50 F. Supp. 3d 1328 | C.D. Cal. | 2014
CLASS ACTION
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
This is a putative securities class action against defendant Ixia and defendants Victor Alston, Atul Bhatnagar, Thomas B. Miller, and Errol Ginsburg (the “individual defendants”). Plaintiffs allege that during the class period, defendants misled the public by improperly classifying Ixia’s revenue. They assert that defendants sought to portray Ixia, which was exceeding its revenue and earnings per share targets during the class period, as a steady growth company. They contend that to foster this image, Ixia did not record certain present revenue and instead booked it as deferred revenue to give the impression that the company would continue to grow at an attractive rate in future quarters. Plaintiffs contend this misled inventors and caused them to conclude that Ixia’s growth would continue for some period of time.
They assert that by making these misleading statements, defendants violated section 10(b) of the Securities Exchange Act of 1934 (the “1934 Act”) and Securities and Exchange Commission (“SEC”) Rule 10b-5 during a class period that extended from November 28, 2007 to August 17, 2010. They also assert that defendants Victor Alston, Atul Bhatnagar, Thomas B. Miller, and Errol Ginsburg violated § 20(a) of the 1934 Act because they were controlling persons of Ixia.
On June 11, 2014, plaintiffs filed a first amended complaint.
I. BACKGROUND AND FACTUAL ALLEGATION
A. Background Concerning Ixia, the Individual Defendants and the Plaintiff Class
Ixia was incorporated in California in 1997 and maintains its headquarters in Calabasas.
Ginsburg founded Ixia in 1997; he has been chairman of its board of directors since January 2008 and chief innovation officer since March 2008.
Plaintiffs allege that each of the individual defendants had authority to control the contents of Ixia’s quarterly reports, annual reports, press releases, and presentations to securities analysts, money and portfolio managers, and institutional investors.
Plaintiffs are public pension retirement funds that allegedly acquired shares of Ixia at artificially inflated prices during the class period and that have been damaged as a result.
B. Defendants’ Allegedly Fraudulent Scheme
Plaintiffs allege that Ixia’s common stock began to trade publicly on the NASDAQ on October 25, 2000.
Plaintiffs allege that, as Ixia’s stock fell out of favor with investors, the company was forced to restate the way it recognized its software service and warranty contracts. On February 23, 2007, Ixia pur
Plaintiffs contend that the decline in Ixia’s stock price occurred largely because it had fallen out of favor as a technology “growth” company.
1. Ixia’s Focus on Future Growth Potential
Plaintiffs allege that Ixia began to focus on future growth potential after it strategically acquired two small businesses in 2009
Plaintiffs cite numerous other analyst reports from 2010 that focused on Ixia’s potential for growth. They note that Morgan Keegan & Co. reported that “Ixia’s growth rates of 46% in 2010 (boosted by acquisitions) and 15% in 2011 compare[d] to its test & measurement end market growth rates of 18% and 21% in our estimates, which suggested] that [the] estimates [were] conservative with room for upside.”
Plaintiffs allege that during the period Ixia was “building its story as a growth company,” analysts were paying close attention to its deferred revenues, and in particular its ability to generate service-based or other types of renewable, recurring revenue.
Wunderlich purportedly continued to focus on deferred revenue for the rest of 2010 and into 2011. During a February 3, 2011 analyst call, a Wunderlich analyst noted that Ixia had “good deferred revenue growth, along with activity decrease in [day sales outstanding].” In response, Miller commented that Ixia was a “very back-end loaded business.” The next day, Wunderlich reported that Ixia’s “deferred revenue grew the most in a year and [day sales outstanding] declined to the lowest level in more than a year.” Specifically, it reported that deferred revenue was up 11.9% — “the strongest sequential comparison since the 4Q09 N2x acquisition.”
Plaintiffs contend that Deutsche Bank also “bought in” to Ixia’s growth story; it observed in a February 3, 2011 report that although Ixia was trading at a premium in comparison with its peers, the premium was “merited by [Ixia’s] leadership position in the test equipment market and by the current network upgrade cycle.”
2. Allegations of Fraudulently Inflated Deferred Revenue in Quarterly and Annual Reports
Plaintiffs contend that simply acquiring new businesses was not sufficient to permit Ixia to grow. They assert that at some point during 2010, Ixia began fraudulently to inflate its deferred revenue to convince investors of its capacity for sustained growth, and that it continued the practice throughout the class period.
On April 21, 2011, Ixia held an analyst call to announce earnings for the first quarter of 2011. It reportéd that revenues
During the April 21 conference call, Ixia allegedly continued to encourage investors to view it as a growth company. Then-CEO Bhatnagar stated that Ixia was “excited about [its] market positioning, as well as the opportunities [it] [saw] for future growth and global expansion.”
On July 6, 2011, Ixia purportedly announced ahead of its earnings report that it expected to miss expectations for the second quarter of 2011.
Miller and Bhatnagar also allegedly made’ statements focusing on deferred revenue during this period. During a conference call on July 21, 2011, Miller allegedly stated that there were deals Ixia hoped to pull out of deferred revenues in the next quarter; plaintiffs assert his statement served to reinforce investors’ belief that deferred revenues were an indicator of the company’s future success.
On October 20, 2011, Ixia held an analyst call to report third quarter 2011 earnings.
They assert that the first restatement confirmed that Ixia’s inflation of deferred earnings continued into the fourth quarter of 2011.
On March 15, 2012, Ixia announced it was replacing Bhatnagar with Alston, effective May 1, 2012.
On April 19, 2012, Ixia announced total revenue of $85.6 million for the first quarter of 2012; it also reported deferred revenues of $57 million.
Deutsche Bank noted that Ixia had beat analysts’ consensus number of $83.5 million; Gabelli & Company, Inc. observed that the company’s solid growth trend was expected to continue; and Wunderlich remarked on Ixia’s “strong balance of deferred revenue [which could] diminish[] head-line risk for the current quarter.”
Plaintiffs also allege that Ixia made two more acquisitions in 2012. On May 4, 2012, it announced that it acquired Anue Systems, Inc. for $154.4 million, and on July 2, 2012, it announced that it acquired Breaking Point Systems.
Ixia purportedly continued to report inflated deferred revenue during the remainder of 2012. On July 26, 2012, it announced second quarter results. These included revenue of $92.3 million and deferred revenue of $62.5 million, up 9.8% from the prior quarter, and 25.3% over the same quarter in 201 l.
Ixia announced third quarter 2012 results on October 24, 2012. It reported revenues of $109.6 million, and record deferred revenues of $76.8 million — up 22.8% from the prior quarter, and 56% form the third quarter 2011.
On February 6, 2013, Ixia announced yet another record breaking quarter. It reported that fourth quarter revenue was $124 million, up 48% from the same' quarter in 2011.
3. Misstatements Concerning Internal Controls
Plaintiffs also allege that Ixia made misstatements concerning its internal controls. Specifically, they allege that Ixia made the following statement in each Form 10-Q that it filed during the restated periods:
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d — 15(f) under the Exchange Act) during the fiscal quarter ... that have materially affected, or are reason*1342 ably likely to materially affect, our internal control over financial reporting.100
Plaintiffs assert this statement was materially false and misleading because Ixia announced on April 3, 2013, as discussed in more detail infra, that there had been material weaknesses in its internal controls over revenue recognition related to software maintenance and warranty contracts.
Plaintiffs allege that each Form 10-Q issued during the restated periods was signed and certified under § 302 of the Sarbanes-Oxley Act of 2002 by either Bhatnagar or Alston, and that Alston, Miller, and Bhatnagar were responsible for establishing and maintaining disclosure controls and procedures, and internal controls over financial reporting. They assert that, by signing the quarterly reports on Form 10-Q, each of them represented that the company’s internal controls and procedures were adequate and that they had designed appropriate disclosure controls and, procedures over financial reporting.
4. The First Restatement
Plaintiffs contend the truth behind Ixia’s “growth story” began to emerge on March 19, 2013, when Ixia announced that it had filed a Form 12b-25 with the SEC concerning its annual Form 10-K for the year ended December 31, 2012, and had to delay the filing of its annual report to “correct an error related to the manner in which [it] recognize[d] revenues for its warranty and software maintenance contracts.”
Many of Ixia’s product sales include up to one year of technical support, warranty, and software maintenance; customers can choose to extend the services for annual or multi-year periods thereafter.
The implied arrangement error concerned revenues generated by one of Ixia’s largest customers, Cisco. The company initially recorded deferred implied warranty and software maintenance revenue based on estimated amounts and estimated times of receipt.
In response to the company’s announcement of the first restatement, Ixia’s share price dropped by 9.55%, from a closing price of $20.31 on April 3, 2013, to a closing price of $18.37 on April 4, 2013.
On May 3, 2013, following announcement of the first restatement, Ixia reported that its auditor, PricewaterhouseCoopers LLP (“PwC”) had “decline[d] to stand for reappointment as [Ixia’s] independent registered public accounting firm for the fiscal year ending December 31, 2013.”
On October 24, 2013, Ixia announced that Alston had resigned as CEO following a finding by the Audit Committee that he had misrepresented his academic credentials, his age and early employment history.
5. The Second Restatement
On March 5, 2014, Ixia announced in a Form 8-K filed with the SEC that its Audit Committee had completed an internal investigation and that certain of its financial statements would have to be restated as a result of the investigation. On April 11, 2014, Ixia announced the results of the investigation, and described the forthcoming second restatement as follows:
“[T]he Company’s management and the Audit Committee concluded that the Company’s previously issued condensed consolidated financial statements contained in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013 should no longer be relied upon, and should be restated due to the following errors: For certain sales transactions, ... [Ixia] improperly recognized product revenues when the additional products were shipped rather than deferring a portion of the consideration and recognizing the related revenues over the remaining term of the applicable fixed fee, multi-year extended maintenance and warranty arrangements. For certain other sales transactions, the Company recognized product revenues prematurely (I) in advance of delivering certain product functionality or other deliverables that were committed to be provided to the customers or. (ii) due to an incorrect assessment of certain multiple-element arrangement sales transactions which included professional services that were provided based on a purchase order separate from the product purchase order but that were negotiated concurrently with the customer.
The correction of these errors is expected to reduce total revenues by approximately $2.0 million and $4.5 million for the quarters ended March 31, 2013 and June 30, 2013, respectively.”
Plaintiffs assert that the second restatement “sheds further light” on defendants’ fraudulent scheme to inflate deferred revenues and create the illusion that Ixia was a growth company.
The second restatement reflected that the decline in year-over-year and quarter-over-quarter organic revenue was steeper than originally reported. Revenue for the first quarter of 2013 was 13.1% lower than for the fourth quarter 2012; revenue for the second quarter of 2013 was 5.2% lower than for the first quarter of 2013.
6. Insider Trading
Plaintiffs also allege that the individual defendants engaged in insider trading.
Plaintiffs allege that Ginsburg also profited from suspicious trades he made in May 2011 and February 2013.
Finally, plaintiffs allege that Miller too engaged in suspicious trading. They note that he sold more than 122,000 shares between February 7 and February 18, 2011, just prior to the start of the class period, netting $1.97 million. They assert that, like Ginsburg, Miller avoided the losses associated with Ixia’s July 7, 2011 announcement that it would not meet its guidance for the second quarter of 2011, selling 50,741 shares, or 36.75% of his
Plaintiffs contend that the sales made by Alston, Ginsburg, and Miller coincide with some of the peak prices of Ixia’s stock, and that they were made shortly before precipitous stock price declines.
7. The Confidential Witnesses (“CWs”)
Plaintiffs also allege that they interviewed certain confidential witnesses (“CWs”). CW1 worked at Ixia’s corporate headquarters in Calabasas from September 2007 to January 2014.
CW1 allegedly reported that Ixia hired an expert in recognizing revenue from software and maintenance contracts, Will Liang, and that Liang was ultimately appointed director of accounting.
II. DISCUSSION
A. Legal Standard Governing Motions To Dismiss Under Rule 12(b)(6)
A Rule 12(b)(6) motion tests the legal sufficiency of the claims asserted in the complaint. A Rule 12(b)(6) dismissal is proper only where there is either a “lack of a cognizable legal theory” or “the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir.1988). In deciding a Rule 12(b)(6) motion, the court generally looks only to the face of the complaint and documents attached thereto. Van Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir.2002); Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555 n. 19 (9th Cir.1990).
The court must accept all factual allegations pleaded in the complaint as true, and construe them and draw all reasonable inferences from them in favor of the non-moving party. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127
B. Requests For Judicial Notice
Both plaintiffs and defendants ask that the court take judicial notice of various documents. Because Rule 12(b)(6) review is confined to the complaint, the court typically does not consider material outside the pleadings (e.g., facts presented in briefs, affidavits, or discovery materials) in deciding such a motion. In re American Continental Corp./Lincoln Sav. & Loan Securities Litig., 102 F.3d 1524, 1537 (9th Cir.1996). It may, however, properly consider exhibits attached to the complaint and documents whose contents are alleged in the complaint but not attached, if their authenticity is not questioned. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir.2001).
In addition, the court can consider matters that are proper subjects of judicial notice under Rule 201 of the Federal Rules of Evidence. Id. at 688-89; Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir.1994), overruled on other grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th Cir.2002); Hal Roach Studios, Inc., 896 F.2d at 1555 n. 19; see also Tellabs, 551 U.S. at 322, 127 S.Ct. 2499 (“[CJourts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice”).
1. Defendants’ Request for Judicial Notice
Defendants ask that the court take judicial notice of several of Ixia’s SEC
In addition, defendants ask that the court take judicial notice of Ixia’s class period stock price.
Additionally, courts can consider documents that are referenced in the complaint under the “incorporation by reference” doctrine. In re Stac Electronics Securities Litigation, 89 F.3d 1399, 1405 n. 4 (9th Cir.1996) (discussing securities offering documents); see also In re Silicon Graphics, Inc. Securities Litigation, 183 F.3d 970, 986 (9th Cir.1999) (holding that the district court properly considered SEC filings under the incorporation by reference doctrine because their contents were alleged in the complaint), superseded by statute on other grounds; In re Copper Mountain Sec. Litig., 311 F.Supp.2d 857, 864 (N.D.Cal.2004) (taking judicial notice of an analyst report that was referenced in the complaint); In re Northpoint Communications Group, Inc. Securities Litigation, 184 F.Supp.2d 991, 994 n. 1 (N.D.Cal.2001) (“In a securities-fraud suit, judicial notice can be had of documents directly related to documents referenced in the complaint that bear on the adequacy of the disclosure” (citations omitted)).
The complaint references many of Ixia’s SEC filings, as well as multiple analyst reports. The court will therefore consider the SEC filings, analyst reports, and data concerning Ixia’s share price that defendants have proffered.
The parties dispute whether the court may properly consider certain Forms 4 that the individual defendants filed with the SEC during the class period. Plaintiffs seek to have the court take judicial notice of the documents.
C. Legal Standard Governing the Pleading of Securities Fraud Claims
Rule 9(b) of the Federal Rules of Civil Procedure provides that the “circumstances constituting fraud or mistake shall be stated with particularity.” Fed.R.Civ. PROC. 9(b). A securities fraud claim cannot survive a motion to dismiss under Rule 9(b) merely by alleging that certain statements were false. Metzler, 540 F.3d at 1070 (“A litany of alleged false statements, unaccompanied by the pleading of specific facts indicating why those statements were false, does not meet th[e Rule 9(b) ] standard”); see also In re Oracle Corp. Securities Litigation, 627 F.3d 376, 390 (9th Cir.2010) (“Plaintiffs must ‘demonstrate that a particular statement, when read in light of all the information then available to the market, or a failure to disclose particular information, conveyed a false or misleading impression,”’ quoting In re Convergent Technologies Securities Litigation, 948 F.2d 507, 512 (9th Cir.1991)). Rather, the complaint must allege “why the disputed statement was untrue or misleading when made.” In re GlenFed Inc. Securities Litigation, 42 F.3d 1541, 1549 (9th Cir.1994) (en banc) (emphasis added).
In 1995, Congress passed the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4, which amended the Secu
In enacting the PSLRA, “Congress ‘impose[d] heightened pleading requirements in actions brought pursuant to § 10(b) and Rule 10b-5.” ’ Tellabs, 551 U.S. at 320, 127 S.Ct. 2499 (citing Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006)). The PSLRA’s requirements “prevent[ ] a plaintiff from skirting dismissal by filing a complaint laden with vague allegations of deception unaccompanied by a particularized explanation stating why the" defendant’s alleged statements or omissions are deceitful.”. Metzler, 540 F.3d at 1061 (citing Falkowski v. Imation Corp., 309 F.3d 1123, 1133 (9th Cir.2002)).
D. Legal Standard Governing Liability Under Section 10(b) and Rule 10b-5
Rule 10b-5, promulgated by the Securities and Exchange Commission pursuant to section 10(b) of the 1934 Act, makes it unlawful for any person to use “manipulative or deceptive deviee[s]” in connection with the purchase or sale of securities. 15 U.S.C. § 78j(b). Specifically, one cannot “(a) ... employ any device, scheme, or artifice to defraud; (b) ... make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) ... engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5.
The elements of a section 10(b) or Rule 10b-5 violation are (1) a misrepresentation or omission of a material fact, (2) scienter, (3) reliance (4) a connection with the purchase or sale of a security, (5) economic loss, and (6) loss causation. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005); see also Paracor Finance, Inc. v. General Electric Capital Corp., 96 F.3d 1151, 1157 (9th Cir.1996) (en banc); McCormick v. Fund American Companies, Inc., 26 F.3d 869, 875 (9th Cir.1994).
The Ninth Circuit has also emphasized that “plaintiffs ‘must plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct.’ ” Middlesex Retirement System v. Quest Software Inc., 527 F.Supp.2d 1164, 1179 (C.D.Cal.2007) (quoting Silicon Graphics, 183 F.3d at 974); see also Silicon Graphics, 183 F.3d at 977 (“recklessness only satisfies scienter under § 10(b) to the extent that it reflects some degree of intentional or conscious misconduct”). The requisite state of mind must be a “ ‘departure from the standards of ordinary care [that] presents a danger of misleading buyers that is either known to the defendant or so obvious that the actor must have been aware of it.’ ” Zucco Partners, 552 F.3d at 991 (quoting Silicon Graphics, 183 F.3d at 984). If plaintiffs rely on allegations of recklessness, the pleading standard requires that they “state specific facts indicating no less than a degree of recklessness that strongly suggests actual intent.” Silicon Graphics, 183 F.3d at 979. Allegations of mere negligence are insufficient. Glazer Capital Management, LP v. Magistri, 549 F.3d 736, 748 (9th Cir.2008) (“At most, it creates the inference that he should have known of the violations. This is not sufficient to meet the stringent scienter pleading requirements of the PSLRA”); Police Retirement Systems of St. Louis v. Intuitive Surgical, Inc., No. 10-CV-03451-LHK, 2011 WL 3501733, *7 (N.D.Cal. Aug. 10, 2011) (“[T]he Ninth Circuit defines ‘recklessness’ as a highly unreasonable omission [or misrepresentation], involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it”).
“To qualify as ‘strong’ within the intendment of ... the PSLRA ... an inference of scienter must be more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314, 127 S.Ct. 2499 (emphasis added). “[C]ourts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss.... The inquiry ... is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual al
In determining whether plaintiffs have alleged facts showing a strong inference of scienter, the court must draw all reasonable inferences from the allegations presented, including inferences unfavorable to plaintiffs. Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir.2002). “However, the ‘inference that the defendant acted with scienter need not be irrefutable, i.e., of the “smoking-gun” genre, or even the “most plausible of competing inferences.” ... [T]he inference of scien-ter must be more than merely “reasonable” or “permissible[,]” [however] — it must be cogent and compelling ... in light of other explanations.’ ” Middlesex Retirement System, 527 F.Supp.2d at 1179 (quoting Tellabs, 551 U.S. at 314, 127 S.Ct. 2499).
The first amended complaint relies, to some extent, on the statements of confidential witnesses. Before those witnesses’ statements can support a strong inference of scienter, they must meet two requirements. First, “the confidential witnesses whose statements are introduced to establish scienter must be described with sufficient particularity to establish their reliability and personal knowledge.” Zucco Partners, 552 F.3d at 995; see also In re Siebel Systems, Inc. Sec. Litig., No. 04-0983, 2005 WL 3555718,*8-9 (N.D.Cal. Dec. 28, 2005) (allegations attributed to a confidential witness “ ‘must be accompanied by enough particularized detail to support a reasonable conviction in the informant’s basis of knowledge,’ ” quoting In re Metawave Communications Corp., 298 F.Supp.2d 1056, 1068 (W.D.Wash.2003)). Second, the information “reported by confidential witnesses with sufficient reliability and personal knowledge must [itself] be indicative of scienter.” Zucco Partners, 552 F.3d at 995.
The Ninth Circuit often treats the falsity and scienter analyses as “a single inquiry, because falsity and scienter are generally inferred from the same set of facts.” In re New Century, 588 F.Supp.2d 1206, 1227 (C.D.Cal.2008) (citing In re Read-Rite Corp., 335 F.3d 843, 846 (9th Cir.2003), abrogated by Tellabs on other grounds, as recognized in South Ferry LP, No. 2 v. Killinger, 542 F.3d 776 (9th Cir.2008), and Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir.2001)). The court therefore analyzes plaintiffs’ falsity and scienter allegations in tandem below.
E. Whether Plaintiffs Have Adequately Alleged that Ginsburg and Alston “Made” Misstatements
In their motions to dismiss, Ginsburg and Alston argue that plaintiffs fail adequately to plead that they “made” a material misstatement for which they can be held primarily liable under Rule 10b-5.
. “[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not ‘make’ a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by — and only by— the party to whom it is attributed.” Id. at 2302.
In reaching this conclusion, the Court declined to adopt a broader interpretation urged by the government. The government argued that “to make” should be construed as “to create.” Id. at 2303. The Court noted that this construction would result in a grammatical anomaly, and “permit private plaintiffs to sue a person who provides ... false or misleading information that another person then puts into [a] statement.” Id. at 2303 (quotation omitted). The individual providing information, the Court stated, merely engaged in “an undisclosed act preceding the decision of an independent entity to make a public statement,” and should not be subject to liability under the securities laws. Id. at 2304.
The Ninth Circuit has not definitively addressed, and has left open, “whether, in some circumstances, it might be possible to plead scienter under a collective theory.” See Glazer Capital Management, LP v. Magistri, 549 F.3d 736, 744-45 (9th Cir.2008). Numerous cases, however, have disapproved “group pleading,” which “in its broadest form allows unattributed corporate statements to be charged to one or more individual defendants based solely on their corporate titles.” Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 363 (5th Cir.2004). Among these are three circuits that have concluded that group pleading is no longer viable following the enactment of the PSLRA. See id.; see also Makor Issues & Rights v. Tellabs, Inc., 437 F.3d 588, 603 (7th Cir.2006), vacated on other grounds, 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007); Winer Family Trust v. Queen, 503 F.3d 319, 337 (3d Cir.2007). “Courts within the Ninth Circuit have also largely concluded that group pleading is not compatible with the PSLRA’s requirements.” In re American Apparel, Inc. Shareholder Litigation, No. CV 10-06352 MMM (JCGx), 2013 WL 174119, *25 (C.D.Cal. Jan. 16, 2013) (citing In re New Century, 588 F.Supp.2d at 1223-24 (“All of the Circuit courts that have expressly considered whether group pleading is compatible with PSLRA have concluded that it is not”); In re Hansen Natural Corp., 527 F.Supp.2d 1142, 1153—54 (C.D.Cal.2007) (holding that “the group pleading doctrine can no longer be used in pleading cases under the PSLRA,” and noting that “[t]his view is shared by numerous district courts within this circuit”); Petrie v. Electronic Game Card Inc., No. SACV 10-00252 DOC (RNBx), 2011 WL 165402, *3 (C.D.Cal. Jan. 12, 2011) (“Although the Ninth Circuit has yet to squarely address the issue, the majority of district courts within the Circuit to confront the group pleading doctrine post-Tellabs have decided that the doctrine did not survive. The Central District of California, in particular, appears to be unanimous in this conclusion”); In re Tibco Software Securities Litigation, No. C 05-2146 SBA, 2006 WL 1469654, *27
Plaintiffs counter that they do not seek to hold Ginsburg and Alston liable simply by virtue of the fact that they are corporate officers. They contend that Alston signed Sarbanes-Oxley certifications for the quarters ended June 30, 2012 and September 30, 2012, as well as Forms 10-Q for those quarters, and that Ginsburg signed Forms 10-K for the years ended December 31, 2010 and 2011.
As plaintiffs argue, courts that have disapproved the use of group pleading have observed that an individual defendant’s signature on a document containing actionable misrepresentations is a sufficient basis upon which to hold that defendant liable. See Southland Securities Corp., 365 F.3d at 365 (“[CJorporate documents that have no stated author or statements within documents not attributed to any individual may be charged to one or more corporate officers provided specific factual allegations link the individual to the statement at issue. Such specific facts tying a corporate officer to a statement would include a signature on the document or particular factual allegations explaining the individual’s involvement in the formulation of either the entire document, or that specific portion of the document, containing the statement” (emphasis added)); In re Hansen Natural Corp., 527 F.Supp.2d at 1153 (distinguishing among defendants that had “signed annual reports as well as a single Form S-8,” and defendants that had not “played any role- ... in the preparation or dissemination of any allegedly false statements”); Petrie, 2011 WL 165402 at *3 (“Plaintiffs have alleged no facts linking any of these alleged misrepresentations to Christiansen, Houssels or Farrell. For instance, Plaintiffs do not aver that any of these three Defendants signed any of the above-listed statements or authored the press releases. In fact, the Complaint specifically identifies other defendants as the signatories of the forms at issue”). Even in the absence of allegations regarding specific representations Alston and Ginsburg made concerning the company’s financial reporting, therefore, their signatures on documents containing allegedly false representations could be sufficient to support a Rule 10b-5 claim.
The complaint, however, does not allege that Ginsburg is liable because he signed certain of Ixia’s quarterly or annual reports. In fact, the complaint does not allege that Ginsburg signed any of the quarterly or annual reports that contained material misstatements. The only allegations plaintiffs make concerning Ginsburg’s involvement in the preparation or dissemination of Ixia’s financial reports are allegations common to all of the individual defendants. Plaintiffs assert that the individual defendants “possessed the authority to
The same is not true of Alston, however. The first amended complaint alleges that each Form 10-Q issued during the periods for which restated financial statements were prepared was signed and certified under Section 302 of Sarbanes-Oxley either by Bhatnagar or Alston as CEO and by Miller as CFO. Alston contends that plaintiffs fail to allege which documents he signed, and hence that the Rule 10b-5 claim against him must be dismissed. The court disagrees. The complaint alleges that each Form 10-Q was signed by Bhatnagar or Alston as CEO.
F. Whether Plaintiffs Have Adequately Pled Scienter 1. Whether Plaintiffs Understatement Theory is Plausible
All defendants contend that plaintiffs fail to allege with the particularity required by PSLRA that they acted with scienter.
In Davis v. SPSS, Inc., 385 F.Supp.2d 697 (N.D.Ill.2005), the court observed that some of plaintiffs’ allegations appeared inconsistent, inasmuch as they pled that SPSS overstated licensing fees in 2002 and 2003, but understated them during the class period. Id. at 709. As respects understated licensing fees during the class period, the court found it “difficult to understand” how understating licensing fees supported plaintiffs contention that SPSS misstated its financials in order to inflate the price of its stock. It observed that it did not appear that understating revenue would “serve th[e] purpose” of inflating the stock price. Because the “understatement of revenue amounted] to less than 0.3% of SPSS’ restated revenue for 2001,” and because plaintiff “provided no facts concerning [the] misstatement to [permit it to] conclude otherwise,” the court reasonably “infer[red] not that SPSS purposely manipulated its financials, but that reporting errors occurred.” Id.
Defendants argue that plaintiffs similarly fail to allege facts from which one can reasonably infer that they manipulated Ixia’s financials. They contend there are no allegations that would support an inference that analysts preferred higher deferred revenue “at the expense of lower actual revenues and earnings,” nor any that would support an inference that defendants believed analysts or investors had such a preference. The complaint, however, is replete with references to the fact that analysts and investment firms looked to deferred revenue as an indicator of future growth.
Moreover, in contrast to the fraud theories discussed in the cases cited, by de
Defendants contend that plaintiffs’ theory is refuted by their allegation that Ixia failed to meet its second quarter 2011 earnings forecast. They contend that if Ixia were manipulating its results to “bank” revenue in excess of guidance and analyst expectations, it surely would have drawn from that source to avoid missing expectations for the second quarter of 2011. They assert the fact that deferred revenue was treated consistently, even in the second quarter of 2011 when the company missed expectations, supports an inference that the class period treatment of deferred revenue was the result of consistent, albeit mistaken, accounting — not intentional manipulation of deferred revenue.
Defendants place the pleading bar too high. From a theoretical point of view, their position is arguably as compelling as plaintiffs’, and may be insufficient for that reason to plead scienter. The court cannot simply dismiss plaintiffs’ theory outright, however, without analyzing the adequacy of their allegations of scienter.
2. Whether the Complaint Alleges Facts That Give Rise to a Strong Inference of Scienter
a. Individual Allegations of Scienter
Defendants’ arguments concerning the deficiencies in plaintiffs’ pleading of scien-ter focus on their allegations concerning: (1) Ixia’s violation of GAAP principles and inadequate internal controls; (2) stocks sales by certain individual defendants; and (3) Alston’s resignation.
i. Violation of GAAP and Inadequate Internal Controls
Defendants first contend that plaintiffs’ allegations concerning purported violations of certain GAAP principles and Ixia’s failure to ensure that it had adequate internal controls do not adequately plead scienter.
The Ninth Circuit, however, has recognized two narrow exceptions to this general rule. See Zucco Partners, 552 F.3d at 1000.
“First, a restatement due to accounting violations, without more, may be sufficient to establish a strong inference of scienter under those limited circumstances where the nature of the relevant [violation] is of such prominence or obviousness that it would be absurd to suggest that management was without knowledge of the violation. Second, an accounting violation may itself be indicative of scienter where it is combined with allegations regarding ... management’s role in the company that are particular and suggest that the defendant must have known its accounting methodology was wrong.” In re Medicis Pharm. Corp. Securities Litigation (“Medicis I”), 689 F.Supp.2d 1192, 1204 (D.Ariz.2009) (quoting Zucco Partners, 552 F.3d at 1000 and South Ferry, 542 F.3d at 785) (internal quotation marks omitted) (alteration original).
Defendants contend that the first amended complaint lacks any allegations
Defendants contend the first amended complaint is likewise devoid of allegations showing that the individual defendants knew what the relevant accounting rules were and how they were being interpreted, much less facts showing that any allegedly incorrect interpretation was so unreasonable or obviously wrong that it would be “absurd” to suggest that they were not aware of the accounting mistakes that necessitated the restatements.
Plaintiffs counter that scienter can be inferred because deferred revenue was a “key metric” involving “core operations” that had been highlighted by analysts as indicative of Ixia’s future prospects.
Here, in contrast to Applied Signal, plaintiffs do not allege facts from which the court can infer that deferred revenue was related to Ixia’s “core operations.” The first amended complaint, in fact, contains no allegations whatsoever from which one could infer that service and maintenance contracts on the eompa-
Furthermore, even were deferred revenue associated with a “core operation,” this case is distinctly different than Applied Signal. The misrepresentation here involves allegedly intentional misapplication of accounting principles — not nondisclosure of allegedly disastrous information about which defendants admitted they knew within two weeks after the alleged misstatements were made. Compare Applied Signal, 527 F.3d at 987, 988 n. 5; see also Zucco Partners, 552 F.3d at 1001 (distinguishing Applied Signal because “the alleged misrepresentations [at issue in Zucco Partners did] not concern especially prominent facts,” and “the falsity of the original representations would not be immediately obvious to corporate management” because “reporting false information will only be indicative of scienter where their falsity is patently obvious”).
As Zueco Partners and South Ferry make clear, to rely on defendants’ purported violation of GAAP principles to prove scienter, plaintiffs must plead facts demonstrating that defendants knew of the relevant principles and knew how the company was interpreting them. Additionally, they must plead facts explaining why employing an incorrect interpretation was so unreasonable or obviously wrong that it gives rise to a cogent inference of deliberate wrongdoing. See In re Medicis Pharm. Corp. Sec. Litig. (“Medicis II ”), No. CV-08-1821-PHX-GMS, 2010 WL 3154863, *5 (D.Ariz. Aug. 9, 2010) (“A plaintiff, however, cannot merely point at a GAAP principle and contend that a correct interpretation was simple or obvious. At the very least, the plaintiff must present facts demonstrating that the defendant was aware of the relevant GAAP principle and that this defendant knew how that principle] was being interpreted. The plaintiff must then plead facts explaining how the defendant’s incorrect interpretation was so unreasonable or obviously wrong that it should give rise to an inference of deliberate wrongdoing”).
Plaintiffs cite allegedly applicable GAAP principles, but do not plead facts demonstrating that defendants knew of the principles or knew they were being incorrectly interpreted and applied.
Plaintiffs also contend they have shown that the GAAP violations defendants committed were so basic that scien-ter can be inferred. It is true that specific allegations of significant GAAP violations will sometimes support an inference of scienter. See In re McKesson HBOC, Inc. Sec. Litig., 126 F.Supp.2d 1248, 1273 (N.D.Cal.2000) (“When significant GAAP violations are described with particularity in the complaint, they may provide powerful indirect evidence of scienter. After all, books do not cook themselves”); see also Batwin v. Occam Networks, Inc., CV 07-2750 CAS (SHX), 2008 WL 2676364 (C.D.Cal. July 1, 2008) (same). The GAAP violations plaintiffs plead were violations of general principles — not rules that require specific accounting treatment for deferred revenue. Each of the cases plaintiffs cite concerned the violation of a specific GAAP rule requiring that accounting be performed in a particular manner. None involved general principles that provide no particularized guidance.
As defendants argue, if plaintiffs’ “boilerplate allegations were sufficient, an inference of scienter would follow virtually any time a company issued a restatement.”
Plaintiffs contend that the sheer magnitude of the violations provides additional evidence of scienter.
Additionally, plaintiffs’ allegations belie any argument that the magnitude of the violations was such that scienter can be inferred. Plaintiffs concede that Ixia’s GAAP violations merely shifted earnings from present to future periods; overall revenues were not impacted. They quote Ixia’s April 8, 2013 press release, which stated that Ixia’s changed revenue recognition practices was “generally [going to] result in a shift of revenues between accounting periods in [its] previously issued financial statements, and [would] not have any impact on the total revenues recognized over the life of a warranty and software maintenance contract or arrangement, although the timing of the recognition of such revenues [was] generally [going to] commence earlier and end earlier than was reflected in [its] previously issued financial statements].”
For all of these reasons, the court concludes that plaintiffs’ allegations concerning violation of GAAP principles does not adequately plead scienter. Plaintiffs’ attempt to plead scienter through allegations concerning Ixia’s lack of adequate internal controls is equally unavailing. As with the GAAP violations, they do not plead specific facts indicating that any of the individual defendants recklessly disregarded or intentionally exploited internal control deficiencies. Mere allegations that Ixia had deficient internal controls are insufficient to give rise to a strong inference of scienter. See In re Maxwell Technologies, Inc. Securities Litigation, 18 F.Supp.3d 1023, 1040-41, 2014 WL 1796694, *14 (S.D.Cal. May 5, 2014) (“Plaintiff appears to argue in the briefing that, given the nature of the violation, Defendants could not have missed the violations if they evaluated the internal controls as they claimed. Although the large amount at issue suggests Plaintiffs argument may be plausible, this Court does not have the information to evaluate this argument and conclude there is a strong inference of scienter. Plaintiff has not presented the necessary information about accounting principles and internal controls to allow this Court to evaluate whether the individual defendants should have been or must have been aware of the violations”); In re ChinaCast Educ. Corp. Securities Litigation, No. CV 12-4621-JFW (PLAx), 2012 WL 6136746, *7 (C.D.Cal. Dec. 7, 2012) (“Plaintiffs allege that ChinaCast’s auditor, Deloitte, ‘warned the Board that serious internal control weaknesses existed.’ However, ‘allegations that Defendants had deficient internal controls during the class period do[] not create a strong inference that Defendants knowingly [made] false or misleading statements,’ ” quoting In re Loudeye Corp. Securities Litigation, No. C06-1442MJP, 2007 WL 2404626, *7-8 (W.D.Wash. Aug. 17, 2007) (holding that allegations “[t]hat the controls were inadequate is perhaps an indication of incompetence, but incompetence, even gross incompetence, is no basis for a securities fraud claim”)); Karpov v. Insight Enterprises, Inc., No. CV09-856-PHX-SRB, 2010 WL 2105448, * 10 (D.Ariz. Apr. 30, 2010) (“Allegations
For these reasons, plaintiffs have not demonstrated that defendants’ allegedly lax internal controls support a strong inference of scienter. See Tellabs, 551 U.S. at 314, 127 S.Ct. 2499 (“to qualify as ‘strong’ within the intendment of ... the PSLRA ... an inference of scienter must be more than merely plausible or reasonable — it must be cogent and at least as ■compelling as any opposing inference of nonfraudulent intent.” (emphasis added)). Thus, neither their allegations of purported violations of GAAP principles nor their internal control allegations adequately plead scienter.
ii. Stock Sales by Alston, Miller, and Ginsburg
“ ‘[UJnusual’ or ‘suspicious’ stock sales by corporate insiders [can] constitute circumstantial evidence of scienter[.]” No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 938 (9th Cir.2003) (citing Silicon Graphics, 183 F.3d at 986 (citation omitted)). ’Insider stock sales, however, are only suspicious if they are “ ‘dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside information.’ ” Id. (quoting In re
Defendants do not dispute that evidence of insider trading can lead to an inference of scienter. They assert, however, that plaintiffs cite incorrect data in support of their allegations. Specifically, they contend that plaintiffs have inaccurately stated the number of shares the individual defendants held at the time of the sales referenced in the complaint, and that they also fail to take into account exercisable stock options.
Plaintiffs acknowledge that they failed to take exercisable options into account, and attempt to “accept as true” defendants’ corrected values.
Moreover, the complaint contains no allegations concerning the total number of shares held by Miller, Alston, or Ginsburg at the beginning or end of the pre-class period or the percentage of shares sold during the pre-class period. This is especially problematic, given that the court must compare pre-class period activity to activity during the class period in order to decide if, in fact, trading in the latter period is suspicious. Miller, Alston, and Ginsburg may well have acquired most of their shares during or immediately preceding the class period; if that is so, their class period trades may not be as suspicious. See Silicon Graphics, 183 F.3d at 986 (“When evaluating stock sales, we have held that the proportion of shares actually sold by an insider to the volume of shares he could have sold is probative of whether the sale was unusual or suspicious.”). More fundamentally, absent allegations of pre-class period holdings, the court cannot determine whether plaintiffs have adequately alleged that class period sales were “dramatically out of line with prior' trading practices.” Compare Zucco Partners, 552 F.3d at 1005 (noting that a plaintiff must allege “a meaningful trading history” that can be compared with stock sales during the class period to determine suspiciousness). For this reason as well, plaintiffs’ additional allegations of suspicious trading do not support a strong inference of scienter.
iii. Alston’s Resignation
Finally, defendants assail plaintiffs’ contention that Ixia’s explanation for Alston’s resignation was a pretense designed to conceal his involvement in the fraudulent inflating of deferred revenue during the class period.
b. Holistic Review
As noted, even if individual allegations of scienter are not sufficient to give rise to a “strong inference” of knowledge or recklessness, the court must “conduct a ‘holistic’ review of the same allegations to determine whether the insufficient allegations combine to create a strong inference of intentional conduct or deliberate recklessness.” New Mexico State Investment Council, 641 F.3d at 1095; Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1234 (9th Cir.2004) (“We find that the totality of the allegations does create a strong inference that Oracle acted with scienter, and we reverse the District Court”). Under this standard, “[v]ague or ambiguous allegations are ... considered as a part of [the] holistic review ... [because] the federal courts ... need not close their eyes to circumstances that are probative of scienter viewed with a practical and common-sense perspective.” South Ferry, 542 F.3d at 784. Even when a court is conducting a holistic review, however, “if a set of allegations may create an inference of scienter greater than the sum of its parts, it must still be at least as compelling as an alternative innocent explanation.” Zucco Partners, 552 F.3d at 1006. As the Supreme Court has instructed, the analysis is a comparative one. Tel-labs, 551 U.S. at 310, 127 S.Ct. 2499 (“The inquiry is inherently comparative: How likely is it that one conclusion, as compared to others, follows from the underlying facts? To determine whether the plaintiff has alleged facts that give rise to the requisite ‘strong inference’ of scienter, a court must consider plausible noneulpa-ble explanations for the defendant’s conduct, as well as inferences favoring the plaintiff’).
Although in this case, the whole is indeed greater than the sum of its parts, the facts pled do not give rise to a “strong inference” of scienter that is as compelling as plausible innocent explanations.
The fact that Ixia was required to issue the 2007 restatement — for fiscal years ended December 31, 2003, December 31, 2004, and December 31, 2005, and quarters ended March 31, 2006, June 30, 2006, and September 30, 2006 — does not change this conclusion.
Plaintiffs’ allegations concerning the fact that Ixia hired Will Liang as a revenue recognition expert further support an inference that Ixia had ongoing problems properly accounting for its service and warranty contract revenue, to the point that it hired a specialist in that area. Based on the allegations in the complaint, it is at least as plausible that management was unable to control Ixia’s accounting practices during the company’s fast-paced integration of new acquisitions than that it was systematically manipulating the accounting to make it appear that the Ixia was making less money than was true in reality.
In pleading scienter, “[t]he requisite recklessness must be an ‘extreme departure from the standards of ordinary care, and ... present[ ] a danger of misleading buyers that is either known to the defendant or so obvious that the actor
G. Whether Plaintiffs Adequately Allege a Violation of Section 20(a) of the 1934 Act
Section 20(a) imposes joint and several liability on persons who directly or indirectly control a violator of the securities laws. It provides:
“Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person ... unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.” 15 U.S.C. § 78t(a).
A prima facie case of control person liability requires allegations and evidence (1) that a primary violation of the securities laws has occurred and (2) that defendant directly or indirectly controlled the person or entity committing the primary violation. See, e.g., Howard v. Everex Systems, Inc., 228 F.3d 1057, 1065 (9th Cir.2000); Paracor Finance, 96 F.3d at 1161. Plaintiffs need not prove the individual defendant’s scienter or “culpable participation” in the alleged wrongdoing. Id. (quoting Arthur Children’s Trust v. Keim, 994 F.2d 1390, 1396 (9th Cir.1993)). “Section 20(a) claims may be dismissed summarily ... [however,] if a plaintiff fails to adequately plead a primary violation of section 10(b).” Zucco Partners, 552 F.3d at 990. Because the court has dismissed plaintiffs’ section 10(b) and Rule 10b-5 claims, there is no primary violation upon which to predicate section 20(a) liability. Consequently, it dismisses plaintiffs’ § 20(a) claim.
For the reasons stated, the court grants defendants’ motion to dismiss the first amended complaint in its entirety with leave to amend. Plaintiffs may file an amended complaint within thirty (30) days of the date of this order.
. First Amended Class Action Complaint ("FAC”), Docket No. 61 (Jun. 11, 2014), ¶¶ 195-210.
. Id. at 1.
. Defendant Atul Bhatnagar, Errol Ginsburg, and Thomas B. Miller’s Motion to Dismiss First Amended Complaint ("BGM MTD”), Docket No. 81 (July 18, 2014); Defendant Ixia’s Motion to Dismiss First Amended Complaint ("Combined MTD”), Docket No. 83 (July 18, 2014); Defendant Victor Alston's Motion to Dismiss First Amended Complaint ("Alston MTD”), Docket No. 85 (July 18, 2014).
. Plaintiffs’ Omnibus Opposition to Defendants’ Motions to Dismiss ("Opposition”), Docket No. 89 (Aug. 18, 2014).
. FAC, ¶ 20.
. Id.
. Id., ¶ 24.
. Id., ¶ 21.
. Id., ¶ 22.
. Id., ¶ 23.
. Id., ¶ 26.
. Id.
.Id., ¶ 18.
. Id., ¶ 189.
. Id., ¶ 27.
. Id.
.Id., ¶28.
. Id.., ¶ 174.
. Id. See also Supplemental Declaration of Eric Rieder in Support of Defendants' Motion to Dismiss ("Supp. Rieder Decl.”), Docket No. 93 (Sept. 8, 2014), Exh. 33 at 10 (listing total revenues as initially reported and total revenues as restated).
. FAC, ¶ 175.
. Id., ¶ 29
. Id.
. Id., ¶ 30.
. Id.
. Id., ¶¶ 31, 38.
. Id., ¶ 38.
. Id., ¶ 40.
. Id., ¶ 41.
. Id.
. Id., ¶ 42.
. Id.,% 43.
. Id., ¶ 44.
. Id., ¶ 44.
. Id., ¶ 45 (emphasis removed).
.Id., ¶ 46 (emphasis removed).
. Id.., ¶ 47.
. Id.
. Id., ¶ 49 (emphasis removed).
. Id., ¶50.
. Id.
.Id., ¶ 31.
. Id., ¶¶ 8, 35.
. Id., ¶ 109.
. Jd., ¶ 51, 111.
.Id., ¶ 112.
. Id.., ¶ 113.
. Id., ¶ 52.
. Id., ¶ 115.
. Id., ¶53.
. Id.
. Id., ¶54.
. Id.
. Id., ¶ 55.
. Id., ¶ 57.
. Id., ¶ 117.
. Id.
. Id.
. Id., ¶¶ 58, 59, 118.
. Id., ¶ 119.
. Id.. ¶ 59. 120.
. Id., ¶ 121.
. Id., ¶ 121.
. Id., ¶ 60.
. Id., ¶61.
. Id., ¶¶ 61-62.
. Id., ¶ 62.
. Id., ¶ 65
. Id. ¶¶ 65, 122.
. Id., ¶ 122.
. Id., ¶ 66.
. Id.
. Id., ¶ 125.
. Id., ¶ 67.
. Id.., ¶ 126.
. Id.
. Id., ¶ 67.
. Id., ¶ 128.
. Id., ¶ 67, 129.
. Id., V 130.
. Id., ¶ 131.
. Id., ¶ 68.
. Id,
. Id., ¶ 69.
. Id., ¶¶ 74, 132.
. Id., ¶ 134.
. Id., ¶¶ 74-76.
. Id., ¶ 77, 136-37.
. Id., ¶78.
. Id.
. Id., ¶¶ 79, 138.
. Id., ¶ 80.
. Id., ¶ 81.
. Id., ¶ 142.
. Id., ¶ 143.
. Id., ¶¶ 81, 146.
. Id., ¶ 147.
. Id., ¶ 88.
. Id.
. Id., ¶ 89.
. Id., 1T151.
. Id., ¶ 152.
. Id., ¶¶ 153-54.
. Id., ¶ 156.
. Id., ¶ 90.
. Id., ¶¶ 8, 91.
. Id., ¶ 93 ("The errors that require the restatement of our previously issued financial statements relate to the manner in which the Company recognizes revenues related to its warranty and software maintenance contracts, including a previous implied warranty and software maintenance arrangement with one of the Company’s customers.... The changes in the Company's revenue recognition practices will generally result in a shift of revenues between accounting periods in our previously issued financial statements, and will not have any impact on the total revenues recognized over the life of a warranty and software maintenance contract or arrangement, although- the timing of the recognition of such revenues will generally commence earlier and end earlier than was reflected in
. Id.., 1194 ("Management has concluded and the Company expects to disclose in its 2012 Form 10-K that the Company did not maintain effective disclosure controls and procedures and internal control over financial reporting as of December 31, 2012 because of the identified material weaknesses related to the accuracy with which the Company had historically recognized revenues related to its warranty and software maintenance contracts and arrangements. Specifically, the Company did not design a control to compute and assess the significance of the difference between its revenue recognition practices related to the Company's warranty and software maintenance contracts and the revenues that would have been recognized using the appropriate accounting principles generally accepted in the United States of America. The Company also did not design a control to review changes to its previous implied warranty and software maintenance arrangement with one of its customers to properly determine the impact of revenue recognition when the implied arrangement ceased to exist”).
. Id., ¶ 148.
. Id.
. A company's “book-to-bill ratio” is the ratio of orders'received to units shipped and billed in a particular period. (Id.) It is used by investors to assess the future revenue outlook. A ratio of 1 or more implies that more orders were received than filled, which in turn indicates strong demand. (Id.)
. Id., ¶ 149.
. Id., ¶ 150. These include: (i) the principle that financial reporting should provide information that is useful to present and potential future investors and creditors in making rational investment and credit decisions, FASB Statement of Concepts No. 1, ¶ 34; (ii) the principle that financial reporting should provide information about the.economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims' to the resources, FASB Statement of Concepts No. 1, ¶ 40; (iii) the principle that financial reporting should provide information about how the management of an enterprise has discharged its responsibility to stockholders in using the enterprise resources entrusted to it, FASB Statement of Concepts No. 1, ¶ 50; (iv) the principle that financial reporting should provide information about an enterprise’s financial performance during a period, including past performance, FASB Statement of Concepts No. 1, ¶ 42; (v) the principle that financial reporting should be reliable in the sense that it represents what it purports to represent, FASB Statement of Concepts No. 2, ¶¶ 58-59; and (vi) the principle of completeness, i.e., that nothing is omitted from public disclosures that may be necessary to insure that other public statements accurately represent underlying events and conditions, FASB Statement of Concepts No. 2, ¶ 79. (Id., ¶ 150.)
. Id., ¶ 97. '
. Id.,n 97-98.
. Id., ¶98.
. Id.
. Id., ¶99.
. Id., ¶ 100.
. Id.
. Id.
. Id., ¶ 8.
. Id., ¶ 9.
. Id., ¶¶ 10, 36.
. Id.
. Id., ¶ 102.
. Id., ¶ 103:
. Id.
. Id., ¶ 104.
. Id., ¶105.
. Id., ¶ 107.
. Id., ¶¶ 105-06.
. Id., ¶ 108.
. Id.
. Id., ¶¶ 158-169.
. Id., ¶ 159.
. Id., ¶ 160.
. Id., ¶ 161.
. Id., ¶ 162.
. Id.
. Id., ¶ 164.
. Id.
. Id., ¶ 166.
. Id., ¶ 167.
. Id., ¶ 169.
. Id., ¶ 172.
. Id.
. Id., ¶ 176.
. Id.
.Id.
. Taking judicial notice of matters of public record does not convert a motion to dismiss into a motion for summary judgment. MGIC Indemnity Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir.1986).
. Ixia’s Request for Judicial Notice ("Ixia RJN”), Docket No. 84 (July 18, 2014) at 9, Exhs. 1-22. Ixia also filed a supplemental request for judicial notice, asking that the court take judicial notice of two Form 8-K filings by Ixia on February 23, 2007 and May 9, 2013. (Ixia’s Supplemental Request for Judicial Notice, Docket No. 95 (Sept. 8, 2014).) In addition to the fact that the Forms 8-K are public filings, and thus proper subjects of judicial notice, plaintiffs rely on the documents in their opposition, and incorporate them by reference in the complaint. (See Opposition at 1, 3, 17; FAC, ¶¶ 9, 174-76.) Accordingly, the court will consider these documents in deciding the motion.
. Id. at 9.
. The court takes judicial notice of the SEC filings only for their existence and contents, not for the truth of the information contained in them. See In re Foundry Networks, Inc., C 00-4823 MMC, 2003 WL 23211577, *10 n. 11 (N.D.Cal. Feb. 14, 2003) ("Plaintiffs ‘object to the request to the extent defendants seek to establish the truth of the contents in the noticed documents,’ but raise no objection to the extent the request asks the Court to take notice of the contents of the documents. Defendants’ request is hereby GRANTED to the extent it requests that the Court take judicial notice of the content of such documents”); Del Puerto Water Dist. v. U.S. Bureau of Reclamation, 271 F.Supp.2d 1224, 1234 (E.D.Cal.2003) ("Judicial Notice is taken of the existence and authenticity of the public and quasi
. Plaintiffs Request for Judicial Notice, Docket No. 89-1 (Aug. 18, 2014).
. Defendants' Opposition to Request for Judicial Notice, Docket No. 92 (Sept. 8, 2014) at 1-2 (citing Plaintiffs' Request for Judicial Notice at 1-2).
. The PSLRA creates a "safe harbor” for "forward-looking” statements that are immaterial, are limited by “meaningful cautionary statements,” or are made without actual knowledge of their falsity. 15 U.S.C. §§ 77z-2(c), 78u-5(c). Such statements include, but are not limited to, statements of future economic performance and management plans and objectives. 15 U.S.C. §§ 77z-2(i), 78u-5(i). This "safe harbor” has much the same effect as the "bespeaks caution” doctrine, which provides that forward-looking representations that contain adequate cautionary language or risk disclosure protect a defendant from securities liability. See, e.g., Plevy v. Haggerty, 38 F.Supp.2d 816, 830 (C.D.Cal.1998).
. See BGM MTD at 4-5; Alston MTD at 4-5. The remaining individual defendants do not challenge the adequacy of allegations concerning their individual liability under Rule 10b-5.
. Opposition at 10-11.
. This is so notwithstanding the fact that judicially noticed documents demonstrate that Ginsburg did, in fact, sign certain of the documents. Plaintiffs dispute this, citing In re American Apparel, Inc. Shareholder Litig., 2013 WL 174119 at *25. There, the shareholder-plaintiffs affirmatively alleged that two individual defendants were liable because they signed SEC filings containing material misstatements; the court, however, could not determine which of the documents each defendant had signed. See id. ("[T]he complaint alleges that both individuals signed a number of the SEC filings that contained allegedly false factual statements.... The complaint does not clearly allege, however, which documents Charney and Kowalewski authorized or signed, and the parties did not seek judicial notice of the documents in question”). Plaintiffs argue that, here, the court has judicially noticed the SEC filings, and hence can determine which of the forms Ginsburg signed. That the court has taken judicial notice of the SEC filings does not cure the fact that, unlike the American Apparel shareholders, plaintiffs have not alleged that Ginsburg is liable as a result of signing SEC filings. (See, e.g., FAC, ¶¶ 26, 156.) For that reason, American Apparel is inapposite, and plaintiffs’ Rule 10b-5 claim against Ginsburg must be dismissed.
. FAC, ¶ 156.
. RJN, Exhs. 9, 10; Declaration of Eric Rieder in Support of Motion to Dismiss First Amended Complaint ("Rieder Decl.”), Docket No. 83 (July 18, 2014), Exhs. 9, 10.
. Combined MTD at 6.
. Id.
. See FAC, ¶¶ 3, 44-49.
. See FAC, ¶ 93 (quoting Ixia's April 8, 2013 press release concerning the first restatement: "The changes in the Company's revenue recognition practices will generally result in a shift of revenues between accounting periods in our previously issued financial statements, and will not have any impact on the total revenues recognized over the life of a warranty and software maintenance contract or anangement, although the timing of the recognition of such revenues will generally commence earlier and end earlier than was reflected in our previously issued financial statement for the Restated Periods” (emphasis added)).
. Plaintiffs cite a number of SEC litigation releases discussing enforcement proceedings involving overstatement of deferred revenue. Only one of them involves a factual scenario like the one plaintiffs allege in their complaint, however. See SEC Files Settled Enforcement Action Against Veritas Software Corporation, 2007 WL 528458, *1 (Feb. 21, 2007) ("Veritas engaged in three improper accounting practices to manage its earnings and artificially smooth its financial results. Specifically, Veritas improperly (a) recorded and maintained excess accrued liabilities, employing ‘accrual wish lists' and 'cushion schedules'; (b) stopped recognizing professional service revenue it had fully delivered and earned upon reaching internal targets; and (c) inflated its deferred revenue balance”).
.Combined MTD at 7-8.
. Opposition at 8.
. Combined MTD at 9-23. They also attack the sufficiency of the CW allegations. These allegations concern purported violations of GAAP principles, and are addressed in analyzing the sufficiency of that set of allegations.
.Id. at 9.
. Combined MTD at 10.
. Id. at 10-11.
. Opposition at 14.
. The complaint appears to allege that Ixia's products, rather than the service and maintenance bundles packaged with them, are the company’s "core” business. (See FAC, ¶ 39 ("These initial acquisitions piqued the interest of the investment community. For example, in its May 19, 2010 analyst report, [Wunderlich] reported that '[d]ata center and core routing product cycles ensure a growth cycle for' one of Ixia's newly acquired products.”).) In judicially noticed SEC filings, moreover, Ixia noted that results were being driven by its products, not the services bundled with them. (See, e.g., RJN, Exhs. 15, 17; Rieder Decl., Exh. 15 at 741) (Ixia's Form 8-K dated 2/2/12) ("Accelerated demand for our 10G and high-speed Ethernet solutions drove growth in the quarter along with higher than expected sales of LTE and Wi-Fi testing solutions. We saw especially strong demand from equipment manufacturers and from customers in North America.”); Exh. 17 at 767 (Ixia's Form 8-K dated 7/26/12) (" 'Our solid second quarter results were driven by healthy demand for our high-speed Ethernet, LTE and Wi-Fi products,’ commented Vic Alston, Ixia’s president and chief executive officer. 'We are very pleased with the momentum of our organic business — on a standalone basis we generated record revenue and non-GAAP operating profit in the quarter' ”).
. The first amended complaint references CWl’s report that Will Liang was hired as an expert in recognizing software and maintenance contract revenue, and that "everyone above Will Liang” would "have been involved in any decision about how to recognize revenue relating to Ixia's software and mainte
. See Batwin, 2008 WL 2676364 at *12 ("Plaintiff argues that by prematurely recognizing revenue in these ways, Occam violated Statement of Position ("SOP”) 97-2, Software Revenue Recognition, issued by the Accounting Standards Executive Committee of the AICPA; SEC Staff Accounting Bulletin ("SAB”) 104; and SAB 101, all of which essentially provide that revenue is recognizable only when four criteria are met: (i) there is persuasive evidence of an arrangement; (ii) delivery has occurred, (iii) the vendor’s fee is fixed or determinable, and (iv) collectibility is probable”); Medicis II, 2010 WL 3154863 at *6 (concluding that plaintiffs had "adequately pled particular facts demonstrating that the executive [defendants were all well aware of SFAS 48, which governs revenue recognition where a right of return exists”); Bache v. Novatel Wireless, Inc., 642 F.Supp.2d 1169, 1186 (S.D.Cal.2009) ("Given the complaint’s allegations concerning early product ship
. FAC, ¶ 176.
. Id., ¶ 97.
. The court does, however, agree with plaintiffs that they are not required to quantify the amount by which deferred revenues were inflated. See In re Washington Mut., Inc. Securities, Derivative & ERISA Litigation, 694 F.Supp.2d 1192, 1222 (W.D.Wash.2009) (“Plaintiffs are not required to quantify the amount by which the Allowance was understated”). This is especially true given allegations that the first restatement did not disclose the amount by which deferred revenue had been inflated.
. Combined Reply at 5.
. Opposition at 15.
. FAC, ¶ 93.
. Defendants attempt to negate any inference of scienter because Ixia’s class period financial statements were reviewed and audited annually by PwC, a well-respected independent accounting firm; that the auditors did not identify the accounting errors for an extended period of time, defendants contend, further refutes any inference that defendants made the errors knowingly. (Combined MTD at 11.) Plaintiffs counter that the fact PwC declined reappointment is a “red flag” that might actually indicate scienter, as opposed to negate it. The cases they cite, however, concerned allegations of more than merely the reaction of a company’s auditors to its accounting errors. More fundamentally, they concern auditors’ decision to resign, not situations in which auditors decline reappointment. See McIntire v. China MediaExpress Holdings, Inc., 927 F.Supp.2d 105, 126-27 (S.D.N.Y.2013) ("Plaintiffs have pled a number of 'red flags’ that contribute to support a reasonable finding of scienter. Plaintiffs have alleged that investigators visited CCME's facilities and found that no employees were actually working. They have also alleged that the CFO, two board members, and the independent auditor resigned”); In re Spear & Jackson Securities Litigation, 399 F.Supp.2d 1350, 1358 (S.D.Fla.2005) (listing "auditor resignations” as one of several indicia of scienter courts consider).
Plaintiffs also argue that, absent discovery, there is no way to know what communications transpired between PwC and Ixia, and accordingly that PwC’s audit opinion cannot negate scienter for purposes of a motion to dismiss. The court agrees. See In re Diamond Foods, Inc., Securities Litigation, No. C 11-05386 WHA, 2012 WL 6000923, *8 (N.D.Cal. Nov. 30, 2012) (“Diamond further contends that the fact that its outside auditor, Deloitte, provided unqualified audit opinions undermines a finding of scienter. A clean audit opinion may possibly support the conclusion that defendants did not act with scien-ter, but it is not dispositive. In order to know how much reasonable reliance should be accorded the audit opinion, we will eventually have to evaluate what communications passed between the company and the auditor as well as what, if anything, was hidden from the auditor”). For that reason, PwC’s audit opinion does not, standing alone, negate any otherwise compelling inference of scienter plaintiffs’ pleading raises.
. Combined MTD at 12.
. Id.
. Citing In re Oxford Health Plans, Inc., 187 F.R.D. 133, 140 (S.D.N.Y.1999), plaintiffs contend that stock options need not be taken into account at the motion to dismiss stage. Plaintiffs' reliance on Oxford is misplaced, however. First, it is an out-of-circuit decision and does not bind the court. Second, the Oxford court's decision not to consider vested options because they ."are not shares” appears to contradict binding Ninth Circuit precedent. More fundamentally, plaintiffs do not allege whether their figures do or do not include vested options.
.Because plaintiffs allegations concerning stock sales by Ginsburg, Miller, and Alston fail to conform to Ninth Circuit law, the court declines to engage in an analysis of the hypothetical sales figures plaintiffs attempt to "accept as true” in their opposition. The correct figures should be set out in particularized allegations in an amended complaint.
. Combined MTD at 23.
. Id. (citing FAC, ¶ 101).
.Id. (citing FAC, ¶¶ 10, 101).
. While "[vjague or ambiguous allegations are ... properly considered as part of a holistic review when considering whether the complaint raises a strong inference of scien-ter,” South Ferry, 542 F.3d at 784, plaintiffs concede their allegations of suspicious stock trading are not adequately pled because they fail to take into account options that vested either before or during the class period. Plaintiffs also fail to allege the percentage by which defendants’ shares (including vested options) increased or decreased during the class period. It is therefore entirely unclear that any of the alleged stock trades was actually suspicious. See Silicon Graphics, 183 F.3.d at 986 (“When evaluating stock sales, we have held that the proportion of shares actually sold by an insider to the volume of shares he could have sold is probative of whether the sale was unusual or suspicious”); Ronconi, 253 F.3d at 435 n. 25 ("Stock options should be considered in calculating the percentage of shares sold unless the insider could not have exercised them”). For that reason, as currently pled, the suspicious stock trade allegations add nothing to the court’s holistic review.
. FAC, ¶ 174.
. Supp. Rieder Decl., Ex. 33 at 10 (listing total revenues as initially reported and total revenues as restated).
. Because plaintiffs failed adequately to allege scienter as to any defendant, the court need not address Bhatnagar’s argument that the complaint lacks sufficient allegations specifically to plead scienter on his part because he left Ixia early in the class period and also did not sell any stock during the period. (BMG MTD at 8-10.) The same is true of Alston's argument that plaintiffs have failed to plead scienter on his part because they do not allege that he was involved in any of the complex accounting decisions concerning revenue recognition. (Alston MTD at 7-8.) Plaintiffs should nonetheless take these defendants’ arguments into account in drafting any future amended complaint to remedy any deficiencies in these aspects of their pleading.
. Since plaintiffs have failed adequately to allege a primary violation, the court cannot conclusively address control person liability. The individual defendants' arguments concerning control person liability bear some mention, however. They first assert that plaintiffs have failed to plead control person liability based on their relationship with Ixia. Specifically, they maintain that to allege the "control” element, plaintiffs "must plead ... that defendants exercised ‘a significant degree of day-to-day operational control, amounting to the power to dictate another party’s conduct or operations.' ” In re McKesson HBOC, 126 F.Supp.2d at 1277; see also Lilley v. Charren, 936 F.Supp. 708, 716 (N.D.Cal.1996) ("[P]laintiffs must allege facts showing that each defendant possessed the actual power to control the person primarily liable”).
Control person liability is "an intensely factual question.” Howard, 228 F.3d at 1065. Thus, all allegations in the complaint must be considered to determine if plaintiffs have adequately alleged that any individual defendant exercised a significant amount of control over the operations of the company. See Batwin, 2008 WL 2676364 at *25 (C.D.Cal. July 1, 2008) (" 'The traditional indicia of control are: having a prior lending relationship, own
One of Bhatnagar's individual arguments has particular merit, however. Since his alleged control of Ixia ended in May 2012 — in the middle of the class period — he can be held liable only for misrepresentations and omissions made before that time. See Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc., 690 F.Supp.2d 959, 979 (D.Ariz.2010) ("First, the court agrees with [defendant’s] assertion that 'officers and di- . rectors’ cannot be found 'liable as control persons under Section 20(a) for alleged violations that took place before they assumed their positions’ ”). The court directs plaintiffs to amend this aspect of their § 20(a) claim against Bhatnagar in any amended complaint.