ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS COMPLAINT
Defendants have filed a motion to dismiss plaintiffs complaint. The motion is scheduled for hearing on April 18, 2008. Pursuant to Civil Local Rule 7 — 1(b), the Court finds this matter appropriate for resolution without oral argument, and hereby VACATES the hearing. Having considered the arguments of the parties and the papers submitted, and for good cause shown, the Court hereby GRANTS defendants’ motion to dismiss.
BACKGROUND 1
This is a securities class action against UTStarcom and certain of its officers and directors under Sections 10(b), 14(a), 20(a), Rule 10b-5, and Rule 14a-9 of the Securities Exchange Act of 1934 (the “Exchange Act”). The case is brought by lead plaintiff Peter Rudolph on behalf all purchasers of UTStarcom securities between September 4, 2002, and July 24, 2007 (“the class period”).
UTStarcom is a publicly-traded company based out of Alameda, California, which “manufactures, integrates and supports IP-based, end-to-end networking and telecommunications solutions.” In layperson’s terms, UTStarcom sells broadband wireless and Internet television products. On November 7, 2006, the company issued a press release announcing that it had begun to review its prior practices concerning the *885 granting of stock options. On February 1, 2007, defendants issued a second press release stating that this review was ongoing, but that the review had revealed that the company had used incorrect measurement dates for certain stock option grants. In another announcement on May 16, 2007, defendants stated that the use of improper measurement dates likely meant that the company failed to report roughly $35 million in non-cash compensation. In a press release dated July 24, 2007, defendants revised that amount to $28 million. Based on these disclosures, plaintiff alleges that defendants engaged in a fraudulent scheme of intentionally backdating stock options. Plaintiff alleges that by backdating stock options, defendants overstated the company’s net income and earnings, thereby artificially inflating the stock price. Specifically, plaintiff alleges that 17.9 million stock options out of a total of 28.8 million stock options granted by defendants between 2000 and 2005 had incorrect measurement dates. Of these 17.9 million, 7.6 million had exercise prices that were higher than the prices on the actual grant date, while 10.3 million had exercise prices that were lower than the prices on the actual grant date. That is, 10.3 million of the backdated stock options were “in-the-money” options because they had intrinsic value on the day they were granted, while 7.9 million of the backdated options actually left the grantees with a loss on the day they were granted. Plaintiff further alleges that once the backdating scheme was revealed to the public through the company’s restatements, the price of UTS-tarcom stock declined to the detriment of investors in the class. After defendants’ November 7, 2006 announcement that it had commenced a voluntary review of its stock option practices, UTStarcom stock fell 9%, from $10.23 on November 7, 2006, to $9.32 on November 9, 2006. In addition, after defendants’ July 24, 2007 announcement of the likely $28 million restatement (in addition to other negative news), UTStarcom stock fell 22%, from $4.73 on July 22, 2007, to $3.70 on July 25, 2007.
Plaintiff filed this lawsuit on September 4, 2007, and filed an amended complaint on January 25, 2008. Now before the Court is defendants’ motion to dismiss the amended complaint in its entirety.
LEGAL STANDARD
I. Rule 12(b)(6)
Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. The question presented by a motion to dismiss is not whether the plaintiff will prevail in the action, but whether the plaintiff is entitled to offer evidence in support of the claim.
See Scheuer v. Rhodes,
In answering this question, the Court must assume that the plaintiffs allegations are true and must draw all reasonable inferences in the plaintiffs favor.
See Usher v. City of Los Angeles,
If the Court dismisses the complaint, it must then decide whether to grant leave to amend. The Ninth Circuit has “repeatedly held that a district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other
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facts.”
Lopez v. Smith,
II. Section 10(b) and Rule 10b-5
Section 10(b) of the Securities Exchange Act provides, in part, that it is unlawful “to use or employ in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.” 15 U.S.C. § 78j(b). Rule 10b5 makes it unlawful for any person to use interstate commerce:
(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 3 fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
In order to state a claim under section 10(b) and Rule 10b-5, the plaintiff must allege (1) a misrepresentation or omission (2) of material fact (3) made with scienter (4) on which the plaintiff justifiably relied (5) that proximately caused the alleged loss.
See Binder v. Gillespie,
III. Heightened pleading standard for § 10(b) claims
A securities class action alleging violation of § 10(b) of the Exchange Act must satisfy the pleading requirements of Federal Rule of Civil Procedure 9(b) and the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”). The Federal Rules of Civil Procedure require that “[i]n all aver-ments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” Fed. R.Civ.P. 9(b). Federal securities fraud claims, like common law fraud claims, are subject to the special pleading requirements of Rule 9(b).
Semegen v. Weidner,
The PSLRA was enacted as an amendment to the Exchange Act.
See In re Silicon Graphics Inc. Sec. Litig.,
In any private action arising under his chapter under which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.
15 U.S.C. § 78u-4(b)(2). The required state of mind is “at a minimum, deliberate recklessness.”
In re Silicon Graphics,
IV. Section 14(a) and Rule 14a-9
To establish a claim under § 14(a) of the Exchange Act, plaintiffs must allege that some part of a proxy statement “con-taints] any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not misleading_”17 C.F.R. § 240.14a-9;
see also Desaigoudar v. Meyercord,
IV. Request for judicial notice
Generally, when considering a motion to dismiss, a district court must consider only the facts stated in the plaintiffs’ complaint, or in documents attached to the complaint as exhibits or incorporated into the complaint by reference. Under certain circumstances, the court may also consider matters that are appropriate subjects of judicial notice under Federal Rule of Evidence 201.
Kramer v. Time Warner,
DISCUSSION
I. Motion to dismiss Section 10(b) claims
Defendants move to dismiss plaintiffs § 10(b) and Rule 10b-5 claim. Defendants do not take issue with plaintiffs allegations regarding certain elements of a § 10(b) claim, but focus on whether plaintiff has failed to adequately plead loss causation and scienter. The Court finds that plaintiff has adequately plead loss causation but has not adequately plead scienter.
A. Loss causation
A plaintiff bringing a securities claim must show some causal connection between the alleged fraud and the securities transaction in question.
In re Daou Sys., Inc.,
Plaintiff alleges that “two specific pronouncements from the Company,” AC at ¶ 146, revealed the truth about defendants’ fraudulent backdating practices and caused a decline in UTStarcom’s stock prices. The first pronouncement relied upon by plaintiff is the November 7, 2006 press release announcing that the company had “commenced a voluntary review of its historical equity award grant practices.”
Id.
at ¶ 147. Following this announcement, stock prices fell from $10.23 to $9.32.
Id.
Defendants argue that this press release cannot support the element of loss causation because an announcement of an internal investigation, without more, does not reveal to the market that prior statements made by the company were untrue.
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The press release specifically stated that “no conclusions have been reached about whether the Company will need to record any non-cash adjustments to its financial statements related to prior equity grants.” Ketroser Decl. ex. A.
2
The Court finds that at that point in time, prior to any revelation by defendants of actual backdating, the “true nature of [the company’s] financial condition had not yet been disclosed.”
Daou Sys.,
The second pronouncement upon which plaintiff relies is the July 24, 2007 press release that announced, among other things, “the preliminary results of its review of historical equity award practices, requiring the Company to restate approximately $28 million of non-cash compensation expenses over the years 2000 through 2006.” AC at ¶ 148. Following this announcement, stock prices fell from $4.73 to $3.70.
Id.
Defendants argue that this disclosure cannot support the element of loss causation because (1) other information in the July 24 release could have caused stock prices to drop, and (2) in comparison to prior press releases regarding the ongoing stock option investigation, the news announced on July 24 was actually positive, not negative. As to defendants’ first argument, the Ninth Circuit has made clear that “[a] plaintiff is not required to show ‘that a misrepresentation was the
sole
reason for the investment’s decline in value’ in order to establish loss causation.”
Daou Sys.,
As to defendants’ second argument, they are correct that the company announced, prior to July 24, 2007, that previous financial statements should no longer be relied upon and that the company would need to restate additional non-cash compensation charges of approximately $50 million, on February 1, 2007, and then $35 million, on May 16, 2007. See id. at ¶¶ 16, 17, 115. In comparison to restatements of $50 million and $35 million, it could be argued that $28 million was actually good news, but the Court finds that plaintiff has adequately pled loss causation based on the July 24, 2007 disclosure because this disclosure was significantly more definite than the prior disclosures. The February 1, 2007 disclosure, for instance, stated that the “investigation is on-going,” that “the Company is not yet able to determine with finality the amount of additional non-cash stock-based compensation charge to be recognized,” and that the $50 million restatement was “based on preliminary information.” Id. at ¶ 16. By contrast, the July 24, 2007 disclosure was cast in far more definitive terms. Although it did state that the results were preliminary and approximate, it did not state that the investigation was ongoing or that the Company was not able to make a *889 final determination. See Ketroser Decl. at ex. D. The Court finds this disclosure sufficient to satisfy the pleading requirements for loss causation. Accordingly, the Court GRANTS defendants’ motion to dismiss as to the November 7, 2006 press release, and DENIES defendants’ motion to dismiss as to the July 24, 2007 press release.
B. Scienter
“[T]he PSLRA requires that the Complaint ‘state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind,’ or scienter.”
Nursing Home Pension Fund, Local 144 v. Oracle Corp.,
“ ‘[T]he mere publication of inaccurate accounting figures, or a failure to follow GAAP, without more, does not establish scienter.’ ”
DSAM Global Value Fund v. Altris Software, Inc.,
Here, plaintiffs scienter pleading is based on numerous factual allegations, many of which cannot support—either alone or taken collectively—an inference of
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scienter. For instance, plaintiff relies on the company’s admission in its restatement that some options had been backdated, defendants’ responsibility for approving stock option grants, defendants’ certification of the company’s financial reports, and defendants’ receipt and exercise of backdated stock options. As shown in the cases cited above, none of these factual allegations is cogent and compelling,
see, e.g., DSAM Global Value Fund,
Instead, plaintiff relies on the observations of two confidential witnesses, who apparently can confirm that defendants actively and intentionally backdated stock option grants in order to provide additional compensation to senior executives. AC at ¶¶ 57-60, 62. The statements of these witnesses, in combination with plaintiffs other allegations, might be sufficient to survive defendants’ motion to dismiss. The problem, as defendants point out, is that plaintiff has not provided sufficient information about these confidential witnesses. Courts in this District have rejected statements by confidential witnesses in which, as is the case here, only the witness’ job title and period of employment was provided.
See, e.g., In re Northpoint Comm. Group, Inc. Sec. Litig.,
In short, the Court agrees with defendants that plaintiffs complaint, as written, fails to adequately plead scienter.
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Plaintiff must either provide additional information about the confidential witnesses, or put forth other evidence demonstrating that defendants intentionally engaged in backdating or acted with deliberate recklessness. In so doing, plaintiff must plead facts showing that each individual defendant acted with scienter, not only the one or two defendants currently implicated by the confidential witnesses.
See Southland Sec. Corp. v. INSpire Ins. Solutions, Inc.,
II. Motion to dismiss Section 14(a) claim
Defendants next argue that plaintiffs claim under Section 14(a) of the Exchange Act must be dismissed for multiple reasons. Section 14(a) and Rule 14a-9 “disallow the solicitation of a proxy by a statement that contains either (1) a false or misleading declaration of material fact, or (2) an omission of material fact that makes any portion of the statement misleading.”
Desaigoudar,
Defendants first argue that plaintiff fails to identify any false or misleading statements contained in defendants’ proxies. The PSLRA requires that a securities fraud plaintiff must identify each misleading statement when seeking relief under § 14(a). Id. at 1023; 15 U.S.C. § 78u-4(b)(1). In response to defendants’ motion, plaintiff points to sections of his complaint that state that “UTStarcom’s annual Proxy Statements for fiscal years 2002 through 2006 contained false statements about the compensation of UTStarcom’s officers,” AC at If 66, and that “Defendants negligently omitted the material facts about option grant backdating and negligently misrepresented the terms of the Individual Defendants’ compensation and management integrity,” id. at ¶ 164. Defendants are correct that plaintiffs complaint manifestly fails to identify what statements in the proxies are alleged to have been misleading. Merely stating that the proxies “contained false statements” obviously does not comply with the PSLRA. In addition, to the extent plaintiff also argues that defendants violated § 14(a) by omitted material facts, plaintiff must provide additional details about what facts were omitted and must identify what statements in the proxies were rendered misleading by virtue of defendants’ material omission.
Second, defendants argue that plaintiffs complaint fails to satisfy the “essential link” element of a § 14(a) claim. Plaintiff must allege that defendants’ misleading statements or omissions were an “essential link” in the accomplishment of the transaction proposed in the proxy statement.
Desaigoudar,
Third, defendants argue that plaintiffs complaint fails to plead that defendants acted negligently. Plaintiff relies solely on his showing of defendants’ scien-ter to plead that defendants acted negligently. See Plaintiffs Opposition at 24. As discussed above, the Court finds that plaintiff fails to adequately plead scienter. Accordingly, if plaintiff chooses to amend his complaint to plead scienter, the Court will consider whether plaintiffs new allegations adequately allege defendants’ negligence.
Finally, defendants argue that plaintiffs § 14(a) claim is partially time-barred as it relates to proxy statements filed in 2003 and 2004. Plaintiff does not dispute the proxy dates on which defendants rely, but instead argues that defendants rely on the wrong statute of limitations. The statute of limitations for claims brought under § 14(a) “is one year from the discovery of the occurrences giving rise to the claim, but no later than three years from the date of the violation.”
In re Verisign, Inc., Derivative Litig.,
For these reasons, the Court GRANTS defendants’ motion to dismiss the § 14(a) claim for failure to comply with the PSLRA.
III. Motion to dismiss Section 20(a) claim
Because plaintiff has not adequately alleged a primary violation of federal securities laws, the Court also GRANTS defendants’ motion to dismiss plaintiffs claim for control person liability under § 20(a).
See Lipton v. Pathogenesis Corp.,
CONCLUSION
For all of the foregoing reasons, the Court hereby GRANTS defendants’ motion to dismiss plaintiffs complaint [Docket No. 54]. Should he wish to do so, plaintiff may file an amended complaint no later than May 16, 2008.
IT IS SO ORDERED.