*1 RETIREMENT TEACHERS’ SYSTEM LOUISIANA,
OF Plaintiff-
Appellant,
Barry Schoenfeld, Individually and on similarly situated;
behalf of all others Group;
Schoenfeld Bernardinelli
Group, Bernardanelli, Joseph Carmine being
M. Hansen and Frances C. Hunt Group;
referred to as Bernardinelli
Gary Sandler; Sandler; Judy Rochelle Smith; Dail;
A. H. William Louisiana Employee System,
School Retirement
Plaintiffs,
v. HUNTER; Cynthia
Fred Neal B. Mer
rell; Arx; Dolph W. Von Charles
Swoboda; Robb; Walter John W.
Palmour; Cree, Incorporated; Calvin Carter, Jr.; Dykes,
H. James E. Defen-
dants-Appellees.
No. 05-1988.
United Appeals, States Court of
Fourth Circuit.
Argued Sept. 2006.
Decided Feb. 2007. *5 Tucker, Patterson, Jr., Donald H. N.
Carl Dorsett, Anderson, Blount, Jr., Smith, L.L.P., Raleigh, Jernigan, & Mitchell Carolina; Roberts, Lyle Paul Chal- North Kramer, Porritt, mers, I. liana Nicholas Rosati, Sonsini, Re- Wilson, & Goodrich sten, Appellees. Virginia, for NIEMEYER, WILKINSON, Before SHEDD, Judges. Circuit Judge by published opinion. Affirmed majority opinion, NIEMEYER wrote joined. Judge in which WILKINSON dissenting opinion. Judge wrote SHEDD NIEMEYER, Judge. Circuit plaintiffs’ court dismissed The district com- class-action 168-page securities-fraud Cree, Inc., high- against plaint brought Durham, North technology business Carolina,1 claims purported 10(b) Exchange Securities under 10b-5 thereunder. Act of 1934 Rule *6 made mis- that Cree complaint claims business about its leading statements pe- a companies over with six transactions dis- years, which were of almost four riod a officer sued when former covered Relying Feder- in June company 2003. 12(b)(6) and Procedure al Rule of Civil Act Litigation Reform Private Securities that 1995, court held the district of sufficient complaint failed facts claims that Cree’s plaintiffs’ support misleading. court were statements Columbia, Harpootlian, Ara Richard not plaintiffs did that the also concluded Carolina, Bruce C. Appellant. for South allege that statements sufficiently Rosenman, Katten, Muchin & Yanyo, scienter requisite made with California, L.L.P., Appel- for Angeles, Los caused mis- plaintiffs’ losses were Kairis, Eisenhofer, John C. Jay lees. W. of which omissions Eisenhofer, and representations Liebesman, & S. Grant Sidney Delaware, they complained. P.A., Appellant. for Wilmington, diodes, tors, are light-emitting which 1987, major innovator 1. Founded digital as variety products such of used in carbide-based and manufacturer silicon semiconductors, telephones. and wireless cameras including transis- products, 13, Applying Litiga- the Private Securities 1999 to June 2003. The consolidated Cree, Act and Federal Rules of Civil class action named as well tion Reform 12(b)(6) 9(b), 8(a), plain- corporation’s as six of the officers and Procedure novo, affirm, directors, Hunter, con- F. Cynthia tiffs’ de we Neal B. Merrell, Arx, complaining only Dolph are cluding plaintiffs W. Von Charles Swob- risks, oda, Robb, particularized not about market se- Walter L. and John Palm- W. (often our, fraud. as defendants hereafter curities re- “Cree”). collectively ferred to as I I Count of the consolidated class action 2003, Hunter, Eric complaint alleged On June co- that Cree violated 10(b) Cree, Inc., § Exchange founder and CEO of from 1987 of the Securities Act (“the Act”), against § filed Exchange 78j(b), and his wife suit 15 U.S.C. (Eric Cree, 10b-5, 240.10b-5, § F. Hunter Hunter’s and Rule Neal 17 C.F.R. Cree, prohibits making misleading brother and co-founder as well as which false or its CEO from 1994 to 2001 and chairman statements in connection with the sale of thereafter), officers, of the and other II board securities. Count claimed that the indi- 20(a) § alleging violations state federal se- vidual defendants violated laws, defamation, Act, Exchange 78t(a), curities and intentional 15 U.S.C. assigns joint infliction of emotional distress. Eric liability per- and several to a injunc- sought preliminary Hunter also son who controls another who violates a against pre- regulation. tion Cree and Neal Hunter to securities The district court alleged personal ap- granted vent harassment the defendants’ motion to dismiss peared family an ongoing failing to have attended plead both to fight. of the lawsuit particularity plead News caused the fraud with and to price day stock to fall the next supporting strong inference that Cree Cree, from acted with scienter. In re $22.21 $18.10. See Inc. Litig., F.Supp.2d Sec. 474-75 Eric Although promptly Hunter settled (M.D.N.C.2004). August his suit in complaint quickly spawned response, his numerous filed the first by purchasers class actions Cree stock amended consolidated class action com- during peri- plaint (hereafter, who securities fraud complaint”), “the at issue *7 12, 1999, beginning August od when appeal. complaint The bolstered report allegations Cree filed an annual on SEC Form the original made in the consol- 10-K, 13, 2003, ending and on June idated complaint class action and named suit, day Eric pur- defendants, after Hunter filed his two more Cree directors as portedly revealing the truth of Cree’s H. Calvin Carter and James E. Dykes. during years. fraud previous Additionally, The added Counts III, IV, cases were consolidated in the Middle Dis- and III alleged V. Count that the Carolina, trict of North and Teachers’ Re- individual engaged defendants in insider System tirement of Louisiana trading, § was named in violation of 20A of the Ex- plaintiff. Act, 78t-l(a). the lead In a change § consolidated class 15 U.S.C. Count complaint, action Teachers’ Retirement claimed that IV the individual defendants (collective- System plaintiffs other personally § and the are liable under 18 of the ly, “plaintiffs”) sought Act, 78r(a), certification Exchange § of a 15 U.S.C. class of all purchasers Cree’s common making misleading statements. Count V stock during period August Hunter, Swoboda, from claimed that Neal and § of the transactions only violated the Sarbanes- became known Merrell Act, § which re- when Eric Oxley against U.S.C. Hunter filed his action Cree, brother, then- and CFOs to reimburse quires CEOs his and other officers of and other com- corporations for bonuses complaint alleges Cree June 2003. The pensation corporation required if the to that what was learned in June 2003 dif- to prepare accounting an restatement due fered from what Cree had public- disclosed misconduct. ly public and that disclosures were materially misleading.
Each of the counts relies on its misrepresented that Cree series of Cree filed a motion plaintiffs’ to dismiss companies transactions with six other over complaint pursuant amended class-action 46 months in an effort period of to Federal Rule of Civil Procedure artificially price inflate of its stock. 12(b)(6), and granted the district court complaint alleges engaged The that Cree entirety, motion in finding its “channel-stuffing” in a scheme with complaint’s impressive length did por- not (“C C”), by Charles & Colvard & similarly impressive tend substance. The to purchase Cree forced C & C silicon court “plaintiffs concluded first that ade- crystals far in carbide excess C & C’s quately identified] statements [of unqualified need and then booked the rev- they Cree] believe[d] be false and the crystals enue from the sales of these even why they reasons believe[d] them be an though right C & C held undisclosed to false, particularity but to state with fail[ed] crystals alleg- return the later on. It also supporting strong inference of improperly es that booked revenue Second, fraud.” the district court conclud- development agree- from a research adequately plead ed that did not and a of equipment ment with C & C sale that the defendants requi- acted with the C, to C & these transactions were because site scienter because the neither a sham. misleading identified statements or omis- alleged sions nor circumstantial sufficient alleges further that Cree Finally, evidence of scienter. the court engaged in “round-trip” transactions with “plaintiffs ... Microvision, Inc., found failed to demon- companies, five other Inc., strate a direct Theatre, Inc., relationship between then- Spectrian, Xe- World alleged misrepresentations losses and the mod, Inc., Lighthouse, Inc. “Round- failed, therefore, have establish the tripping” typically reciprocal refers required element loss causation.” agreements, involving products the same services, lack economic substance Having alleg- count dismissed first permit parties but to book revenue to 10(b) 10b-5, ing a claim under and Rule improve financial their statements. plaintiffs’ the court also dismissed claims pattern of putative these deals as 20(a) Exchange §§ under and 20A of the *8 in- complaint in the was that Cree would depended upon Act because these claims tentionally overpay for an investment liability alleged the first count. company the stock of the other in ex- Similarly, plaintiffs’ the court dismissed change company’s agreement for the other § pursuant Exchange claim 18 of the purchase bogus R & D from services Act plaintiffs plead because failed to Cree. showing that Cree made false statements.
Although aspects Finally, plaintiffs’ Cree disclosed of these the court dismissed public filings, plain- Sarbanes-Oxley transactions in its claim under 304 of the complaint alleges plaintiffs tiffs’ that the true nature Act because did not 170 any required process
Cree was
to issue
restate-
federal
the beginning, under
—in
12(b)(6);
reports.
ment of its financial
Rule
after the pleadings have
filed,
12(c);
been
under Rule
after discov-
From the district court’s final order dis-
56;
ery,
plaintiff
under Rule
or after the
missing
complaint
prejudice,
presented
trial,
has
his case at
under
plaintiffs
appeal, challenging
filed this
each
50(a)
Rules
or 52. When the issue of
grounds
of the district court’s
for dismissal
whether a complaint
upon
states a claim
seeking
either the reinstatement of
granted
by
which relief can be
is raised
their
or leave to amend it. Cree
12(b)(6)
dependent
Rule
motion and is
urges us to affirm the district court’s order
facts, however,
development
ju-
of
or,
alternative,
in the
to find that the com-
12(b)(6)
risprudence
requires post-
of Rule
plaint
by
applicable
was barred
statute
ponement
of
final determination of the
argues
of limitations.
that in a
secu-
issue.
this,
rities fraud case such as
the limita-
run
period began
tions
when a reason-
precisely,
More
under this scheme
“inquiry
able investor would have
notice”
pleading
discovery,
notice
and broad
fraud,
potential
citing
Brumbaugh v.
consideration of a motion to dismiss must
Partners,
(4th
157,
Princeton
985 F.2d
account for
possibility
that a noticed
Cir.1993).
claim could become legally sufficient if the
necessary facts were to be developed dur
II
ing discovery.
Supreme
As the
Court has
The district court
plain-
dismissed the
characterized
approach
to Rule
tiffs’ class-action
under Federal
12(b)(6)motions:
12(b)(6)
Rule of Civil Procedure
and the
simplified
Given the Federal Rules’
stan-
Litigation
Private Securities
Reform Act
dard for pleading,
may
a court
dismiss a
104-67,
Pub.L. No.
109 Stat. 737
complaint only if it is clear that no relief
(the “PSLRA”). Because the district
granted
could be
under any set of facts
court’s order ruled on
legal sufficiency
proved
that could be
consistent with the
complaint,
of the
we review that order de
allegations.
novo. See
v.
Jordan
Alternative Res.
N.A.,
(4th Cir.2006). Swierkiewicz v.
Sorema
Corp., 458 F.3d
534 U.S.
506, 514,
122 S.Ct.
L.Ed.2d
Ordinarily,
legal
sufficiency of a
(2002) (internal quotation marks
cita
12(b)(6)
complaint under Rule
is deter-
omitted)
added).
tion
(emphasis
Of
mined
whether the
states a
course, when the
matters
claim upon which
granted
relief can be
complaint are taken as true and the com
light
pleading requirements
of Rules
plaint still
upon
fails to state a claim
8 and
larger
as well as the
design of the
granted,
relief can be
it will be dismissed
Federal
design provides
Rules. This
12(b)(6).
outset,
at the
under Rule
See
simplicity
pleading
give
that intends to
Jordan,
This discourage dismiss, to frivo- protections any discovery stayed, cedural motion to be 78u-4(b)(3)(B). litigation. lous subject exceptions, § to id. Id. at 730-31. Thus, generally while the Federal Rules pleading that in provides
The PSLRA court, ruling allow a on a motion to omission, or misrepresentation material 12(b)(6), dismiss under Rule to take into 10(b) Exchange § Act violation of any account set that be could of facts 10b-5, necessary and the scienter and Rule proved consistent with the omission, or misrepresentation to such a complaint, though the even such facts have Fed. plaintiff plead the must facts. Cf. alleged complaint, not been the 8(a)(2) pleading that a (providing R.Civ.P. (1) by PSLRA modifies this scheme re- only contain “a short and generally need quiring plaintiff plead to to state a facts showing claim that plain statement (2) claim by authorizing and the court to pleader (emphasis is entitled to relief’ plaintiff assume that the has indeed stated added)). Thus, alleging misrepresenta- upon all of the facts which he bases his PSLRA, tions or omissions under allegation misrepresentation of a or omis- complaint must include “each statement 78u-4(b)(l). § sion. 15 U.S.C. The Act alleged misleading, to have been the rea- requires also a plaintiff plead sufficient why son or reasons the statement is mis- strong facts to raise a of scien- inference leading, allegation regarding if an and 78u-4(b)(2). course, § ter. Id. Of the oth- made on informa- statement or omission is er elements of a securities fraud claim belief, tion shall state analyzed would be under the traditional particularity with all on which that facts pleading scheme of Rules 8 and since 78u-4(b)(l) § belief is formed.” 15 U.S.C. Congress only misrepresenta- addressed added). (emphasis alleging And in scien- 78u-4(b). § tions and scienter ter, must, plaintiff respect “with In purporting allege claims un each act or omission violate this 10(b) 10b-5, § der and Rule plaintiffs chapter, particularity giv- with state “(1) required ing strong the defen rise to a inference dant made a false required defendant acted with the statement or omission of state 78u-4(b)(2) (2) (3) § mind.” material fact (emphasis upon Id. add- scienter ed). (4) plaintiff justifiably The PSLRA also directs that relied meeting pleading proximately not re- plaintiffs caused the dam dismissed, quirements id. ages.” be 78u- Hillson P’ship Partners Ltd. v. further, (fraud-on-the-market Breaking cases) 2. down these elements as "transac- Supreme recently causation,” Court stated: tion see Basic [Inc. v. Levin- son, 224, 248-49, 485 U.S. 108 S.Ct. involving publicly In cases traded securities (1988)] (nonconclusively L.Ed.2d 194 purchases public or sales in securities presuming price publicly that the of a markets, the action’s elements in- basic misrepre- traded share reflects material clude: sentation and that have relied (1) (or misrepresentation a material upon misrepresentation long as omission); as they (2) scienter, i.e., bought would not have the share in wrongful state of absence); mind; (5) loss; (3) economic purchase a connection with the (6) causation,” i.e., security; "loss sale of a a causal con- (4) reliance, misrepre- often referred to in cases nection between the material involving public securities markets sentation and the loss.
173 (4th Inc., why Cir. the reason or reasons the Adage, F.3d statement 1994). and, if dismissing plaintiffs’ misleading, allegation In the com- is an re- complaint garding court held the the statement or the district omission is plaint, (1) belief, (misrepre- to elements made on information and the com- wanting to be as (2) omission), (scienter), plaint and shall particularity or state with all sentation causation). (4) (loss Thus, respect with to on which that belief is formed. facts (1) (2), apply we will the elements 78u-4(b)(l) added). § (emphasis 15 U.S.C. PSLRA, created the pleading standard (1) Thus, plaintiffs allege: must each mis- (4) respect to element the and with —that (2) statement; leading the reasons each misrepresentation plaintiffs’ caused the (3) misleading; statement was when general pleading the apply loss—we will an allegation regarding such a statement is applicable standards of Rules 8 and as belief, par- based on information and “with to fraud claim. ticularity all on which that belief is facts formed.”
Ill
im
requirement
“all facts”
is
plaintiffs’
the
com
dismissing
posed for several reasons. First and most
the district court concluded first
plaint,
obviously, it is included to determine the
§
satisfy
to
78u-
complaint
that the
failed
sufficiency
legal
complaint
under
4(b)(l)’s
heightened
requirements
12(b)(6).
12(b)(6),
Rule
Under Rule
a com
pleading misrepresentations or omissions.
plaint
legally
sufficient if it
“state[s]
complaint
it found that
the
ade
While
upon
granted.”
claim
can
which relief
be
quately specified
allegedly misleading
the
above,
explained
generally
As
under the
why they
statements and the reasons
were
rules,
applicable
pleading
notice
stan
that,
misleading,
respect
it concluded
requires
dard
the court to ask whether
statement,
every single
complaint
any conceivable set
could be
alleging
fell short of
facts sufficient to
of facts
proved
complaint’s
consistent with
alle
plaintiffs’
information and be
support
gations
permit
that would
relief to be
misleading,
lief that the statements were
Swierkiewicz,
granted.
at
See
U.S.
78u-4(b)(l).
§
required by
as
514, 122
992. The
“all
S.Ct.
PSLRA’s
78u-4(b)(l) provides:
Section
standard, however, changes
facts”
the rele
In any private
arising
action
under this
for alleging misrepresen
vant set of facts
plaintiff alleges
chapter
alleged
to those
tations
omissions
that the defendant—
PSLRA,
there
complaint.
Under
(A) made an untrue statement of a ma-
fore,
whether, if
inquiry
our
becomes
those
fact;
terial
true,
alleged
facts
are
(B)
a material fact nec-
omitted
state
granted
plaintiffs’
on the
relief could be
essary
order to make the statements
way,
claim. Stated another
we must as
made, in
light
circumstances
states
certain whether the
suffi
made,
they
in which
not mislead-
permit
person
cient
a reasonable
ing;
plaintiff
satisfied this ele
to find
shall
each state- ment of his claim—that
defendant
specify
misleading,
misleading
ment
to have been
made a false or
statement.
Pharm.,
Broudo,
(2005) (citations omitted).
Dura
Inc. v.
544 U.S.
341-42, 125 S.Ct.
If the fails to all Reading require pleading of all facts which support plain- facts but does sufficient facts tiffs belief on the sanction *12 in of dismissal support allega a reasonable the belief 78u-4(b)(3)(A) by § authorized could theo- tion that the defendant’s statement was retically lead to some harsh in results the deny the court should misleading, the Rule management of discovery and PSLRA liti- 12(b)(6) to this “misrepresenta motion as gation Novak, in general. See 216 F.3d at See, Kasaks, e.g., tion” element. Novak v. (discussing 314 possibilities). these But (2d 300, Cir.2000); 216 F.3d 313-14 see 12(b)(6) since Rule focuses on whether the Rights, also Makar Issues & Ltd. v. Tel- complaint upon states a claim which relief (7th labs, Inc., 588, Cir.2006) 437 F.3d 595 granted,” only “can be we need determine standard); (endorsing Novak’s California in the circumstances before us whether Employees’ Sys. Pub. Retirement v. Chubb plaintiffs’ complaint alleges sufficient facts (3d Cir.2004) Corp., 394 F.3d 146 upon which a reasonable can be belief (same); Inc., Kinder-Morgan, Adams v. formed that representations (10th Cir.2003) (same). 340 F.3d 1099 misleading. omissions were 78u-4(b)(l) § logically This construction of Determining whether inquiry required by follows from the the com Rule plaint satisfies this standard 12(b)(6), necessarily only legal which tests the suffi entails a case-by-case assessment of the ciency of complaint. complaint as a whole. We will consider 78u-4(b)(l)’s § In interpreting “all facts; number and level of detail of the facts” in the context of a Rule standard plausibility facts; and coherence of the 12(b)(6) require motion to a pleading of whether sources of the facts are disclosed facts,” “sufficient we do not read the “all apparent reliability of those facts” standard out of the statute. It re- sources; other criteria that inform mains aspects relevant other how well the support facts supervision court’s of securities fraud class allegation that defendant’s statements or action litigation. example, For the court Adams, omissions were misleading. See must be able to determine whether some 1102-03; 340 F.3d at Corp., Chubb discovery permitted, despite will be the F.3d at 147-55. When complaint general against discovery bar pending mo- rely chooses to provided by facts confi § tions to dismiss. See U.S.C. 78u- sources, dential it must describe the 4(b)(3)(B). Having the assurance that all sources “with sufficient particularity ‘to upon plaintiffs’ which the support belief is the probability person that a in based position could be relevant making occupied by this the source would possess the might decision. The court information similarly alleged’ be or in the provide alternative other supervising assisted in evidence to preservation sup port Tellabs, Inc., their allegations.” evidence allegations” “relevant to the un- Novak, F.3d at 596 (quoting 78u-4(b)(3)(C). 216 F.3d at § der course, And of at 314). every conclusion of lawsuit covered PSLRA, the court specific must make at issue adequately here findings parties’ as to the compliance specifies the alleged statements to have 11(b) Federal Rule of Civil Procedure as it been misleading and why the reasons they applies “any complaint, responsive misleading. Indeed, it identifies no pleading, or dispositive motion.” See id. less than 48 publicly statements made 78u-4(c)(2) added). (emphasis nearly over years four regarding Cree’s agreement, the second entered misleading But each Under after transactions. crystal supply at the time as the statement, simply repeats a into same agreed pay & why, upon agreement, “in- C C formulaic set belief,” development research and colorless sil- the statement was formation and crystals. icon carbide As amended support The facts misleading. agreement required C & C to support reasons fail to of these formulaic R Cree for & D efforts at a level pay that the statements were belief reasonable totaling annually million for four therefore we con- misleading, in fact $2.88 May In an satisfy years. amendment that the fails clude *13 12(b)(6)’s however, R requirement parties lowered the level of and Rule PSLRA particu- annually. & D to million complaint shall state with $1.44 that the facts on which a reason- larity sufficient 1999, year reported For fiscal Cree formed. This becomes able belief can be in booking million revenue from the $11.4 support- the facts when we consider clear 2000, year and in fiscal agreements, $16.2 about each transaction. ing by & million. These sales were boosted C option purchase to
C’s exercise its Crystal Supply Agreement, A. C & C May produc- in 1999 for equipment Cree’s D Agreement, R & crystals. tion of more silicon carbide As Equipment Sale month, trig- this decision disclosed obligation & C’s contractual to gered C from 1997 multiple public filings In output equipment of the new purchase the 2002, agreements disclosed two to Cree pay- & years. over the next two C C’s (“C into & Colvard & entered with Charles years constituted a during ments these C”), by in Eric founded company revenue for portion substantial Cree’s brother, managed by then his Hunter and instance, For sales periods. the relevant long- agreement Hunter. One was Jeff crystal materials to C & of silicon carbide 6, supply agreement, dated June term year half of the calendar C the second 1997, agreed purchase in & to which C C revenue represented 35% Cree’s requirements for silicon carbide half of its period. for the calendar crystals during from Cree each 1999, to Cree, turn, began In late & C’s fortunes agreed supply C quarter. turn, need crystals take a and C & C’s quantities and colors of downward specific crystals carbide thereafter also for silicon exclusively agreement to C & C. The disclosed its steadily order more declined. Cree that if C & C would provided 3, registration state- January 2000 SEC crystals capacity pro had a than Cree duce, that & C’s sales were slow right either to ment C C & C would have acknowl- inventory grown, had and Cree pur of its order or to quantity reduce the portion [its] that “a crystal-growing equipment edged from substantial chase by large purchases has come from opted purchase equip If revenue Cree. C & C customers,” of C ment, number of equipment a small Cree would construct that it “an- reported one. Cree the additional & C was premises produce on its will de- C, C] that sales to & ticipate[d] [C & C crystals for C & C would in calendar 2000” and Cree purchase at least six crease obligated become could reschedule “agreed C] & output equipment. [C months’ from the new purchase of its approximately one-half equipment fully depreciated, was After the commitments half of calen- from the first required to transfer title C & C would be year.” the second half of the dar 2000 to equipment to the to Cree. never conducted such R D & work.” Fi- April quar- Cree disclosed its that, terly report due to C & C’s anemic nally, the complaint alleges that Cree high inventory, anticipate “We sales and fraudulently “booked revenues from the to & will [C C] that overall sales decrease C, equipment sale of to C & and booked of our percent to less than 10 revenue for that transaction as a sale to C & C fol- fiscal quarter the fourth and will lowed repurchase equip- Cree’s percentage continue to decline as a of rev- repurchase ment when no such sale and through enue half of 2001.” the first Like- had occurred.” wise, February quarterly Cree’s however, complaint, completely fails stated, report anticipate “We little or no to include permit facts sufficient to a rea- gemstone revenue from the business over sonable belief that Cree exercised con- as & bal- quarters the next several [C C] trol over C & and caused C & C to C levels. C & inventory their ance[s] C sales purchase crystals unneeded in a “channel up approximately made 5% of total reve- stuffing” scheme. Far from impeaching during quarter nue the second of fiscal disclosures, the truth of public By May reported 2001.” that it *14 alleged facts complaint are consis- had made no sales to C & C in the third performance tent with the publicly quarter of 2001 expected and to no “little contract, supply disclosed which obligated revenue” from & in up- C C the several & purchase C C to certain outputs of coming quarters. Because C & C’s weak- crystals. complaint alleges testimony The ening ability sales hindered its pay to of a process engineer former Cree crystals, who repurchased Cree selling observed Cree crystal-growing equipment quantities that it consistent had con- C, structed and sold to of silicon financing crystals C & carbide to C & during C C & C a purchase by giving precisely million what publicly $5 disclosed 2000— against credit C & crystal pur- C’s future supply contract It called for. also includes chases. C & equipment C disclosed this source, the statement of a confidential an sale in its own April quarterly report. undisclosed former C & C director of tech- nology, who stated that spent “C & C complaint alleges Plaintiffs’ that Cree’s money by like ‘drunken regularly sailors’ disclosures were false or misleading be- writing $200,000- checks to Cree for with C & C was arrangement cause Cree’s $300,000.” This, too, is indicative of C & scheme, a “channel-stuffing” by which payments C’s actual pursuant to Cree to Cree “exerted actual control over C & C” the contract. To the extent that the com- in their dealings business and caused “C & plaint alleges that Cree somehow forced C purchase C to [silicon SiC carbide] materi- contract, & to supply C enter the als in the facts excess of its demand for such mate- rials, are even more knowing wanting. that The purchases complaint’s such were leading only support inventory to excessive of this claim is that buildup” managing signaled and which “growth in officers from the recurring companies two were re- business that did not exist.” periodically The com- lated and met negotiate to plaint alleges also supervise Cree overstated its agreements. It impossible is by booking revenues “payments by C & C to infer from publicly this that dis- for SiC material which & right C C had a agreements closed were fraudulent. reject and return.” complaint The al- leges that Cree overstated plead its revenues To permit facts sufficient to “book[ing] payments from C & C for a reasonable belief that Cree improperly R Cree’s & D work as revenue when Cree booked sales of silicon crystals carbide family. Eric his on the famed Hunter and The C, depends complaint C & Eric complaint’s allegations based on of C & C to return right of a existence not, short, sup- the Hunter’s statement do works under complaint crystals. belief that afforded port not have been reasonable Cree that Cree would assumption right to return if C & C had C & C secret silicon the sales entitled to book crystals. condition carbide crystals on the purchased rejected and returned. they could be complaint’s alleging second source correct, the assumption if this were Even right secret of return is a “former Cree from which provide fails to process engineer who worked as the lead that C person could conclude a reasonable manager of the & engineer C C any right of return. More- & C held such product line” from mid-2000 mid-2001. over, suggest fails to This source stated that his last few adjust due ever had to its revenues (i.e., employment early months his from & C. If crystals returns of C 2001), began rejecting large quanti- &C C existed and the right of return had such crystals. ties of He claimed that “the sham, expect were a one would purchases rejected products kept in & C C’s right have exercised the that C & C would justification why facilities to create as adjust its return, Cree to requiring required Cree was not to create reserve Yet, sug- no such scenario even books. charge purportedly or take a for the re- complaint. gested jected nonconforming goods.” But meaningful light these facts are not Instead, relies on settled, history. By publicly disclosed who personal two sources *15 early Cree’s sales to C & C had of return— right concealed C & C’s Cree trickle; reported booking to a slowed Cree former Eric Hunter and an unidentified in January no from sales to C & C revenue First, Eric Hunt process engineer. Cree expected 2001 and “little to no March reasonably taken er’s statement cannot be quarters. subsequent revenue” in the his support agreement such an because Thus, correctly recalls even if this source officer ended in 1994— service as Cree rejecting large shipments of silicon C & C years period before the class be three Cree, simply crystals from he is carbide no basis gan complaint provides —and recogni- wrong regarding Cree’s revenue & C for his assertions about the Cree-C no sales to C tion methods. Cree booked Eric Hunter was un agreements. "While during & C this time. employee during der contract as a Cree Finally, complaint’s leaves the alle- states that period, complaint the class booked reve- actually gations improperly that Cree performed Eric Hunter never performed nue for R & D that it never the contract. Nor does the work under accounted for the improperly fact that Eric Hunter is the brother Cree bare equipment transaction. complaint crystal-growing help of Neal Hunter because the entirely upon rest Again, Hunter ever these does not Neal discussed Eric Hunter’s assertions. As regarding with Eric Hunter communicated above, complaint advances insufficient contrary, To the Eric operations. Hunter could have facts to show how Eric personal complaint against filed Hunter’s to this information and had access Cree in June which satisfy strin- fails to PSLRA’s complaint, alleged therefore incorporated their misleading requirements pleading for gent and other Cree officials that Neal Hunter threatened, intimidated, or omissions. harassed, and de- statements B. Microvision Investment Plaintiffs’ alleges that Cree Agreement what,
and R & D misrepresented in reality, were meaningless “round-trip” transactions with report, In its 1999 annual Cree Microvision, only entered into purposes for reported May 1999, purchased it creating “sham” income. The Microvision, million of the stock $4.5 alleges intentionally that Cree overpaid in Inc., Washington corporation. At the making its million investment in Mi- $12.5 time, agreed pay same Microvision Cree crovision, paying per share when Mi- $50 million for development research and $2.6 crovision’s shares traded at The $36.88. on light-emitting diodes. complaint alleges that Cree made this overpayment in exchange for Microvision’s quarterly report its of April money return of the in payments for 17, 2000, reported Cree that on March it work, “sham” R D& compa- neither 250,000 purchased an additional shares ny actually intended Cree to perform. Microvision, when Microvision stock was alleges further that rather trading purchase at The stock $63.75. using payments than for R & D to agreement contemplated closing April perform Microvision, research beneficial to 13, 2000, provided revision of the simply “Cree doing continued very purchase price to if per share Microvi- $50 same research it had doing been price dropped sion’s share substantially by ordinary course of business.” that date. Because Microvision’s shares in goal of the Microvision deal was to reduce fact closing date, traded at at the $36.88 Cree’s R D thereby & costs and overstate paid ($12.5 per Microvision share $50 its net income. million), in accordance agreement. with the quarterly report Microvision’s of March typical A “round-tripping” scheme in- 30, 2000, that, time, discloses at that Mi- parties entering volves reciprocal into con- crovision also entered into an identical exchange tracts to similar amounts mon- stock purchase agreement with General ey See, for similar e.g., services. In re Electric. Homestore.com, Inc. Litig., Sec. *16 (C.D.Cal.2003) F.Supp.2d 1024-25 In April its 2000 quarterly report, Cree (describing bartering of like services to also disclosed that and Cree Microvision revenues). artificially inflate Such trans- had contract, amended their R D prior & actions can be improper par- because the bringing its total value to million $12.6 ties book revenues even though the trans- years. over two report, its 2000 annual actions “wash out” any without economic Cree stated that it apply would this fund- substance. But the basis for alleging ing from Microvision to reduce R Cree’s & “round-tripping” does not exist when ei- D expenses 2000, 2001, years over fiscal ther of the transactions have economic and 2002. substance because those transactions Also its report, 2000 annual Cree would not wash out. The mere existence disclosed 162,200 that in June it sold of reciprocal dealing does not suggest shares, of its Microvision realizing a Indeed, “round-tripping.” common, $3.6 it is a gain. shares, million Microvision’s howev- legitimate, perhaps and useful business er, steadily thereafter, declined value practice for company one to invest in the and Cree ultimately sold the remainder of stock of a company second with which it is the stock in December 2002 for mil- entering major $1.8 into a products contract for lion. or services. report March quarterly Microvision’s of allege not the usual do plaintiffs
The 30, 2000, of like services. en- exchange shows Microvision also “round-tripping” an Instead, theory paid is that Cree agree- their into an identical stock-sale tered money for Microvision’s amount of extra ment with General Electric. These facts value, and that beyond its market stock support do not reasonable belief that excess amount returned Microvision intentionally overpaid for its invest- Cree D for R & disguise payment of a inment Microvision. actually perform. did not that Cree work round-tripping plausi- allegation
This of leg As for the second of this al ble, however, if in- only both transactions leged “round-trip” provided Cree no —that payment excess amount of volve this same payments R D for & Microvision’s —the If lack otherwise economic substance. complaint relies statements from two substance, transaction has economic either confidential sources besides Eric Hunter. wash, cannot be a the transactions project An unnamed former Microvision artificial of would be no inflation there manager purportedly “personal who had Thus, allege must revenue. knowledge contract between Cree support a reasonable facts sufficient R D and Microvision” stated the & round-tripping legs that both belief develop contract “made no mention sham, out. washing each other See improvements green ment of blue and Elec. Co. v. Zenith Ra- Matsushita Indus. devices for mobile handsets” and that laser 574, 587, 106 S.Ct. Corp., dio 475 U.S. “the contract did not contain mile (1986) (“[I]f the claim L.Ed.2d 538 development for the stones deadlines makes no economic simply is one that But the actual contract any products.” must come forward plaintiff] [the sense— statements, providing that belies these support persuasive more evidence with development ... “Cree will undertake claim than would otherwise be neces- their useful in green LEDs and LDs blue sary”). display systems.” scanned beam Addition adequately fails lays program out ally, specific the contract the conclusion that either supporting this source’s goals and deadlines. Given “round-trip” transactions leg of Cree’s R D familiarity with the & evident lack Microvision lacked economic sub- contract, sup cannot the facts he stated overpay- intentional stance. As complaint’s assertion Cree port ment, rely solely on the fact that R & D work. performed no Microvi- paid per share when $50.00 impugning second basis for Plaintiffs’ at on the trading shares were sion’s $36.88 from a R & D contract was statements public filings closing deal’s date. *17 R D di- former Microvision & confidential show, however, that about this transaction rector, position gave that his who stated to invest in Microvision agreement Cree’s knowledge him of Microvision’s “internal shares signed was when Microvision’s But the projects.” research and external Moreover, at the trading $63.75. that Microvision and complaint also states agreement provided a neutral formula to denied that director access Cree officials if purchase price established $50.00 agreement. R & D information about the price dropped share substan- Microvision’s Thus, only firsthand testimo- source’s Micro- tially by closing the date. Because ny that he did not know whether Cree dropped, in fact price vision’s share Yet, plaintiffs D R & work. price performed fix at operated to agreement allegations support note-worthy argue these It is per share. $50.00 180 performed in fact no report,
belief that Cree other Cree compa- announced that R & D work for Microvision. Fraud is not supply agreement nies had modified the in a reasonable inference to be drawn from push Spectrian’s October back pur- the statements of this source. chases to subsequent quarters the two and give Spectrian a million credit if Ul- $2.1 Acquisition Spectrian C. and UltraRF did not specified meet devel- traRF/Cree D Agreement R & opment goals. 12, In a March 2002 press release, Cree announced that it expected also complete the LDMOS-8 arrangement development “round-tripping” Spect- during and to deliver it quarter the fourth January filing, rian. SEC Cree 2000, fiscal 2002. But it also in stated that the disclosed that December it had delays prompted UltraRF, Cree to consider acquired writing a division of Spectrian down California, goodwill UltraRF’s Sunnyvale, for one-time located $100 charge of million. engaged May million. Cree’s $60 UltraRF was the de $77 2002 quarterly report disclosed that sign manufacturing and of transistors and companies again supply modified the laterally diffused metal oxide semiconduc (“LDMOS”). agreement to extend it time, six months tors At the same Spectrian’s purchase reduce total also commit- Spectrian agreed announced that million, ment to subject pay Cree million to further $54.8 for the further devel $2.4 reduction if opment complete Cree did not Spectrian of LDMOS devices for development of the technology. and to LDMOS-8 purchase from Cree million of $58 quarterly report also products disclosed that period over UltraRF/Cree Cree wrote years. entirety down the two In March UltraRF’s Cree amended goodwill in March having its January filing, reporting that it determined had fully its value was impaired. allocated purchase price million of its $81.6 goodwill. UltraRF to During July the course of a out, call, As it reported turned conference the defendants Merrell UltraRF/Cree better-than-expected revenues in fiscal Swoboda stated that Cree had million, 2001 of important of which achieved development about 90% $19.2 mile- came from Spectrian. its sales to stones LDMOS devices and expect- May quarterly report spoke testing ed to be completed by of Ul- September traRF with “In 2002. But optimism: statement, cautious Cree’s annual filed term, long 19, 2002, August UltraRF’s success depend will was less optimistic and stated, simply on the rate at diversify which we our “If we are unable to com- Spectrian-concentrated plete product the full qualification business.... We process believe that product ramp up production LDMOS line will en- recently of our growth able of our products products released adequately, customers LDMOS-8 other Spectrian.” Spectrian than During may reduce pur- first the amount it quarter of fiscal during applicable Cree announced that chases quarter under high agreement.” level of sales from its UltraRF operations continued, reporting another quarterly The next report dated October million in revenue. $9.6 *18 29, 2002, disclosed that UltraRF/Cree’s
Cree, however, began to have trouble Spectrian sales to in that quarter totaled developing device, a only $190,000. newer LDMOS It also disclosed that the “LDMOS-8,” dubbed Spectrian which re- supply amended agreement “permits quired. February its 2002 quarterly Spectrian significantly to pur- reduce its fact, price goodwill. if not to tion While this we were able obligations chase alone, standing might signal of our LDMOS- that Cree complete qualification our the end of the first prior great made an that products investment carried risk, reward, 2003 and for each subse- quarter of fiscal potential and indeed for it parts quali- until are quent month those suggest price, does not an excessive much fied.” price. a fraudulent A “fair” acquisi- less tion price depends variety on wide January quar- in Finally, Cree’s factors, value, dividends, including market disclosed that terly report, Cree earning prospects, the nature of the enter- development delays caused LDMOS-8 ... prise, “any other facts supply agreement to cancel the Speetrian any light prospects.” throw on future See in late payment a final million with $5 Int’l, Icahn, Viacom Inc. v. 946 F.2d allowed. agreement as the (2d Cir.1991). 1000-01 alleges that Plaintiffs’ engaged matter that Cree truth of the was telling the fact that Most the com- “round-tripping” Speetrian in with and plaint particular that is devoid overpaid for “intentionally that Ul- Cree speak to fraudulent valuation UltraRF understanding that traRF with the acquired. at the time it was It relies on returned to Cree as overpayment would be conclusory hardly probative state- Supply Agreement.” under the revenues by ments four confidential sources besides alleges The further that Cree’s example, Eric Hunter. For Cree techni- misleading they disclosures were because cian asserted that “it was well-known “prior acquisi- that to the failed to disclose for a they overpaid within Cree that had tion, ability it did not have the Cree knew company prospects,” with dim but in contemplated the R & D perform complaint does not tie this “well-known” agreements” and that “Cree never per- any particular sentiment date or R D performed required the & work under In hindsight, employees likely Cree sons. Speetrian.” agreements its regretted acquisition, the UltraRF but this ultimately fact that had to Cree does not mean Cree knew ex ante goodwill write down the value of UltraRF’s Also, a investment would sour. former develop or was unable to the LDMOS-8 department in IT assert- employee Cree’s “ timely in fashion does not technology ‘very aggressive’ ed that was Cree fraudulently overpaid for mean and “would ‘move cutting deals Cree” neglected or to conduct LDMOS- UltraRF necessary.” vague This the line’ when development. These facts 8 research provides particularized statement also no just having are consistent with Cree as supports fact that the belief that Cree hope securing profits, taken a risk in the A for- intentionally overpaid for UltraRF. risks are and it is well known Spectri- president mer assistant to the industries, great high-technology such an’s division asserted Ul- UltraRF venture, standing as Cree’s. A failed and that products traRF had no “saleable” alone, infer- permit does not a reasonable “the division would be worth its total value ence of fraud. and infrastructure or between facilities million.” The com- million and complaint’s primary $5 $10 basis for this however, plaint say, does not how allegation purchase is the fact that person would know this information price exceeded UltraRF’s book value times, valuing expertise would have business. forcing about five Cree to allocate Moreover, appears his assessment be approximately acquisi- million of the $81.6 *19 complaint by knew, in the ry allegation contradicted the fact that it Cree when en- UltraRF, R D being acquired by agreement, that after tered into the & that it Cree, perform could not it. approximately did sell million of $30 products Spectrian. Spectrian to Whether short, In complaint fails plead to immaterial; found useful is products particularity with facts that Cree made purposes, for Cree’s these were bona fide any misleading disclosures with respect products shipped sales because “real were Spectrian transactions. paid real who then with [a] ] customer! WTI, Xemod, money.” Bristol-Myers Squibb real In re D. Lighthouse Litig., F.Supp.2d Investments and R & D Sec. (S.D.N.Y.2004). Agreements complaint alleges, Plaintiffs’ also complaint support
The also fails to detail, in far less that Cree entered into leg second of the undisclosed “round-tripping” arrange round-trip Spectrian with “sham” —the with technology ments three other firms— R D product agreement. sales and & The Theatre, (‘WTI”), Xemod, Inc., World Inc. problem is that complaint’s basic the facts Lighthouse, pattern alleged Inc. The alleges it do not contradict public overpaid was Cree for investments in Spectrian disclosures. Cree disclosed those firms in exchange for the firm’s Spectrian purchase committed to cer- promises pay Cree for R D& services tain products, levels of UltraRF which is knowledge with the that Cree would not precisely happened. what The actually perform the services. assigns deal, a sinister motive to the in failure, but, light of UltraRF’s ultimate as respect With arrangement, to the WTI above, we noted there are no facts to Cree filed a preliminary proxy on SEC sure, support this claim or belief. To be Form PRE 14A September in reciprocal contracts without more are not which disclosed in April per se fraudulent. had invested in million $5 WTI. proxy definitive statement filed three In an attempt to cure deficient their later, weeks Cree disclosed that in late pleading, plaintiffs’ complaint alleges that four-year WTI entered into a devel- Cree concealed what it upon knew enter- opment agreement with Cree and that ing agreements Spectrian De- WTI had option exercised its to terminate cember 2000—that would UltraRF/Cree agreement in March 2001. In Cree’s be able develop neither to the LDMOS statement, 2003 annual in September filed technology nor attempt develop it. 2003, Cree disclosed that it had taken complaint proffers just one confiden- several write-downs of its WTI invest- tial source to support allegation, ment, recognizing its value to be im- Spectrian president vice operations who paired. These write-downs occurred baldly, stated performed any “Cree never the fourth quarter of fiscal 2001 in the real R D& for Spectrian,” and who called $750,000, amount of quarter second R Cree’s & D work “smoke and mirrors.” of fiscal the amount of mil- $2.1 does not facts to lion, and in the fourth quarter of fiscal support how this source would know that 2002 in the amount of million. $2.1 performed D no “real” R & UltraRF/Cree Spectrian. Moreover, work for even this Plaintiffs’ alleges that Cree observations, source’s they if knowingly fact overpaid for its investment in observations, support do not the concluso- WTI and hid this fact failing to disclose *20 Cree’s 2003, mod, Lighthouse before 2003. and September until write-downs 2002 described in 2001 and not, reports annual complaint does The later. year a over invest- privately-held on its write-downs regarding however, any allegations make aggre- D in the and R & revenues ments agree- development of legitimacy disclosed report 2001 annual gate. Cree’s com- briefly between that existed ment in the a million write-down that it took $4.6 panies. a “to establish of fiscal 2001 quarter fourth Xemod, announced Cree respect With private in made reserve for investments 2000, 20, September on press release in to be other was considered companies that in Xe- million invested it had $11.3 that to value.” impairment temporary than and maker developer mod, privately-held it that report discloses 2002 annual Cree’s com- for components wireless amplifier of its on million write-down recorded $20.4 also point, Cree some At munications. their due to investments privately held Inc., Lighthouse, of in an affiliate invested these explains that Cree impaired value. dis- specific no contains though record transactions to the disclosures related invest- Lighthouse of the by Cree closure in their complain which the about statement, how- annual Cree’s ment. complaint. 2003, ever, disclosed September in filed documentary alleges no on its took that Cree of write-downs series allega- support personal source In and Lighthouse. in Xemod investments for intentionally overpaid that Cree tion 2001, took of Cree quarter fourth R & perform or failed to these investments Xemod and million on of $2.4 write-down simply It agreements. pursuant D to the the second in Lighthouse; million on $1.4 by hindsight, fraud pleading in engages 2002, an Cree took $8.4 fiscal quarter of down these had to write noting that Cree mil- and on Xemod $1.8 write-down million 2000, 2001, and years fiscal investments in the fourth and in Lighthouse; on lion these 2002, report did not and Cree that million it took a of quarter $3.4 2003 annual it filed its until write-downs Lighthouse. Cree’s on write-down Cree, filings public report. Previous further disclosed statement annual write-downs, however, albeit report the did agreements R D& had completed Cree breaking down without aggregate, the recent Lighthouse in Xemod and were overvalued which investments the two agreements, Under these past. if choice Even what amounts. $500,000 in paid $3.5 Cree companies account- improper was method reporting in 2003. million $5.2 million specifi- not complaint does ing, which the not reporting is allege, this method cally Cree alleges that Plaintiffs’ of “round- allegation plaintiffs’ probative investments for its intentionally overpaid tripping.” for exchange Lighthouse Xemod and funds to returning court’s sum, the district companies those affirm we ground The com- R & D work. “sham” dismissal Cree particu- with sufficient misrepresentations it fails to state alleges also plaint allega- support the larity existence disclose the needed did not Cree misleading state- made agree- that Cree tions development or the investments though ments. even September until ments early 2000. as as were executed some IV however, did in shows,
record aof second element For on invest- write-downs disclose the fact § 10b of the under claim WTI, fraud Xe- securities developments with ments thereunder, Act and Rule 10b-5 Exchange positions based on the that individuals held *21 allege that plaintiff must the defendant in Cree. But it any concluded that more misleading made the statement or probing inquiry omis- scienter was rendered intentionally or with “severe sion reckless- moot its conclusion that the complaint danger regarding deceiving ness” the failed to plead that the defendants made v. plaintiff. Hanger any the Ottmann Ortho- misleading statement or omission. Inc., pedic Group, 353 F.3d 343-44 Because no misleading statement or omis- (4th Cir.2003). A showing negli- of mere sufficiently alleged, sion was the defen- gence will not suffice. Id. dants could not misrepresenta- have made tions or omissions intentionally or with significantly PSLRA sufficient recklessness. strengthens requirement for pleading agree We with this conclusion. While this scienter. Whereas Federal Rule of complaint allege does facts that dem- 9(b) person’s Civil Procedure allowed a onstrate that at least defendants Neal generally,” state of mind to averred “be Hunter, Merrell, fairly and Swoboda had provides: the PSLRA intimate knowledge of the various relevant any In private arising action under this transactions, any inferences that could be chapter plaintiff may which the recov- drawn from the facts are immaterial be- money damages only proof er on cause the statements omissions about particular the defendant acted with those transactions were misleading. not mind, shall, complaint state of respect to each act or omission addition, other facts stated chapter, partic- violate this state with complaint are too circumstantial to ularity giving a strong rise to in- give “strong rise to a inference” that the that the acted with the ference defendant defendants acted with scienter. The com required state mind. plaint suggests that the defendants artifi 78u-4(b)(2). Thus, 15 allege U.S.C. cially price inflated Cree’s share in order against securities fraud claim individual profit personal from sales of Cree stock. defendants, plaintiff allege must facts But insider trading imply can only scienter that support “strong inference” each if timing and amount of a defendant’s defendant acted with at least recklessness trading See, were suspicious.” “unusual or in making the false statement. See Tel- e.g., Solutions, In re PEC Inc. Sec. Litig., labs, Inc., 602-03; 437 F.3d at Southland 390; Larkin, 418 F.3d at Ronconi v. Solutions, Inc., Corp. Sec. v. INSpire Ins. (9th Cir.2001). F.3d The com (5th Cir.2004). 365 F.3d 363-67 And plaint falls far short of showing that if the defendant corporation, plain- is a trades were made at a time consistent with tiff allege must support facts that a strong knowing or reckless fraud. The inference of respect scienter with to at does not allege that defendants timed their least one agent corpora- authorized sales to profit from particular disclo tion, liability since corporate derives from sures, and defendants’ sales generally oc Tellabs, Inc., the actions agents. of its See prices curred at especially that were not 602-03; 437 F.3d at Corp., Southland Sec. high for period. Ronconi, the class See 365 F.3d at 363-67. 253 F.3d at (finding defendants’ sales The district if plain- court held that suggest did not “knowing falsehood” when true, tiffs’ sales were made at prices well below the have, may sufficiently alleged Thus, scienter stock’s high point). example, through a series of attenuated inferences while Cree’s shares high reached a of $198 catching a valid hope with the over dition period, class during the share per claim. trades within Hunter’s of Neal 75% shares occurred when Cree’s period
class
Additionally,
V
per share.
below
traded
$80
defendants’
provide
does not
Finally, the district court relied
period
the class
outside
trading patterns
adequately
failure
loss
plaintiffs’
their trades within
comparison with
permit
causation,
fourth element of a securi
*22
(faulting
id. at 436
period. See
the class
§
claim under
10b and Rule
ties fraud
trading
defendants’
stating
for
plaintiff
held,
plaintiff
a
must
10b-5. As we have
months before class
history
only
for
seven
mis
allege
prove
the defendant’s
period).
caused the
representations
proximately
case,
the
economic loss—in
plaintiffs
num-
emphasize the
complaint does
The
of the value of their shares.
diminution
traded
that the defendants
of shares
ber
Hillson,
Miller v. Asensio &
F.3d
value,
increment
the settlement
rath-
(4th Cir.2004)
231-32
(explaining loss cau
*23
er than a reasonably founded
hope
require
to
a showing
sation
that “defen
discovery
process will reveal rele-
misrepresentation
dant’s
was a substantial
vant evidence. Such a rule would tend
cause of the loss
showing ‘a direct or
private
transform a
securities action
proximate relationship between the loss
”
partial
into a
downside insurance policy.
and the misrepresentation.’
(quoting Gas-
Supervisors,
ner v. Bd.
103 F.3d
of
347-48, 125
(internal
Id. at
1627
quo
S.Ct.
(4th Cir.1996))).
360
Moreover, the Su
omitted).
tation marks and citations
preme Court has not
holding
ruled out a
Accordingly, we conclude that a
9(b)
governs
Rule
a pleading of loss
plaintiff purporting
a securities
Pharm.,
causation. See Dura
544 U.S. at
fraud claim
only prove
must not
loss cau
346,
187 from & equipment [C C] worth Xemod, about WTI, Lighthouse, in- already held a beneficial 2003 which Cree Hunter’s Because complains. now he terest, understanding that &[C facts” of with the the “true not reveal did use and transactions, revelations would restrict the 2003 Chairman C]’s these plaintiffs’ proceeds payments loss. allocation have caused could not market con- long-term requirements that “the respond under the While tract, allegations disguising & se- thereby [C C]’s Hunter’s have construed would broadly since Cree and forced invento- cashflow deficit complaint] 2003 vere his [in engaged crystals. in round carbide ry surplus it of silicon denied previously had that Hunt- remains problem tripping,” theory on the plaintiffs’ problem with gen- even complaint is devoid er’s that these facts had & transactions is C C round-tripping. We eral public filings, so already been disclosed court’s dis- the district agree with thus in Hunter’s 2003 their revelation causation pleading loss for lack of missal price to caused Cree’s stock could not have Micro- dealings with respect with filing May quarterly decline. Cree’s WTI, Xemod, Light- vision, Spectrian, copy supply of its with the SEC included a house. C, obligated C & with & which contract C car- amounts of silicon purchase C to set Second, to Cree’s respect Likewise, April & crystals. C C’s bide C, theory of plaintiffs’ with C & dealings an- quarterly report and Cree’s but from a different suffers loss causation *24 agreed to report nual disclosed that Cree Eric Hunter’s fatal flaw. no less equipment for repurchase crystal-growing relating allegations did contain a that amount as apply million and $5 C, Hunter accusing and Neal Cree to C & crystal pur- for future credit to C & C of: by Eric of these facts Disclosure chases. (d) an undisclosed Entering into could not in his 2003 Hunter contract requirements long-term price stock caused Cree’s therefore have Hunter, C] of & Cor- [C Chairman Jeff explained, court As the district decline. required C]&[C ... which poration nothing complaint discloses “Eric Hunter’s crys- of silicon carbide accept shipments improper an new, merely attributes but demand, ... in excess of market tals far facts.” disclosed purpose previously oper- artificially increase in order to by approxi- of in this ating and income Cree causation allege To loss more, and artifi- that mately forty percent case, would have plaintiffs share value of cially per increased to new facts disclosed the market reacted previous stock. 2003 that revealed in June fraudulent.3 to have been (e) representations and the Misleading [SEC] investors disclosed, the facts were no such million Because in excess of by purchasing $4.0 (ac- 278, (S.D.N.Y.2005) plain- F.Supp.2d 305-07 a acknowledge possibility 3. We by loss causation successfully allege plaintiffs' causation of cepting loss tiff could previously concealed risk ma- pleading that a could not service that Parmalat where news terialized, causing plaintiff's loss. such previous disclosures revealed its debt case, not need to identi- plaintiffs would a position company's true concealed the previ- corrected the fy public disclosure that a tumble). price to But the share caused ous, misleading the news disclosure because any previously alleged that plaintiffs have not be the would itself the materialized risk 2003, in June risk materialized concealed plaintiffs’ loss. that caused revelation of fraud causing their loss. See, Litig., e.g., In re Parmalat Sec. price 13, in drop Cree’s share on June reasons, For all of affirm these we logically more occurred because the district court’s dismissing order plaintiffs’ 10(b) feared that a market lawsuit launched § claim under of the Exchange Act corpora- founder and former of the CEO and Rule 10b-5 for failure to state a claim portended period tion instability and for which relief granted. can be discord that could disrupt corporation’s loss, however, That operations. is not one VI
for which
in
plaintiffs
this case are
The district court dismissed plaintiffs’
compensation.
entitled to
four other causes of
essentially
action as
plaintiffs
in
argue
the alternative
dependent upon plaintiffs’ success in alleg-
they
should at
granted
least be
leave
10(b)
ing
§
a claim under
Exchange
light
amend their
Act and Rule 10b-5. Count II alleges a
Supreme Court’s
decision Dura Phar-
20(a)
§
claim
Act,
under
Exchange
maceuticals,
544 U.S.
125 S.Ct.
which imposes liability
person
on each
who
(2005).
canWe find no for concluding basis that mandates that corporate officers forfeit bo Dura provides Pharmaceuticals plaintiffs profits nuses and corporation if the is “re with a cure for the deficient quired of to prepare an accounting restate loss causation their complaint. in- The ment” due to the issuer’s “misconduct.” formation that Eric complaint Hunter’s § re- 15 U.S.C. 7243. While not, Cree has to vealed 12, 2003, to the date, world June were issued accounting restatement historical facts that plaintiffs could not that could provide a claim, basis for this change. have, plaintiffs therefore, The plaintiffs argue § that 304 is not depen why demonstrated no reason we should upon dent having restatement actually permit them leave to amend their issued, com- been upon but being one “re plaint. quired.” They that complaint note supporting reasonable to facts point violations GAAP numerous alleges misleading. were disclosures that belief issue restatements. “require” dismissed properly court The district case, for the rea- were the if this Even Congress that 10(b) type case as one this complaint’s rejected sons we enacting the by to eliminate sought claim, that the conclude we 10b-5 Rule that requirements The PSLRA’s PSLRA. that adequately not does technical are not in this case applied required. is any restatement unwary plaintiffs by which rules pleading addition, presented have not of the heart they go to trapped; can be provides § 304 analysis that convincing market simply on based claims separating action, a cause litigants private actual fraud. based on from claims risks issue. that not now reach although we do that correctly concluded The district court Co., 98 Power Corp. v. Ohio Ormet See class of fell into former this case Cir.1996) (4th (noting 799, 805 F.3d claims. if does statute “presumption court’s the mar- appears it epilogue, anAs cause of private create expressly not regarding same conclusion exist”). ket reached the action, not one does record shows allegations. plaintiffs’ dropped price share although Cree’s YII day after Eric from $18.10 $22.21 court’s the district uphold we Because on June his Hunter filed in its en- plaintiffs’ dismissal a low of dropped to $11.84 and then upon pass no cause we have tirety, quick- price recovered August claim plaintiffs’ argument the end of trading above ly, $18.00 limita- statute applicable by the barred most of higher for and at $22.00 tions. 2004. of the district judgment affirm the We VIII court. continuing down case boils This AFFIRMED. intra-Hunter-family dis- from an fallout Hunter, a former 2003, Eric In June pute. dissenting: SHEDD, Judge, Circuit Neal Cree, his sued brother officer the 170- court dismissed district Cree, Hunter, purportedly an officer Class Consolidated First Amended page way Cree was dissatisfaction over *26 Teach- (“Complaint”) Complaint Action filing Eric Hunter’s operated. With being of Louisiana System Retirement ers’ action, of Cree shares price the defendants (“TRSL”), named as tem- For this share. per over dropped $4 managers of its Cree, several stock, Inc. and of Cree’s price the drop in porary “Cree”) complicated secu- in a (collectively, com- their this case filed in plaintiffs the action, that the Com- holding fraud way rities to the attributing drop the plaint, sufficient to plead failed plaint years prior the four during run was 10(b) § of action under support cause point plaintiffs While 2008. to June of 1934 Exchange Act the Securities high dealings and reciprocal business some conclusion, reaching its Rule 10b-5. compa- different with six investments risk applied interpreted district court transactions during period, nies Reform Litigation the Private Securities filings over public disclosed (“PSLRA”), No. 104- Pub.L. of 1995 Act been able have not plaintiffs and the years, 190
67, view, 109 my Stat. 737. In the factual to an ordinary fraud, action for a securities allegations in Complaint satisfy the fraud action must meet heightened heightened pleading requirements of the imposed by standards the PSLRA when PSLRA as well as the ordinary pleading pleading the first two of these four ele- requirements apply action for 78u-4(a)(l). ments. 15 U.S.C. When fraud, provided as Rules 8 and 9 of the pleading the final two elements of securi- Federal Rules of Civil Procedure. Accord- fraud, ties plaintiff must simply satisfy ingly, I would reverse the decision of the the generally applicable requirements of district court and remand this case for Rules 8 and 9 of the Federal Rules of Civil further proceedings consistent with this Procedure.
opinion. As the majority notes, the district court dismissed the Complaint for three rea- I (1) sons: failure to plead particulari- We review de novo the decision of the ty all facts giving rise belief district court grant a motion to dismiss false statement or omission of material pursuant 12(b)(6). to Fed.R.Civ.P. Kloth (2) occurred, fact failure to plead with v. (4th Corp., 444 F.3d 319 Microsoft particularity facts giving rise to a strong Cir.2006). A grant court should a Rule scienter, (3) inference of failure to ad- 12(b)(6) only motion if “after accepting all equately plead loss causation.2 The ma- well-pleaded allegations in jority approach to testing the adequacy of complaint as drawing true and all reason the Complaint examines isolation each able factual inferences from those facts individual suspect transaction in order to plaintiffs favor, appears it certain that ascertain whether the elements of securi- plaintiff prove any cannot set of facts ties fraud have been adequately pled with in support of his entitling claim him to respect to each However, one.3 ap- relief.” Edwards City Goldsboro, v. 178 proach ignores the fact that this case re- (4th Cir.1999).1 F.3d 244 volves a single around securities fraud ac- Generally speaking, the majority opinion against tion a single company, Cree. correctly summarizes the law of securities fraud. plead prima case, To Therefore, one the Complaint does not—and facie (1) must allege: a false statement or need omis- allege an action for securities not— sion of by (2) material fact defendant, fraud with respect to all six companies scienter, (3) reasonable by reliance the with which Cree Instead, dealt. the Com- (4) plaintiff, and loss causation. plaint Hillson alleges a single cause of action for Inc., Partners L.P. v. Adage, 42 F.3d fraud, securities as evidenced many (4th Cix.1994). However, in contrast transactions with multiple companies. If 1.With exception requiring 2. This strong case; is a thus, fraud-on-the-market scienter, inference of the PSLRA does not investor upon publicized reliance market change prices presumed. Basic, our normal standard Levinson, of review for a Inc. v. 12(b)(6) 224, 246-47, motion. U.S. part, For the most S.Ct. *27 (1988). L.Ed.2d 194 simply PSLRA quantum the modifies of infor- mation that must be included in complaint. a 3. This approach is substantially the same as Accordingly, purposes for my analysis, of I employed the one court, which, the district assume well-pleaded the truth of all allega- like majority, the opinion divided its into sec- tions Complaint, and I draw all reason- according tions titled to the companies that able factual inferences in favor of TRSL. i.e., C, Cree Microvision, dealt with: C & WTI, Spectrian, Xemod, Lighthouse. and The state- J.A. 1007. Period.” the Class ade- pled is transactions these one of even filings, press 23 SEC include ments re- pleading the to meet enough quately calls, one releases, and conference two Rules 8 and the PSLRA under quirements Therefore, Complaint the news article. the must survive of action cause the and this ele- prong first of meets the clearly Moreover, the totali- if to dismiss. motion be- each statement by specifying ment larger pic- reveals actions ty of Cree’s misleading. to be lieved neces- meet to the sufficient of fraud ture must this case requirements, adequate sary pleading Further, gives Complaint the the stage of current the beyond is advance the statements why each of reasons C & C the my opinion, that Cree alleged proceedings. misleading. TRSL has alone, viewed especially when in- to in numerous activities transactions was involved numerous other the artificially. with These conjunction its revenue flate whole, a reason- permit schemes, “channel as a known as transactions fraudulent denial requires “round-tripping,” fraud that involved inference of stuffing” and able Cree, in to dismiss. motion sham deals of series Cree’s of compa- at other insiders collusion with goods or services nies, exchange would II return rights secret of subject to either A. Cree’s excused agreements secret or ref- included Cree non-performance.4 misrepresentation a material plead To of these portions favorable the erenced the fact under material of or omission re- filings, press in its SEC agreements each PSLRA, “specify must calls, news ar- and the leases, conference misleading, have been to alleged statement However, portions secret the ticle. is why the statement or reasons the reason which rendered agreements, and, regarding allegation if an misleading, course, were, futile, omit- agreements in- is made or omission statement representations Thus, public Cree’s ted. belief, shall and formation misleading were agreements about these on which all facts particularity with state omissions— they made material because § 78u- 15 U.S.C. is formed.” that belief i.e., that vi- deals “handshake” secret 4(b)(1). alleged has multitude TRSL other- the contracts any substance tiated The Com- by Cree. misleading statements appeared retain.5 wise state- of these specifies each plainly plaint all of note Finally, important it is “Defendants’ heading, ments under its and regarding Cree During TRSL’s Misleading Statements and False Microvision, Spect- “exchanges” illusory stuff- channel example is An 4. rian, others. and C would & C. C with C & ing agreement crystals from carbide silicon “purchase” majority Cree, right C & of return. and the subject district court to secret Both 5. argument on right of re- TRSL's its secret the crux of then exercise C seem miss would pub- crystals. shipments Simply a contract "reject” point. because this turn and legitimate returning be However, actually appears licly disclosed instead of being materially mis- Cree, crys- prevent it from C would store does not crystals to C & Cree facilities, allowing agreements between thereby leading. Cree to secret at tals its publicly companies caused the charges for accounting reserves or other avoid something Thus, appear to be agreement contracts disclosed products. its returned what are omissions they not. per- These appearance Cree to create allowed materially fact, were, public statements rendered profits that sales manent misleading. similarly allegedly illusory. entered into *28 192
transactions are made on od, information and he paid was a consultant for Cree.7 belief; thus, I agree with majority that Eric Hunter’s statements and his close Complaint must state at least professional and familial relationship to “suffi- cient support a reasonable in allegedly fraudulent actors certainly sup- belief allegation” that the material omissions port a reasonable belief that the omissions were misleading. Maj. Op. 174. TRSL in public Cree’s statements were mislead- has alleged sufficient facts to support such ing. by belief basing many reasonable of its Though Eric Hunter’s allegations alone allegations on information obtained from a would likely suffice to satisfy particu- lawsuit by Hunter, filed Eric one of Cree’s requirements larity the PSLRA im- The day co-founders. before the pe- class poses made under informa- closed, riod Eric Hunter filed suit against belief, tion and TRSL identifies numerous Cree, alia, alleging, inter securities fraud. other sources who attest fraudulent, to the In his complaint, Eric alleged Hunter agreements secret between Cree other Cree engaged had “in a series of undis- companies. The majority closed refers these activities, corporate including but individuals as not “confidential (1) Maj. sources.” to” following: limited Op. 174.8 In public addressing these confidential filings omitted material facts in con- sources, the majority nection (2) adopts stock offerings analysis with of the Seventh entered an Circuit in into requirements undisclosed Makor Issues & Rights, Tellabs, Inc., contract Ltd. v. with C & C that amounted F.3d (7th Cir.2006). channel stuffing and round-tripping.6 J.A. Tellabs court held 672. Eric Hunter that a complaint is the brother of Neal which relies on confiden- Hunter, Cree’s chairman tial during sources the class must allege facts sufficient “ period. Eric Hunter is also support ‘to brother of the probability person that a Hunter, Jeff C & C’s chairman during position occupied by the source ” period. class In addition to being a co- possess would alleged.’ information Cree, founder of Eric Hunter was Cree’s Id. at 596 (quoting Kasaks, Novak v. CEO until and during (2d peri- class F.3d Cir.2000)). 6. Though Eric Hunter's Though used never their names do not appear in the the words stuffing” “channel or "round-trip- Complaint, a inquiry modest by Cree would ping,” it facts sufficient to reasonably likely they establish who are. These so-called infer such schemes. confidential by sources cited TRSL are nu- merous, they certainly provide sufficient 7. The fact that Eric facts to form a performed Hunter reasonable no belief Cree's public work in capacity his statements misleading. as were only consultant underscores the continuation of his “insider” example, For TRSL identifies a former Cree Cree, status despite the fact that he was process engineer employed during the class longer no an executive company. Only period; this source learned topa from man- personal someone with close corpo- ties to a ager at Cree that a secret existed deal be- ration receive a salary would in exchange for C, tween Cree and C & required C & C no substantial work. accept shipments crystals far excess of its needs. TRSL also reveals a former C & C question 8. I if the characterization as "confi- director and vice president marketing, who dential” particularly context, useful in this claimed that C C& was simply “feeding where the readily sources are by discernable spending Cree” and money like “drunken Cree. These sources are only confidential sailors” because of the close familial relation- they named; not specifically are howev- ship between the directors of Cree and C & C. er, TRSL by identified them years title and the Many examples more of such unnamed they employed companies. various presented sources are in the Complaint. *29 15 U.S.C. scienter. acted with” defendant surrounding issues the resolve
I would 78u-4(b)(2). that scien- have noted the We differently because sources unnamed that amount by allegations not may pled majority does ter be by the adopted approach Han- the v. language of Ottmann recklessness. plain to severe inhere Inc., the of F.3d language plain Group, Orthopedic ger The PSLRA. Cir.2003). Ottmann, unnamed sources re- subject (4th not we PSLRA does averments than other scrutiny that would higher approach categorical a jected Ac- and belief. information upon made and allege motive require pleading a view, complaint must my a cordingly, in satisfy height- the order opportunity “with sources identify unnamed simply under standards pleading ened scienter lan- by plain the required as particularity,” Instead, we at Id. 345. PSLRA. the PSLRA, might include which guage of the re- approach, case-specific a adopted employ- of years job title the source’s allega- the all of to “examine courts quires facts sufficient other ment, possibly, or whether to determine in each tions case plain- the that belief a support reasonable strong infer- a collectively establish they invent sources. merely not tiff did Id. ence scienter.” of re- particularity PSLRA’s of the purpose as Complaint of the reading aon Based of fabrication the prevent tois quirement pleads adequately it whole, I believe a reliability or information, its weigh not the mate- truth Assuming the scienter. aide personal a example, For credibility.9 the indi- allegations, misrepresentation rial CEO to the assistant administrative or certainly defendants named as viduals pertinent piece overhear plausibly could agree- about the secret known have would form later may that information other and various between Cree ments action, notwith- fraud for a securities basis personal from the companies. Aside I be- Accordingly, job title. standing his allegedly management that Cree wealth nu- and the Eric Hunter that both lieve stuffing and the channel from gained listed sources unnamed merous fact mere agreements,10 round-tripping particularity sufficient Complaint provide directors executives individual believing basis a reasonable to form into entering actively people made material- contracts that the disclosed Cree’s to inflate agreements fraudulent omissions. ly misleading strong inference supports revenues B. from omissions material scienter. not have could statements public ele- the scienter adequately plead To compa- of the agents without action, occurred a com- fraud of a ment securities the fraudulent facilitating knowingly ny facts particularity “with must plaint strong infer- Accordingly, transactions. strong inference giving rise to timing rely 10. substance court, do not weighs majority I 9. Like district strong inference finding a trades in credibility unnamed sources stock of various directly Rather, may be their recollec- scienter them because scienter. and discredits at publicly available informa- acts fraudulent tions conflict the nature shown However, 12(b)(6) motion assessing omitting de intentionally salient tion. issue here-— weighing evi- from requires we refrain con publicly disclosed otherwise from tails favor of all assume dence tracts. particularly relevant in plaintiff. is This case, claim of TRSL's the crux where current infor- publicly available falsified mation. *30 ence supported of scienter is under the 672. J.A. Eric Hunter’s contra- Complaint as a dicted, whole. or at least called question, into prior denials of round-tripping.
C.
When the information in Eric Hunter’s
public
became
knowledge,
Finally, the Complaint must adequately
Cree’s stock price
by
dropped
nearly 20%.
causation,
loss
subject
which is not
Under the normal pleading standards of
heightened pleading requirement
8,
Rule
a reasonable inference of loss cau-
under the
agree
PSLRA.
I
with the ma-
plainly
sation
exists under these facts.
I
jority that
the Supreme
Court
Dura
simply cannot envision a more direct and
Pharmaceuticals,
Broudo,
Inc. v.
544 U.S.
proximate causal link than an
insider’s dis-
125 S.Ct.
that the ordinary requirements of Rule 8
Ill
applied.
Id. at
Rule 8 “short plain statement” re-
quirement.
The Complaint alleges loss by causation
referencing the precipitous decline in stock
value upon the filing of Eric Hunter’s law-
suit against Cree. Though Eric Hunter’s
complaint specifically only referenced
secret agreements C, with C & it clearly
stated that Cree had engaged in a “series
of undisclosed ... violation[s] the feder-
al laws, securities ... including but not
limited to” the agreements with C & C.
11. I note that this
distinguishable
case is
from
that revealed secret
agreements;
fraudulent
Dura because the corrective
disclosure
the misrepresentations
upon
that TRSL relied
Dura was much
tenuously
more
connected to
public
disclosures
failed
to mention
made in
complaint.
Broudo’s
agreements. Thus,
these secret
compared to
The corrective disclosure in
compa-
Dura—a
Dura, this case has a much closer
be-
nexus
ny press
simply
earnings
stated that
release —
tween the corrective disclosure and the mis-
would be diminished because of
drug
reduced
representations
upon
relied
by TRSL.
sales. Id. at
However,