896 F. Supp. 2d 877
C.D. Cal.2012Background
- Shareholders bring a securities class action over conflicting financials reported to the SEC and to SAIC.
- ZST is a Delaware corporation with operations in PRC and files financials with both the SEC and SAIC.
- Alleged misstatements show SEC-reported 2008 revenues >$50M and 2009 >$100M, while SAIC-reported figures were a small fraction.
- The Court previously dismissed some Securities Act claims for lack of standing and some Exchange Act claims for lack of auditor liability, with leave to amend.
- Amended complaint alleges two registrations (Initial Oct 2009 and Amended Jan 2011) and a scheme to bifurcate registrations to shield liability; Plaintiff contends all shares are traceable to those registrations.
- The current decision grants in part and denies in part: Securities Act claims dismissed for lack of standing; Exchange Act claims against some defendants survive (WestPark and Rappaport) and are dismissed against others without leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Section 11 standing viability | Plaintiff contends all ZST shares are traceable to the IPO registrations. | Defendants maintain lack of traceability; second registration precludes tracing. | Section 11 standing dismissed; traceability not shown. |
| Section 11/15 liability viability | Allegations show misstatements in SEC filings and related registration statements. | Standing and traceability defeated; insufficient pleading of liability. | Counts 1 and 2 dismissed without leave to amend. |
| Exchange Act liability against WestPark and others | WestPark knowingly participated; proper maker of statements. | WestPark stock offering statements not made by WestPark under Janus standard; limited control. | Exchange Act claims sustained as to WestPark and Rappaport; other WestPark defendants dismissed. |
| Rule 10b-5 scheme liability viability | Plaintiff pleads a scheme with WestPark aiding and abetting. | Scheme liability cannot rest on misstatements alone. | Scheme-liability claims addressed; partially sustained as to WestPark. |
| Individual WestPark defendants' liability | Rappaport closely connected to fraud; alter-ego theory pleaded. | Other WestPark defendants lacked connection or scienter. | Claims against Rappaport survive; others dismissed. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues and Rights, Ltd., 551 U.S. 308 (U.S. 2007) (requires a cogent, compelling inference of scienter under PSLRA)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading must plead plausible, not merely possible, entitlement to relief)
- Twombly v. Bell Atl. Corp., 550 U.S. 544 (U.S. 2007) (plausibility standard for pleading (factual content required))
- Daou Systems, Inc. v. City of Costa Mesa, 411 F.3d 1006 (9th Cir. 2005) (pleading requirements for securities fraud; scienter interplay with falsity)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (U.S. 2005) (loss causation and material misrepresentation elements)
- South Ferry LP, No. 2 v. Killinger, 542 F.3d 776 (9th Cir. 2008) (PSLRA scienter standard; collective inference approach)
- Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001) (dual pleading requirements for falsity and scienter interconnected)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (falsity and scienter considerations evaluated together; strong inference standard)
- Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296 (S. Ct. 2011) (maker of statement; ultimate authority over content determines liability)