City of Miami Fire Fighters' & Police Officers' Retirement Trust v. Quality Systems, Inc.
865 F.3d 1130
9th Cir.2017Background
- Quality Systems, Inc. (QSI) sold EHR and practice-management software; NextGen accounted for the vast majority of revenue; growth relied on "greenfield" new-system sales and related high‑margin maintenance revenue.
- Plaintiffs (City of Miami Fire Fighters’ & Arkansas Teacher Retirement) sued on behalf of investors who bought QSI stock during May 26, 2011–July 25, 2012, alleging QSI and officers (Razin, Plochocki, Holt) made false/misleading statements about the current and past sales pipeline and used them to support optimistic forward-looking revenue/EPS guidance.
- Defendants publicly repeatedly described the pipeline as "deep," "growing," and "greenfield," and issued forward-looking guidance (e.g., revenue growth ~21–24% and EPS growth ~20–35% at various times). On July 26, 2012 QSI disclosed a steep decline; stock fell sharply.
- Complaint alleges executives had real‑time access to Salesforce pipeline data showing market saturation and declining greenfield opportunities beginning ~April 2011; multiple confidential witnesses and a former director corroborated internal awareness and reporting practices. CEO Plochocki sold ~87% of his shares in Feb. 2012.
- District court dismissed with prejudice, treating present/past pipeline statements as non‑actionable puffery and forward‑looking guidance as protected by the PSLRA safe harbor; Ninth Circuit reversed and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are non‑forward‑looking statements embedded in mixed statements protected by PSLRA safe harbor? | Mixed statements contain present/factual assertions that are unprotected and actionable if false. | The presence of forward‑looking language (projections) brings the whole statement within safe harbor. | Non‑forward‑looking portions of mixed statements are not protected by the PSLRA safe harbor. |
| Were defendants' present/past statements about the sales pipeline actionable (material and false)? | Statements were concrete, factual descriptions of pipeline that contradicted internal data and thus were materially false/misleading. | Statements were puffery or vague optimism and not material misrepresentations. | Court held the pipeline statements went beyond puffery, were materially misleading given internal data, and thus actionable. |
| Were forward‑looking revenue/EPS statements protected by safe harbor (cautionary language)? | Many forward‑looking statements were part of mixed statements based on false present facts; accompanying cautionary language could not cure misleading present‑tense assertions. | Forward‑looking statements were accompanied by cautionary slides and thus protected; any remaining statements lacked actual knowledge of falsity. | Forward‑looking statements embedded in mixed statements were not shielded because meaningful caution could not cure false present facts; some standalone forward‑looking statements with adequate caution could be protected. |
| Was scienter sufficiently pleaded for defendants? | Confidential witnesses and management admissions show executives had real‑time access to pipeline data; Plochocki’s large February 2012 stock sale supports conscious recklessness/knowledge. | Allegations are speculative or insufficient to create a strong inference of scienter. | Court found plaintiffs pleaded facts that, taken together, give a strong inference of scienter (access to Salesforce data, corroborating witnesses, suspicious insider sale). |
Key Cases Cited
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (standards for pleading and use of confidential witness allegations)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (standard for assessing whether pleaded facts give rise to a strong inference of scienter)
- Cutera, Inc. v. Barger, 610 F.3d 1103 (9th Cir. 2010) (PSLRA safe harbor and forward‑looking statement analysis)
- In re Stone & Webster, Inc. Securities Litigation, 414 F.3d 187 (1st Cir. 2005) (non‑forward assertions in mixed statements are not sheltered by safe harbor)
- Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d 702 (7th Cir. 2008) (mixed present/future statements not entitled to safe harbor as to present‑tense claims)
- Police Retirement System of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051 (9th Cir. 2014) (distinguishing when statements are examined "as a whole")
- Nursing Home Pension Fund v. Oracle Corp., 380 F.3d 1226 (9th Cir. 2004) (executive admission of monitoring sales databases supports scienter allegations)
- In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970 (9th Cir. 1999) (insider stock sales can be circumstantial evidence of scienter)
- Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (U.S. 2014) (elements of private securities fraud claims)