Mike Hernandez v. Brian Farrell
675 F. App'x 718
| 9th Cir. | 2017Background
- Hernandez, a securities fraud class-action plaintiff, sued THQ executives Brian Farrell (CEO/Chair) and Paul Pucino (CFO) under §§ 10(b) and 20(a) alleging false statements about the prospective success of THQ’s uDraw device for PS3 and Xbox 360.
- Hernandez alleges defendants knew from internal feedback and an independent study that "hardcore" PS3/Xbox users were uninterested in the child-focused uDraw, but publicly forecasted strong uDraw sales anyway.
- Defendants moved to dismiss, invoking the PSLRA safe-harbor for forward-looking statements based on (1) meaningful cautionary language and (2) lack of actual knowledge of falsity; district court granted dismissal.
- Plaintiff pleaded that defendants participated in creating sales forecasts designed to hit desired financial targets and that they possessed contrary, reliable information; some allegations relied on sufficiently particular confidential witnesses.
- The Ninth Circuit reviewed de novo and examined whether the safe-harbor applied, whether the statements were immaterial puffery, and whether Hernandez adequately pleaded scienter.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether defendants’ forward-looking statements are protected by the PSLRA safe-harbor because of meaningful, tailored cautionary language | Hernandez: disclosures were boilerplate and failed to warn of the specific risk that PS3/Xbox users would reject the uDraw | Defendants: issued meaningful cautionary statements identifying material risks, so safe-harbor protects forecasts | Court: dispute over whether warnings were meaningful requires record; cannot conclude safe-harbor applies on pleadings alone |
| Whether statements fall outside safe-harbor because defendants had actual knowledge of falsity | Hernandez: defendants crafted forecasts while aware of contrary reliable information and built forecasts to meet targets, raising strong inference of actual knowledge | Defendants: no actual knowledge that forecasts were false | Court: particularized allegations create a strong inference that defendants knew forecasts were false or misleading; safe-harbor inapplicable on this basis |
| Whether alleged statements were immaterial puffery | Hernandez: statements addressed a specific product’s expected profitability, not vague puffery | Defendants: statements were non-actionable puffery | Court: statements were material because they concerned a particular product’s anticipated success |
| Whether Hernandez pleaded scienter sufficiently | Hernandez: failure to disclose known risk and involvement in forecasts supports a strong inference of deliberate recklessness/intent | Defendants: no conscious intent or recklessness pleaded | Court: facts alleged permit a cogent, at-least-as-compelling inference of scienter; §10(b) claim survives (and §20(a) reversed without separate analysis) |
Key Cases Cited
- In re Cutera Sec. Litig., 610 F.3d 1103 (9th Cir.) (safe-harbor inapplicable where company knew forecasts were unreliable; example of meaningful tailored warnings)
- Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051 (9th Cir.) (example of adequate, specific cautionary language addressing material risks)
- Ariz. Students’ Ass’n v. Ariz. Bd. of Regents, 824 F.3d 858 (9th Cir.) (standard of de novo review cited)
- Schueneman v. Arena Pharm., Inc., 840 F.3d 698 (9th Cir.) (scienter includes deliberate recklessness; companies must not mislead about negative information they possess)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S.) (plaintiff must plead a strong inference of scienter at least as compelling as opposing inferences)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir.) (standards for particularity of confidential witness allegations)
- Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598 (9th Cir.) (materiality analysis distinguishing corporate puffery from actionable product-specific statements)