 2002 Press Release

On March 25, 2002, DDi "announced a $75 million offering of convertible subordinated notes due 2007 in a private placement (plus an additional amount of up to $15 million), subject to market and certain other conditions." Id. ¶ 234. Following this announcement, DDi's stock price fell below $10 per share. Id. ¶ 235. Plaintiffs allege that this release was misleading because it "failed to properly and completely notify investors of the adverse business trends and uncertainties . . ." Id. ¶ 237.

3. April 2, 2002 Press Release

On April 2, 2002, DDi "announced that the convertible note offering had been closed and had jumped to $100 million." Id. ¶ 236. Plaintiffs claim this release was misleading for the same reasons as the March 25, 2002 press release. Id. ¶ 237.

4. End of the Class Period — April 30, 2002 Press Release Phone Conference

On April 30, 2002, the end of the Class Period, DDi issued a press release announcing its results for the first quarter of 2002. Id. ¶ 238. The Company reported "net sales of $62.5 million (a 56% decline from the first quarter 2001) and a net loss of $5.9 million, compared with net income of $5.6 million in the first quarter 2001." Id. DDi also "announced that [its] outlook appeared bleak as losses were projected to widen and sales [to] drop approximately 25% from the second quarter 2001." Id. McMaster commented that "[t]he first quarter [had] brought continued . . . weakness in many of [DDi's] end markets" and that "demand and pricing remain[ed] volatile." Id.

On that same day, McMaster and Gisch held a conference call with analysts. Id. ¶ 239. During the call, McMaster stated that "weak demand in [DDi's] industry [had] resulted in added pressure on [its] margins" and that DDi was using only 50% of its operating capacity, was seeking to consolidate its redundant operations, and had recently closed its Texas facility. Id. McMaster also provided that DDi "[had] not seen [business related to the value-added operations] since really the second quarter of last year." Id. ¶ 240.

Plaintiffs allege that these announcements "led to an initial drop in DDi's stock price, and started a chain reaction that caused DDi's stock price to fall precipitously." Id. ¶ 241. On May 6, 2002, Standard and Poor's slashed DDi's credit rating, causing the stock's value to plunge 45 percent. Id. "[W]hen the smoke finally cleared, DDi's stock price fell from a Class Period high of $35.50 on January 30, 2001 to below $1.00 on June 20, 2002." Id.

F. DDi's Bankruptcy

On April 11, 2003, DDi announced that its common stock would be delisted from the NASDAQ SmallCap Market. Id. ¶¶ 246-49. On August 20, 2003, after its stock closed at $0.05 per share, DDi announced that it had filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Id. ¶ 249. On December 2, 2003, the United States Bankruptcy Court for the Southern District of New York signed an order ("Bankruptcy Order") confirming DDi's plan for reorganization ("Reorganization Plan"). See Underwriter Defendants' Req. for Jud. Not. ("RJN"), Ex. A ("Bankruptcy Order") B ("Reorganization Plan").¹⁸

G. Defendants' Motives

Plaintiffs allege that Defendants made these misrepresentations in order to artificially inflate DDi's stock value and thereby: (1) reap increased profits from insider stock sales; and (2) allow DDi to retire some of its debt through the sale of inflated convertible subordinated notes and through the conversion of those notes upon DDi's stock reaching a certain value. Id. ¶¶ 148-58.

H. The Present Action

Raymond Ferrari filed the original complaint in this action on October 1, 2003. Three similar complaints soon followed. The first complaint against the Underwriter Defendants was filed on December 1, 2003. On July 29, 2004, Plaintiffs filed the CAC. Plaintiffs assert five causes of action in the CAC. First, Plaintiffs allege that the Underwriter Defendants, McMaster, Gisch, and all of the defendants who were directors of DDi violated § 11 of the Securities Act. Second, Plaintiffs allege that the Underwriter Defendants, the Individual Defendants, and Bain violated section § 12(a)(2) of the Securities Act. Third, Plaintiffs allege that these same defendants violated § 15 of the Securities Act. Fourth, Plaintiffs allege that the Individual Defendants and Bain violated § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Fifth, Plaintiffs allege that these same defendants violated § 20(a) of the Exchange Act.

III. LEGAL STANDARD A. Rule 12(b)(6)

A court should dismiss a complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim only where it appears beyond doubt that plaintiff can prove no set of facts in support of the claim which would entitle the plaintiff to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957). All allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party. Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996).

Review is generally limited to the contents of the complaint. Allarcom Pay Television, Ltd. v. Gen. Instrument Corp., 69 F.3d 381, 385 (9th Cir. 1995). However, material that is properly presented to the court as part of the complaint may be considered as part of a motion to dismiss.Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001). If a plaintiff fails to attach to the complaint the documents on which it is based, the defendant may attach those documents to a Rule 12(b)(6) motion to show that they do not support the plaintiff's claim. Id. In addition, the court may take judicial notice of facts that are capable of accurate and ready determination by resort to sources whose accuracy cannot be questioned. See Fed.R.Evid. 201.

B. Rule 9(b)

Usually, a plaintiff is only required to give a short, plain statement of his claim sufficient to put the defendant on notice. See Fed.R.Civ.P. 8. In actions alleging fraud, however, "the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). Under Rule 9(b), the complaint must allege specific facts regarding the fraudulent activity, such as the time, date, place, and content of the alleged fraudulent representation, how or why the representation was false or misleading, and, in some cases, the identity of the person engaged in the fraud. In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1547-49 (9th Cir. 1994) (en banc), superseded by statute on other grounds as stated in Marksman Partners, L.P. v. Chantal Pharm. Corp., 927 F. Supp. 1297, 1310 (C.D. Cal. 1996). Because the plaintiff must set forth what is false or misleading about a particular statement, he must do more than simply allege the neutral facts necessary to identify the transaction. Yourish v. California Amplifier, 191 F.3d 983, 992-93 (9th Cir. 1999). He must explain why the disputed statement was untrue or misleading at the time it was made. Id.

C The Securities Act Claims

Under § 11(a) of the Securities Act, any purchaser of a security covered by a registration statement may sue if the registration statement contained a material misrepresentation or omission. 15 U.S.C. § 77k(a). Individuals who sign the registration statement, directors of or partners in the issuer, professionals who participate in the preparation of the registration statement, and underwriters of the security are all liable under § 11(a). Id. See In re Stac Elec. Sec. Litig., 89 F.3d 1399, 1403-04 (9th Cir. 1996).

Section 12(a)(2) of the Securities Act makes it unlawful for any person to use any instrumentality of interstate commerce to offer or sell securities by means of a prospectus or oral communication that includes "an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading." 15 U.S.C. § 771(a)(2). A plaintiff must establish that he or she purchased shares directly in the offering pursuant to the prospectus or communication alleged to be misleading. Moore v. Kayport Package Express, Inc., 885 F.2d 531, 535 (9th Cir. 1989).

Meanwhile, section 15(a) of the Securities Act imposes joint and several liability upon anyone who controls a person liable under § 11 or § 12. 15 U.S.C. § 77o. Thus, violation of § 15(a) is predicated upon violation of § 11 or § 12.

D. The Exchange Act Claims

Section 10(b) of the Exchange Act provides, in part, that it is unlawful "to use or employ in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 78j(b).

Rule 10b-5 makes it unlawful for any person to use interstate commerce:

(a) To employ any device, scheme, or artifice to defraud,

(b) To 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, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5.

In order to state a claim under § 10(b) and Rule 10b-5, a plaintiff must allege: (1) a misrepresentation or omission (2) of material fact (3) made with scienter (4) on which the plaintiff justifiably relied (5) that proximately caused the alleged loss. Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 1999).

Under § 20(a) of the Exchange Act, joint and several liability can be imposed on persons who directly or indirectly control a violator of the securities laws. 15 U.S.C. § 78t(a). Violation of § 20(a) is predicated on a primary violation under the Exchange Act. Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 978 (9th Cir. 2000).

E. The Private Securities Litigation Reform Act

Congress enacted the Private Securities Litigation Reform Act ("PSLRA") in 1995 to establish uniform and stringent pleading requirements for securities fraud actions and "to put an end to the practice of pleading 'fraud by hindsight.'" In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 988 (9th Cir. 1999). The PSLRA heightens the pleading standards in private securities fraud litigation by requiring that the complaint plead both falsity and scienter with particularity. In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1084 (9th Cir. 2002). Under the PSLRA, the complaint — whether alleging that a defendant "made an untrue statement of a material fact" or that a defendant "omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading" — must specify each statement alleged to have been false or misleading, specify the reason or reasons why each such statement was misleading, and, if an allegation regarding the statement or omission is made on information and belief, state with particularity all facts on which that belief is formed. 15 U.S.C. § 78u-4(b)(1).¹⁹ If the challenged statement was not false or misleading, it does not become actionable merely because it was incomplete. In re Vantive, 283 F.3d at 1085; Brody v. Transitional Hosp. Corp., 280 F.3d 997, 1006 (9th Cir. 2002).

19 Matters that are not alleged on personal knowledge are considered to be alleged on information and belief. See In re Vantive Corp., Sec. Litig., 283 F.3d 1079, 1085 n. 3 (9th Cir. 2002).

In addition, the complaint must, with respect to each alleged act or omission, "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). In the Ninth Circuit, the required state of mind is "deliberate or conscious recklessness." In re Silicon Graphics, 183 F.3d at 979. 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." In re Read-Rite Corp. Sec. Litig., 335 F.3d 843, 846 (9th Cir. 2003) (citation and internal quotations omitted). "[R]ecklessness only satisfies scienter under § 10(b) to the extent that it reflects some degree of intentional or conscious misconduct." In re Silicon Graphics, 380 F.3d at 977. When considering whether plaintiffs have shown a strong inference of scienter, "the district court must consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs." Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir. 2002).

F. Non-Actionable Statements

Any of three doctrines may apply to render a defendant's statements non-actionable. First, the PSLRA provides a "safe harbor" for certain forward-looking statements including: (1) projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items; (2) statements of the plans and objectives of management; or (3) statements of future economic performance. See 15 U.S.C. § 78u-5(i)(1). Under the PSLRA, such statements cannot be the basis of liability if: (A) they are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements; or (B) the plaintiff fails to prove that the defendant who made the forward-looking statements did so with actual knowledge that they were false or misleading. See 15 U.S.C. § 78u-5(c). See also In re Splash Tech. Holdings, Inc. Sec. Litig., No. C 99-00109 SBA, 2000 WL 1727377, at *8 n. 6 (N.D. Cal. Sept. 29, 2000) (defendant need only satisfy one prong of 15 U.S.C. § 78u-5(c)(1) to establish immunity).

Second, the "bespeaks caution doctrine" provides protection for optimistic projections accompanied by cautionary language containing relevant specific facts or assumptions. In re Worlds of Wonder Sec. Litig. ("WOW"), 35 F.3d 1407, 1413 (9th Cir. 1994). The doctrine arises from the application of two fundamental concepts in securities fraud cases: materiality and reliance. Id. at 1414. When appropriate cautionary language accompanies forward-looking statements, the materiality of the forward-looking statements and the reasonableness of reliance are affected. Id. Courts in the Ninth Circuit have held that dismissal under the bespeaks caution doctrine is appropriate on a motion to dismiss. See In re Stac, 89 F.3d at 1408. Nevertheless, "[c]ourts have exercised caution in applying the . . . doctrine at the pleading stage when plaintiffs have alleged that defendants possessed material information, at the time that they provided cautionary statements, that rendered even the cautionary statements themselves fraudulent or at least misleading." In re Splash, 2000 WL 1727377 at *11 (citing In re Prudential Sec. Litig., 930 F. Supp. 68, 72 (S.D.N.Y. 1996)). See also Huddleston v. Herman MacLean, 640 F.2d 536 (5th Cir. 1981), rev'd on other grounds, 459 U.S. 375 (1983) ("To warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit.").

Third, under the doctrine of "puffery," a corporate insider's vague expressions of optimism or belief generally cannot serve as the basis for a securities law claim. See Raab v. General Physics Corp., 4 F.3d 286, 290 (4th Cir. 1993); In re Verifone Sec. Litig., 784 F. Supp. 1471, 1481 (N.D. Cal. 1992). However, Ninth Circuit law provides that "projections and general expressions of optimism [occasionally] may be actionable. . . . ." See In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989). As stated in In re Apple Computer: "A projection or statement of belief contains at least three implicit factual assertions: (1) that the statement is genuinely believed, (2) that there is a reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement." Id. Consequently, "[a] projection or statement of belief may be actionable to the extent that one of these implied factual assertions is inaccurate."Id. See also In re Intermune, Inc. Sec. Litig., C 03-2954 SI, 2004 WL 1737264, at *3-4 (N.D. Cal. July 30, 2004) (applying In re Apple Computer); Nursing Home Pension Fund v. Oracle Corp., 242 F. Supp. 2d 671, 679-80 (N.D. Cal. 2002), rev'd on other grounds by Nursing Home Pension Fund, Local 144 v. Oracle Corp. ("Oracle"), 380 F.3d 1226 (9th Cir. 2004); Kane v. Madge Networks N.V., C 96-20652 RMW, 2000 WL 33208116, at *8 (N.D. Cal. May 26, 2000) (when "many of the alleged 'lies' are statements of opinion (for example, . . . personal beliefs), the pleadings [must] address the degree to which the speaker did not in fact believe those opinions"); id. ("While . . . forecasts may be actionable, plaintiffs must plead specific facts that show that such projections lacked a reasonable basis at the time that they were made or were not issued in good faith.") (quotation marks and citation omitted).

IV. ANALYSIS

Defendants attack Plaintiffs' claims collectively and individually. First, Defendants argue that all of Plaintiffs' causes of action are barred by the statute of limitations and the Bankruptcy Order. Second, Defendants advance a piece-meal assault on Plaintiffs' Securities Act and Exchange Act claims.

A. Statute of Limitations

Defendants argue that all of Plaintiffs' claims are time-barred. See Underwriter Defendants Mot. ("UW Mot.") at 4-6; Bain Defendants Mot. ("Bain Mot.") at 2 n. 1; Individual Defendants Mot. ("ID Mot.") at 26-29.

The statute of limitations for Securities Act claims is set forth in § 13 of the Act, which requires a complaint to be brought "within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence. . . ." 15 U.S.C. § 77m. Thus, the statute of limitations on Securities Act claims is triggered either by "actual notice" — the discovery of the untrue statement or omission — or "inquiry notice" — when discovery should have been made by the exercise of reasonable diligence. In re Infonet Serv. Corp. Sec. Litig. ("Infonet II"), 310 F. Supp. 2d 1106, 1113 (C.D. Cal. 2003) (citing Newman v. Warnaco Group, 335 F.3d 187, 193 (2d Cir. 2003); In re CBT Group PLC Sec. Litig., 2000 WL 33339615, at *6 (N.D. Cal. Dec. 29, 2000); In re Livent, Inc. Sec. Litig., 148 F. Supp. 2d 331, 364-65 (S.D.N.Y. 2001)). Inquiry notice may be triggered by "any financial, legal, or other data, such as public disclosures in the media about the financial condition of the corporation and other lawsuits alleging fraud committed by the defendants, that provide the plaintiff with sufficient storm warnings to alert a reasonable person to the probability that there were either misleading statements or significant omissions involved in the sale of securities." In re Livent, 148 F. Supp. 2d at 364-65. Inquiry notice may also be triggered by "the suspension of trading in the issuer's stock, public reports of federal or state investigations of the registrant, notice that the issuer has filed for reorganization or bankruptcy, a sharp decline in stock value, or public disclosure of the adverse financial condition of the issuer." Infonet II, 310 F. Supp. 2d at 1114. "While any one of these [events] may not be determinative, the cumulative effect of two or more of them may well require that a purchaser of a registered security commence a [Securities Act] action within one year of these events." Id. (internal quotation marks and citation omitted).

The statute of limitations for Exchange Act claims has been in a state of flux during the past few years. Prior to July 30, 2002, the statute of limitations for these claims provided that the plaintiff had to bring suit "within one year after the discovery of facts constituting the violation and within three years after such violation." 15 U.S.C. § 78i(e);Lampf, Pleva, Lipkind, Prupis Petigrow v. Gilbertson, 501 U.S. 350, 364 (1991). Although the Ninth Circuit never determined whether inquiry notice was sufficient to trigger this limitations period, district courts followed the lead of other circuits and adopted the inquiry notice standard. See In re Splash, 2000 WL 1727405 at *17; City Nominees Ltd. v. Macromedia, Inc., 1998 WL 267964, at *1 (N.D. Cal. 1998), rev'd on other grounds, 2000 WL 432056 (9th Cir. 2000).²⁰ On July 30, 2002, President Bush signed the Sarbanes-Oxley Act, amending the statute of limitations for private rights of action "that involve a claim of fraud . . . in violation of a regulatory requirement concerning the securities laws" and providing that such claims "may be brought not later than the earlier of — (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation." 28 U.S.C. § 1658(b); Pub.L. No. 107-204, § 804(a), 116 Stat. 745, 801 (July 30, 2002). While this amendment extended the limitations period, it did not alter the law regarding when the limitations period is triggered. See, e.g., In re Enterprise Mortgage Acceptance Co., LLC, Sec. Litig., 295 F. Supp. 2d 307, 311 (S.D.N.Y. 2003) ("The principles discussed above [ i.e., the inquiry notice rule] still apply to the new limitations period."). Thus, although there is now a longer limitations period for claims "that involve fraud," inquiry notice still triggers the statute.

20 In In re Splash, the court explained that the inquiry notice rule applies as follows:

[I]nquiry notice implicates a two-part analysis. First, the court must determine when the duty to investigate arose. The focus at this stage is on whether the information allegedly triggering the duty constituted a sufficient "storm warning" to alert a reasonable investor of the probability of fraud. Second, the court must determine when a reasonably diligent investor, armed with the triggering information, should have discovered the facts forming the basis of the fraud alleged in the complaint.

In re Splash, 2000 WL 1727405 at *17 (citations omitted).

The parties dispute what limitations period applies to each of Plaintiffs' causes of action. While Plaintiffs appear to argue that the two-year period applies to all their claims, Defendants assert that Sarbanes-Oxley is inapplicable to Plaintiffs' Securities Act claims and cannot be "retroactively" applied to their Exchange Act claims. Compare Opp. to Bain Defendants' and Underwriter Defendants' Mot. ("Opp. to BUW") at 14-17, with Bain Mot. at 2 n. 1; ID Mot. at 26-29. It is unnecessary to resolve this dispute. Even accepting all Defendants' arguments as true, the court cannot find, as a matter of law, that Plaintiffs' claims are time-barred.²¹

21 The court notes, however, that it is by no means clear that the extended statute of limitations under Sarbanes-Oxley for "private right[s] of action that involve a claim of fraud" would not apply to Securities Act claims, such as Plaintiffs, that are "grounded in fraud."See infra Part IV.C.1. Moreover, Defendants take the holding from In re Heritage Bond Litig., 298 F. Supp. 2d 1132 (C.D. Cal. 2003), too far in asserting that it unequivocally demonstrates that the limitations period created by Sarbanes-Oxley does not apply to claims that accrued before Sarbanes-Oxley's enactment. Rather, that case merely stands for the proposition that the limitations period in Sarbanes-Oxley "cannot apply to claims already barred at the time of [Sarbanes-Oxley's] enactment." Id. at 1148.

The question when a plaintiff was on inquiry notice is one of fact, appropriate for resolution as a question of law only "when uncontroverted [facts] irrefutably demonstrate plaintiff discovered or should have discovered the [wrongful] conduct." Gray v. First Winthrop Corp, 82 F.3d 877, 881 (9th Cir. 1996) (discussing standard as applied to a motion for summary judgment). See also Nelson v. Stahl, 173 F. Supp. 2d 153, 166 (S.D.N.Y. 2001) ("The Court will not reach [the issue of inquiry notice], because the question of whether Plaintiffs should have discovered the fraud earlier than they did, and thus whether the action is timely, is a question for the trier of fact."); In re Executive Telecard, Ltd. Sec. Litig., 913 F. Supp. 280, 283 (S.D.N.Y. 1996) (determining issue of inquiry notice is appropriate on Rule 12(b)(6) motion to dismiss only "where no reasonable fact finder analyzing the circumstances as presented could determine that inquiry notice did not exist"); Blatt v. Merrill Lynch, Pierce, Fenner Smith, Inc., 916 F. Supp. 1343, 1356 (D.N.J. 1996) ("[T]he question of whether a plaintiff exercised reasonable diligence is usually a question of fact for the jury to decide. . . .") (quotation marks and citation omitted); Brogen v. Pohlad, 933 F. Supp. 793, 798-99 (D. Minn. 1995) ("The Court finds that the [resolution of when the alleged fraud should have been discovered] is a factual inquiry which cannot be resolved on a motion to dismiss."); Nivram Corp. v. Harcourt Brace Jovanovich, Inc., 840 F. Supp. 243, 249 (S.D.N.Y. 1993) ("[D]efendants bear a heavy burden in establishing that the plaintiff was on inquiry notice as a matter of law" and "inquiry notice [may be found on a Rule 12(b)(6) motion to dismiss] only when uncontroverted evidence irrefutably demonstrates when plaintiff discovered or should have discovered the fraudulent conduct."); Lawrence Kaplan, Annotation, What Constitutes "Inquiry Notice" Sufficient to Commence Running of Statute of Limitations in Securities Fraud Action — Post-Lampf Cases, 148 A.L.R. Fed. 629, § 10 (2004) (discussing numerous cases).

Here, the gravamen of Plaintiffs' claims is that Defendants misrepresented DDi's financial results and failed to disclose that DDi had been in a financial slump since October 2000. Plaintiffs assert that they were not on inquiry notice of these claims until August 20, 2003.²²

22 Plaintiffs allege that this was when DDi's Vice President admitted in an affidavit offered in the Bankruptcy proceeding that "it was known in late-2000 that DDi's business had been negatively impacted by the industry-wide slump. . . ." CAC ¶ 251 (paraphrasing Donnelly's statement).

After reviewing the various press releases and statements involved in this case, the court cannot find that the facts "irrefutably demonstrate" that Plaintiffs were placed on inquiry notice before this date. Defendants' arguments to the contrary are unavailing. First, Defendants heavily rely on the fact that DDi's stock value dropped to below $1.00 per share by June 20, 2002. See, e.g., UW Mot. at 2, 5. However, it is clear that a "decrease in stock price alone is insufficient to trigger inquiry notice." Infonet II, 310 F. Supp. 2d at 1118 (citing In re Ames Dep't Stores, Inc. Note Litig., 991 F.2d 968, 981 (2d Cir. 1993)). Second, although Defendants offer a variety of press releases and statements that they claim placed Plaintiffs on inquiry notice by June 2002, none of those releases or statements suggested that Defendants had misrepresented DDi's prior financial performance. Instead, they simply indicated that DDi, like much of the market, was experiencing financial difficulties. See, e.g., Individual Defendants' RJN, Ex. O (June 27, 2001 Press Release) ("[D]ue to general economic weaknesses and the resulting softening of end-market demand, the Company has adjusted its anticipated results for the second quarter.").²³ In addressing whether these types of statements place a plaintiff on inquiry notice, the Ninth Circuit has held: "It is well settled that poor financial performance, standing alone, does not necessarily suggest securities fraud at the time of the sale, but could also be explained by poor management, general market conditions, or other events unrelated to fraud, creating a jury question on inquiry notice."Gray, 82 F.3d at 881. Third, the releases and statements discussed by Defendants, at most, placed Plaintiffs on inquiry that DDi was not completely "insulated" from general market forces. None of the statements can be said to have clearly alerted Plaintiffs to Defendants' "general fraudulent scheme" and thus to have triggered the running of the statute of limitations. See Salinger v. Projectavision, Inc., 972 F. Supp. 222, 229 (S.D.N.Y. 1997). In short, the facts as alleged do not "irrefutably demonstrate" that Plaintiffs were placed on inquiry notice prior to August 20, 2003. Defendants' Motions to Dismiss are denied insofar as they assert that Plaintiffs' Securities Act and Exchange Act claims are barred by the statute of limitations.

23 The court takes judicial notice of this document. In re Stac, 89 F.3d at 1405 n. 4 ("[D]ocuments whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss.") (quotation marks and citation omitted).

B. The Bankruptcy Order

On December 2, 2003, the United States Bankruptcy Court for the Southern District of New York signed the Bankruptcy Order confirming DDi's Reorganization Plan. The Underwriter Defendants and some of the Bain Defendants contend that the Bankruptcy Order bars all of Plaintiffs' claims against them. UW Mot. at 16-18; Bain Mot. at 2 n. 2. The crux of this argument is that Plaintiffs' causes of action violate the Reorganization Plan's requirement that Plaintiffs "release 'any and all Claims and Causes of Action arising from or related in any way to the Released Claims [against DDi].'" UW Mot. at 16 (quoting Reorganization Plan ¶ 12.5.1) (bracketed text in UW Mot.). According to the Underwriter and Bain Defendants, Plaintiffs' causes of action against them "are 'related to' the claims against DDi that [P]laintiffs released." Id.

However, the Underwriter and Bain Defendants' quotation of the Reorganization Plan is incomplete. In full, paragraph 12.5.1 of the Reorganization Plan provides that Plaintiffs shall "conclusively, absolutely, unconditionally, irrevocably and forever release, waive and discharge the Released Parties from any and all of the Released Claims and any and all Claims and Causes of Action arising from or related in any way to the Released Claims." Reorganization Plan ¶ 12.5.1 (emphasis added). Thus, the Reorganization Plan not only refers to specifically-defined "Released Claims," but also appears to bar certain claims only against particularly-defined "Released Parties." See id. ¶ 2.1.118-19. The Underwriter and Bain Defendants have failed to cogently argue what claims are "related" to the "Released Claims," whether they qualify as "Released Parties," or why paragraph 12.5.1 should be read to bar claims other than those asserted against "Released Parties." Accordingly, the court cannot find that the Bankruptcy Order adopting the Reorganization Plan precludes Plaintiffs' claims against the Underwriter and Bain Defendants. The Defendants' Motions to Dismiss are denied insofar as they assert that Plaintiffs' claims are barred by the Bankruptcy Order.²⁴

24 For this reason, the court need not address Plaintiffs' arguments that "the bankruptcy court did not have the power to discharge the liabilities of a non-debtor" or that "indemnification for Securities Act violations violates public policy." Opp. to UWB at 12-14. Defendants are not precluded from reasserting arguments based upon the Bankruptcy Order in other motions filed in this action.

C. Securities Act Claims

Plaintiffs' Securities Act claims are based on the Prospectus issued in conjunction with the February 2001 offering. Plaintiffs allege that the Prospectus was materially false and misleading because it misrepresented DDi's performance and potential. The parties dispute both the applicable pleading standard and whether Plaintiffs' allegations satisfy that standard.

1. Applicable Pleading Standard

Although the notice pleading model of Rule 8 generally applies to claims brought under the Securities Act, the heightened pleading requirements of Rule 9(b) apply when the plaintiff's Securities Act claims are "grounded in fraud." See In re Stac, 89 F.3d at 1404-05. See also In re Infonet Serv. Corp. Sec. Litig. ("Infonet I"), 310 F. Supp. 2d 1080, 1094 (C.D. Cal. 2003) ("Plaintiffs['] assert[ion] that their Securities Act claims are 'based on principles of strict liability and negligence' . . . is belied by Plaintiffs' allegations in the complaint, 'where the gravamen of the complaint is plainly fraud[.]'") (quoting In re Stac, 89 F.3d at 1405 n. 2). Defendants argue that Plaintiffs' Securities Act claims are "grounded in fraud" and therefore must satisfy the heightened pleading requirements of Rule 9(b). UW Mot. at 7-8. The court agrees.

First, Plaintiffs' Securities Act claims are plainly "grounded in fraud," as evidenced by the fact that the Prospectus is simply one of a number of allegedly fraudulent statements that Defendants made throughout the Class Period. In fact, Defendants allegedly made similar fraudulent statements both before and after the Prospectus was issued. As another district court recognized:

Plaintiffs cannot allege fraud based on a series of events occurring before the offering and on essentially identical events continuing after the offering, and then scissor out a non-fraud claim from the center of that unified course of conduct in order to evade the Rule 9(b) requirement.

In re Metricom Sec. Litig., No. C01-4085 PJH, 2004 WL 966291, at *24 (N.D. Cal. Apr. 29, 2004). Here, Plaintiffs do no more than attempt to "scissor out . . . a non-fraud claim" from their general allegations. The court cannot accept Plaintiffs' characterization of their pleadings and finds that Plaintiffs' Securities Act claims are grounded in fraud.

Second, it is far from dispositive that the CAC contends that the Securities Act claims "do not assert that the defendants . . . are liable for fraudulent or intentional conduct." See, e.g., CAC ¶ 104. The Ninth Circuit has "applied Rule 9(b) even though the complaint specifically disclaimed any reliance on fraud for the [Securities Act] claim[s]." In re Stratosphere Corp. Sec. Litig., 1 F. Supp. 2d 1096, 1104 (D. Nev. 1998) (discussing In re Stac, 89 F.3d at 1404 n. 2). Such "nominal efforts are unconvincing where the gravamen of the complaint is plainly fraud. . . ." In re Stac, 89 F.3d at 1405 n. 2. Here, Plaintiffs' claims sound clearly in fraud. For example, both the Securities Act and Exchange Act claims are based, in part, on Defendants' alleged failure to disclose a known decline in demand that started in October 2000. See, e.g., CAC ¶ 53 ("W-4 confirmed that Defendants were able to conceal DDi's dry pipeline.") (emphasis added); id. ¶ 98 ("The February Prospectus . . . failed to disclose known trends. . . ."). Fraud, therefore, "lies at the core of the action." See Infonet I, 310 F. Supp. 2d at 1094. See also In re Harmonic, 163 F. Supp. 2d 1079, 1088 (N.D. Cal. 2001) (allegation that defendants knew that business had slowed, but had failed to disclose such and represented otherwise in order to reap financial profit "plainly sound[s] in fraud").

Third, it is of no consequence that the CAC "physically separates" the Securities Act and Exchange Act claims. Not only do the allegations in these two "portions" of the CAC constantly incorporate each other by reference, but the entire CAC alleges a "unified course of fraudulent conduct." Courts have recognized that Plaintiffs' manner of pleading does not avoid the requirements of Rule 9(b). See, e.g., In re Metricom, 2004 WL 966291 at *22 (finding that plaintiff had alleged a unified course of fraudulent conduct, in part, because "the § 11(a) and § 12(a)(2) causes of action incorporated by reference all the allegations relating to the alleged knowing misrepresentations"). See also Infonet I, 310 F. Supp. 2d at 1094 (noting the significance of the fact that "Plaintiffs' Section 10(b) claim for securities fraud relies on the same allegations upon which their Sections 11 and 12 claims are based"); id. ("Plaintiffs' assertion that their Securities Action claims are based only on negligence or strict liability is untenable in light of the complaint's wholesale adoption of the allegations under the Securities Exchange Act fraud claims for the purposes of the Securities Act claims.") (quotation marks and citations omitted).

Fourth, although Plaintiffs' Exchange Act claims include an allegation relating to DDi's acquisition and expansion policy not found in the Securities Act claims, that does not change the fact that Plaintiffs' Securities Act claims are "grounded in fraud." Thus, Rule 9(b) applies to Plaintiffs' Securities Act claims.²⁵

25 Plaintiffs assert that the court must disregard any portion of their Securities Act claims based on a fraud theory, and instead focus on their other allegations to which Rule 9(b) would not apply. See Opp. to BUW at 5-6 (citing Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003)). However, Vess recognized that when plaintiffs allege "a unified course of fraudulent conduct and rely entirely on that course of conduct as the basis of a claim[,] . . . the claim is said to be 'grounded in fraud' or to 'sound in fraud,' and the pleading of that claim as a whole must satisfy the particularity requirement of Rule 9(b)." Vess, 317 F.3d at 1103-04. Plaintiffs' suggestion that the court bifurcate consideration of their Securities Act claims is disingenuous, as the course of conduct upon which these claims rely is inextricably grounded in fraud. See Infonet I, 310 F. Supp. 2d at 1094 n. 8; see also Lone Star Ladies Inv. Club v. Schlotzsky's Inc., 238 F.3d 363, 368 (5th Cir. 2001) ("[A] district court is not required to sift through allegations of fraud in search of some 'lesser included' claim of strict liability.").

2. Materially False or Misleading Representations or Omissions

Having concluded that Rule 9(b) applies to Plaintiffs' Securities Act claims, it remains to be determined whether Plaintiffs' allegations satisfy the heightened pleading requirements of Rule 9(b). Plaintiffs allege that the Prospectus was materially false or misleading because: (1) accounting fraud skewed DDi's results; (2) Defendants misrepresented the demand for DDi's services and the strength of its customer base, and failed to disclose certain "adverse trends"; and (3) "DDi's glowing outlook was untenable and incomplete as DDi [had] suffered a precipitous loss of business in the four months leading up to the February 14, 2001 offering." CAC ¶ 74. Defendants, however, assert that Plaintiffs have not adequately alleged the material falsity or misleading nature of any of Defendants' representations. Defendants further contend that Plaintiffs have failed to demonstrate that Defendants had a duty to disclose what was allegedly omitted from the Prospectus. The court agrees with Defendants on both points.²⁶

26 Defendants also argue that "the CAC does not identify with the requisite particularity which specific statement(s) [P]laintiffs contend were false." UW Mot. at 3, 8-9. In light of its own ability to identify the statements Plaintiffs contend were false, the court cannot agree. Instead, paragraph 74 clearly indicates why "each" of the statements quoted or summarized in paragraphs 67-73 was allegedly false or misleading. Even the Bain Defendants, in their Motion to Dismiss, were able to discern the statements Plaintiffs allege were misleading. See Bain Mot. at 6-22.

a. Accounting Fraud

Plaintiffs allege that the Prospectus was misleading because Defendants artificially inflated DDi's revenues by prematurely shipping and booking orders. See CAC ¶¶ 10, 75-87.

In In re Foundry Networks, Inc. Sec. Litig., C 00-4823 MMC, 2003 WL 22077729 (N.D. Cal. Aug. 29, 2003), the court encountered an allegation of this type of accounting fraud, known as "channel stuffing." The court held that, in order to particularly plead such an allegation, the plaintiff must adequately allege facts:

(1) reflecting the source of information a[s] to the allegations; (2) indicating whether any such products were returned, to support the assertion that the shipments were "unauthorized" or sent without customer approval; (3) respecting the number of such early deliveries, the number of customers affected, or the identity of any such customers affected; (4) showing that demand actually had decreased or that [the Company] had initiated the early shipments in order to conceal weakening demand for its products; (5) showing that any decrease in [the Company's] internal forecast was in fact the result of the early shipments; (6) setting forth the amount of revenue that such early shipments involved represented; and (7) indicating whether [the Company] violated GAAP by engaging in any such practice.

Id. at *6.

Similarly, another court held: "To adequately plead financial fraud based on improper revenue recognition, plaintiffs must allege, at minimum, some particular transactions where revenues were improperly recorded, including the names of the customers, the terms of specific transactions, when the transactions occurred, and the approximate amount of the fraudulent transactions."Fitzer v. Security Dynamics Tech., Inc., 119 F. Supp. 2d 12, 35-36 (D. Mass. 2000) (quotation marks and citations omitted).

Plaintiffs' allegations fall short of meeting these standards. They fail to describe any particular transactions, precisely state when certain channel stuffing occurred, or, most importantly, indicate how much the channel stuffing skewed DDi's total results. Consequently, it is impossible to determine if DDi's results were not only misleading, but materially misleading. See In re Trex Co., Inc. Sec. Litig., 212 F. Supp. 2d 596, 611-12 (W.D. Va. 2002) ("Without a more specific basis for determining the effect of defendants' alleged channel stuffing, the court cannot determine whether the failure to disclose those activities more specifically was a material omission."). See also In re Vantive, 283 F.3d at 1091 (in order to plead accounting fraud, there must be a "sufficient allegation of the amounts by which revenues were allegedly overstated"); Greebel v. FTP Software, Inc., 194 F.3d 185, 204 (1st Cir. 1999) (a "basic detail" in an accounting fraud allegation is the "approximate amount by which revenues and earnings were overstated").

The most that Plaintiffs provide is that DDi's Virginia facility prematurely shipped "between $600,000 and $1,200,000" in pending orders "each quarter," representing "between 4% and 8% of the Virginia facilities['] quarterly revenues." CAC ¶ 78. This allegation, however, fails to specify the amount of orders prematurely shipped in the fourth quarter of 2000 or how much those shipments skewed DDi's total revenues. Instead, it generally refers to "each quarter" over the course of approximately 1.5 years and provides the financial figures for only one of DDi's facilities. Therefore, this allegation provides no insight into whether, and by how much, channel stuffing skewed the Prospectus. Accordingly, Plaintiffs' allegations of channel stuffing fail to meet the pleading requirements imposed by Rule 9(b) and are dismissed without prejudice. See Gross v. Summa Four, Inc., 93 F.3d 987, 996 (1st Cir. 1996) (dismissing allegations of revenue overstatement where plaintiff failed to adequately allege the amount of the overstatement or the net effect it had on the company's earnings), superseded on other grounds by statute as stated in Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999). See also In re Vantive, 283 F.3d at 1091 n. 11 (it is difficult for a complaint asserting accounting fraud to meet the particularity requirement of Rule 9(b) if it does not allege the "specific amounts" by which "defendant . . . inflated its revenues").

b. DDi's Demand and Customer Base

Plaintiffs also allege that the Prospectus was materially false or misleading in providing that: "[(1)] DDi's fourth quarter sales demand was 'strong,' [(2)] DDi was 'retaining' and 'increasing' its customer base, [(3)] DDi's business was 'insulated' from market volatility, and [(4)] DDi was making full and efficient use of its manufacturing capacity." CAC ¶ 74. Plaintiffs further assert that the Prospectus was misleading for failing to disclose certain "known trends." Id.

i. "Strong" Fourth Quarter Demand

Because Plaintiffs failed to adequately allege accounting fraud, the court must accept as true the Prospectus's statement that DDi's "net sales for the [fourth] quarter [of 2000] . . . increased 118% to $171.3 million, from $78.7 million for the same period" a year before. Id. ¶ 67. In light of this fact, the court cannot find that it was false or misleading for DDi to assert that it experienced "strong" demand during this record-setting quarter. See In re Foundry, 2003 WL 22077729 at *3-5 ("in light of the record . . . revenues experienced by [the Company]," allegations of weak demand do not render misleading the statement that there was "good overall demand").

Furthermore, Plaintiffs' confidential witnesses' testimonials are too vague to undermine the statement that demand was "strong." According to these witnesses, DDi's business "substantially slowed down" and "demand turned the corner" in October 2000. CAC ¶¶ 52-53. These testimonials, however, fail to quantify this decline or provide the detail and specificity necessary to satisfy Rule 9(b). See, e.g., In re Vantive, 283 F.3d at 1086 ("Even when the complaint eventually indicates that '[the Company's] sales cycles were lengthening substantially,' the complaint gives no indication of what it means for a sales cycle to lengthen 'substantially. . . .'");id. at 1088 (a plaintiff must allege more than that there were "slow sales" in order to rebut a statement that the company experienced "good demand"); In re Foundry, 2003 WL 22077729 at *12 (a witness's statement that "fourth quarter sales were 'dead'" does not satisfy the particularity requirement). Nor do the Post-Class Period statements support Plaintiffs' allegation that DDi experienced a decline beginning in October 2000. For example, McMaster's August 22, 2003 statement that DDi had "been through 2½ years of hell" demonstrates, at most, that DDi had been through "hell" since approximately February or March 2001. It does not indicate that DDi's demand was "weak" in the fourth quarter of 2000.²⁷ Thus, Plaintiffs' Securities Act claims are dismissed without prejudice insofar as they are based upon DDi's representation that fourth quarter demand was "strong."

27 Similarly, Donnelly's affidavit from August 14, 2003 admitted that demand for DDi's services "ha[d] generally decreased over the past two years." CAC ¶ 63. Consequently, it did not admit that DDi's business "substantially slowed down" in the fourth quarter of 2000.

ii. DDi was "Retaining" and "Increasing" its Customer Base

Plaintiffs allege that the Prospectus's assertion that DDi was retaining and increasing its customer base was also materially false and misleading. However, Plaintiffs' claims regarding this matter lack the particularity required by Rule 9(b). In fact, the testimonials from Plaintiffs' confidential witnesses demonstrate, at most, that DDi lost a few of its customers at some point in 2001. See, e.g. CAC ¶ 57 (W-4 stating that "Redback . . . 'just stopped buying'" and "Alcatel . . . 'went away completely' in 2001"); id. ¶ 60 (W-7 recalling that the Dallas facility lost Infinitec and Latus Lightwork in "mid-2001"). These allegations fail to refute the statement that DDi "retain[ed]" and "increas[ed]" its customer base during the fourth quarter of 2000. Thus, Plaintiffs have not adequately alleged that these statements were materially false or misleading, and Plaintiffs' claims based thereon are dismissed without prejudice.²⁸

28 Plaintiffs assert in their Opposition that DDi had already lost Alcatel by late 2000. Opp. to ID at 19; Opp. to BUW at 8. The CAC, however, does not support this allegation. At most, the confidential witnesses' testimonials demonstrate that DDi lost Alcatel's business sometime in 2001.

iii. DDi's Business was "Insulated" from Market Volatility

In the CAC, Plaintiffs assert that "DDi suffered a decline in demand and loss of customers, including several of DDi's largest, since at least October 2000, thereby invalidating DDi's claims that . . . [its] business was 'insulated' from market volatility." CAC ¶ 74. Nowhere in the Prospectus did DDi claim that it was "insulated from market volatility." Instead, the Prospectus provided:

Outlook. We announced on January 25, 2001 that, while acknowledging recent macro-economic indicators suggesting an economic slowdown, we remain comfortable with our performance estimates for 2001. Unlike many volume printed circuit board manufacturers, we specialize in providing prototype and low-quantity manufacturing services for research and development programs and new product development, with production lead times that can be as short as 24 hours. We believe this focus provides higher margins and lower performance volatility by insulating us from large order cancellation or deferment decisions made in light of softening market forecasts. We believe that our large and diverse customer base also makes us less vulnerable to individual customer shifts in demand. We announced that for 2001 we are targeting increases in net sales and earnings per share in excess of 25% over our 2000 results. A number of factors, including those described below in "Risk Factors," will affect our ability to achieve these goals, and there can be no assurance that we will do so.

Prospectus at 4 (emphasis added). Plaintiffs cannot, in good faith, argue that the Prospectus represented that "DDi's business was 'insulated' from market volatility." Furthermore, the "Risk Factors" specifically warned: "A downturn in the communications or networking equipment industries would likely negatively impact our revenues." Id. at 9. Consequently, no reasonable investor could understand the Prospectus as standing for the proposition that DDi was "'insulated' from market volatility." Thus, any of Plaintiffs' Securities Act claims based upon this allegation are dismissed with prejudice.

iv. Full and Efficient Use of Manufacturing Capacity

Plaintiffs also contend that the Prospectus wrongfully represented that "DDi was making full and efficient use of its manufacturing capacity." CAC ¶ 74. The Prospectus does not contain any representations to this effect and Plaintiffs do not argue otherwise. Thus, Plaintiffs' claims based upon this alleged misrepresentation are dismissed with prejudice.

v. Omission of Adverse Trends

Plaintiffs also claim that Defendants violated the Securities Act by failing to disclose "known trends . . . that were reasonably likely to have a materially adverse effect on the Company's revenues and income."Id. ¶¶ 98-100. In arguing that Defendants had a duty to disclose this information, Plaintiffs rely upon 17 C.F.R. § 229.303. See id. ¶¶ 98-100.²⁹ This regulation, however, imposes a duty on companies to disclose this type of information in "reports for full fiscal years." In re Metricom, 2004 WL 966291, at *19 (citing 17 C.F.R. § 229.303(a)(3)(ii), Note). "It is not applicable to interim reports, to press releases, or to other communications with shareholders." Id. As Plaintiffs have made no showing that the Prospectus constitutes a "report for [a] full fiscal year," the court cannot find that the requirements of § 229.303 apply to the Prospectus. Thus, Plaintiffs' Securities Act claims are dismissed with prejudice insofar as they are premised upon the proposition that Defendants had a duty to disclose "known trends" in the Prospectus pursuant to § 229.303.³⁰

29 Plaintiffs do not appear to contend that a company generally has a duty to disclose these trends. See Raab v. General Physics Corp., 4 F.3d 286, 289 (4th Cir. 1993) ("[The company's] accurate reporting of its past results did not then require the company to speculate on the effect that a contract slowdown . . . would have on its future earnings."). See also In re Convergent Technologies Sec. Litig., 948 F.2d 507, 514 (9th Cir. 1991) (rejecting plaintiffs' contention that accurate reporting of past results "misled investors by implying that [the company] expected the upward first quarter trend to continue throughout the year.").

30 Plaintiffs also appear to contend that Defendants had a duty to disclose DDi's financial condition as of February 2001, when DDi issued the Prospectus. See Opp. to BUW at 7-8. Defendants argue, however, that they fulfilled their duty by disclosing DDi's most recent annual and quarterly data and that they had no duty to provide data regarding the quarter in progress. Bain Mot. at 19. Plaintiffs fail to respond to this argument and the law supports Defendants' position. See Kapps v. Torch Offshore, Inc., 379 F.3d 207, 220-21 (5th Cir. 2004).

c. DDi's "Glowing Outlook"

Plaintiffs contend that the Prospectus's "glowing outlook was untenable and incomplete as DDi [had] suffered a precipitous loss of business in the four months leading up to the February 14, 2001 offering." CAC ¶ 74. As discussed, Plaintiffs have not particularly pled "a precipitous loss of business" beginning in October 2000. Thus, Plaintiffs' allegations in this regard are far too vague to satisfy the requirements of Rule 9(b) and are dismissed without prejudice.³¹

For the reasons set forth above, the court grants Defendants' Motions to Dismiss Plaintiffs' Securities Act claims.³²

32 Because Plaintiffs' Securities Act claims are dismissed on the above-mentioned grounds, the court need not address Defendants' arguments that Plaintiffs "lack standing to bring a section 12 claim" or that the "section 12 claim fails because the Individual DDi Defendants are not alleged to have 'solicited' a sale of securities to any named plaintiff."See UW Mot. at 13-15; Bain Mot. at 6 n. 7; ID Mot. at 21-23.

D. Exchange Act Claims

Most of the allegations supporting Plaintiffs' Exchange Act claims are doomed for similar reasons. For example, Plaintiffs' Exchange Act claims rely heavily upon the allegation that Defendants engaged in accounting fraud and concealed that DDi had started slumping in October 2000. However, as discussed, Plaintiffs have failed to particularly plead that material accounting fraud occurred or that DDi actually encountered economic difficulties beginning in October 2000. Thus, Plaintiffs cannot rely on either of these allegations to support a claim that Defendants' statements were materially false or misleading.

Meanwhile, the last of Plaintiffs' primary allegations — that Defendants engaged in a fraudulent acquisition and expansion campaign — also fails to satisfy the particularity requirements of Rule 9(b) and the PSLRA. Plaintiffs attempt to support this allegations by proffering the statements of W-4. W-4, however, simply offers conclusions and fails to provide any particular details regarding how or why Defendants' statements relating to the expansion and acquisition campaign were false or misleading. Consequently, this allegation also fails. Thus, Plaintiffs' Exchange Act claims must be dismissed without prejudice.

In addition, Plaintiffs also inappropriately employ the "group pleading" or "group published information" doctrine to attribute statements to a number of defendants and to plead scienter. Prior to the PSLRA, this doctrine had allowed plaintiffs to rely "upon a presumption that the allegedly false and misleading 'group published information' complained of [was] the collective action of officers and directors." In re Secure Computing Corp. Sec. Litig., 120 F. Supp. 2d 810, 821 (N.D. Cal. 2000) (citation omitted).³³ This doctrine, however, is wholly inconsistent with the PSLRA and its particularity requirement. Consequently, many courts have held that it is no longer good law. See, e.g., Southland Sec. Corp. v. Inspire Ins. Solutions, Inc., 365 F.3d 353, 363-65 (5th Cir. 2004) (rejecting group pleading doctrine and holding that "corporate officers may not be held responsible for unattributed corporate statements solely on the basis of their titles, even if their general level of day-to-day involvement in the corporation's affairs is pleaded"); Allison v. Brooktree Corp., 999 F. Supp. 1342, 1350 (S.D. Cal. 1998) (group pleading doctrine would "permit a judicial presumption as to particularity [which] simply cannot be reconciled with the statutory mandate that plaintiffs must plead specific facts as to each act or omission by the defendant"); Coates v. Heartland Wireless Communications, Inc., 26 F. Supp. 2d 910, 916 (N.D. Tex. 1998) ("It is nonsensical to require that a plaintiff specifically allege facts regarding scienter as to each defendant, but to allow him to rely on group pleading in asserting that the defendant made the statement or omission."); In re Lockheed Martin Corp. Sec. Litig., 272 F. Supp. 2d 928, 936 (C.D. Cal. 2002) ("The group-published information doctrine is inconsistent with the PSLRA because it requires courts to accept a plaintiff's belief regarding the individual liability of a corporate officer even when the belief is based on the officer's job title alone."). This court agrees. Therefore, Plaintiffs may not rely on the group pleading doctrine in lieu of pleading specific facts about each defendant named in their Exchange Act claims. Thus, even if Plaintiffs had adequately alleged the material falsity or misleading nature of Defendants' statements, their extensive reliance on the group pleading or group published information doctrine would require the court to dismiss their Exchange Act claims without prejudice.³⁴

33 Group published information is information contained in documents such as prospectuses, registration statements, annual reports, and press releases. See Wool v. Tandem Computers Inc., 818 F.2d 1433, 1440 (9th Cir. 1987).

34 Because of these failures, the court need not determine whether Plaintiffs have adequately pled Defendants' scienter. The court notes, however, that many of Plaintiffs' scienter allegations are in need of improvement. For example, Plaintiffs refer to an "emergency Sunday sales meeting . . . in November 2001," Opp. to ID at 23, but provide no details regarding what was discussed at the meeting. Furthermore, despite the fact that the meeting took place in November 2001, Plaintiffs employ it to demonstrate Defendants' scienter with regard to statements occurring as early as December 2000. This is not the only one of Plaintiffs' allegations to suffer from such deficiencies. Plaintiffs are advised to provide greater specificity in any subsequent complaint and to organize their allegations so as to permit the court to determine what information Plaintiffs allege a particular defendant knew at the time he made a particular statement. See In re Read-Rite Corp. Sec. Litig., 335 F.3d 843, 846 (9th Cir. 2003) (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").

V. CONCLUSION

For the foregoing reasons, Defendants' Motions to Dismiss are DENIED in part and GRANTED in part. The court denies Defendants' Motions insofar as they assert that Plaintiffs' claims are barred by the statute of limitations and the Bankruptcy Order. The court grants Defendants' Motions insofar as they contend that Plaintiffs have failed to adequately allege any materially false or misleading representations or omissions. The court also grants Defendants' Motions insofar as they contend that the CAC inappropriately relies upon the group pleading or group published information doctrine. Plaintiffs' Securities Act and Exchange Act claims are therefore dismissed in conformity with this order. Because Plaintiffs may be able to cure some of the deficiencies in their complaint, the court grants Plaintiffs leave to file a Second Amended Consolidated Complaint. Any such complaint shall be filed by no later than 30 days from the date of this order.

IT IS SO ORDERED.