*1 27,Mаy S062661. 1999.] [No. Petitioners, al., v. et INCORPORATED
STORMEDIA COUNTY, Respondent; CLARA OF SANTA COURT THE SUPERIOR al., Parties in Interest. et Real SARA WERCZBERGER *3 Counsel Winawer, DiBoise,
Wilson, Sonsini, Rosati, Lloyd & James A. Goodrich Petitioners. C. and Jonathan Block for Michael J. Levy, Shirley Wang Adobe Facter and Michele F. for Jeffrey Kyrouz Shearman & S. Sterling, of Petitioners. as Amicus Curiae behalf Systems Incorporated for No appearance Respondent. Lerach, B. J. Leonard Coughlin, Bershad & Patrick
Millberg Hynes Weiss Burkholz, Simon, Dato, Bandman, A. Amber William S. Randi D. Spencer Lifshitz, Eck, Grant; A. & Liebhard Sandy L. John K. Bernstein Liebhard and Mel Real Parties in Interest. E. Lifshitz for Opinion matter, a Multimedia
BAXTER, J.
Systems,
to Diamond
companion
This
P.2d
Inc. v.
Court
needWe not reach the last because we conclude question that the allega- *4 tions of the which, true, this complaint underlying action state facts if are sufficient to establish that StorMedia itself sold stock within the meaning of of section 25400. We therefore affirm the judgment Court of Appeal.
I Factual and Procedural Background The filed in the petition Court of StorMedia and Appeal by six individu- als, below, defendants sought writ mandаte to the Santa Clara compel County Court to set Superior aside an order overruling demur- rer to a complaint seeking damages violations of alleged (market demurrer, to sustain the and manipulation),2 dismiss the action. pending
A. The complaint. The was filed as a class action and real in by plaintiff party interest Sara on behalf Werczberger of herself and all who persons pur- chased StorMedia common stock between November and August statutory 1All Corporations references are to the Code unless otherwise indicated. 2Additional causes of complaint alleged action in the violations of Civil Code seсtions (fraud/deceit) 1709-1710 and Business and Professions Code sections 17200 and 17500 (unfair competition). A demurrer the fraud cause action was sustained with leave to amend, plaintiffs and subsequently competition withdrew the unfair cause of action. We action, therefore address those issues alleging relevant to the first cause of violation of section 25400. The residence residents of California. nationwide class includes 1996. The location at which members not stated. The the named plaintiff stated, the named “admits” is not although plaintiff StorMedia shares bought in StorMedia stock did that the class includes persons and in California persons as as who are domiсiled California well StorMedia stock in California. who purchased Almon, chairman, StorMedia, Defendants, J. are in addition to William member; Oxsen, executive, committee and Michael E. presi- chief executive officer; senior and and Atef Eltoukhy, vice-president dent chief operating officer; and M. chief financial officer vice- Abely, chief technical Stephen finance; Silverman, & of sales market- Sherman vice-president president Lo, and of investor relations. and treasurer ing; Henry vice-president has and that StorMedia its headquarters principal complaint alleges3 California, Clara, is a business manufac- develоper, Santa place turer, and marketer thin film disks for hard disk drives used desktop It formed in when Nashua was portable computers. May Corpora- Almon, Oxsen, tion divested its film disk money-losing computer operation. returned the went profitability company Abely operation NASDAQ 1995. StorMedia shares were traded May through public National Market system during Werczberger 21, 1996, at 28 share. shares StorMedia stock Vá May per *5 the class StorMedia sold its stock During through shares period and stock to the exercise of purchase plan repurchased pursuant “put op- 500,000 tions” sold shares of stock the class StorMedia with prior period. stock was also sоld to the the stock from acquired insiders who public exercise of stock All of the through StorMedia the individual options. defendants sold StorMedia stock the class during Almon except allegedly information, based on insider and all were aware of and period approved false statements issued or on behalf of StorMedia the class during controlled Stor- Through their individual defendants positions, allegedly releases, and Exchange Media Commis- press corporate requests, concealed information analysts. sion and communications with filings, They it about the deterioration of StorMedia’s business make and problems did so artifi- that the was аnd and succeeding growing, business appear inflate the of StorMedia stock. cially price demurrer, well-pleaded court of all ruling 3For the on a assumes truth purpose (Lazar
allegations complaint. Superior v. 12 Cal.4th 635 [49 Court 981].) Cal.Rptr.2d P.2d The that complaint alleges each defendant made false and misleading statements,4 ain scheme or and/or willfully aided participated conspiracy, and abetted fraud in order to deceive the about demand public StorMedia and inflate the product its stock. This insiders price permitted $4.8 to sell million of their StorMedia stock at inflated artificially prices enabled StorMedia to аvoid a loss on shareholder exercise of the larger put options.
The cause action for violation of that members of alleges StorMedia when was inflated artificially price as a of the result false misleading statements defendants. Class on the members relied of the market and would integrity not have purchased at the had at all been aware price paid they artificial inflation of price.
B. The demurrer. all individual defendants demurred on the that the ground failed to state cause of action complaint in that did not allege transactions which it took “in this state.” StorMedia complained place Almon demurred оn the ground that failed to state cause of action because it did not that either sold allege any period. Silverman and Eltoukhy ground demurred on the that the complaint failed to state cause of action because it did not that made allege they challenged Lo demurred on complaint. ground it failed state a cause of one action because the statement attributed to him made was not to induce the of StorMedia stock or to be alleged false. court overruled the demurrer based “on the superior jurisdictional
ground,” a reference to the failure to apparently allege any transaction оccurred this It “in state.” sustained Almon’s demurrer with leave amend. demurrer, on the ground it did offer or sell or *6 high 4The were primarily products, statements statements about demand for StorMedia and greatly production earnings growth forecasts of anticipated increased in 1996 and 1997. Maxtor, customer, large The part forecasts were based in on contract a major a with whose specifications new contract defendants not knew StorMedia could meet. Defendants also earnings analysts’ quarter announced that StorMedia exceeded first expectations for the of 1996, earnings high but not reveal the not products did that a result of demand the for but a products lowering reflected reduction in reserve for returns defective and a of its fact, adjustments, estimated rate. In the nonoperating tax absent financial first quarter earnings analysts’ weakening would have been a below estimate as result of demand for the products.
455 The demurrer was overruled. during period, securities make did not they and Silverman on the that ground Eltoukhy was overruled.5
C. writ mandate. petition The for filed the instant individual defendants peti-
StorMedia and six the Sixth District. in the Court of for Appeal tion for writ mandate court to the extent that aside the order sought superior to set petition (1) remedy that: the section 25500 their demurrеrs on the grounds overruled who only for violation of section 25400 is available California; (2) a issued purchased previously sold stock damages market not recover for violation may common stock on open a that did not conduct of section 25400 from a corporation its to the public otherwise sell offering general its affected market mani- by in which the of its stock was period price activities; (3) that 25400 and 25500 to the extent sections pulation immunized that the “Safe Harbor” based on conduct impose liability (15 Reform Act of U.S.C. Litigation Private 1995 provision 78u-5(c)), law is California preempted.6 § denied
The Court of after soliciting summarily Apрeal, opposition, Proc., (See 1085.) Civ. This defendants’ granted Code court petition. § for and issued an order to show cause the relief petition why sought review Plaintiffs, interest, should not be the real granted. parties have a and return to the order to filed consolidated demurrer the petition show cause.7 grounds 5The on Lo in the minute order. The assertion demurred were mentioned may a matter
that his was not to induce the of stock is factual constitute purpose however, apparent complaint, a is not a on the face and thus does not defense. It matter (Assurance (1995) Co. v. Haven America proper ground constitute of demurrer. Citrus, 78, 25]; (1979) Far West Inc. v. Bank America Cal.Rptr.2d Cal.App.4th [38 464].) Cal.Rptr. Cal.App.3d 917 [154 Multimedia, 1056-1058, supra, 6For the reasons stated in Diamond pages at 19 Cal.4th we liability reject petitioners’ imposing also these claim that on StorMedia or the individual forward-looking be with the Safe Harbor defendants for statements would inconsistent (15 78u-5.) Act provision of the Private Securities Reform of 1995. U.S.C. demurrer, 7The authorized Code of Civil Procedure asserts granted. petition writ of to state on which relief “[A] mandate fails claim general justify not state facts to relief is showing petition demurrer sufficient cause, discharging complete and the court is then warranted in answer to an order shоw (Green v. Gordon dismissing proceeding.” 39 Cal.2d [246 order Where, here, 38].) ground are is based on that issues law P.2d as demurrer *7 separately. is and demurrer by petition, there no need consider return presented
II
Discussion ” A. Purchase “in this state.
Petitioners, below, contend, defendants as did the in petitioners Multimedia, 1043, Diamond supra, 19 Cal.4th at that the words “in this page state” in the sentence of should introductory be read into section. subdivision of that section. Under of that reading subdivision petitioners’ there is no violation unless the defendant intends to induce or purchase California, sale of stock others in by only persons protected group, i.e., California, who or sell persons stock in sue under thе purchase authority section 25500.
The that “in argument this state” as used in reflects section 25400 intent to legislative conduct intended to proscribe only manipulate and, therefore, California market for a stock created section remedy available an or sell affected stock in California has been considered rejected Diamond Multimedia. These make arguments no have not been petitioners considered there. We turn therefore to second petitioners’ argument. B. seller StorMedia as or stock purchaser within meaning 25400, (d).
StorMedia demurred to the on the com- that the complaint ground did not plaint allege sоld shares corporation 27, (November 9, 1996). period through August Subdivision section 25400 to a “broker-dealer other applies person selling offering for sale or or offering to the stock affected purchasing, purchase” defendant’s unlawful market manipulation activity.8 had alleges StorMedia an employee 1995, were purchase plan pursuant employees given StorMedia common at 85 right of its fair market percent value a through Under the on the enrollment subscription agreement.9 plan date each offering period, eligible granted employees option corporation, Corporate 8“Person” includes a within Securities Law of 25013.) (§ 1968. judicial pursuant five request 9Petitioners notice of documents to Evidence Code sections 452, (h), (1) Registration 459: StorMedia Form S-3 Statement filed with 1996; (2) Exchange May May press Commission announcing secondary proposed offering; copy release of its 1995
457 offering the The offering date of period. on the exercise shares purchase months, on the effective date of began which was approximately period with the stock that was registered of common offering the initial public Commission, and for 26 periods continued payroll Securities and Exchange are to benefit plan issued an employee therеafter. Shares of stock pursuant (§ 25019.) (d) section 25400. the securities within subdivision does not allege claim that the complaint Contrary petitioners’ “as a result allege the class it during period, was sold to employees its stock selling StorMedia was of this stock purchase plan], [employee the $1.6 million from sale StorMedia received during the Class Period.”10 the the Finally, complaint alleges stock to class during period. employees under granted sold the exercise through options that StorMedia securities during two other stock option plans period. sold, should not be deemed to have
StorMedia nonetheless that it sell, shares purchаse offered to offered purchased, the transactions allege does not because period complaint market, and does not allege in the took on alleged place open and were made to induce its misleading employees that the false through plan. StorMedia stock purchase employee purchase Neither is argument persuasive.
1. market. Open “sale,” govern definitions “offers sell” statutory 25400, under no reference to forum in include StorMedia, (4) Participate Employee entitled Inc. 1995 plan; article How Plan; (5) a filed the Securities and proxy Stock Purchase statement with 25, some, judiciаl but Exchange The trial court took notice Commission on March 1997. all, in their briefs and not of these documents. Since both sides refer to the documents oppose plaintiff requests judicial of one of the documents and does implicitly notice request, granted. request demurrer, may judicial has ruling In a court consider facts of which it taken notice. on Proc., 430.30, (Code (a).) existence a document. When subd. This includes the § Civ. document, however, judicial proper interpretation taken notice is truthfulness (Joslin disputable. Brokerage Cal.App.3d the document are v. H.A.S. Ins. 878].) reviewing judicially noticed the trial Cal.Rptr. A court consider facts [228 Code, 459.) (Evid. § court сould have noticed. properly court or those which the trial demurrer, ground that matter must be judicially When a matter to be noticed is supporting unless the court otherwise specified points in the demurrer or authorities Proc., 430.70.) (Code parties real to do so here as permits. appropriate Civ. We deem their interest refer to of the documents in briefs. also some notice, judicial have plan, and the of which we taken 10Therecord plan did fall participants on was confirm that an “exercise date” which stock sold one-year at plan approximate an exercise date occurred within the class Under stock, May following offering which occurred public of StorMedia intervals initial May date fell An exercise therefore 1996. 1995. Moreover, which the sale takes place. itself *9 no contains or limitation of its to express implied market traders. scope open “ “Sale” is defined (a): in section ‘Sale’ or ‘sell’ of, sell, of, includes contract of sale contract every to or a disposition or interest in a security for value. ‘Sale’ or ‘sell’ security includes any of securities and in exchange any change rights, preferences, privileges, or of restrictions or on securities.” outstanding “
Under of (b) section or ‘Offer’ ‘offer to sell’ includеs of, or offer to every attempt or solicitation of an to dispose offer a buy, or interest in a security for value.” security definitions, of
Neither these are to all applicable forms securi- ties, makes reference to sale in an market or the open equivalent.
StorMedia nonetheless that the sale stock argues to employees did not insiders make a who sold or within of section 25400 because these an transactions not in open market. We disagree. only
Not would StorMedia’s construction section add a proposed not restriction but this limitation imposed Legislature, of subdivision (d) of section trading 25400 to securitiеs parties on market fails to open acknowledge that the to forms proscriptions all apply securities defined in section 25019 of Corporate Law stocks.11 Many those securities are not traded a simply on market, or in the exchange which StorMedia is a open prerequisite “ note; stock; stock; ‘Security’ any treasury 11Section 25019: means membership in an association; bond; indebtedness; debenture; incorporated or unincorporated evidence of cer- certificate; any agreement; tificate of interest or participation profit-sharing collateral trust contract; share; preorganizаtion or subscription; voting certificate transferable investment certificate; security; trust deposit company certificate of for a limited liability interest in a any any interest), class or series of (including such interests fractional or other interest in such except liability a in a membership company person claiming interest limited in which this prove can exception actively engaged management that all of the are members of the vote, liability company; provided right limited or evidence members vote have the right concerning or the liability information the business and affairs limited establish, more, right or the company, participate management, shall not without that all actively engaged in management liability members are of the limited certificate company; oil, participation gas mining of interest or in an payments or title or lease or in out of lease; call, straddle, production put, privilege any security, under such a title or or option, on of deposit, group (including any certificate or or index of or securities interest therein based call, straddle, thereof); put, option, privilege on the value or or entered into on national exchange relating foreign currency; any security securities beneficial interest or other bonus, pension, profit sharing, issued in connection employees’ with funded similar as only cannot read applicable Section 25400 thus liability. market. The securities in open those other types
entities which sell traded stock and nationally no distinction between shares statute makes other securities. (d) for its that subdivision
StorMedia relies argument who sell on violators for market civil imposes liability manipulation a statement market general open purchases stock to public Marsh, Jr., Robert Commissioner Harold and former Corporations Professor Volk, the Corporate which drafted H. who were members of committee *10 to regard In these state with Law of their treatise drafters Securities 1968. the defendant must (d) that is that of section 25400 “it required Volk, (1 be Marsh & in order to liable.” have in market engaged activity 14.05[4], (Marsh (1998) Under Securities 14-52 p. Practice the Cal. Laws § Volk).) and of to construction
Consideration extrinsic aids statutory proper Multimedia, Diamond if a statute is As we in only ambiguous. recognized 1046, if a there is unambiguous 19 Cal.4th at statute is clear and supra, page no for the court not in it. may engage need construction and judicial (d) of makes conduct un
Subdivision section 25400 the proscribed if a or for sale or only offering lawful committed by person “selling a It not or to purchasing offering purchase” security. provide expressly for, or that there must be offer or a sale or implication purchase on, the market. If this construction of security statutory language open for that were a seller would not liable market adopted, manipulation stock, affected, affected the of the no matter how if price many persons or a he she took artificial market advantage resulting through private of sale. does not this was the legislative statutory language suggest intent. context,
Moreover, considered in when the Marsh and Volk statement is of Law is not clear that the drafters Securities Corporate or, ‘security’; general, any commonly any in known as a plan; benefit interest or instrument or for, in, for, receipt participation of or interim certificate temporary certificate interest or of, guarantee right any foregoing. All purchase, or or to subscribe to or of of warrant ‘Security’ foregoing are not evidenced a written document. does not securities whether or (1) any any voluntary trust which is not created for include: beneficial interest in inter vivos (2) any solely voting, any of or purpose carrying purpose on business or for the trust, testamentary any policy or or any beneficial interest or insurance endowment a annuity company promises pay contract an insurance admitted in this state under which fund) (whether performance segregated money upon sum or not a based investment (4) any lump periodically specified period, either a for life some or sum or or other Law, subject registration exempted or from such franchise under Franchise Investment registration by or Section 31100 that law.” intended to make a sale or market a purchase open prerequisite (d) for violation of subdivision and liability section 25400. Marsh Volk (c) of subdivisions explain provisions which or for impose liability persons “selling offering sale or purchasing securities, or offering (e), and subdivision purchase” imposеs on runners of sheets receive liability tipster from compensation or for sale or or “selling offering purchasing offering purchase” decisions security “repudiate” under Securities and Commission Exchange (17 rule 10b-5 (1998)), C.F.R. 240.10b-5 under which corporation might § be liable to all in the market if it persons dealing filed false with the report even Exchange Commission had not though corporation Volk, (Marsh 14.05[4], market & engaged activity itself. supra, p. Thus, 14-52.) the authors’ reference to “market activity” mean to, sell, shares, offer must or or corporation those activities must occur in an market. open
Since liability violation section 25400 is not stock, limited to sellers аnd buyers corporate corporations broker-dealers, but extends to sale individuals to the *11 market, for securities which there is no construc- open petitioners’ proposed tion of the subdivision is to the the contrary of subdivision. Even as wording stock, the limited to and sale of that construction purchase would exempt violators from for face-to-face transactions. in the liability Nothing language of (d), (c) subdivision or for that and (e), matter subdivisions suggests this the legislative was intent.12 that StorMedia is of
Recognizing a seller its stock within the (d) of section 25400 on the basis of its stock employee purchase not, to plan argument, make section 25400 a state contrary petitioner’s (17 Securities and rule analogue Commission 10b-5 C.F.R. Exchange (1998)). 240.10b-5 Petitioners the intended to argue Legislature § repu- diate rule decisions under that which made a liable the losses for corporation of all the in market for an persons dealing simply false filing allegedly report Volk, the (See with Securities and Commission. Marsh & Exchange supra, 14.05[4], 14-52.) Civil to arises p. under subdivision liability purchasers § (d) of section 25400 if the false statements made “for the only were purpose And, the or sale of such others.” as Marsh inducing purchase security by Act, 12We that section prohibits note 1985 Uniform Securities which market manipulation, requirement conduct еngaging proscribed includes no that the be liability purchaser. a seller or Civil remedies under section 605 of that Uniform Act of the act or sold persons purchased violation are available to who an affected stock exchange “traded on a or on a automated quoted is not national securities national (7B quotation system self-regulatory organization.” administered U. Laws Ann. West’s 1985, 605, (1998 (c).) U. supp.) Securities Act subd. 25400 for civil under section is not recognize, and Volk privity required to is directed market violation section liability predicated Volk, (Marsh & supra, the investor. not defrauding particular manipulation, [a], 14-51.) to 14-50 pp. § 1405[3] claims, in an
If, sale the violator open as StorMedia purchase violation, be a violator would not an element section market were holders who may the option its and former employees liable to employees stock was decision to class if their purchase be members even in the lan- Nothing enhanced market artificially open price. based on Legislature section 25400 suggests of subdivision guage extending to those while the section 25500 deny remedy persons intended market. securities on bought open remedy offer sell its shares to stock incentive was an ongoing plan sold shares to its employees during its and the corporation employees, within the literal lan- These actions brought corporation did under its (d), as its sale stock guage other stock option plans.13 or sale. that seller intend induce Necessity
2. also that its sales employee pur- pursuant whether a determining corporation chase should not considered in plan stock, was seller of as term is used in subdivision to induce its false statements not made employees because allegedly that she the stock and does not allege plaintiff through purchase plan. *12 view, (d) to section 25400 does not subdivision of
Contrary of state false statements must be made for the purpose that and misleading the sale the as a or of stock thаt defendant seller inducing qualifies purchase within or the of that subdivision. purchaser a seller or (d) of section 25400 is violated if makes false Subdivision the or sale” of statements “for the misleading purpose inducing purchase decide, therefore, might theory on a civilly also be liable 13Weneed not whether StorMedia defendants, the all of allegedly that it the unlawful acts of individual whom participated in during period. provides Section that except sold stock the class Almon StorMedia “[a]ny willfully participates any act or transaction violation Section person who argues purchasers and of the stock. Plaintiff that StorMedia 25400” is liablе to sellers affected willfully participated might held liable the 25400 violation because section by proscribed not the unlawful conduct stock sales of the defendants. The stock sales are 25400, making is the of false and however. The unlawful conduct subdivision section security which the misleading inducing purchase the the or sale purpose statements for sell, selling, offering offering purchase. to to purchasing, is or defendant the in which seller the is As we have concluded in security dealing. Diamond Multimedia, 1047, 19 Cal.4th at under the market supra, page manipulation provisions subdivision no actual sale is necessary. be violated the affected by pеrson simply offers Moreover, stock for the sale. subdivision does not the intent that or require be to induce a buyer to the Even if purpose particular stock. we purchase claim, were to merit find in this it is not a (See for demurrer. proper ground 5, ante.) fn. the face on of the or of court Nothing which the complaint might take notice would judicial claim there no intent support petitioners’ was to induce the to employees StorMedia stock when the purchase allegedly false and statements were made.14 misleading
The conduct is regardless unlawful whether any person actually pur- stock, the is not chases and it that the defendant to necessary intend induce the sale or the purchase which defendant as a qualifies seller or purchaser under section It (d). is that the defendant is a enough seller or the false when statement is and that purchaser misleading made the is made an statement with intent to induce to others or sell stock. buy Unlike section sales or prohibits “by stock means purchases statements, of’ false or is not misleading required by section 25400. privity Volk, (Marsh [a], & to supra, 14-51.) 14-50 The defendant pp. § 14.05[3] need not have sold to stock whom false or party misleading statement was is made. It that the statement enough was made for the or or purpose inducing any persоn sell the stock. purchase Since StorMedia sold shares to to the stock employees pursuant employee and sold shares to the other exercise of stock plan, pursuant conclude, it did sell securities options, We on that during period.15 basis, which, true, facts if establish that complaint allege was a sale or selling offering for “person purchasing offering its purchase” also stock purchased employee purchase plan 14StorMedia under the could misleading be affected false and because price was fixed contract employee
under bound percent price. which the was shares at market argument That whether irrelevant states a cause of action behalf of the observe, however, contrary class. We to the assertion of counsel for StorMedia made at argument, plan permitted oral participation employee discontinue purchase plan at Since purchase price plan time. under fluctuate would *13 shares, price employee’s plan might based on the market for the to continue decision would, course, well be price. influenced artificial inflation of the market StorMedia misleading artificially price benefit from false or increased the at its which which emрloyees purchased purchase plan. under put options when purchasers 15Plaintiff also that StorMedia sold stock exercised right gave purchasers require corporation in October sold 1995 May repurchase January April the shares between 1996 22, 1996, registration planned secondary offering May filing and its a announcement
463 III
Disposition for writ of denying petition of the Court of Appeal The judgment mandate is affirmed. J., Mosk, J., Kennard, J., J., concurred. Werdegar, C.
George, BROWN, J., my dissenting opinion the reasons stated Dissenting.—For Court Multimedia Inc. v. Cal.4th Systems, Superior in Diamond 539], I do not believe that P.2d Cal.Rptr.2d [80 a California have of the securities of compаnies out-of-state purchasers Code, et under the Securities Law 1968 (Corp. remedy Corporate I dissent. Accordingly, for market manipulation. seq.) J., Chin, concurred. the Securities and preliminary prospectus planned for that offer with statement with period. the class
Exchange Commission constituted an offer sell stock sold shares within grounds that StorMedia was a We have concluded on other Therefore, put options constituted we need not address whether options redemption under section 25017 continuing offer to or whether sold, plaintiffs’ need not consider options and we constituted sale when notwithstanding a an offer to sell argument preliminary prospectus constituted disclaimer contained therein.