Costabile v. Natus Med. Inc.
293 F. Supp. 3d 994
N.D. Cal.2018Background
- Natus Medical (through Argentine subsidiary Medix) announced a $232.5M, three-year supply contract with the Venezuelan Ministry of Health in October 2015 and said ~$69M in prepayments were expected by Q1 2016; the announcement materially moved the stock price.
- Executives Hawkins (CEO) and Kennedy (CFO) reiterated that prepayments were imminent in multiple press releases, conference calls, and investor presentations in Oct–Dec 2015, and incorporated the contract into 2015 revenue guidance.
- Plaintiff alleges (based largely on confidential witnesses) that the contract either was not executed in late 2015, that prepayments were overdue (including three missed installments due Oct–Dec 2015), that the contract left Natus with poor enforcement remedies under Venezuelan law, and that payments were actually peso‑denominated.
- Beginning January 2016, Natus disclosed delays in prepayments and later (Feb–Apr 2016) disclosed the unsigned contract, missed prepayments, political/economic risks, lowered guidance, and ultimately that no Venezuela revenue was recognized in 1Q2016; stock price declined on these disclosures.
- Plaintiff brought securities fraud claims under §10(b)/Rule 10b‑5 and §20(a). Defendants moved to dismiss under Rules 9(b) and 12(b)(6). The court granted the motion, dismissing the complaint with leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether challenged statements were false or misleading | Hawkins/Kennedy misled investors about the existence/terms/effect of the Venezuela contract and failed to disclose missed prepayments and enforcement risks | Statements accurately described the contract and were forward‑looking or not materially misleading; some disclosures later acknowledged "delays" | Court: Some November–December 2015 statements about imminent prepayments and revenue guidance were plausibly misleading (sufficiently alleged) but other challenged statements failed to plead falsity with particularity |
| Whether the PSLRA safe harbor protects the statements | Plaintiff: omissions of existing facts (missed payments) are not protected | Defendants: statements were forward‑looking and accompanied by cautionary language / not known false when made | Court: Safe harbor inapplicable to the November–December statements because they omitted present/historical facts (missed prepayments) despite forward‑looking wording |
| Whether scienter (intent or deliberate recklessness) was adequately alleged | Plaintiff: confidential witnesses, executives’ stock sales, shifting statements support strong inference of scienter | Defendants: CWs unreliable/hearsay, sales not unusual given prior history, alternative innocent inferences plausible | Court: Plaintiff failed to plead a strong inference of scienter; CW allegations were insufficiently particular and insider sales were not suspicious in context |
| Whether control‑person liability under §20(a) survives without primary violation | Plaintiff: Hawkins and Kennedy controlled Natus and are liable based on §10(b) violations | Defendants: No primary violation; thus no control liability | Court: Because §10(b) claim fails for lack of scienter, §20(a) claim fails as well |
Key Cases Cited
- Zucco Partners LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (standards for confidential witnesses and heightened PSLRA/Rule 9(b) pleading)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard under Rule 8)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (application of Twombly plausibility standard)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (framework for evaluating whether scienter inference is "strong")
- In re Cutera Securities Litigation, 610 F.3d 1103 (9th Cir. 2010) (definition of misleading statements and caution re: puffery)
- In re Daou Systems, Inc., 411 F.3d 1006 (9th Cir. 2005) (requirements for confidential witness reliability and corroboration)
- Brody v. Transitional Hospitals Corp., 280 F.3d 997 (9th Cir. 2002) (literally true statements can nonetheless be misleading)
- TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) (materiality standard — "total mix" of information)
- In re Quality Systems, Inc., 865 F.3d 1130 (9th Cir. 2017) (scienter standard includes deliberate recklessness; limits of PSLRA safe harbor)
- Align Technology, Inc. v. 856 F.3d 605 (9th Cir. 2017) (control‑person claim requires a primary securities law violation; insider sale analysis guidance)