227 F. Supp. 3d 1098
N.D. Cal.2017Background
- This is the third iteration of a securities-fraud class action previously dismissed for failing to allege sufficient scienter; plaintiffs amended to add statements from two confidential witnesses (CWs), chiefly CW5.
- Plaintiffs allege CW5 attended meetings in which SanDisk executives received information inconsistent with their public statements, particularly downplaying acquisition-integration problems.
- Defendants moved to dismiss and asked dismissal be with prejudice; they submitted a "recanting declaration" from CW5 denying or minimizing some statements attributed to him.
- Plaintiffs moved to strike the recanting declaration; they argued the declaration is improper at the pleading stage and cannot be credited without discovery or an evidentiary hearing.
- The court concluded the recanting declaration was improperly submitted in connection with a motion to dismiss because it would require testing through discovery before being credited, and struck/discounted its use in deciding dismissal-with-prejudice.
- The court denied the motion to dismiss without prejudice (free to be refiled without reference to the recantation), left the PSLRA discovery stay in place, and gave plaintiffs 21 days to file a third amended complaint if they choose.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the court may rely on CW5's recanting declaration to deny leave to amend or dismiss with prejudice | Plaintiffs: the recantation is extrinsic evidence that cannot be credited on a Rule 12(b)(6) motion and must be subject to discovery/evidentiary testing before being used to deny amendment or dismissal | Defendants: recanting declaration shows plaintiffs cannot cure scienter defects and thus supports denial of leave and dismissal with prejudice | Court: recantation cannot be used to deny leave or justify dismissal-with-prejudice without testing; striking/discounting it and denying DM with leave to refile without reference to the recantation |
| Whether submitting a recanting declaration at the pleading stage is procedurally proper | Plaintiffs: such declarations improperly introduce extrinsic evidence at the pleading stage and should be struck sight unseen | Defendants: the declaration is a permissible method to show allegations are inaccurate and to argue against amendment | Court: improper in this context because it seeks to evade the limits of a 12(b)(6) motion; courts should not credit recantations during motion-to-dismiss adjudication |
| Whether defendants’ tactic warrants sanctions or other procedural remedies | Plaintiffs: defendants’ submission may be sanctionable if made in bad faith or to intimidate CW5 | Defendants: used a middle-ground tactic short of seeking sanctions; intended to correct the record | Court: declining to resolve sanctions now; defendants may use Rule 11 process or move for sanctions after the motion-to-dismiss is adjudicated; not sanctioning at this stage |
| Appropriate next steps while PSLRA discovery stay remains | Plaintiffs: request to proceed on amended complaint or file a further amendment after seeing recantation | Defendants: urge dismissal-with-prejudice now to avoid further litigation | Court: denies motion to dismiss without prejudice; plaintiffs may file third amended complaint within 21 days; discovery stay continues |
Key Cases Cited
- City of Pontiac Gen. Employees’ Ret. Sys. v. Lockheed Martin Corp., 952 F. Supp. 2d 633 (S.D.N.Y.) (discussing limits on using confidential-witness allegations and need to test recantations)
- City of Livonia Emps.’ Ret. Sys. v. Boeing Co., 711 F.3d 754 (7th Cir.) (confidential-witness statements carry weight at pleading stage and are not easily rebutted by extrinsic evidence)
- Felber v. Yudof, 851 F. Supp. 2d 1182 (N.D. Cal.) (declination that courts may consider declarations describing what an amended complaint would allege when evaluating leave to amend)