ORDER REGARDING DEFENDANTS’ MOTIONS TO DISMISS
Re: Dkt. Nos. 160, 161, 163, 164, 182, 183
INTRODUCTION
This is a securities class action brought on behalf of a putative class of persons who purchased or otherwise acquired Velti pic (“Velti”) securities between January 27, 2011 and August 20, 2013. On the last day of the putative class period, Velti announced its Q2 2013 financial results and disclosed that it had decided to write off approximately $111 million in outstanding accounts receivable. Plaintiffs allege that Velti’s reserves and revenues were materially misrepresented throughout the putative class period and bring claims against Velti’s accounting firm — Baker, Tilly, Vir-chow & Krause, LLP (“Baker Tilly”) — and the underwriters of Velti’s initial and secondary public offerings — Jefferies LLC, RBC Capital Markets, LLC, Needham & Company, LLC, and Canaccord Genuity Inc. (collectively, the “Underwriters”) — under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”).
As plaintiffs announce at the start of their opposition brief, “this case is about receivables.” Opp. 1 (Dkt No. 183). Most if not all of plaintiffs’ claims are founded on the charge that Velti’s financial reporting during the putative class period failed to account for millions of dollars of uncol-lectible receivables on Velti’s books. Accordingly, plaintiffs must plead facts indicating that these uncollectible receivables existed when the alleged misrepresentations were made, and that Velti failed to account for them. Plaintiffs have not done so. The motions to dismiss are GRANTED.
BACKGROUND
I. FACTUAL BACKGROUND
Except where otherwise noted, the following facts are taken from plaintiffs’ Amended Consolidated Complaint (“ACC”) or documents incorporated therein and are presumed true for the purposes of these motions.
A. Velti’s Business Model
Velti was founded in Athens, Greece in 2000. ACC ¶ 8 (Dkt. No. 144). It is a provider of “mobile marketing and advertising technology and solutions” for businesses around the world. ACC ¶ 6. As a regular part of its business, Velti entered contracts pursuant to which it provided services but did not get paid until its work had been completed, the customer had been invoiced, and the customer had delivered payment. Id. Between the time the work was completed on a contract and the time the customer delivered payment, the amount due on a contract represented an account receivable. Id.
Velti classified its receivables in one of two ways. ACC ¶ 11 n.4-5. From the
Plaintiffs allege that because Velti operated heavily in Greece, it was particularly impacted by the 2010 Greek economic crisis through increasing numbers of unpaid invoices. They assert that Velti hid this from the public in part by" calculating its reported DSO only on the basis of its trade receivables. See ACC ¶ 12. They contend that this method of calculating the reported DSO “left investors unaware that [Vel-ti] had very ... old receivables sitting on its books for which it was not carrying an appropriate reserve for bad debts.” ACC ¶11.
B. Velti’s Initial and Secondary Public Offerings
Velti’s registration statement and prospectus for its initial public offering («IPO”) was declared effective by the SEC on January 27, 2011. ACC ¶ 147; Baker Tilly RJN, Ex. A (Dkt. No. 168-1). The IPO registration statement included Baker Tilly’s August 3, 2010 audit report on Vel-ti’s 2008-2009 financial statements.
Velti’s registration statement and prospectus for its secondary public offering (“SPO”) was declared effective by the SEC on June 14, 2011. ACC ¶ 151; Baker Tilly, RJN Ex. C (Dkt. No. 168-3). The SPO registration statement included Baker Tilly’s April 11, 2011 audit report on Velti’s 2008-2010 financial statements. Baker Tilly RJN, Ex. D (Dkt. No. 168-4).
Baker Tilly’s August 3, 2010 audit report included in the IPO registration statement contained the following certification regarding Velti’s financial reporting:
In our opinion, the consolidated financial statements and financial statement schedule referred to above present fairly, in all material respects, the consolidated financial position of Velti pic and its subsidiaries as of December 31, 2009 and 2008, and the results of their operations and cash flows for each of the three years ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
ACC ¶¶ 148, 168. Baker Tilly’s April 11, 2011 audit report included in the SPO registration statement contained a substantially identical certification regarding Velti’s financial reporting for “each of the three years ending December 31, 2010.” ACC ¶ 202.
The IPO registration statement reported that Velti had never failed to collect on any significant receivable or incurred any bad debt expense:
*910 We have not historically incurred bad debt expense, none of our significant customers have historically failed to pay amounts due to us, and we do not believe that any of the customers contributing to our increased accounts receivable aging will fail to pay us in full.
ACC ¶¶ 160, 163; Baker Tilly RJN, Ex. A at 48. The SPO registration statement similarly reported: “We have historically collected all amounts due from our customers, ... as evidenced by our insignificant bad debt expense for 2010, 2009, and 2008.” ACC ¶ 196, Baker Tilly RJN, Ex. C at 71.
C. Velti’s Switch to Comprehensive DSO
Although plaintiffs claim that the 2010 Greek economic crisis triggered an increase in the number of Velti’s unpaid invoices, plaintiffs do not specifically identify any collectability problems until Q1 2012. According to the ACC, Velti’s DSO began to accelerate in that quarter. See ACC ¶¶ 119, 128. A confidential witness who joined Velti in June 2011 informed plaintiffs that “sometime in Q1 2012” he or she “began to hear that ... [Velti] was having trouble collecting receivables.” ACC ¶ 119. The confidential witness also recalled “emails sent around [Velti] discussing DSOs and how they needed to be shorter.” Id.
Shortly before Velti’s Q1 2012 earnings call, which occurred on May 15, 2012, a stock market research firm specializing in forensic accounting issues published a report stating that Velti’s reported DSO only accounted for trade receivables.
On May 22, 2012, Velti confirmed that the information in the report was accurate and announced that it was changing its method of calculating its reported DSO. ACC ¶ 13. The new method, which calculated what Velti called “comprehensive DSO,” accounted for both trade receivables and accrued contract receivables. ACC ¶¶ 99, 277. Velti’s reported DSO more than doubled as a result, from 116 days to 272 days. ACC ¶ 13. Plaintiffs assert that
[b]ecause the trade DSO figure was less than half of the comprehensive DSO, until May 22, 2012, Velti was able to mislead investors into believing that it was taking a much shorter time to collect on outstanding receivables. Disclosing only the trade DSO figure also enabled Velti to conceal that it had a large sum of aging, undisclosed receivables sitting in its accrued contract receivables.
ACC ¶ 280.
On November 14, 2012, Velti announced that due to its inability to timely collect receivables from certain of its customers in Greece, the Balkans, and various North African and Middle Eastern countries, it was transitioning its business away from those regions and into the United States and Western Europe. ACC ¶ 14. Plaintiffs allege that at the time this announcement was made, the DSO for customers in those regions had risen to 450 days. ACC ¶ 14. Velti subsequently represented that only 10 percent of its receivables were
D. Deloitte’s Audit and Collapse of Velti’s Stock Value
In June 2013, Velti hired Deloitte LLP (“Deloitte”) to review and evaluate Velti’s operations in Greece and Cyprus, with a specific eye to determining the collectability of receivables in those regions. ACC ¶ 139. After two weeks, “with access to the same information available to Baker Tilly,” Deloitte presented its initial findings, which were ultimately confirmed in Deloitte’s final report. ACC ¶ 140. Among other things, Deloitte’s final report concluded that (i) a “large amount” of Vel-ti’s receivables were “very old;” (ii) 85 percent of Velti’s receivables in Greece and Cypress were attributable to only 26 customers; and (iii) the receivables attributable to those customers were uncollectible. Id.
Deloitte recommended that Velti write off more than $100 million to account for its uncollectible receivables. ACC ¶ 142. Velti followed Deloitte’s advice. On August 20, 2013, Velti announced its Q2 2013 financial results and disclosed that it had decided to write off approximately $111 million in outstanding receivables. ACC ¶¶ 23, 401. It disclosed that some of the written off receivables were “substantially old” and had been due since “before 2012.” ACC ¶ 23. Plaintiffs describe this disclosure as “a de facto admission that the [$111 million] write off was long overdue.” ACC ¶ 23. Velti also disclosed that, despite its earlier representation that only 10 percent of its receivables were with customers in Greece and the Balkans, the true proportion was about 66 percent. ACC ¶ 23. Velti shares declined $0.66 per share, or 66 percent, to close on August 21, 2013 at $0.34 per share. Id. Velti’s United States-based operations filed for bankruptcy on November 4, 2013. Dkt. No. 170-1 at ¶ 39. Its European-based operations did the same on August 18, 2014. Dkt. No. 150.
Except for the information stated in the preceding two paragraphs, plaintiffs do not allege the specific contents or findings of Deloitte’s final report and have not provided a copy of the report to defendants.
II. PROCEDURAL BACKGROUND
Between August 22, 2013 and October 4, 2013, four securities class actions were filed in this district in connection with the collapse of Velti’s stock value. On December 3, 2013, the cases were consolidated. Dkt. No. 81. On January 24, 2014, a fifth securities class action was filed. See Yadegar v. Velti pic, No. 14-cv-00372-WHO (N.D. Cal. filed Jan. 24, 2014) at Dkt. Nos. 1, 6. Baker Tilly was first named as a defendant on January 24, 2014. See id. at Dkt. No. 1. The Underwriters were first named on October 4, 2013. See Manabat v. Velti plc, No. 13-cv-04606-WHO (N.D. Cal. filed Oct. 4, 2013) at Dkt. No. 1.
Plaintiffs filed a Consolidated Complaint on April 22, 2014. Dkt. No. 105. The Consolidated Complaint identified three groups of defendants: (1) Velti and four of its officers/directors — Wilson Cheung, Nicholas Negroponte, Jeffrey Ross, and Winnie Tso; (2) five other Velti officers/directors — Jerry Goldstein, David Hobley, Chris Kaskavelis, David Mann, and Alex Moukas; and (3) Baker Tilly and the Underwriters. Id. It asserted five causes of action: (1) violations of Section 11 of the Securities Act against all defendants; (2) violations of Section 12(a)(2) of the Securities Act against Velti, Goldstein, Hobley, Kaskavelis, Mann, Moukas, Negroponte, and the Underwriters; (3) violations of Section 15 of the Securities Act against all of the individual defendants; (4) violations of Section 10(b) against Velti, Cheung,
On May 23, 2014, Velti, along with Cheung, Negroponte, Ross, and Tso, entered a settlement agreement with plaintiffs. See Dkt. No. 170-2. I granted preliminary approval of the settlement on August 19, 2014 and final approval on February 3, 2015. Dkt. Nos. 147, 199. In addition to Velti, Cheung, Negroponte, Ross, and Tso, the settlement agreement and resulting judgment released the other five Velti officers/directors named in this action — i.e., Goldstein, Hobley, Kaskavelis, Mann, and Moukas — leaving only Baker Tilly and the Underwriters as active defendants. See Dkt. Nos. 199, 200.
Plaintiffs filed the ACC on August 12, 2014. Dkt. No. 144. The ACC asserts three causes of action relevant here: (i) violations of Section 11 against Baker Tilly and the Underwriters; (ii) violations of Section 12(a)(2) against the Underwriters; and (iii) violations of Section 10(b) against Baker Tilly. Dkt. No. 44. Defendants filed their respective motions to dismiss on October 15, 2014. Dkt. Nos. 161, 164. I heard argument from the parties on February 18, 2015.
III. REQUESTS FOR JUDICIAL NOTICE
In connection with their motions to dismiss, defendants request judicial notice of a number of documents, including SEC filings, NASDAQ reports of Velti’s historical daily stock prices, accounting standards issued by the Financial Accounting Standards Board and the American Institute of Certified Public Accountants, and the May 10, 2012 CFRA report on Velti. See Dkt. Nos. 162, 168, 188, 191. Plaintiffs ask that I take judicial notice of the documents only for their existence and the existence of their contents, not for the truth of the information contained in them. Opp. 28 n.21.
Federal Rule of Evidence 201 authorizes courts to “judicially notice a fact that is not subject to reasonable dispute because it: (1) is generally known within the trial court’s territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b). “[Fjacts subject to judicial notice may be considered on a motion to dismiss.” Mullis v. U.S. Bankr.Court for Dist. of Nevada,
Because the documents submitted by defendants for judicial notice are either appropriate for judicial notice, incorporated into the ACC, or both, the requests for judicial notice are GRANTED. See City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., No. 12-cv-06039-WHO,
LEGAL STANDARDS
I. RULE 12(b)(6): MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM
A motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of a complaint. Navarro v. Block,
II. RULE 9(b): HEIGHTENED PLEADING STANDARD FOR FRAUD OR MISTAKE
Claims sounding in fraud or mistake are subject to the heightened pleading standard of Federal Rule of Civil Procedure 9(b), which requires that such claims “state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). To satisfy this standard, a plaintiff must identify “the time, place, and content of [the] alleged misrepresentation[s],” as well as the “circumstances indicating falseness” or “manner in which the representations at issue were false and misleading.” In re GlenFed, Inc. Sec. Litig.,
The Ninth Circuit has held in the securities fraud context that “[a] plaintiff may ... satisfy Rule 9(b) with allegations of circumstantial evidence if the circumstantial evidence alleged explains how and why the statement was misleading when made.” Fecht v. Price Co.,
I. SECTION 11 CLAIMS AGAINST BAKER TILLY AND THE UNDERWRITERS
Section 11 creates a private right of action for any purchaser of a security where “any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a). To prevail on a Section 11 claim, a plaintiff must demonstrate (1) that the registration statement contained a misrepresentation or omission; and (2) that the misrepresentation or omission was material. In re Daou Sys., Inc.,
Accountants and underwriters may be held liable under Section 11 for material misrepresentations or omissions in registration statements. See Monroe v. Hughes,
A. Statute of Limitations
Defendants contend that plaintiffs’ Section 11 claims are time-barred. Baker Tilly Mot. 18-20; Underwriters Mot. at 20-21. Section 11 claims must be brought “within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C. § 77m. This one year statute of limitations begins to run when the plaintiff discovered or should have discovered the untrue statement or omission. See F.D.I.C. v. Countrywide Fin. Corp., No. 12-cv-04354,
Defendants argue that the statute of limitations on plaintiffs’ Section 11 claims began to run in May 2012, when CFRA issued the report stating that Vel-ti’s reported DSO accounted only for trade receivables and Velti subsequently announced that it had switched to reporting “comprehensive DSO.” Baker Tilly Mot. 18-20; Underwriters Mot. at 20-21. Plaintiffs respond that while the May 2012 disclosures revealed that Velti had been excluding accrued contract receivables from its reported DSO, they did not reveal the extent of the problems that Velti had experienced and would continue to experience in collecting its receivables, or that Velti was understating reserves, overstating revenues, and lacked adequate internal controls. Opp. 40.
Courts in this district have held that the determination of “discovery” for the purpose of Section U’s limitations period “is fact intensive and is usually not appropriate at the pleading stage.” Booth,
In light of the high hurdle to establishing untimeliness at this juncture, the May 2012 disclosures are not enough to completely bar plaintiffs’ Section 11 claims. The CFRA report and the subsequent switch to reporting “comprehensive DSO” made plain that Velti had been excluding accrued contract receivables from its reported DSO. But neither disclosure made plain the linkages between Velti’s method of calculating its reported DSO and its alleged understatement of reserves and overstatement of revenues. Plaintiffs’ Section 11 claims are based primarily on these alleged misrepresentations, not on the undisputed fact that until May 2012, Velti’s reported DSO accounted only for trade receivables.
In this way, the instant case is distinguishable from those cited by defendants, in which the disclosures at issue concerned “precisely” the information the defendants had allegedly misrepresented or concealed. See, e.g., Freidus v. Barclays Bank PLC,
That said, to the extent plaintiffs’ Section 11 claims are based on the allegation that Velti “improperly excluded” accrued contract receivables from its reported DSO, see Opp. 27-28, the claims are time-barred. The CFRA report plainly stated that Velti “only include[d] trade receivables within [its] calculation of DSO.” Underwriters RJN, Ex. H at 4. According to the ACC, the CFRA report “revealed” that Velti’s reported DSO “only included trade receivables and excluded accrued receivables,” information that was “digested by the market” and that triggered a significant decline in Velti’s stock value. ACC ¶ 12. On May 22, 2012, Velti confirmed that the CFRA report was accurate and announced that it had modified its reported DSO to include accrued contract receivables. ACC ¶¶ 13, 99, 277. In addition, according to both the ACC and the documents submitted for judicial notice by defendants, the SPO registration statement reported that Velti’s DSO was “calculated based on trade receivables.” ACC ¶ 196; Baker Tilly RJN, Ex. C at 71. In short, by the end of May 2012, Velti’s allegedly misleading method of calculating its reported DSO had been explicitly disclosed to the public on at least three different occasions.
While defendants face a high hurdle in establishing untimeliness on a motion to dismiss, these facts are sufficient to satisfy that burden with respect to plaintiffs’ allegation that Velti’s DSO figure was misrepresented in the registration statements. As in Freidus v. Barclays Bank PLC, the disclosures in May 2012 and in the SPO registration statement “provided precisely the information” that plaintiffs claim should have been disclosed earlier.
There is no dispute that defendants were not sued within one year of May 2012. Accordingly, to the extent plaintiffs’ Section 11 claims are based on the allegation that Velti’s DSO figure was misrepresented in the registration statements, the claims are time-barred and must be DISMISSED WITH PREJUDICE. As pleaded, there is no indication that plaintiffs can amend the complaint to overcome this defect. To the extent plaintiffs’ Section 11 claims are based on other alleged misrepresentations, defendants’ motions to dismiss for untimeliness are DENIED.
The parties dispute whether Rule 8(a) or the heightened pleading standard of Rule 9(b) governs plaintiffs’ Section 11 claims.
To decide whether a complaint sounds in fraud, a court must “determine, after a close examination of the language and structure of the complaint, whether the complaint alleges a unified course of fraudulent conduct and relies entirely on that course of conduct as the basis of a claim.” Rubke,
Plaintiffs have alleged a unified course of fraudulent conduct against both Baker Tilly and the Underwriters. While plaintiffs attempt to distinguish their Section 11 claims by including a separate section of factual allegations in the ACC entitled, “Securities Act Claims,” that section incorporates a number of paragraphs which plaintiffs also use as a basis for their Section 10(b) claims. See ACC ¶¶ 150, 154 (incorporating ACC ¶¶ 156-69, 193-204). The incorporated paragraphs include the allegation that the “true facts” underlying the “false and misleading” statements in the IPO and SPO registration statements “were known to and/or disregarded with deliberate recklessness by defendants but concealed from the investing public.” ACC ¶¶ 166, 199. The incorporated paragraphs also assert that Baker Tilly “knew [or] was deliberately reckless in not knowing and not disclosing [in the IPO and SPO registration statements] that Velti’s financial statements had not been prepared in accordance with GAAP.” ACC ¶¶ 169, 204. Elsewhere in the complaint, plaintiffs allege that defendants “engaged in a fraudulent scheme to manipulate [Velti’s] financial results,” and that, “as a result of this fraudulent scheme, defendants violated the federal securities laws in several ways,” including by issuing or causing the issuance of “false and misleading statements ... in violation of Section 11 ... of the Securities Act.” ACC ¶¶ 62, 64.
These allegations — which intermix plaintiffs’ Section 11 and Section 10(b) pleading and squarely accuse both Baker Tilly and the Underwriters of fraudulent conduct in connection with Velti’s registration statements — distinguish this case from those cited by plaintiffs. See, e.g., In re Suprema Specialties, Inc. Sec. Litig.,
Plaintiffs contend that despite these allegations, the Section 11 claims in the ACC should not be subject to Rule 9(b). Opp. 18-21. Plaintiffs assert that the allegations regarding the “fraudulent scheme to manipulate [Velti’s] financial results” are aimed exclusively at Velti and the individual defendants; thus, “to the extent that the Securities Act claims incorporate allegations of fraud to support claims that Velti’s financial statements were false,” such allegations do not concern either Baker Tilly or the Underwriters. Opp. 20. This would be a significant point if it were supported by the ACC. However, it is not. See Charles Schwab,
Plaintiffs also note that while the Section 11 cause of action incorporates “each and every allegation above,” it excludes “those alleging fraud.” ACC ¶ 428. In light of the rest of the language and structure of the ACC, this and other boilerplate disclaimers included in plaintiffs’ allegations do not justify analysis under Rule 8(a). A plaintiff “cannot escape the requirements of Rule 9(b) by virtue of a general disclaimer that a [Section 11] claim is based on negligence rather than fraud.” In re Metro. Sec. Litig.,
Plaintiffs claim that the Underwriters are liable under Section 11 on the basis of four categories of misrepresentations in the IPO and SPO registration statements: (i) misrepresentations regarding Velti’s methodology for calculating reserves and the amount of its reported reserves; (ii) misrepresentations regarding Velti’s methodology for ascertaining the collectability of its receivables for the purpose of calculating revenues and the amount of its reported revenues; (iii) misrepresentations that Velti’s financial statements conformed with GAAP; and (iv) misrepresentations regarding Velti’s DSO figures. See Opp. 22. As stated above, plaintiffs’ allegation that Velti’s DSO figures were misrepresented fails because it is time-barred. Plaintiffs’ three other theories of Section 11 liability are deficient because the ACC does not adequately plead the falsity of any of the alleged misrepresentations.
1. Methodology for Calculating Reserves and the Amount of Reported Reserves
Plaintiffs identify the following representations in the IPO registration statement regarding Velti’s reserves:
Allowance for Doubtful Accounts
We evaluate the collectability of accounts receivable based on a combination of factors; an allowance for doubtful accounts is provided based on estimates developed using standard quantitative measures, which include historical write offs and current economic conditions. We also make a specific allowance if there is strong evidence indicating that the amounts due are unlikely to be collectible. As of September 30, 2010 and December 31, 2009 and 2008, the allowance for doubtful accounts was $135,000 (unaudited), $135,000, and $131,000, respectively.
[•••]
We have not historically incurred bad debt expense, none of our significant customers have historically failed to pay amounts due to us, and we do not believe that any of the customers contributing to our increased accounts receivable aging will fail to pay us in full. Accordingly, we have not determined that any slow-paying customers will require an allowance for bad debt against accounts receivable.
ACC ¶¶ 159-60. The SPO registration statement included similar representations regarding Velti’s reserves:
Allowance for Doubtful Accounts
We evaluate the collectability of accounts receivable based on a combination of factors; an allowance for doubtful accounts is provided based on estimates developed using standard quantitative measures, which include historical write offs and current economic conditions. We also make a specific allowance if there is strong evidence indicating that the amounts due are unlikely to be collectible. The allowance for doubtful accounts was $554,000, $135,000, and $135,000, as of March 31, 2011, and December 31, 2010 and 2009, respectively.
[...]
We have historically collected all amounts due from our customers, even from those customers with balances with*920 longer aging, as evidenced by our insignificant bad debt expense for 2010, 2009 and 2008. We do evaluate receivables on a customer specific basis and record a reserve based on relevant facts and circumstances as deemed necessary. Accordingly, during the three months ended March 31, 2011 we recorded an increase in the provision for doubtful accounts by $419,000 primarily related to one customer subject to currency control restrictions.
ACC ¶¶ 196-97.
Plaintiffs offer two theories that these statements were false or misleading when made. They first contend that Velti did not actually calculate its reserves “based on estimates developed using standard quantitative measures, which include historical write offs and current economic conditions,” as stated in both registration statements. Opp. 23. According to plaintiffs, Velti in fact “never had any methodology for calculating its reserves.” Id. Plaintiffs base this claim on an alleged statement by defendant Jeffrey Ross that, before his arrival at Velti in January 2013, “[Velti] had no methodology for calculating or allocating reserves against uncollectible receivables. Because [Velti’s] clients had always eventually paid, the presumption was that they always would.” ACC ¶ 74.
Plaintiffs provide no context for this statement or any supporting factual allegations. They do not even provide the exact language of the statement, instead paraphrasing it as quoted above. Moreover, the other allegation that plaintiffs offer in support of their claim that Velti “never had any methodology for calculating its reserves” conflicts with that claim. Plaintiffs point to another statement by Ross— this one made during Velti’s Q4 2012 conference call on March 12, 2013 — in which he explains that Velti had decided to increase its reserves because
[Velti] has had very, very limited experience with bad debts ... So if you sort of come up with a reserve based on your past experience, it’s a rather — it’s pretty dang close to nothing ... I just pressure tested some of the assumptions, took mathematical percentages of balances over certain ages and came up with an amount that I felt more comfortable with, that provided us some cushion, when and if something happens. There wasn’t much in the specific area that led me to say, oh my gosh, we have a huge problem. I want a big additional reserve ... I just thought it was more prudent to have a little bit more cushion with respect to those numbers.
ACC ¶ 367. But this quote does not indicate that Velti had “no methodology” whatsoever for calculating its reserves. Rather, it shows that Velti had a methodology based on certain “assumptions” based on past experience that Ross found insufficient. Ross’s statement is additionally deficient because, according to the ACC, Ross did not begin working for Velti until January 2013. This was approximately two years after issuance of the IPO registration statement and approximately one- and-a-half years after issuance of the SPO registration statement. Absent additional details about the content and/or context of Ross’s statement, it is not enough to satisfy the pleading requirements of Rule 9(b).
Plaintiffs’ second theory that the statements regarding Velti’s reserves were false or misleading when made is that, even at the time of the IPO and SPO, Velti’s reserves were materially understated. Opp. 23. In support of this theory, plaintiffs point to several allegations in the ACC, including that: (i) the Greek economic crisis began in April 2010, ACC ¶ 8; (ii) Velti admitted on August 20, 2013 that some of the $111 million in receivables being written off were “substantially old”
“[U]nderstatement of bad debt reserves can be a form of securities fraud.” Kane v. Madge Networks N.V., No. 96-cv-20652-RMW,
Whether pleading under Rule 8(a) or under Rule 9(b), a plaintiff alleging a Section 11 violation on the basis of misstated bad debt reserves must also plead subjective falsity. Where an alleged misrepresentation is an opinion, as opposed to a statement of fact, it is only actionable under Section 11 where “the complaint alleges ... that [it was] both objectively and subjectively false or misleading.” Rubke,
Subjective falsity means the person who gave the opinion believed it was false or misleading at the time it was given. See Rubke,
Plaintiffs here have adequately alleged subjective falsity, see, e.g., ACC ¶¶ 166, 199, but the facts stated in the ACC are not sufficient under Rule 9(b) to show that Velti’s reserves were objectively false or misleading in either of the registration statements. Courts have held that claims based on misstated bad debt reserves are insufficiently alleged where they: (i) do not identify any specific accounts that were in jeopardy when the alleged misrepresentations were made, Siegel v. Lyons, No. 95-cv-03588-DLJ,
The ACC pleads none of these things. Plaintiffs do not identify a single receivable that was in jeopardy of becoming uncollectible when the IPO and SPO registration statements were issued, nor any receivable that existed then and was ultimately written off, either following De-loitte’s audit or at any other time.
Nor do plaintiffs state when and to what extent Velti’s reserves should have been increased. With the exception of the Greek economic crisis beginning in April 2010, each of the allegations highlighted by plaintiffs concerns an event that occurred months, if not years, after the registration statements were issued. There are no allegations of “contemporaneous statements or conditions” specific to defendants or anyone else associated with Velti that show that Velti’s reserves were understated at the time the registration statements were issued.
Similarly, because the $111 million write down occurred more than two years after the IPO and SPO, that the write down occurred is not a sufficient indicator of how or why the reserve figures in the registration statements were misleading when made. Although plaintiffs vaguely allege that some of the written off receivables were “substantially old” and had been due since “before 2012,” plaintiffs do not allege that any of the receivables had been due since January or June 2011, much less'that evidence existed at that time that the receivables were uncollectible.
Meanwhile, plaintiffs’ own allegations indicate that Velti’s accounts receivable woes did not develop until Q4 2011, after both registration statements had been issued. The ACC states that between December 31, 2010 (a month before the IPO) and June 30, 2011 (two weeks after the SPO), Velti reduced its receivables from $72.7 million to $66 million. ACC ¶ 128. By September 30, 2011, Velti had increased its receivables to $79 million, but it was not until December 31, 2011, nearly one year after the IPO and several months after the SPO, that receivables jumped to $170 million. Id. Plaintiffs also fail to specifically allege any collectability problems earlier than Q1 2012 except to vaguely allude to the onset of the Greek economic crisis in April 2010. Plaintiffs’ confidential witness joined Velti in June 2011 yet stated that it was not until “sometime in Q1 2012” that he or she “began to hear that ... [Velti] was having trouble collecting receivables.” ACC ¶ 119.
In sum, the allegations in the ACC fall short under Rule 9(b) of adequately pleading the falsity of any representations in the registration statements regarding Vel-ti’s methodology for calculating reserves and the amount of its reported reserves.
2. Methodology for Ascertaining the Collectability of Receivables for the Purpose of Calculating Revenues and the Amount of Reported Revenues
Plaintiffs assert that the IPO and SPO registration statements falsely reported that Velti only recognized revenue from its receivables when their “collectability [was] reasonably assured.” Opp. 14; ACC ¶¶ 158, 195. According to plaintiffs, Velti in fact recognized revenue from its receivables even when their collectability was not reasonably assured. Opp. 14. This claim is based on the same after-arising
3. Conformance with GAAP
Because the alleged misrepresentations in the registration statements regarding whether Velti’s financial statements complied with GAAP are dependent on the failure to properly report reserves and revenues, these claims are also deficient. See Fait,
D. Failure to Adequately Plead Falsity of Alleged Misrepresentations by Baker Tilly
As noted above, Baker Tilly may only be held liable under Section 11 for misrepresentations or omissions contained in “those portions of the [registration] statements] that purport to have been prepared or certified by [Baker Tilly].” Monroe,
Plaintiffs’ first and second theories fail for the reasons stated above regarding Velti’s reported reserves and revenues when the registration statements were issued. See Opp. 30 (“Velti’s financial statements did not comply with GAAP [because they] did not provide for adequate reserves, which in turn inflated revenues.”). Plaintiffs have not alleged sufficient facts indicating that Velti’s reported reserves or revenues were false or misleading at that time. Accordingly, plaintiffs’ claim that Velti’s financial statements did not comply with GAAP (because they failed to properly calculate reserves or revenues) or that Baker Tilly failed to comply with GAAS are also deficient. See Fait,
Plaintiffs’ “non-GAAP” theories are based on allegations that when the IPO and SPO registration statements were issued, Velti was misrepresenting its DSO figures and lacked adequate internal controls. Opp. 30. As I found earlier, plaintiffs’ Section 11 claim that Velti’s DSO figures were misrepresented is time-barred. Further, even if the statute of limitations had not expired, plaintiffs have not alleged that Velti’s DSO figures.were included in the financial statements that were the subject of Baker Tilly’s audit reports. Plaintiffs’ reliance on alleged misrepresentations regarding Velti’s lack of internal controls is also without merit, as this claim is duplicative of plaintiffs’ claims that Velti’s reserves, revenues, and
Because plaintiffs have failed to adequately plead the falsity of any material misrepresentation or omission in either of Velti’s registration statements, plaintiffs’ Section 11 claims against both Baker Tilly and the Underwriters are DISMISSED WITH LEAVE TO AMEND.
II. SECTION 12(a)(2) CLAIMS AGAINST THE UNDERWRITERS
Plaintiffs bring Section 12(a)(2) claims against the Underwriters. Sections 11 and 12(a)(2) are “Securities Act siblings” with similar elements. In re Morgan Stanley Info. Fund Sec. Litig.,
In addition to the arguments discussed above regarding the statute of limitations and plaintiffs’ failure to plead falsity under Rule 9(b) — which apply equally to plaintiffs’ Section 12(a)(2) claims — the Underwriters argue that the Section 12(a)(2) claims must be dismissed because plaintiffs have not established that they have standing to bring a claim under the statute. I disagree with that argument.
A plaintiff has standing to bring a Section 12(a)(2) claim only against a “statutory seller” from which the plaintiff purchased the security at issue. In re Lehman Bros. Sec. & Erisa Litig.,
“Purchasers in private or secondary market offerings do not have standing to bring actions under [Section 12(a)(2) ].” In re Ultrafem Inc. Sec. Litig.,
Here, plaintiffs allege that plaintiff Frank Borreani “purchased Velti common stock pursuant to and traceable to [Vel-ti’s] January 28, 2011 IPO registration statement” and that plaintiff St. Paul Retirement Teachers’ Retirement Fund Association “purchased Velti common stock pursuant to and traceable both to (i) [Vel-ti’s] January 28, 2011 IPO registration statement, and (ii) [Velti’s] June 14, 2011 SPO registration statement.” ACC ¶¶ 33-34. Plaintiffs additionally allege that “St. Paul, Borreani, and other members of the class purchased or otherwise acquired Velti common stock issued in the IPO and SPO pursuant to materially inaccurate registration statements.” ACC ¶ 445. These allegations are sufficient to show that plaintiffs purchased their Velti securities in a public offering as opposed to on the aftermarket See Maine,
The parties also dispute whether plaintiffs have adequately alleged that the Underwriters qualify as statutory sellers. Plaintiffs allege that the Underwriters qualify as statutory sellers because they “(i) transferred title to St. Paul, Borreani, and/or other members of the class who purchased in the IPO and SPO; and (ii) solicited the purchase of the common stock by St. Paul, Borreani, and other members of the class and were financially benefitted thereby, including but not limited to by receiving underwriting fees, commissions, or discounts' in connection with the IPO and SPO.” ACC ¶ 442. This allegation is enough at the pleading stage to establish that the Underwriters are statutory sellers.
The plaintiffs cite several cases that support this view. See, e.g., In re MF Global Holdings Ltd. Sec. Litig.,
That said, because the ACC does not plead the falsity of any material misrepresentation of omission in either of Velti’s registration statements, plaintiffs’ Section 12(a)(2) claims against the Underwriters are DISMISSED WITH LEAVE TO AMEND.
III. SECTION 10(b) CLAIMS AGAINST BAKER TILLY
Section 10(b) of the Exchange Act makes it unlawful “for any person ...
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to 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) To 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 basic elements of a Section 10(b) claim are:' (i) a material misrepresentation or omission; (ii) a connection with the purchase or sale of a security; (iii) scienter; (iv) economic loss; and (v) loss causation, i.e., a causal connection between the material misrepresentation or omission and the economic loss. Dura Pharm., Inc. v. Broudo,
Plaintiffs allege a Section 10(b) class period that begins on January 27, 2011 and ends on August 20, 2013. See ACC ¶ 1. There is no dispute that throughout that time period, Velti’s SEC filings included ’ Baker Tilly’s audit opinions oh Velti’s 2008. to 2012 financial statements. See Baker Tilly Mot. 21. Plaintiffs accuse Baker Tilly of fraudulently issuing clean audit opinions on these financial statements, thereby “falsely assuring] investors that [the] financial statements fairly reflected [Velti’s] financial condition and were prepared in compliance with GAAP.” Opp. 43.
Baker Tilly argues that the Section 10(b) allegations in the ACC are deficient under Rule 9(b) and the PSLRA because they do not adequately plead either falsity or scienter. Baker Tilly Mot. 20-24. I agree.
The PSLRA imposes “exacting requirements” for pleading falsity. Metzler Inv. GMBH v. Corinthian Colleges, Inc.,
To the extent plaintiffs’ Section 10(b) claims are based on Baker Tilly’s audit reports on Velti’s 2008 through 2010 financial statements — which were included in the IPO and SPO registration statements — the claims fail to adequately plead the falsity of any alleged misrepresenta
Although plaintiffs do not provide a clear explanation in either the ACC or their opposition brief, their core theory regarding the reports appears to be the same as regarding the IPO and SPO registration statements — i.e., that the reports were false and misleading because Velti’s reserves were materially understated when the reports were made. See, e.g., Opp. 7-8, 43. Accordingly, to adequately plead falsity, plaintiffs must allege specific facts demonstrating how and why Velti’s reserves were understated at those times.
Plaintiffs have not done so. I assume that plaintiffs mean to rely on the same allegations which they highlight in attempting to show the falsity of Velti’s reserves in 2009 and 2010. To reiterate, those allegations include that: (i) the Greek economic crisis began in April 2010, ACC ¶ 8; (ii) Velti admitted on August 20, 2013 that some of the $111 million in receivables being written off were “substantially old” and had been due since before 2012, and that approximately 66 percent of its receivables were from Greece and the Balkans, ACC ¶ 15; (iii) in fall 2012, Velti divested itself of certain receivables for which the DSOs topped 450 days, ACC ¶ 338; (iv) also in fall 2012, Velti reclaimed from third parties $5.1 million in factored receivables that remained unpaid, ACC ¶ 323; and (v) Deloitte was able to swiftly determine in summer 2013 that many of Velti’s receivables needed to be written off. Opp. 23-24.
Given the greater proximity in time, these allegations carry more force with respect to Velti’s 2011 and 2012 reserves than with respect to the 2009 and 2010 reserves. But they are still not enough to demonstrate falsity with the particularity required under Rule 9(b) and the PSLRA. Plaintiffs do not specifically identify which allegations in the ACC indicate the falsity of Velti’s reserves in 2011 and 2012. See Opp. 42-50. That some of the receivables written off in summer 2013 were “substantially old” and had been due since “before 2012” does not translate to an explanation of how and why Velti’s reserves were understated during the relevant time period. Likewise, Velti’s decisions to divest certain aging receivables and to reclaim $5.1 million in factored receivables in fall 2012 indicate, that Velti was experiencing col-lectability problems around that time, but they give little indication as to how and why Velti’s reserves were understated. As discussed above with regard to plaintiffs’ Securities Act claims, missing from the ACC are any allegations regarding specific accounts that were in jeopardy when the alleged misrepresentations were made, specific accounts in existence at the time the alleged misrepresentations were made that were ultimately rendered uncol-lectible, and when and to what extent Vel-ti’s reserves should have been changed. See Alaska,
Plaintiffs must plead more than generalized allegations about collectability problems and that Velti’s reserves ultimately
“[Fjalsity and scienter in private securities fraud cases are generally strongly inferred from the same set of facts, and the two requirements may be combined into a unitary inquiry under the PSLRA.” Daou,
IV. ADMINISTRATIVE MOTIONS TO FILE UNDER SEAL
On October 3, 2014, I issued an order denying without prejudice the administrative motion to file under seal portions of the ACC, and giving the Settling Defendants (i.e., Velti, Cheung, Negroponte, Ross, and Tso) until October 24, 2014 to file a revised declaration establishing compelling reasons to justify sealing. Dkt. No. 159. On October 15, 2014, Baker Tilly and the Underwriters filed their respective motions to dismiss and sought to seal those portions of their motions that reference the portions of the ACC that had been filed under seal. Dkt. Nos. 160, 163. Baker Tilly and the Underwriters made clear that the only basis for sealing their motions was that the Settling Defendants still had time to submit a revised declaration justifying sealing of the ACC. See id.
The Settling Defendants did not file a revised declaration by October 24, 2014 or at any time since then. Accordingly, Baker Tilly and the Underwriters’ sealing motions, Dkt. Nos. 160, 163, are DENIED. Plaintiffs’ sealing motions, Dkt. Nos. 182, 183, are also DENIED. The Clerk shall UNSEAL the ACC, Dkt. No. 144, as well as each of the parties’ sealing motions, Dkt. Nos. 160,163,182,183.
CONCLUSION
For the foregoing reasons, defendants’ motions to dismiss are GRANTED WITH
IT IS SO ORDERED.
Notes
. Velti booked its receivables as revenue around the time that its work on the underlying contract had been completed. ACC ¶ 89.
. Two portions of the Baker Tilly audit report included in the IPO registration statement are dated September 3, 2010 instead of August 3, 2010. See ACC ¶ 433; Baker Tilly RJN, Ex. B.
. Plaintiffs do not identify the title or author of the report or the specific date on which the report was published. See ÁCC ¶ 12. The Underwriters assert, and plaintiffs do not dispute, that the report was published by “CFRA” on May 10, 2012. See Underwriters Opp. 8; Underwriters RJN, Ex. H.
. Defendants assert that plaintiffs’ Section 11 claims must be dismissed under either pleading standard but contend that the claims are especially defective under Rule 9(b).
. This is not to say that it is impossible for plaintiffs to bring their Section 11 claims in. conjunction with their Section 10(b) claims without subjecting the Section 11 claims to Rule 9(b). Courts regularly apply Rule 8(a) to Section 11 claims brought in the same action as Section 10(b) claims, in particular where the Section 11 defendants are not accused of violating Section 10(b). See, e.g., Brown v. China Integrated Energy, Inc., No. 11-cv-02559,
. Plaintiffs assert that they do identify specific uncollectible receivables, in that they allege that Deloitte determined that the ten customers who accounted for 65 percent of the receivables in Greece and Cyprus were primarily comprised of two entities, the VTRIP Group and the Globo Group. Opp. 27; ACC ¶¶ 132, 132 n.13. However, plaintiffs do not state that any of these accounts receivable existed — much less that they appeared uncol-lectible — at the time the registration statements were issued.
Plaintiffs’ contention that defendants improperly rely on cases analyzed under both Rule 9(b) and the PSLRA is also unconvincing. See Opp. 24 n.18. Under the PSLRA, "to properly allege falsity, a securities fraud complaint must ... specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement ... is made on information and belief, ... state with particularity all facts on which that belief is formed.” Zucco Partners,
. This failure to plead contemporaneous facts distinguishes this case from the two cited by plaintiffs. In In re Complete Mgmt. Inc. Sec. Litig.,
. Defendants also argue compellingly that plaintiffs' allegations of misstated reserves in the IPO and SPO registration statements fail to state a claim even under Rule 8(a). See, e.g., Panther Partners, Inc. v. Ikanos Commc’ns, Inc.,
. Q4 2011 appears to be the earliest quarter for which a comprehensive DSO figure is available. See ACC ¶ 128.