Opinion
No. C-92-20349-RMW (EAI)
April 20, 1994
CLASS ACTION ORDER ADOPTING IN PART AND REJECTING IN PART MAGISTRATE JUDGE INFANTE'S RECOMMENDATION
The court has conducted a de novo review and hereby adopts Magistrate Judge Edward A. Infante's disposition granting in part and denying in part defendants' motion to dismiss plaintiffs' second amended complaint except as set forth below.
1. Group Pleading Outside Directors
Rule 9(b) requires a plaintiff to attribute particular fraudulent acts or statements to a particular defendant. See e.g., In re XOMA CORP. Secur. Litigation, [1991-92 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 96,491 at 92,160 (N.D.Cal. 1991). The Ninth Circuit has recognized an exception to this rule where alleged misstatements can be attributed to a group:
In cases of corporate fraud where the false or misleading information is conveyed in prospectuses, registration statements, annual reports, press releases, or other "group-published information," it is reasonable to presume that these are the collective actions of the officers. Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1440 (9th Cir. 1987).
Where the misrepresentations take the form of "group published information," plaintiffs may plead fraud by officers and executives involved in the day-to-day management of those parts of the corporation involved in the fraud through "general averment." In re Sunrise Technologies Sec. Litig., [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,042 at 94,584 (N.D. Cal. (citation omitted) (emphasis added). In order to invoke the group pleading doctrine with regard to outside directors, plaintiffs must establish that the outside directors are "involved in the day-to-day management of those parts of the corporation involved in the [alleged] fraud." Plaintiffs have alleged insufficient facts to invoke the group pleading doctrine with respect to outside directors M. Essam Badawi, Norman Kidd, and Daniel D. Tompkins, Jr. The Complaint alleges no committee membership, no position in the company other than the position of director, and no facts indicating involvement in the day-to-day activities of the company. The court realizes that its opinion in In re Digital Microwave Secur. Litigation [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,044 at 94,594 (N.D. Cal. 1992) may have indicated that such pleading was sufficient. However, upon reconsideration, the court finds that such conclusory allegations are not adequate. Plaintiffs must allege some factual basis for concluding that these outside directors were involved in Rasterops' day-to-day management.
The "independently published statements by financial analysts are not group published information." Network Technologies Inc. Litig., 762 F. Supp. 1359, 1367 (N.D.Cal. 1991). As discussed below, plaintiff have failed to sufficiently link the analysts' reports to the defendant. Therefore, these reports are independent and not subject to the group published doctrine.
Although it is reasonable to presume that misleading information conveyed in prospectuses, registration statements, annual reports, or press releases are the collective actions of the officers, it is not reasonable to presume that oral statements by individual defendants are the product of such collective efforts. "By its very nature the group pleading presumption does not apply to oral statements by individual defendants." In re Sunrise, supra ¶ 97,042 at 94, 585. Plaintiffs allege that statements made by defendant Sorenson are subject to the group published doctrine. Plaintiffs state that "RasterOps participated in a conference co-sponsored by Technologic Partners and Merrill Lynch in Burlingame, California, attended by securities analysts and the press" and allege that false and misleading statements were made at the conference by defendant Sorenson. (Complaint ¶ 41). Plaintiffs also state that "[o]n January 15, 1991, in announcing the promotion of Susan Saul to Vice President of International Sales" defendant Sorenson made a false and misleading statement. (Complaint ¶ 42). Plaintiffs provide no facts that indicate that these statements are the collective actions of the officers rather than the statement of an individual defendant. Absent such facts, plaintiffs may not invoke the group pleading doctrine with respect to these oral statements by defendant Sorenson.
2. Analysts' Reports
The instant complaint includes allegations that the Rasterop defendants are liable for misleading analyst reports. A company may be liable for an analyst's report which it fostered and reviewed but failed to correct if it expressly or impliedly represented that the information was accurate or coincided with the company's views. Elkind v. Liggett Meyers, Inc., 635 F.2d 156, 163 (2d Cir. 1980). However, in pleading allegations based on this theory of liability, plaintiffs bear an additional burden. They must allege facts supporting the conclusion that the company adopted or endorsed the analysts' reports. See e.g., Elkind, supra, 635 F.2d at 163 (the company must "sufficiently entangle itself with the analysts' forecasts to render those predictions `attributable to it'").
Therefore, it is not enough to simply allege that the reports were based on information provided by the company and that the company received a draft of the report. The instant complaint states:
Several securities analysts also issued positive statements about RasterOps in reports that RasterOps provided information for, saw, reviewed and/or approved in draft form and knew were false and would affect the trading price of RasterOps stock. (Complaint ¶ 6).
The Individual Defendants, because of their positions of control and authority as officers and/or directors of the Company, were able to and did control the contents of . . . presentations to security analysts pertaining to the Company. Each officer/director defendant was provided with copies of RasterOps' stockholder reports, press releases and SEC filings alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. As a result, each of the Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore liable for the representations contained herein. (Complaint ¶ 28).
Defendants . . . approv[ed] the issuance of false and misleading analysts' reports. . . . (Complaint ¶ 33).
Throughout the Class Period, RasterOps and the Officer Defendants were in contact with stock market professionals, analysts, money managers and similar members of the professional investment community, and periodically provided information to securities analysts. . . . (Complaint ¶ 36).
The court realizes that its opinion in Rogal v. Costello; 1993 WL 204636 (N.D. Cal. 1993) ("Rogal II") may have indicated that plaintiff's pleading was sufficient. However, as this court indicated in Pleasant Overseas Corporation, et al. v. William D. Hajjar. et al., slip op. No. C 93-200197 RMW (EAI), November 18, 1993 (N.D. Cal. 1993) and Trident v. O'Sullivan, slip op. No. 93-18 20621 RMW (EAI), February 2, 1994 (N.D. Cal. 1993), (N.D. Cal. 1993), the court finds that, based on the reasoning in Verifone, the Second Circuit's opinion in Elkind, Judge Williams' recent holding in Syntex, and the Fourth Circuit's holding in Raab v. General Physics Corp. [1993 Transfer Binder] Fed. Sec. L. Rep. (CCH) § 97, 713 at 97, 342 (4th Cir. 1993), the rule requiring plaintiffs to plead facts sufficient to support a conclusion that the defendants adopted or endorsed the analysts' reports is the better rule. In the instant case, plaintiffs have failed to allege facts sufficient to support a conclusion that defendants adopted or endorsed the analysts' reports.
3. Conclusion
Therefore, the court dismisses with leave to amend plaintiffs' allegations as to all defendants except defendant Sorenson with respect to the oral statements by defendant Sorenson because plaintiffs have not alleged that such statements were the collective action of the officers. The court dismisses with leave to amend plaintiffs' allegations as to outside directors M. Essam Badawi, Norman Kidd, and Daniel D. Tompkins, Jr. because plaintiffs have alleged insufficient facts to invoke the group pleading doctrine with respect to these defendants. The court dismisses with leave to amend plaintiffs' allegations that all defendants are liable for misleading analyst reports because plaintiffs have failed to allege facts to support the conclusion that the company adopted or endorsed the analysts' reports. Plaintiffs shall have thirty days from the date of this order within which to file a third amended consolidated complaint to cure the pleading defects.