In re The VANTIVE CORPORATION SECURITIES LITIGATION.
Glenn R. Fischer; Brian Fischer; Joshua Rizack, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants,
v.
The Vantive Corporation; John R. Luongo; John M. Jack; Kathleen A. Murphy; Christopher W. Lochhead; Roger J. Sippl; David J. Jodoin; Michael J. Loo, Defendants-Appellees.
No. 00-16136.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted July 11, 2001.
Filed March 15, 2002.
COPYRIGHT MATERIAL OMITTED COPYRIGHT MATERIAL OMITTED COPYRIGHT MATERIAL OMITTED William S. Lerach and Eric A. Isaacson, Milberg, Weiss, Bershad, Hynes & Lerach, LLP, San Diego, CA, for the plaintiffs-appellants.
Shirli Fabbri Weiss, Gray, Cary, Ware & Freidenrich, LLP, San Diego, CA, for the defendants-appellees.
Appeal from the United States District Court for the Northern District of California, William H. Orrick, Jr., District Judge, Presiding.
Before: CANBY, HAWKINS and GOULD, Circuit Judges.
OPINION
CANBY, Circuit Judge.
The issue before us is whether the complaint in this securities fraud class action states a claim under the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u 4(b)(1), (2). The district court held that it did not, and dismissed the complaint without leave to amend. The plaintiffs appeal, and we affirm.
Background 1
This action is brought under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. § 240.10b-5. The plaintiffs allege violations of the Act and Rule on behalf of a class of investors who bought Vantive stoсk between April 23, 1997 and July 6, 1998 (the "class period"). The defendants are the Vantive Corporation and certain of its officers and directors. We summarize the facts from the complaint, and assume these facts to be true for the purposes of our decision.
Vantive sold and serviced customer relationship management software (called "front-office software") that enabled field personnel to deliver customer service across many channels, including the Internet, a call center, or in person. Vantive made its initial public offering in August 1995 at $6 per share. Enjoying rapid sales and earnings growth, Vantive's stock price increased to more than $35 per share by late 1996. In April 1997 (the beginning of the class period), however, Vantive's stock price dropped to $14 per share as two competitors announced disappointing results; many believed that this particular software sector had peaked.
The plaintiffs allege that, beginning in April 1997, the defendants made knowingly false and misleading statemеnts about the competitive prospects of Vantive's products and the growth of Vantive's sales force, and falsely forecast increased revenues for 1998 and 1999. The plaintiffs also allege that the individual defendants caused Vantive to manipulate and falsify its publicly reported financial results by prematurely recognizing millions of dollars in revenues for software licensed to resellers even though the resellers were not obligated to pay for those licenses until they sublicensed the product to the end user. Allegedly as a result of these misrepresentations, Vantive's stock rose to $39. During the class period, Vantive allegedly acquired two other firms by issuing 874,000 shares of its common stock and selling $60 million in debt securities to raise capital. Also during the class period, the individual defendants sold 1.39 million shares of their Vantive stock at prices as high as $31 per share, for a total of roughly $36 million in insider trading proceeds.
On July 6, 1998, Vantive revealed that its results for the 1998 second quarter would be worse than earlier foreсast, that Vantive was appointing a new head of North American sales, and that it was going to reduce the size of its direct sales force. Analysts slashed the 1998 revenue and earnings per share forecast for Vantive. Vantive's stock fell to as low as $11 per share and performed poorly thereafter. Unable to compete successfully as an independent company, Vantive was sold to the Peoplesoft Company in October 1999.
On July 6, 1999, one year after the end of the alleged class period, shareholders filed three virtually identical complaints against Vantive and the individual defendants. After these cases were consolidated, and the plaintiffs filed a third amended complaint, the district court granted the defendants' motion to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6). The district court concluded that the plaintiffs had failed to meet the heightened pleading requirements of the PSLRA. The court denied the plaintiffs leave to amend.
Discussion
The PSLRA significantly altered pleading requirements in private securities fraud litigation by requiring that a complaint plead with particularity both falsity and scienter. Ronconi v. Larkin,
In this case, the plaintiffs allege that, over the course of a sixty-three week period, the defendants: 1) knowingly made false and misleading statements about Vantive's ability to sell its products, 2) knowingly made false and misleading statements concerning the quality of its products, 3) manipulated Vantive's financial results, and 4) falsely forecast future revenues. In support of these allegations, the plaintiffs also allege that the individual defendants engaged in suspicious insider trading and corporate transactions. As we discuss below, these allegations do not meet the requirements of the PSLRA because they are not sufficiently particularized and do not raise a "strong inference" that misleading statements were made knowingly or with deliberate recklessness to investors. Ronconi,
Most of the complaint is premised upon Vantive's July 1998 press release announcing "lоwer then expected" earnings. Starting from this announcement, the plaintiffs speculate in hindsight that earlier projections made throughout the prior fifteen months must have been false for failure to disclose adverse facts. The complaint does not allege contemporaneous facts in sufficient detail and in a manner that would create a strong inference that the alleged adverse facts were known at the time of the challenged statements. See Ronconi,
I. Sufficiency of the Allegations of Deception
A. Statements Concerning Vantive's Ability to Sell Its Products
The plaintiffs first allege that Vantive deliberately misled investors with respect to its ability to sell its products. The complаint asserts that, throughout the class period,4 the Vantive defendants continually stated that the growth and performance of its direct sales force was "on plan," when, in fact, Vantive: 1) "was unable to hire sufficient numbers of qualified persons to grow its direct salesforce at the rate necessary to sustain the level of revenue growth being forecast"; 2) was "unable to adequately train its new direct sales persons"; and 3) was "plagued with very high salesforce turnover." Consequently, the complaint alleges, the sales force was not adequately positioned to meet Vantive's projected sales goals.
The plaintiffs also allege that Vantive misleadingly touted its "extremely strong executive and sales management teams" as being a "key competitive advantage" to its ability to sell and grow Vantive's business, when in fact, Vantive "was suffering serious problems" with its management teams, who "were distracted" and "unable to effectively manage" because of "continual disagreements and in-fighting." The plaintiffs alsо label as a misrepresentation the defendants' statement that "Vantive's sales cycle was holding steady at 3-6 months," because Vantive's sales cycles were actually "lengthening substantially." Finally, the plaintiffs allege, Vantive misrepresented that it "had very successful growth in its indirect distribution channels," because in reality "Vantive was not successfully expanding its indirect sales channels with new partnerships with HBO, Learning International, EDS or Lucent, as each of these resellers were [sic], in fact, encountering significant difficulties in sublicensing Vantive's ... products, due to the lack of differentiation and the technological problems with those products."5
We hardly need elaborate on the inadequacy of these generalized allegations under the heightened pleading standard of the PSLRA. See generally Ronconi,
Along similar lines, the complaint leaves unclear what it would mean for Vantive to "adequately train" an employee, what "sufficient numbers" of hirees would be, or what it means for "a substantial percentage" of people to quit. Nor does the complaint indicate how these facts would necessarily show that Vantive's statement that its hiring was "on plan" was misleading and deliberately reckless at the time it was made.6 The complaint also does not indicate what it means for a management team to be "extremely strong," what the "continual" disagreements that supposedly "plagued" the managerial team consisted of, or why such disagreements would make it misleading for the company to have characterized its management as being "strong." Cf. Ronconi,
The other major problem with these allegations is that they do not adequately establish that the defendants had knowledge of the supposedly "true but concealed" circumstances concerning Vantive's problems in selling its products. The plaintiffs attempt to еstablish such knowledge by adverting to the defendants' "hands-on" management style, their "interaction with other corporate officers and employees, their attendance at management and board meetings, and reports generated on a weekly and monthly basis in the Finance Department (under Murphy)." These reports included "`license revenue reports,' `service revenue reports,' `contract revenue reports,' and reports that listed potential sales and the probability that the contract would be signed by the end of a given quarter, ... [and] financial reports comparing Vantive's actual financial results to projected results."
These allegations are insufficient in light of our decision in Silicon Graphics,
As in Silicon Graphics, the plaintiffs here have failed to include corroborating details of the internal reports. Indeed, the plaintiffs have failed to cite to any specific report, to mention any dates or contents of reports, or to allege their sources оf information about any reports. The allegations are similarly deficient, for the same reasons, with respect to the defendants' attendance at meetings and their "hands-on" managerial style.
B. Statements Concerning the Marketability of Vantive's Products
The plaintiffs allege that Vantive deliberately misled investors with respect to the marketability of its products. These allegations suffer from many of the same deficiencies as those discussed above. The complaint asserts that, throughout the class period, the Vantive defendants continually stated that Vantive "experienced good demand for its Vantive Enterprise/Sales product in the U.S." and that its "products were differentiated from competitors' products by their high quality and superior functionality." According to the complaint, these statements were misleading because "Vantive's [core] products were not substantially differentiated from the products of its competitors and did not have superior functionality or technological feаtures ... resulting in slow sales of these products." There are no further allegations to indicate what "slow sales" were, or what is meant by the statements that Vantive products were not "substantially differentiated" or "superior" to those of a competitor. And there are no facts alleged to show why the defendants would know that their representations were false or misleading if they were so.
Similar deficiencies inhere in the complaint's allegations that the defendants lied when representing that Vantive "was successfully developing/had successfully introduced Vantive Sales (Version 7) for release."8 There are simply no details in the allegations that would make these representations false — allegations that Vantive Version 7 "was not well received by customers, was known to be a `disaster' inside the Company, as several of its software modules did not work properly" that deployment of the product resulted in "serious problems" for Vantive sales operations, "requiring the investment of significant management resources ... to cure these operational problems" and that Vantive 7 was "not commercially viable due to defects in the product." Nor are any corroborating facts alleged, or sources stated, for the allegation that Luongo "secretly ordered" that Vantive 7 not be sold and that it be used as a pilot product until Vantive 7.5 could be introduced.
Equally indefinite are the allegations supposedly rendering false the representations of the Vantive defendants that Vantive "was successfully competing in the salesforce automation market." According to the complaint, this statement was misleading because "Vantive's salesforce automation products ... all suffered from technological and performance shortcomings compared to competitive products." Vantive's automation products used an SQL "remote interface" that was "much less architecturally flexible" than the SQL "anywhere interface." This put Vantive at a "significant competitivе disadvantage, especially to Siebel in the salesforce automation market," and resulted in "customers refusing to place large orders for these products after pilot programs and increasingly refusing to even accept these products on a test or pilot basis." It also meant that "Siebel beat Vantive in virtually every major salesforce automation contract." The vagueness of these allegations needs no elaboration; there are no facts alleged to show how the imprecise deficiencies asserted to hamper the product affected Vantive's competitive position, what a "major contract" was, or whether the result rendered Vantive non-competitive in fact. And, once again, there is a total absence of factual allegations that would permit a strong inference that the defendants knew that their representations were false or misleading when made, if they were so, or that the defendants acted in deliberаtely reckless disregard of their truth or falsity. Without any corroborating facts, it is impossible to conclude that such allegations rest on more than hind-sight speculation. Cf. Silicon Graphics,
C. Vantive's Alleged Accounting Manipulations
The plaintiffs further alleged that Vantive engaged in accounting manipulations that allowed Vantive to inflate its revenues artificially. These allegations also fail to meet the pleading standard under the PSLRA.
a. The EDS Contract
The plaintiffs' first allegation is that Vantive misled investors in the Second Quarter of 1997 when it said that it "had signed a $19 million deal with EDS — which would generate revenue for Vantive through year end 98 and likely millions in follow-on revenue after that." According to the complaint, this statement was misleading because "Vantive had no basis to represent that the contract would be worth $19 million," since the "Statement of Work" section stated only, `To be determined.' The complaint further alleges that, "[a]s part of the secret side deals made with EDS in the [4th Quarter of 1997], Vantive knew that the revenues from the EDS reseller contract would not total $19 million but, in fact, the revenues would total materially less."
A number of problems cripple this allegation. First, the complaint fails to allege how much money Vantive ultimately recognized on the EDS contract.9 Without this allegation, it is difficult to find a "strong inference" that Vantive deliberately misled investors, because it is fully possible that Vantive eventually did recognize $19 million on the contract. In fact, the complaint hints at this possibility by indicating that Vantive had recognized $13.6 million on the contract through the first quarter of 1998. Second, the allegation includes no facts showing why an incomplete statement of work would necessarily mean that Vantive had no basis to say that the contract was worth $19 million. Cf. Ronconi,
b. "Secret Change" in Revenue Recognition Policy
The plaintiffs next allege that Vantive "secretly" changed its revenue recognition policies for its reseller arrangements sometime during its 1997 fiscal year. According to the complaint, Vantive began to account for its revenues from indirect sales in a much more "aggressive" fashion than it previously had done, prematurely recognizing millions in revenues by recording revenue on software licenses to resellers even though the resellers were not obligated to pay for those licenses until they sublicensed the product to the ultimate consumer. The result, according to the complaint, was that Vantive's indirect sales' figures were inflated, marked by a jump in indirect sales revenues from 17% of total sales revenues in 1996 to 36% by the third quarter of 1997.10
The plaintiffs' conclusion rests upon a comparison of Vantive's pre-1998 description of its revenue recognition policy on reseller contracts and its later description of the policy on March 25, 1998. Prior to March 1998, Vantive described its revenue recognition policy as follows: "Sublicense fees are generally recognized as reported by the reseller in relicensing the Company's products to end users." In its Form 10-K filed on March 25, 1998, Vantive continued to describe its revenue recognition policy using language identical to that quoted above, although it added a description of how revenues were recognized when the general policy was not followed:
In certain circumstances, sublicense fees are recognized upon the initial sale if all products subject to sublicensing are shipped in the current period, no rights of return policy exits [sic], collection is probable, payment is due within one year, and fee is fixed or determinable [sic]. If these conditions are not met, the Company does not recognize sublicense fees until reported by the reseller in re-licensing the Company's products to end-users.
As the district court properly observed, a major problem with thе plaintiffs' allegation here is that the 1998 language did not necessarily represent a change in policy. The earlier language did not represent that Vantive always recognized revenues upon relicensing, but rather that it generally did so.
Even more significantly, the complaint fails to allege facts making the challenged revenue-recognition practice fraudulent or misleading. The fact that a buyer ultimately may return some goods does not preclude all recognition of revenues from sales to that buyer at the time they are made. See Malone v. Microdyne Corp.,
Because scienter has not been adequately alleged, we need not dwell on the question whether falsity has been pled with particularity here, although we are convinced that it has not. The plaintiffs rely on Cooper v. Pickett,
D. Vantive's Financial Forecasts
In addition to the alleged misrepresentations discussed above, the plaintiffs allege that Vantive lied to investors when making financial forecasts throughout the class period. Because these forecasts are unquestionably forward-looking statements, the plaintiffs must have alleged facts that would create a strong inference that the defendants made the forecasts with "actual knowledge ... that the statement[s were] false or misleading" at the time made. 15 U.S.C. § 78u-5(c)(1)(B)(i).
The basis for this allegation of the plaintiffs is that, because the defendants were aware of the problems discussed above, the defendants knew that their forecasts could not possibly be accurate. This allegation is deficient because, as we have just demonstrated, the alleged problems upon which this allegation relies have themselves not been pleaded successfully. There are no facts alleged to show that the defendants knew their forecasts were false when made.
II. Stock Sales & Corporate Transactions
The plaintiffs next focus on the defendants' stock sales and Vantive's corporate transactions as an alternative basis for showing that the plaintiffs deliberately misled investors when making the representations alleged above. Insider stock sales are not inherently suspicious; they become so only when the level of trading is "dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside information." Ronconi,
A. Defendants' Stock Sales
The plaintiffs allege that the defendants collectively sold 1,398,191 shares of stock totaling $36,383,386 in proceeds over the fifteen-month class period, amounting to аn aggregate sale of 38% of the defendants' holdings.12 The district court determined that, although these figures represented a "substantial" amount of trading, the allegations failed to raise a strong inference of fraud. Having examined the specific circumstances of each of the defendants' stock sales alleged in the complaint, and the circumstances of the defendants' stock sales overall, we agree with the district court.
Before we examine the individual defendants' sales, we point out some overarching considerations. First, the plaintiffs have selected an unusually long class period of sixty-three weeks. Cf. Silicon Graphics,
Second, we have upheld dismissals of complaints that alleged stock sales considerably larger than those alleged here. In Ronconi, for example, we affirmed the dismissal of a complaint that alleged that seven of eleven insider defendants had sold 69% or more of their shares and options, аnd an eighth defendant had sold 98% of her total shares, over a considerably shorter class period than the class period alleged here. Id. at 435-36. Similarly, in In re Apple Computer Sec. Litig.,
Third, we observe that the insufficient allegations of fraud elsewhere in the complaint have a spillover effect here. It is true that in our prior decisions we have severed our discussion of stock sales from other allegations in the relevant complaints. See Ronconi,
We now turn to the individual defendants' stock sales.
1. Chairman Roger Sippl
Chairman Roger Sippl's stock sales were the largest among the defendants, both in terms of percentage and amount. Sippl sold 74% of his holdings over the fifteen-month class period, for a total of approximately $19 million — over half of the defendants' total of $36 million in sales. While these sales were clearly suspicious in amount, they were not suspicious in timing and do not appear to have been "calculated to maximize the personal benefit from undisclosed inside information." Ronconi,
Twelve million of Sippl's nineteen million dollars in sales occurred in the first month of the fifteen-month class period, starting late April 1997, well over a year before the July 1998 press release upon which the plaintiffs largely base their lawsuit. During this first month, no defendant other than Sippl sold a single share of stock, nor did any other defendant sell a single share for an additional two months after Sippl had finished selling the $12 million in stock. Had Sippl been selling these shares to "dump" what he knew was artificially inflated stock, other equally (or more) knowledgeable defendants presumably would have done the same thing. Cf. id. at 436 ("One insider's ... sales do not support the `strong inference' required by the statute where the rest of the equally knowledgeable insiders act in a way inconsistent with the inference that the favorable characterizations of the company's affairs were known to be false when made."). Creating further doubt that Sippl was operating on "inside knowledge" at this time is the fact that he sold the overwhelming majority of shares for between $20 and $24 per share, when the price of the stock continued to increase in the several months following these sales, and ultimately peaked at $39. Cf. id. at 435 (noting that there is no strong inference of scienter when insiders "miss the boat" by selling at share prices between $53 and $56, when the share price ultimately rises to $73).
Sippl's remaining $7 million in sales do not substantially support an inference of fraud either. Because the complaint gives no reason to conclude that Sippl's sale of $12 million in stock in May of 1997 was anything but valid, Sippl's $7 million in sales over the course of the final fourteen months of the class period were not inconsistent with Sippl's prior trading history. See id. at 435. The overwhelming majority of Sippl's remaining sales occurred in November 1997, when the price of stocks hovered at approximately $25 per share — again below a price at which Sippl could be seen to have maximized the value of alleged inside knowledge. See id. Three of the six other defendants did not sell any stock during the month of November 1997, nor did they sell any during the two months before and after November 1997.13 Finally, Sippl is not alleged to have uttered a word, or have participated in preparing statements, during the entire class period. Cf. Silicon Graphics,
There accordingly is no basis for finding circumstantial evidence of fraud in Sippl's stock sales. If his sales are excluded, the defendants' aggregate sales drop considerably, from $36 million to $17 million.
2. Chief Executive Officer John Luongo
Chief Executive Officer John Luongo sold only 13% of his total number of shares and vested options over the course of a fifteen-month period. Under our precedent, this figure is not suspicious, and does not support a strong inference of fraud. See Ronconi,
3. Executive Vice President Charles Lochhead
Defendant Charles Lochhead, an Executive Vice President of Vantive, sold 26% of his shares and vested options during the fifteen-month class period, for approximately $900,000. We do not find this amount or percentage to be terribly "unusual" or suspicious, given the complaint's failure to connect Lochhead's sales with any particular allegedly misleading statements.
The unusually long class period inflates Lochhead's purchases. It is not inherently alarming or unusual that an insider might sell a quarter of his holdings over the course of fifteen months, particularly in a volatile industry. Cf. id. (insider's sale of 17% of his shares over seven months not deemed suspicious); see also Jordan Eth & Michael Dicke, Insider Stock Sales in Rule 10B-5 Corporate Disclosure Cases: Separating the Innocent from the Suspicious, 1 Stan. J.L. Bus. & Fin. 97, 97 (1994) (noting that it is not unusual for insiders to sell their stock frequently).
Lochhead's heaviest trading activity came during one week in February 1998, when he sold approximately half of the shares he would ultimately sell during the entire class period. The price of stock during this time was $25 per share. Shortly after making these sales, the price of stock per share steadily increased, and ultimately peaked at approximately $40. Consequently, Lochhead's relatively modest sales were not "calculated to maximize the personal benefit from undisclosed inside information." Ronconi,
4. Chief Financial Officer Kathleen Murphy
Chief Financial Officer Kathleen Murphy sold 32% of her shares and vested options, for proceeds of $1.6 million over the class period. Her sales were neither "dramatically out of line with prior trading practices," nor "calculated to maximize the personal benefit from undisclosed inside information," and thus they do not support a strong inference of scienter. Id. The amount is sufficiently substantial, however, that we will consider the other circumstances of her trading.
Murphy resigned from her position with the company in May 1998. Murphy's sale in February took place when the price of stock was $25 per share. That the price per share of stock steadily incrеased for the next several months, and peaked at a price of approximately $40, greatly weakens the inference that Murphy was seeking to take advantage of artificially inflated stock prices in February.
Murphy's sales during the class period were not "dramatically out of line" with her prior trading practices. During the fifteen-month class period, Murphy sold approximately 61,000 shares of stock for $1.6 million. Id. In the nine months immediately preceding the class period, Murphy sold 10,000 shares stock for proceeds totaling approximately $400,000. Unable to find anything unusual about her trading pattern, or particularly suspicious about the timing or amount of her stock sales, we attribute little weight to Murphy's stock sales.
5. Executive Vice President David Jodoin
Executive Vice-President David Jodoin sold 48% of his holdings during the class period, for approximately $3.3 million. Because Jodoin joined Vantive four months into the class period, he has no relevant trading history. When a complaint fails to provide us with a meaningful trading history for purposes of comparisоn, we have been reluctant to attribute significance to the defendant's stock sales, even when the percentages of stock sold by an insider were far more suspicious than the percentage of stock sold by Jodoin. In Silicon Graphics, for example, we held that an insider who traded 75.3% of his holdings over a fifteen-week period had not engaged in suspicious trading. Silicon Graphics,
Jodoin's sales were not otherwise suspicious. A large portion of Jodoin's sales occurred when the stock was apрroximately $25 per share; it later increased to $40 per share, and did not substantially decrease in value for many months following his sales. Moreover, Jodoin did not make any of the allegedly misleading statements, which Silicon Graphics noted weakens an inference of fraud.
6. Chief Operating Officer John Jack
Potentially the most significant of the defendants' stock sales were those by Chief Operating Officer John Jack. Jack sold 55% of his shares for $3.5 million during the class period. That amount was substantially out of line with his prior trading practices, as he had sold only $700,000 in stock in the fifteen months preceding the class period. Nonetheless, in the context of this case, we are unable to conclude that his stock sales create a strong inference of fraud.
Jack made three sales over the course of the class period. One sale of $1.2 million occurred in July 1997, a period when Vantive's earnings were meeting targets and for which the allegations of misrepresentation were particularly deficient. These facts weaken any inference of fraud that might otherwise flow from Jack's July 1997 sale.
There is аlso insufficient context from which we could conclude that Jack's second and largest sale, in November 1997, was probative of fraud. He sold his shares at a price of $22 per share, when the price of Vantive stock would not drop significantly below that price for the next six months, and would, in fact, almost double in value over the course of the next several months. The timing of this sale therefore does not admit a reasonable inference that Jack was "dumping" shares that he knew to have been artificially inflated, and thus his second sale is of no assistance to the plaintiffs.
That leaves only Jack's final sale in May of 1998. We need not dwell on this sale, however, because the complaint has given us no good reason to view Jack's first two transactions as having been suspicious. Jack's May 1998 sale, for $1.2 million, was not out of keeping with his unsuspicious trading history earlier in the class period.
7. Vice President Michael Loo
The last of the defendants, Vice President Michael Loo, sold 49% of his shares and vested options, for $1.4 million, over the fifteen-month class period. Loo is not alleged to have made any statements, and his sales amount to less than 4% of the total sales with which the plaintiffs are concerned. In light of the fact that the other defendants' sales are not particularly suspicious, and that other factors further mitigate the suspiciousness of Loo's sales, Loo's relatively insignificant trading activity alone does not give rise to a strong inference of fraud. Cf. Silicon Graphics,
B. Corporate Transactions
The plaintiffs next argue that corporate transactions by Vantive during the class period also help to create a strong inference of scienter. As with the stock sales, these transactions have diminished potential value for the plaintiffs because of the weakness of the complaint's underlying allegations of falsity or scienter. The complaint first alleges that Vantive made twо corporate acquisitions in August 1997 and June 1998, using 874,000 shares of Vantive stock as the principal source of payment. According to the complaint, the defendants inflated the value of Vantive's stock so that Vantive would be able to issue fewer shares for the acquisitions, which would thereby prevent dilution of current shareholders' ownership of Vantive.
This alleged fact has insufficient probative value. First, this allegation would have Jodoin (who was CEO of the company acquired in the first acquisition) defrauding himself.14 In addition, this allegation fails to provide any approximation of how much "dilution" the defendants' alleged misrepresentations prevented. Although the allegation indicates that 874,000 shares were used to fund the acquisitions, the complaint gives no indication of how many shares would have been issued absent the alleged misrepresentations, what the total number of shares at Vantive were, or how much stock each defendant stood to gain by making such representations. In light of these difficulties and the weakness of thе plaintiffs' underlying allegations, the corporate acquisitions fail to bolster the plaintiffs' case.
The plaintiffs also allege that Vantive used "subordinated notes" to raise $60 million, and that the need to raise these funds created a motive to inflate the value of the stock, leading to a strong inference of fraud. The plaintiffs are correct that a desire to raise company financing can be probative of a motive to defraud investors, see Howard v. Everex Sys., Inc.,
In summary, then, neither the corporate transactions nor the insider stock sales are sufficient to save the complaint, in light of the total deficiency of the allegations of knowing falsehood or deliberate recklessness at the time statements were made. The complaint fails to state a securities violation under the pleading standard of the PSLRA.
III. Leave to Amend
The district court dismissed the complaint with prejudice. We conclude that the district court did not abuse its discretion in failing to provide an opportunity to amend the complaint. See Coleman v. Quaker Oats Co.,
Leave to amend need not be granted when an amendment would be futile. Steckman v. Hart Brewing, Inc.,
Conclusion
Unfortunately for the plaintiffs, their case is founded upon exactly the kind of complaint that the PSLRA is aimed at. The district court did not err in ruling that the complaint failed to state a claim under the pleading standards of that Act. The judgment of the district court is
AFFIRMED.
Notes:
Notes
We take our factual summary largely from the district court's opinionIn re Vantive Corp. Sec. Litig.,
See, e.g., DiLeo v. Ernst & Young,
Allegations are deemed to have been made on information and belief until the plaintiffs demonstrate that they have personal knowledge of the factsIn re Splash Tech. Holdings, Inc. Sec. Litig., No. C 99-00109,
The complaint repeats the defendants' alleged misrepresentations at several places throughout the complaint (with some slight variations) to reflect that the defendants continued to make the same misrepresentations throughout the class period. For purposes of the analysis here, we need not consider these slight variations individually
This contention is belied by statistics provided later in the complaint, which indicate that Vantive's indirect sales revenues jumped from 17% of total sales revenues in 1996 to 36% by the third quarter of 1997
The complaint does not indicate what time frame the defendants were referring to when they stated that their sales force hiring goals were on target. Notably, however, the original cоmplaint appears to suggest that Vantive actually met its projected goals for the year 1997Compare complaint ¶ 40 ("management has indicated that they do not foresee any issues with attaining its targeted 80-90 salespeople by [the end of 1997])" with ¶ 57 (estimating that Vantive ended 1997 with a sales force of 80).
In a few instances, the plaintiffs do include more specific facts to support their allegations. These facts, however, do not show that statements were misleading when made. For example, that Vantive gave employees $2,500 when successfully referring new hires to Vantive's sales force does not necessarily indicate that Vantive knew it could not meet its hiring goalsCf. Ronconi,
According to ¶ 66 of the complaint, the Vantive defendants had stated that they had "successfully shipped" Version 7; in ¶¶ 80 & 90 of the cоmplaint Vantive had "successfully introduced" Version 7; and in ¶ 95, Version 7 had been "released" and "was successful."
The complaint merely indicates that in July of 1998, Vantive told analysts that they had expected "more from EDS which did not materialize." But this allegation does not indicate that Vantive did not realize the full $19 million on the contract, or indicate that Vantive's $19 million estimate was deliberately misleading at the time it was made
Earlier in the complaint, the plaintiffs allege that Vantive's 1997 statements that indirect sales figures were growing were false and misleading at the time made. That indirect sales figures went from 17% of 36% of total sales, while overall revenues increased greatly, weakens the strength of these earlier allegations, because this fact suggests that Vantive's 1997 statements that indirect sales figures were growing were true at the time made
The complaint in this case does not even meet the standards ofCooper. In Cooper, we held that a complaint met the particularity requirement of Rule 9(b) in part because it alleged that the dеfendant company had inflated its revenues by "specific amounts" listed in the complaint. Id. at 627; see also id. at 626. There is no such allegation here.
The individual defendants' stock options have been included in computing these percentages. AsSilicon Graphics noted, "[a]ctual stock shares plus exercisable stock options represent the owner's trading potential more accurately than the stock shares alone." Silicon Graphics,
Three other defendants did sell during the month of November. These defendants, however, did not sell stock in alarmingly large amounts, nor for suspiciously high prices. Rather, they sold stock for share prices between $22 and $25, well below the stock's peak price of $39-3/4
Under the plaintiffs' allegations, Jodoin would have been defrauded because he would have received artificially inflated shares in Vantive stock at the time his company was acquired
The Court: Can't you answer my question? It's easy to say yes or no. Do you have the contemporary documents, e-mails, conversations, memoranda contradicting the defendant's challenged statements? You may not have them that's why you didn't put them in
[Counsel]: What we have alleged in the complaint, if that answers your question....
The Court: That's not enough ...
[Counsel]: Well, I think what we do allege is enough.