Costablie v. Natus Medical Incorporated et al, No. 4:2017cv00458 - Document 47 (N.D. Cal. 2018)
Court Description: ORDER GRANTING 29 Motion to Dismiss First Amended Complaint. Amended Pleadings due by 4/6/2018. Signed by Judge Jeffrey S. White on February 26, 2018. (jswlc3S, COURT STAFF) (Filed on 2/26/2018)
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Costablie v. Natus Medical Incorporated et al Doc. 47 1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 Case No. 17-cv-00458-JSW JOHN COSTABILE, Plaintiff, 8 ORDER GRANTING DEFENDANTS' MOTION TO DISMISS PLAINTIFF'S FIRST AMENDED COMPLAINT v. 9 10 NATUS MEDICAL INCORPORATED, et al., 11 Re: Dkt. No. 29 United States District Court Northern District of California Defendants. 12 Now before the Court for consideration is the motion filed by Natus Medical Incorporated 13 14 (“Natus Medical”), James B. Hawkins, and Jonathan A. Kennedy (collectively, “Defendants”) 15 seeking to dismiss this securities class action. The Court has considered the parties’ papers, 16 relevant legal authority, and the record in this case, and the Court finds the motion suitable for 17 disposition without oral argument. See N.D. Civ. L.R. 7-1(b). For the reasons set forth below, the 18 Court HEREBY GRANTS Defendants’ motion to dismiss, but will afford Plaintiff leave to 19 amend. BACKGROUND 20 21 Plaintiff John Costabile alleges that he purchased Natus Medical common stock at 22 “artificially inflated” prices due to alleged misrepresentations and omissions made by Defendants 23 regarding a supply contract between a Natus Medical subsidiary and the Venezuelan Ministry of 24 Health.1 Plaintiff seeks to represent a class of all individuals who purchased or acquired Natus 25 Medical stock during the Class Period (defined as October 16, 2015 and April 3, 2016). (Dkt. No. 26 27 28 1 Though not in the FAC, in the documentation supporting Plaintiff’s motion to become lead plaintiff in this action, Plaintiff represented he purchased 2,000 shares on March 15, 2016 and eventually sold those shares on April 8, 2016. (Dkt. No. 14-3.) Dockets.Justia.com 1 25, First Amended Complaint (“FAC”) ¶¶ 1, 122.) 2 A. 3 Natus Medical and the Supply Contract with the Venezuelan Ministry of Health. Natus Medical is a company which designs, manufactures, and markets newborn care and 4 neurology healthcare products and services worldwide. (Id.¶ 2.) On October 16, 2015, Defendant 5 James Hawkins, Natus Medical’s CEO, and Defendant Jonathan Kennedy, the CFO, announced 6 that Natus Medical, through its wholly-owned Argentinian subsidiary Medix I.C.S.A. (“Medix”), 7 had entered into a three-year, $232.5 million supply contract to provide medical equipment, 8 supplies, and services to the Ministry of Health of Venezuela (“Supply Contract”). (Id. ¶ 3.) In 9 the announcement, Defendants represented that $69 million in prepayments under the Supply 10 Contract were expected by the first quarter of 2016. (Id. ¶¶ 3, 50). United States District Court Northern District of California 11 The announcement of the Supply Contract was received as a significant development by 12 analysts. (See, e.g., id. ¶¶ 4-5.) On October 21, 2015, Defendants issued a press release which, 13 quoting Hawkins, provided details regarding the impact of the Supply Contract on Natus 14 Medical’s revenue forecasts. Specifically, after citing the Supply Contract, Defendant Hawkins 15 noted how Natus Medical had increased its revenue guidance for the fourth quarter of 2015 by $3 16 million and its non-GAAP earnings per share from $ 0.47 to $0.49. (Id.¶ 53.) Hawkins also 17 indicated that Defendants were “increasingly confident that we can achieve and potentially exceed 18 our long term operating margin goal of 20% in 2016.” (Id.) 19 That same day, Defendants held a conference call with analysts to discuss Natus Medical’s 20 earnings. A number of representations were made during this call. For example as with the prior 21 press releases, Defendants represented that the Supply Contract would have a positive impact on 22 Natus Medical’s revenue, with payments from the agreement being anticipated by the first quarter 23 of 2016. (Id. ¶ 55.) For instance, Hawkins told analysts: 24 25 26 27 28 Last Friday we announced that Medix . . . signed a three-year agreement with the Ministry of Health of Venezuela for $232.5 million to supply Venezuela with neonatal and obstetric equipment supplies and services. As stated in our filing, we are to receive three payments totaling $69 million by the end of the first quarter of 2016. Prepayments are to continue throughout the contract period as we fulfill our requirements. We expect to commence on this contract in our fourth quarter, but revenue is expected to be minimal in the fourth quarter. 2 1 (Id.) Later in the call, an analyst asked Hawins to provide additional information on how the 2 Supply Contract would contribute to Natus Medical’s revenue and earnings in 2016. Hawkins 3 answered by again referring to anticipated payments being received in the fourth quarter of 2015 4 and first quarter of 2016: 5 We expect to receive some payments here by the end of the year, to start those three payments totaling the $69 million. And then to— most likely those would extend into the first quarter of next year . . . As we—way this contract is, we’re going to be prepaid throughout the entire contract. 6 7 8 (Id. ¶ 57.) Hawkins further indicated that Natus Medical had, conservatively, included a “couple 9 of million dollars” in its fourth quarter 2015 guidance attributable to the Supply Contract. 10 (Id.¶ 59.) United States District Court Northern District of California 11 In addition, during the conference call Kennedy made the point of highlighting that the 12 Supply Contract was not the first contractual arrangement between the Ministry of Health and 13 Medix. Kennedy instead referenced how the Supply Contract represented a “continuation of an 14 ongoing relationship.” (Id.¶ 61.) Specifically, Kennedy addressed how, around 2010, Medix had 15 completed an almost $100 million deal with Venezuela, thus demonstrating the “ongoing 16 relationship between Medix and other South American countries.” (Id.) 17 Finally, analysts during the call asked about the currency exchange risk inherent in the 18 Supply Contract. (Id. ¶ 63.) Kennedy asserted that the risk was “minimal” because Natus Medical 19 was protected by the fact that the Supply Contract was “denominated in dollars, and our payment 20 is a dollar-denominated payment.” (Id.) 21 The representations by Hawkins and Kennedy continued into November and December 22 2015 at various healthcare conferences. On November 19, 2015, during his opening remarks to a 23 conference, Hawkins expressed “pride” at Natus Medical’s financials and lauded the “major” $232 24 million Supply Contract. (Id. ¶ 65.) Hawkins not only touted the ultimate value of the Supply 25 Contract, but emphasized that Natus Medical was to “be paid up front as we go on this business” 26 with the first payment expected “by the end of the year, and .. . . continu[ing] throughout the life 27 of the contract.” (Id.) 28 At least one analyst at the conference asked how confident Hawkins was regarding 3 1 Venezuela’s ability to perform on the Supply Contract over the entire three-year term. (Id. ¶ 67.) 2 Hawkins responded to this question by acknowledging that there is “always a potential risk with 3 any contract.” (Id.) He then sought to downplay this risk by pointing to Medix’s prior contractual 4 relationship with Venezuela: 5 Yes, so, always a potential risk with any contract. The one thing I would say with this one, before we bought our subsidiary, which is located in Buenos Aires, which is who received this order, a company called Medix, they had received an $82 million order maybe seven years ago and it came through just fine. The money showed up as expected, and it did happen. 6 7 8 So we have pretty good confidence that it should happen. We have been told the money is set aside, and we are looking to get our first payment here by the end of December. 9 10 United States District Court Northern District of California 11 12 (Id.) At a similar December 1, 2015 healthcare conference, Hawkins again lauded the “very 13 large order that [Natus Medical] received from Venezuela totaling $ 232.5 million.” (Id. ¶ 71.) 14 As he had in October and November, he again asserted that Natus Medical was anticipating 15 receiving revenue under the Supply Contract before the end of 2015: 16 We look to some of these revenues to start in December. We expect to get our first $23 million payment in the weeks ahead and then we’ll be prepaid on all of this as we go forward on a rolling basis. It’s quite a big order for us and we are very excited to not only have it ourselves, but also for the babies and mothers in Venezuela. 17 18 19 (Id.) Later, in response to a request from an analyst for additional details, Hawkins again pointed 20 to the imminent commencement of payments and its impact on Natus Medical’s financials: 21 The money . . . that we are receiving for this purchase is all in US dollars. And there always is some potential currency risk as we transfer those dollars into Argentine pesos to do the purchasing and delivering of product. But overall, over this three-year period, we are convinced it’s going to be a good piece of business for us. 22 23 24 It will have average corporate margins of 18% to 20%. And although the gross profits won’t be near that, but the bottom line operating margin should be the same. So we are quite encouraged. We’re expecting to get payment here in the next few weeks and looking for this to kick off . . . . 25 26 27 28 (Id. ¶ 73.) In summary, throughout the fourth quarter of 2016, Defendants represented that the Supply 4 1 Contract was a done deal that would have a significant positive impact on Natus Medical’s 2 revenue, starting in the fourth quarter of 2015. As alleged in the FAC, the market responded 3 favorably to this news, and on December 17, 2015, Natus Medical shares reached an all-time high 4 closing price of $50.48 per share. (Id. ¶ 12.) 5 B. 6 The Alleged Undisclosed Truth. Plaintiff, however, alleges that the above representations regarding the existence of the 7 Supply Contract and its potential impact on Natus Medical’s revenue were false and misleading 8 for a number of reasons. 9 First, and most fundamentally, Plaintiff contends that that there was no enforceable contract at all. Plaintiff relies on a confidential witness (“CW1”) who served as the Venezuelan 11 United States District Court Northern District of California 10 Ministry of Health’s Purchasing Coordinator between February 2016 and July 2016. (Id. ¶ 40.) In 12 this role, CW1 was responsible for “preparing price quotes, handling and maintaining information 13 regarding payments due under contracts for purchases and services, and tracking receipt of goods 14 and services.” (Id. ¶¶ 40.) Plaintiff alleges that CW1 has represented that the Supply Contract 15 was “substantially negotiated” leading up to the fourth quarter of 2015, but not actually executed. 16 (Id. ¶ 43.) As a result, Plaintiff asserts there was, in fact, no Supply Contract in the fourth quarter 17 of 2015 or first quarter of 2016, thus rendering all of Defendant’s statements about that contract 18 (and its potential impact on revenue) misleading. Specifically, he asserts that because the Supply 19 Contract was not executed, no prepayments were scheduled or owed in the fourth quarter of 2015 20 or first quarter of 2016, contrary to Defendants representations. (Id. ¶ 42.) 21 Second, even if the Supply Contract had been executed, Plaintiff contends that Defendants 22 did not disclose to investors that the Ministry of Health failed to make required payments. As 23 detailed above, Defendants repeatedly asserted that they expected the Ministry of Health to begin 24 making prepayments by the first quarter of 2016. Plaintiff contends that these representations 25 were misleading, however, because the terms of the Supply Contract required the Ministry of 26 Health to make prepayments in October, November, and December 2015. (Id. ¶ 13.) None of 27 these prepayments were timely made. In fact, Plaintiff alleges that by December 1, 2015—when 28 Defendants were still touting the imminent receipt of the pre-payments—the Ministry of Health 5 1 was $47 million in default under the terms of the Supply Contract as the October and November 2 payments had not been made. (Id. ¶ 72.) 3 Third, Plaintiff alleges that Defendants failed to disclose that the Supply Contract left 4 Natus Medical with no effective means to enforce its rights under the agreement. Plaintiff relies 5 on the fact that the Supply Contract provided that any questions of interpretation, application, and 6 performance of the contract would be governed by the laws of Venezuela with the City of Caracas 7 being the “special domicile” for such enforcement. (Id. ¶ 47.) According to Plaintiff, this left 8 Defendants with “no means of effectively enforcing their rights under the Supply Contract” 9 because they would be forced to litigate in a Venezuelan court against the Venezuelan government. (Id. ¶ 48.) In support of this contention, Plaintiff points to the allegedly “turbulent 11 United States District Court Northern District of California 10 legal, political, and economic systems in Venezuela” and the Venezuelan government’s alleged 12 intrusion into the independence of the judicial system. (Id.) 13 Compounding this issue, Plaintiff contends that contracts with the government of 14 Venezuela were often disregarded when ministers were replaced. CW1, for example, asserts that 15 “Here things happen in a different way. The minister leaves and everything that he does that isn’t 16 invoiced gets lost — if the money is not committed. One thing is a promise to do a contract and 17 another thing is a contract.” (Id. ¶ 49.) Given this reality, Plaintiff contends that Defendants 18 either were aware, or should have been aware, that imminent elections in Venezuela meant that 19 there was a significant risk that the unsigned Supply Contract would never come to fruition. (Id.) 20 Fourth, Plaintiff asserts that it was misleading for Defendants to bolster public perception 21 of the Supply Contract by referencing the prior agreement prior between Venezuela and Medix. 22 While acknowledging that Medix and the Venezuelan Ministry did have a prior agreement in 23 2011, Plaintiff contends that the prior agreement did not match Defendants’ rosy description. 24 Again relying on CW1, Plaintiff alleges that the prior agreement “failed to come to completion 25 and was cancelled or suspended when the final amounts owing under the contract were not paid to 26 Medix by the Ministry of Health.” (Id. ¶ 44.) Another confidential witness (“CW2”), who 27 worked as Natus Medical’s Director of Operations in Argentina from 2011 to 2013, supports 28 CW1’s description, stating that the prior agreement “was always in the air. Medix was always 6 1 trying to close it” and that there had been a “history of difficulties with payments with 2 Venezuela.” (Id. ¶ 46.) Fifth, Plaintiff alleges that Defendants misrepresented to investors that the Supply Contract 3 4 called on the Ministry of Health to make payments in dollars. (Id. ¶ 63.) In fact, Plaintiff 5 contends that the Supply Contract calls for payments to be made in “Argentinian Pesos at the 6 current exchange rate for the effective day of payment.” (Id. ¶ 64.) 7 C. 8 9 Problems with the Supply Contract Materialize. Plaintiff alleges that the truth about the Supply Contract—withheld from investors during the fourth quarter of 2015—began to come to light in January 2016. On January 11, 2016, Natus Medical filed a Form 8-K which announced that the company 11 United States District Court Northern District of California 10 had failed to meet its revenue guidance for the fourth quarter of 2015. The attached press release, 12 signed by Kennedy, blamed this on the fact that the prior guidance had “included expected 13 revenue of approximately $4 million under the new Venezuelan Ministry of Health contract” but 14 the expected prepayment had been “delayed.” (Id. ¶ 75.) Instead, Kennedy revealed the company 15 “now expects to receive prepayment and begin shipments in the first quarter of 2016.” (Id.) He 16 stated that $5 million of revenue from the Supply Contract was included in the new revenue 17 guidance for the first quarter of 2016 and $60 million for the full year guidance. 18 Similarly, on January 27, 2016, another Form 8-K was filed which again blamed the fourth 19 quarter 2015 shortfall on a “delay” in prepayments under the Supply Contract and this time made a 20 general reference to unspecified “risks associated with our Venezuela contract.” (Id. ¶ 80.) 21 Similar representations were made during a conference call that same day. (Id. ¶¶ 82.) During 22 that call, and in response to a question from an analyst, Hawkins expressed “confid[ence] that this 23 business will happen” and stated it was “safe to assume guidance implies about $0.20 in earnings 24 from Venezuela this year.” (Id. ¶ 84.) Kennedy similarly assured analysts regarding economic 25 benefit of the Supply Contract, by stating “[i]f I had a gun to my head and had to predict, it’s 26 probably in the mid-40%s for a gross profit margin.” (Id. ¶ 86.) 27 28 Plaintiff contends that these partial disclosures of a “delay” and references to unspecified “risks” were themselves misleading as they failed to disclose known fundamental risks and issues 7 1 with the Supply Contract. (Id. ¶¶ 77, 87.) For instance, Defendants continued to not disclose the 2 fact that three pre-payments had been missed during the fourth quarter of 2015. (Id.) 3 Analysts expressed reservation about the prospects of the Supply Contract and at least 4 some analysts removed the Supply Contract from their guidance. (See id. ¶ 88.) Consequently, 5 shares of Natus Medical declined. On January 11, 2016, Natus Medical closed at $38.25, down 6 from $43.20, after a day of unusually high trading volume. (Id. ¶ 76.) On January 27, 2016, 7 following the second Form 8-K and conference call, Natus Medical closed at $34.71, down from 8 $37.15, again on abnormally high trading volume. (Id. ¶ 89.) On February 29, 2016, Natus Medical filed its 2015 Form 10-K. Significantly, attached to 10 the Form 10-K was an (unsigned) copy of the Supply Contract—the first time the Supply Contract 11 United States District Court Northern District of California 9 had been publicly released. (Id. ¶ 92.) This revealed (1) the fact that approximately $70 million in 12 prepayments had been missed in the fourth quarter of 2015, and (2) the allegedly problematic 13 forum and venue selection clause. (Id. ¶¶ 92, 93.) Additionally, in the Form 10-K, Defendants 14 disclosed that recent elections in Venezuela and Argentina had resulted in “significant political 15 changes.” (Id. ¶ 91.) Defendants warned that this, combined with a “highly inflationary economy 16 and recessionary economic conditions,” could “impact the likelihood of the Venezuelan Ministry 17 of Health’s following through with orders under the agreement.” (Id.) Defendants further 18 disclosed that Medix had “not yet received any prepayments under the agreement” and that in the 19 absence of prepayments, Natus Medical would not receive “any benefit” from the Supply 20 Contract.” (Id.) 21 22 23 In the wake of these disclosures, the price of Natus Medical shares again declined, closing at $36.32 on February 29, 2016, down from $37.21. (Id. ¶ 95.) During a March 14, 2016 investor call, Hawkins finally conceded that analysts could 24 discount the expected revenues from the Supply Contract but continued to maintain that the 25 company “really believe[s] this is going to happen.” (Id. ¶ 97.) He acknowledged that the country 26 of Venezuela was “quote, in the toilet” and that “trying to handicap exactly when, with all the 27 changes going on in both governments, Ministry of Health, oil prices, it has made it very 28 difficult.” (Id.) 8 Approximately three weeks later, on April 4, 2016, Natus Medical issued a press release 1 2 releasing its preliminary first quarter 2016 revenue results. (Id. ¶ 99.) The press release stated 3 that Natus Medical had failed to meet its prior revenue guidance and that Natus Medical did not 4 have “any revenue associated with the Venezuela Ministry of Health contract as [it] did not 5 receive any prepayments during the quarter.” (Id.) In the wake of this press release, Natus 6 Medical shares fell to $31.84 per share, down from a previous close of $39.64 — a loss of nearly 7 20% on unusually high trading volume. (Id. ¶ 100.) On April 20, 2016, Natus Medical released its final first quarter 2016 results. These results 8 9 demonstrated that Defendants had slashed Natus Medical’s fiscal year 2016 guidance. In the guidance, Defendants conceded that they could “no longer include revenue or earnings from the 11 United States District Court Northern District of California 10 agreement in . . . guidance until there is more clarity” on the Ministry of Health’s performance 12 under the agreement. (Id.¶ 101.) 13 D. Claims Asserted in this Action. The first amended complaint in this action was filed on July 14, 2017. Plaintiff alleges that 14 15 Defendants’ allegedly false or misleading statements violated (1) section 10(b) of the Securities 16 Exchange Act of 1934 (“Exchange Act’), 15 U.S.C. § 78j(b), and Securities Exchange 17 Commission Rule 10b-5, 17 C.F.R. § 240.10b-5; and (2) section 20(a) of the Exchange Act, 15 18 U.S.C. § 78t. (Id. ¶¶ 130, 138.) Defendants have moved to dismiss these claims for failure to 19 state a claim under Federal Rules of Civil Procedure 9(b) and 12(b)(6). (Dkt. No. 29, Motion, at 20 1.) 21 22 APPLICABLE LEGAL STANDARD A motion to dismiss is proper under Rule 12(b)(6) where the pleadings fail to state a claim 23 upon which relief can be granted. The complaint is construed in the light most favorable to the 24 non-moving party, and all material allegations in the complaint are taken to be true. Sanders v. 25 Kennedy, 794 F.2d 478, 481 (9th Cir. 1986). The Court may consider the facts alleged in the 26 complaint, documents attached to the complaint, documents relied upon but not attached to the 27 complaint when the authenticity of those documents is not questioned, and other matters of which 28 the Court can take judicial notice. Zucco Partners LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th 9 1 2 Cir. 2009) Under Rule 8(a), a plaintiff need only provide a “short and plain statement of the claim showing that the pleader is entitled to relief.” Even under this liberal pleading standard, “a 4 plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than 5 labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” 6 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citing Papasan v. Allain, 478 U.S. 265, 7 286 (1986)). Pursuant to Twombly, a plaintiff must not merely allege conduct that is conceivable 8 but must instead allege “enough facts to state a claim to relief that is plausible on its face.” Id. at 9 570. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court 10 to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft 11 United States District Court Northern District of California 3 v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). While this standard does 12 not impose a “probability requirement,” it nonetheless “asks for more than a sheer possibility that 13 a defendant has acted unlawfully. . . . When a complaint pleads facts that are merely consistent 14 with a defendant’s liability, it stops short of the line between possibility and plausibility of 15 entitlement to relief.” Id. 16 A heightened pleading standard, however, applies in this case. Plaintiff is alleging that 17 Defendants engaged in a pattern of fraudulent or misleading representations in violation of the 18 Exchange Act and Rule 10b-5. Accordingly, Plaintiff’s FAC must meet both the heightened 19 pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). 20 See Zucco Partners, 552 F.3d at 990, 21 Under Rule 9(b), a plaintiff alleging fraud must allege “with particularity the 22 circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). In the securities context, the 23 PSLRA requires that a “complaint ‘plead with particularity both falsity and scienter.’” Zucco 24 Partners, 552 F.3d at 990 (quoting Gompper v. VISX, 298 F.3d 893, 895 (9th Cir. 2002). 25 Accordingly, a securities plaintiff alleging material misstatements or omissions must “specify each 26 statement alleged to have been misleading, the reason or reasons why the statement is misleading, 27 and, if an allegation regarding the statement or omission is made on information and belief, the 28 complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u10 1 4(b)(1). To adequately plead scienter, the PSLRA requires that the plaintiff “state with 2 particularity facts giving rise to a strong inference that the defendant acted with the required state 3 of mind.” Id. § 78u-4(b)(2). DISCUSSION 4 Section 10(b) of the Exchange Act provides, in relevant part, that it is unlawful “to use or 6 employ in connection with the purchase or sale of any security registered on a national securities 7 exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules 8 and regulations as the [Securities and Exchange] Commission may prescribe.” 15 U.S.C. § 78j(b). 9 Rule 10b-5, promulgated under the authority of section 10(b), makes it unlawful for any person, 10 engaged in interstate commerce, to: (a) employ any device, scheme or artifice to defraud; (b) to 11 United States District Court Northern District of California 5 make any untrue statement of material fact or to omit to state a material fact necessary in order to 12 make the statements made, in light of the circumstances under which they were made, not 13 misleading; or (c) to engage in any act, practice, or course of business which operates or would 14 operate as a fraud or deceit upon any person, in connection with the purchase or sale of any 15 security. 17 C.F.R. § 240.10b-5. To state a claim under section 10(b) and Rule 10b-5, a plaintiff must allege: (1) a 16 17 misrepresentation or omission; (2) of material fact; (3) made with scienter; (4) on which the 18 plaintiff justifiably relied; (5) that proximately caused the allege loss. See Binder v. Gillespie, 19 184 F.3d 1059, 1063 (9th Cir. 1999). Where, as here, a plaintiff alleges a “control person” claim 20 under section 20(a) claim which is based on an underlying violation of section 10(b), the pleading 21 requirements are identical for both claims. See, e.g., In re Ramp Networks, Inc. Sec., 201 F. Supp. 22 2d 1051, 1063 (N.D. Cal. 2002); see also City of Dearborn Heights Act 345 Police & Fire 23 Retirement Sys. v. Align Tech., Inc., 856 F.3d 605, 623 (9th Cir. 2017) (“Plaintiff has not 24 sufficiently alleged violations of Section 10(b) and Rule 10b-5. And, without ‘a primary violation 25 of federal securities law,’ Plaintiff cannot establish control person liability.” (citation omitted)). 26 A. Whether Plaintiff Has Alleged Actionable Misrepresentations or Omissions. 27 Under Rule 9(b) and the PSLRA, a plaintiff must “identify[] the statements at issue and 28 set[] forth what is false or misleading about the statement and why the statements were false or 11 misleading at the time they were made.” In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 876 2 (9th Cir. 2012). Notably, this requirement applies to each challenged representation or omission. 3 See, e.g., Doll v. Stars Holding Co., No. 05-cv-01132 MMC, 2005 WL 2811767, at *3 (N.D. Cal. 4 Oct. 27, 2005) (noting plaintiffs must “specify the reasons why each such statement or omission is 5 false or misleading”). For purposes of Rule 10b-5, a statement is misleading “if it would give a 6 reasonable investor the impression of a state of affairs that differs in a material way from the one 7 that actually exists.” In re Cutera Sec. Litig., 610 F.3d 1103, 1109 (9th Cir. 2010) (quoting 8 Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th Cir. 2008)). While a statement is not 9 misleading simply because it is incomplete, it is also the case that a “statement that is literally true 10 can be misleading and thus actionable under the securities laws.” Brody v. Transitional Hospitals 11 United States District Court Northern District of California 1 Corp., 280 F.3d 997, 1006 (9th Cir. 2002). 12 Additionally, the false or misleading statement must also be “material.” Bodri v. GoPro, 13 Inc., 252 F. Supp. 3d 912, 922 (N.D Cal. 2017). “A false or misleading statement or omission is 14 material if there is a ‘substantial likelihood that the disclosure of the omitted fact would have been 15 viewed by the reasonable investor as having significantly altered the ‘total mix’ of information 16 made available.” Id. (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). 17 While materiality should ordinarily be left to the trier of fact, “conclusory allegations of law and 18 unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim.” 19 Reese v. Malone, 747 F.3d 557, 568 (9th Cir. 2014), overruled on other grounds by Align Tech., 20 Inc., 856 F.3d 605. 21 1. Representations Relating to the Existence of the Contract. 22 Plaintiff contends, in essence, that every challenged representation made during the Class 23 Period is false or misleading for one simple reason: The Supply Contract was not signed and, as a 24 result, there was no agreement between Natus Medical/Medix in the fourth quarter of 2015. (See 25 FAC ¶¶ 39, 42.) Because of this, Plaintiff argues that it was misleading for Defendants to 26 announce the Supply Contract to investors, tout its potential benefits to Natus Medical, and 27 include it in Natus Medical’s revenue guidance. Plaintiff, however, has failed to adequately allege 28 that the Supply Contract was unexecuted. 12 1 Plaintiff relies extensively on the allegations of CW1 to support this contention. As 2 detailed above, CW1 is alleged to have been the “Purchasing Coordinator” for the Venezuelan 3 Ministry of Health beginning in the first quarter of 2016. (Id. ¶ 43.) According to the FAC, as 4 Purchasing Coordinator, CW1: 5 6 7 (1) was “responsible for preparing price quotes, handling and maintaining information regarding payments due under contracts for purchases and services, and tracking receipt of goods and services[.]” (Id. ¶ 40) 11 (2) had “oversight responsibility for purchasing department buyers and members of the Ministry of Health’s Commission on Purchasing and Supplies.” (Id ¶ 41.) This Commission, in turn, “advised the Health Minister and made recommendations on purchasing decisions, including . . . appropriate pricing and selection of suppliers.” (Id.) The Health Minister, however, had “ultimate authority for negotiating final prices and other material contract terms, and for executing contracts.” (Id.) 12 Plaintiff alleges that CW1 “confirms that the Supply Contract was not executed by the Ministry of 13 Health.” (Id. ¶ 39.) 8 9 United States District Court Northern District of California 10 14 The PSLRA’s particularity pleading requirements do not foreclose Plaintiff’s reliance on 15 confidential witnesses. However, the PSLRA does require that such sources be described “‘with 16 sufficient particularity to support the probability that a person in the position occupied by the 17 source would possess the information alleged’” and that the complaint contain “‘adequate 18 corroborating details.’” In re Daou Systems, Inc., 411 F.3d 1006, 1015 (9th Cir. 2005) (quoting 19 Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1233 (9th Cir. 2004)). 20 On this record, Plaintiff’s reliance on CW1 is inadequate for two reasons. First, CW1 was 21 “Purchasing Coordinator” for the Ministry of Health beginning in the first quarter of 2016—after 22 the Supply Contract was purportedly executed. This is significant because Plaintiff’s allegations 23 regarding the responsibilities of the Purchasing Coordinator do not plausibly suggest that an 24 individual in that role would have personal knowledge about whether a contract was (or was not) 25 signed months before that individual assumed the role. At most, it appears that CW1 would have 26 personal knowledge about whether the Ministry of Health was performing under the Supply 27 Contract in early 2016. For example, CW1 would likely be in a position to state whether Supply 28 Contract payments were being prepared by the Ministry of Health during this time. 13 1 2 3 4 5 6 The second issue is closely related to the first. Perhaps recognizing that CW1 was not the Purchasing Coordinator at the relevant time, Plaintiff alleges: According to CW1, and based on information provided to CW1 by the Purchasing Coordinator who immediately preceded him, as well as two other individuals who were Purchasing Department buyers and members of the Commission on Purchasing and Supplies during the fourth quarter of 2015 . . . while the Supply Contract was substantially negotiated leading up to the fourth quarter of 2015, it was not actually executed by the Ministry of Health. 7 (FAC ¶ 43 (emphasis added).) It thus appears that CW1’s knowledge about whether the Supply 8 Contract was or was not executed came from hearsay statements by third parties. While reliance 9 on hearsay does not disqualify a confidential witness’s statements from consideration, the Court must “examine [the] confidential witness’s hearsay report to determine if it is ‘sufficiently reliable, 11 United States District Court Northern District of California 10 plausible, or coherent.’” Digimarc, 552 F.3d at 997 n.4. Plaintiff has not provided enough 12 information from which the Court can conduct this inquiry. Plaintiff has not alleged what CW1 13 was told by the prior Purchasing Director or the Purchasing Department buyers. In addition, he 14 has not provided any context surrounding when, why, or how these individuals provided CW1 15 with information regarding the Supply Contract. Instead, he simply states the conclusion that the 16 “information provided” to CW1 demonstrates the Supply Contract was not executed. Such a 17 conclusory assertion, without any supporting context, makes it impossible for the Court to 18 determine if the statements are sufficiently “reliable, plausible, or coherent.” Compare Lloyd v. 19 CVB Fin. Corp., 811 F.3d 1200, 1208 (9th Cir. 2016) (“Here, the statements reported by the COO 20 were specific in time, context, and details, and involved important communications from a chief 21 executive officer to the Board. They are sufficiently reliable for pleading purposes.”). 22 In sum, Plaintiff has not plead sufficient facts to “support the probability” that CW1 23 possesses information regarding whether the Supply Contract was executed. In re Daou Systems, 24 Inc., 411 F.3d at 1015. The Court, however, will afford Plaintiff leave to amend these allegations. 25 Plaintiff must include specific allegations relating to what the prior Purchasing Coordinator and 26 Purchasing Department buyers told CW1 and the context in which these discussions occurred. In 27 addition, Plaintiff should include additional allegations regarding the role of the Purchasing 28 Coordinator and Commission on Purchasing and Supplies in the Ministry of Health generally and 14 1 in the negotiation of contracts more specifically. On the current allegations, Plaintiff has 2 established a probability that an individual in the role of Purchasing Coordinator would be in a 3 position to know whether the Supply Contract was being implemented. This, however, is a 4 distinct question from whether an individual in that position would know whether the Supply 5 Contract was even executed. 6 Having found that Plaintiff fails to adequately allege that the Supply Contract unexecuted, 7 the Court makes the following two observations. First, if Plaintiff is able to adequately allege that 8 the Supply Contract was unexecuted in the fourth quarter 2015, that will have major implications 9 for how the Court views the other challenged statements. For the remainder of this order, the Court will examine the challenged statements as though the Supply Contract was executed (insofar 11 United States District Court Northern District of California 10 as Plaintiff has, as of now, failed to adequately allege the contrary). However, in any subsequent 12 motion to dismiss, it would be useful for the Court if Defendants included alternative arguments, 13 addressing whether each challenged representation would be false or misleading both if the Supply 14 Contract had been executed and if it had not. 15 Second, the Court finds it necessary to address an issue resulting from the parties’ briefing. 16 As discussed above, Plaintiff’s counsel has drafted a FAC that takes the position the Supply 17 Contract was not executed in the fourth quarter of 2015. The filing of this FAC contains certain 18 implicit representations by counsel regarding the existence of a sufficient basis for those 19 allegations. See Fed. R. Civ. P. 11(b). In support of the reply brief (and directly responding to an 20 argument made in Plaintiff’s opposition brief), Defendants’ counsel has attached what purports to 21 be a copy of the Supply Contract executed in October 2015. (See Dkt. No. 22-1.) Defense 22 counsel has sworn, under penalty of perjury, that the attached document is a “true and correct copy 23 of the signed agreement.” (Dkt. No. 37.) The Court has not addressed this purportedly signed 24 copy of the Supply Contract because, even assuming it is properly presented to the Court at the 25 pleading stage, the Court cannot now adjudicate the disputed question of whether the Supply 26 Contract was actually executed. The Court notes, however, that it is cognizant of the fact that 27 counsel have made diametrically opposed representations to the Court. The Court therefore finds 28 it necessary to remind all counsel of (1) their professional obligations relating to the presentation 15 1 of facts and arguments before the Court, and (2) the need to conduct a sufficient investigation into 2 their respective positions before they make any further representation to the Court. See Fed. R. 3 Civ. P. 11; see also Cal. R. Prof. Conduct 5-200. 4 2. Defendants’ Representations Regarding the Prepayments. 5 Many of the challenged statements on which Plaintiff relies involve the prepayments under 6 the Supply Contract. The Supply Contract called for the Ministry of Health to make a prepayment 7 of $69,262,000.00. (Dkt. No. 29-2, Supply Contract, cl. 4(a).)2 This prepayment was to be made 8 in three installments: (1) $24,413,410.95 due October 2015; (2) $22,669,595.89 due November 9 2015; and (3) $22,669,595.89 due December 2015. (Id.) Plaintiff argues that Defendants repeatedly misrepresented when the prepayments were due and then failed to disclose when the 11 United States District Court Northern District of California 10 Ministry of Health defaulted on these payments. Plaintiff challenges four specific statement 12 related to the prepayments: 13 (1) October 15, 2015, Form 8-K: “Prepayments totaling approximately $69 million are expected by the first quarter of 2016.” (FAC ¶ 50.) 14 15 (2) October 21, 2015, Conference Call Statement by Hawkins: “We expect to receive some payments here by the end of the year, to start those three payments totaling the $69 million. And then to – most likely those would extend into the first quarter of next year.” (FAC ¶ 57.) 16 17 18 (3) November 19, 2015, Healthcare Conference Statement by Hawkins: “We are looking to get our first payment in by the end of the year, and those payments would continue throughout the life of the contract.” (FAC ¶ 65.) 19 20 (4) December 1, 2015, Healthcare Conference Statement by Hawkins: “We look for some of these revenues to start in December. We expect to get our first $23 million payment in the weeks ahead and then we’ll be prepaid on all of this as we go forward on a rolling basis.” (FAC ¶ 71.) 21 22 23 24 The Court concludes that Plaintiff has sufficiently alleged that the October 21, November 19, and 25 December 1 statements were false and misleading. As to the October 15, 2015 statement, however, the Court finds that Plaintiff has failed to 26 27 2 28 Defendant’s unopposed request for the Court to take judicial notice of various SEC filings that are referenced in the FAC is GRANTED. 16 1 allege a false or misleading statement. Plaintiff claims that this statement “failed to disclose that 2 . . . three independent pre-payments were separately due in October, November, and December 3 2015.” (FAC ¶ 51.) However, Plaintiff does not dispute that this statement was true, at least 4 technically. Under the terms of the Supply Contract, the $69 million prepayment would be 5 received “by the first quarter of 2016.” The simple fact that the press release statement could have 6 included more detail regarding the timing of the prepayments, without more, does not render the 7 statement misleading. See, e.g., In re Tut Sys., Inc. Sec. Litig., No. 01-cv-02659, 2002 WL 8 35462358 (N.D. Cal. Aug. 15, 2002) (“Plaintiffs fault Defendants for failing to provide more 9 details regarding the extent of the reserves that would need to be booked . . . . However, Defendants’ failure to disclose more specific information at an earlier date does not amount to 11 United States District Court Northern District of California 10 fraud.”); see also Brody, 280 F.3d at 1006 (“Rule 10b-5 . . . in terms prohibit[s] only misleading 12 and untrue statements, not statements that are incomplete.”). Plaintiff has not explained how 13 Defendants’ failure to provide more granular detail regarding the timing of the prepayments 14 created an “impression of a state of affairs that differ[ed] in a material way from the one that 15 actually exists.” Id. (emphasis added). If Plaintiff wishes to rely on this statement, he will need to 16 provide additional factual allegations to demonstrate why this statement, which appears consistent 17 with the terms of the Supply Contract, was nonetheless materially false or misleading. 18 For the October 21, 2015 statement, Plaintiff is correct that the statement was arguably 19 misleading. Whereas Hawkins represented that the $69 million prepayment would “start” in 2015 20 and likely continue into 2016, he failed to disclose that the terms of the Supply Contract called for 21 the entire $69 million prepayment to be received by the end of 2015. The Court finds Plaintiff has 22 plausibly alleged that Hawkins’ statement was false or misleading. As to materiality, the Court 23 finds, for purposes of the pleading stage, that a reasonable investor would view the true, shorter, 24 payment schedule under the Supply Contract as “significantly alter[ing] the ‘total mix’ of 25 information made available.” Bodri, 252 F. Supp. 3d at 922 26 For similar reasons, the Court finds that Plaintiff has adequately alleged that Hawkins’ 27 November and December 2015 statements regarding the first prepayment were materially false or 28 misleading. Hawkins represented to investors in November and December that Defendants 17 expected to receive the Supply Contract’s first prepayment by the end of the year. These 2 statements effectively represented that the Supply Contract simply called for the first prepayment 3 to be received by the end of 2015. As already discussed, however, Hawkins’ statement omitted 4 the fact that the Ministry of Health was required to make prepayments in October, November, and 5 December 2015. This omission was significant because at the time Hawkins made his November 6 and December statements, the Ministry of Health had defaulted on its first and second 7 prepayments, respectively. Taking all inferences in Plaintiff’s favor, Hawkins’ statement was 8 more than just incomplete; rather, it created an “impression of [the Supply Contract] that differ[ed] 9 . . . from the one that actually exist[ed].” In re Cutera, 610 F.3d at 1109. The Court has no 10 problem concluding for purposes of the pleading stage that investors would have found the 11 United States District Court Northern District of California 1 Ministry of Health’s default to be material. Accordingly, the Court finds that Plaintiff has 12 adequately alleged that Hawkins made materially misleading statements by effectively hiding the 13 Supply Contract’s prepayment schedule, and thus the Ministry of Health’s default, from investors. 14 Defendant argues, however, that these statements were “forward looking” and are therefore 15 immunized under the PSLRA’s safe harbor provision. Under the safe harbor, a “defendant will 16 not be liable for a false or misleading statement if it is forward-looking and either is accompanied 17 by cautionary language or is made without actual knowledge that it is false or misleading.” In re 18 Quality Sys., Inc. Sec. Litig., 865 F.3d 1130, 1142 (9th Cir. 2017). A “forward looking” statement 19 is “‘any statement regarding (1) financial projection, (2) plans and objectives of management for 20 future operations, (3) future economic performance, or (4) the assumptions underlying or related 21 to any of these.’” In re Leapfrog Enter., Inc. Sec. Litig., 200 F. Supp. 3d 987, 1004 (N.D. Cal. 22 2016) (quoting Bartlet v. Affymax, Inc., No. 13-cv-01025-WHO, 2014 WL 231551, at *13 (N.D. 23 Cal. Jan. 21, 2014)). Significantly, the Ninth Circuit has recognized that the safe harbor is 24 inapplicable to misleading statements of current or past facts: 25 26 27 28 [T]he safe harbor is not designed to protect companies and their officials when they knowingly make a materially false or misleading statement about current or past facts. Nor is the safe harbor designed to protect them when they make a materially false or misleading statement about current or past facts, and combine that statement with a forward-looking statement. 18 1 2 See In re Quality Sys., Inc., 865 F.3d at 1142. The Court finds that Defendant Hawkins’ statements regarding the prepayments are not 3 “forward looking” statements for purposes of the PSLRA safe harbor. The Court acknowledges 4 that each of the three statements discussed above contain a forward looking component, namely 5 that Defendants “expected” to receive the first prepayment by the end of the year. Notably, 6 however, Hawkins’ stated “expectation” related directly to a term of the Supply Contract, and both 7 the Supply Contract and its terms were existing, present facts. Further, Hawkins’ statement was 8 made in the context of a larger statement about the formation of the Supply Contract and its total 9 value, again, both statements of present fact. Given this context, and the nature of Hawkins’ statements, the Court concludes that the challenged statements included implicit representations 11 United States District Court Northern District of California 10 that the stated “expectation” was consistent with the Supply Contract’s term. On the facts alleged, 12 this implicit representation was, at best, misleading given the Supply Contract’s prepayment 13 schedule and (for the November and December statements) the Ministry of Health’s default. 14 Accordingly, by announcing that he expected the first prepayment installment by the end of the 15 year, without qualification or elaboration, Hawkins made an omission of present fact. See In re 16 Celera Corp. Sec. Litig., No. 5:10-cv-02604 EJD, 2013 WL 4726097, at *2 (N.D. Cal. Sept. 3, 17 2013) (“[T]he failure to alert investors to the reimbursement problem was not forward-looking; 18 rather, it was an omission of a historical fact.”); see also In re CV Therapeutics, Inc., No. 03-CV- 19 03709-SI, 2004 WL 1753251, at *10 (N.D. Cal. Aug. 5, 2004) (“[W]hen the defendants possessed 20 and failed to disclose detailed information about the FDA’s serious reservations concerning 21 Raxena’s safety and efficacy, they failed to disclose historical facts. The fact that defendants used 22 those inadequately disclosed historical facts to support unsound projections does not shield their 23 alleged misrepresentations as forward-looking statements.”). 24 3. Kennedy’s Representation Regarding Currency Exchange Risk 25 During the October 21, 2015 conference call, Defendant Kennedy allegedly asserted that 26 the Supply Contract presented a “minimal” currency exchange risk because the Supply Contract’s 27 payments were “denominated in dollars, and our payment is a dollar-denominated payment.” 28 (FAC ¶ 63.) Plaintiff asserts this was misleading to investors because the Supply Contract, in fact, 19 1 required that payments be made in “Argentinian Pesos at the current exchange rate for the 2 effective date of payment.” (Supply Contract, cl. 4.) 3 First, Plaintiff has abandoned this theory by failing to respond to Defendants’ arguments 4 regarding it in his opposition to the motion to dismiss. See Homsy v. Bank of Am., N.A., No. 13- 5 cv-01608 LB., 2013 WL 2422781, at *5 (N.D. Cal. June 3, 2013) (“[W]here a plaintiff simply 6 fails to address a particular claim in its opposition to a motion to dismiss that claim, courts 7 generally dismiss it with prejudice.”). Second, on the merits, Plaintiff has failed to allege how 8 Kennedy’s statement was false or misleading. In fact, the very terms of the Supply Contract 9 suggest that Kennedy’s statement was accurate. The Supply Contract provides: 10 The payment by [the Ministry of Health] to [Medix] shall be made through Debt Representative Securities (VRD) in US Dollars and payable in Argentinian Pesos at the current exchange rate for the effective day of payment . . . . United States District Court Northern District of California 11 12 13 (Supply Contract, cl. 4.) The precise payments are then defined in American dollars. For 14 example, the entire prepayment is defined as a payment of $69,752,602. (Id.) Under the terms of 15 the Supply Contract, the number of Argentinian pesos needed to satisfy the $69,752,602 amount 16 would depend on the exchange rate at the time of payment, but the underlying dollar value of the 17 payment would not change. In light of these facts, Plaintiff has failed to allege facts showing that 18 Kennedy’s representations regarding the currency exchange risk were false or misleading. 19 4. Representations Regarding Medix’s Prior Ministry of Health Contract. 20 In the FAC, Plaintiff alleges that Defendants improperly sought to bolster investors’ 21 perception of the Supply Contract by misrepresenting Medix’s prior agreement with the Ministry 22 of Health. Plaintiff alleges Defendants did this on two separate occasions: 23 24 25 26 27 28 (1) October 21, 2015, Conference Call Statement by Kennedy: “[T]his isn’t the first contract with Venezuela that Medix has entered into. So this is a continuation of an ongoing relationship. . . . So when we acquired Medix in 2010, they had just completed, I want to say, about a $100 million deal with Venezuela.” (FAC ¶ 61.) (2) November 19, 2015 Healthcare Conference Statement by Hawkins: “Yes, so, always a potential risk with any contract. The one thing I would say with this one, before we bought our subsidiary, which is located in Buenos Aires, which is who received 20 1 2 this order, a company called Medix, they had received an $82 million order maybe seven years ago and it came through just fine. The money showed up as expected and it did happen.” (FAC ¶ 67.) 3 According to Plaintiff, the prior contractual agreement between Medix and the Ministry of Health 4 does not match the “rosy” picture painted by Defendants. 5 Plaintiff relies primarily on three confidential witnesses to support this assertion. CW1, 6 discussed above in connection with the assertion that the Supply Contract was unexecuted, states 7 that she “learned” that the previous contract “failed to come to completion and was cancelled or 8 suspended when the final amounts owing under the contract were not paid to Medix by the 9 Ministry of Health.” (FAC ¶ 44.) CW2, who is alleged to be Natus Medical’s former Medical Director of Operations in Argentina, states that the “contract with Venezuela was always in the air. 11 United States District Court Northern District of California 10 Medix was always trying to close it.” (Id. ¶ 45.) CW2 also reports a “history of difficulties with 12 payments with Venezuela.” (Id.) Finally, CW3, Natus Medical’s former Latin American 13 Regional Sales Manager, similarly reports that “payment of the contract was done one or two 14 months before I left the company” and that the last payment was a “very late payment. One or two 15 years late.” (Id. ¶ 46.) 16 Plaintiff, however, fails to provide sufficient detail to support an inference that Defendants’ 17 account was materially misleading. As to CW1, he is alleged to have been the Ministry of 18 Health’s Purchasing Coordinator starting in February 2016. (FAC ¶ 40.) The prior contract, 19 however, was entered into in 2010. Plaintiff does not allege facts explaining how CW1 has 20 personal knowledge about the details of a contract which was allegedly executed and performed 21 years before she assumed his role with the Ministry of Health. Instead, Plaintiff simply alleges 22 CW1 “learned” of this fact from an undisclosed source at an undisclosed time. This is 23 insufficient. Cf. Digimarc, 552 F.3d at 997 n.4 (“[A] hearsay statement, while not automatically 24 precluded . . . may indicate that a confidential witnesses’ report is not sufficiently reliable, 25 plausible, or coherent to warrant further consideration . . . .”). Further, CW2’s statement vaguely 26 refers to a “history of difficulties’ regarding payments with the Ministry of Health, without 27 providing any detail regarding the nature or pervasiveness of those difficulties. Finally, although 28 CW3’s account of a “one to two years late” payment is in tension with Defendant Hawkins’ 21 1 representation that the money “came through just fine” or “showed up as expected” (FAC ¶ 67), 2 the prior contract apparently involved multiple payments worth close to $100 million. Without 3 more detailed allegations regarding the circumstances into this late payment, or the alleged 4 “history of difficulties,” the Court is unable to determine whether Defendants’ representations 5 regarding the prior contract were false or misleading (let alone in a material sense). 6 5. Defendant’s Fourth Quarter/Full Year 2015 Guidance Adjustment. 7 Plaintiff next contends that Defendants misled investors by including revenue from the 8 Supply Contract in Natus Medical’s fourth quarter and full year 2015 revenue guidance. On 9 October 21, 2015, Defendants filed a Form 8-K with the SEC which increased the fourth quarter revenue guidance from $102.0 million to $105.0 million and full-year guidance from $378 million 11 United States District Court Northern District of California 10 to $381 million. (FAC ¶ 53.) In a quote, Defendant Hawkins attributed this increased guidance, 12 in part, to the Supply Contract: “In addition to our record performance during the quarter, we 13 recently secured a $235 million, three-year agreement between our Argentina subsidiary Medix, 14 and the Venezuelan Ministry of Health.” (Id.) 15 In the FAC, Plaintiff argues that factoring the Supply Contract into Natus Medical’s 16 revenue guidance was false and misleading for two reasons: (1) the Supply Contract was not 17 executed and (2) even if executed, the Supply Contract’s Venezuelan choice of law provision 18 rendered Natus Medical without any means of effectively enforcing its rights under that 19 agreement. The Court has already disposed of the first of these theories above. The second fares 20 no better. The Court begins by noting that Plaintiff has again abandoned this theory by failing to 21 defend (or even reference) it in his opposition to the motion to dismiss. See Homsy, 2013 WL 22 2422781, at *5 (“[W]here a plaintiff simply fails to address a particular claim in its opposition to a 23 motion to dismiss that claim, courts generally dismiss it with prejudice.”). 24 Second, even addressing the theory on its merits, Plaintiff has failed to support it with 25 sufficient factual allegations. The FAC relies entirely on a single quotation from a 2014 report by 26 the “International Commission of Jurists” suggesting that the “failures by the authorities, as well 27 as interference, intimidation, arbitrary suspensions and other pressures” have “undermined 28 independence and impartiality of the country’s judges and prosecutors.” (FAC ¶ 48.) This single 22 1 quote, devoid of context, does not support Plaintiff’s expansive conclusion that any party who 2 enters into a contract with the government of Venezeula and chooses the Venezuelan courts as the 3 forum for resolving disputes is effectively left without a remedy for enforcing its rights. 4 Accordingly, if Plaintiff intends to proceed with this theory, he will have to include additional 5 factual allegations which give rise to an inference that the Supply Contract’s choice of forum 6 provision rendered Defendants’ representations about that agreement false or misleading. 7 In addition to the October 21, 2015 statement announcing the increased revenue guidance, 8 Plaintiff also challenges Defendants’ subsequent touting of that increased guidance during 9 November and December. During the healthcare conferences held during these months, Defendant Hawkins allegedly reiterated the increased guidance (FAC ¶¶ 65, 71) and lauded the 11 United States District Court Northern District of California 10 Supply Contract as one reason for this. (Id.) Plaintiff has adequately alleged that these statements 12 were materially misleading. As discussed above, at the time Defendant Hawkins made these 13 statements, the Ministry of Health had defaulted on its prepayments under the Supply Contract, 14 thus undercutting the basis for that guidance. Defendant Hawkins, however, did not disclose this 15 fact to investors, thus rendering his statements misleading. The Court further rejects Defendants’ 16 contention that these statements are protected by the PSLRA’s safe harbor. As with the related 17 representations, discussed above, that prepayments were “expected” by the end of the year, the 18 Court finds that Plaintiff has adequately alleged that Defendants made an omission of present fact 19 by failing to disclose this default. See In re CV Therapeutics, Inc., 2004 WL 1753251, at *10; see 20 also Loftus v. Primero Mining Corp., 230 F. Supp. 3d 1209 (C.D. Cal. 2017) (“[B]ecause 21 Plaintiffs allege that the way in which Primero’s representations about future tax projections were 22 misleading was by omitting already-existing historical facts, the Court finds that these 23 representations are not protected by the safe harbor provisions.”). 24 6. Defendants’ 2016 Representations. 25 Finally, Plaintiff alleges that Defendants continued to make materially false or misleading 26 statements into 2016, after the truth about the Ministry of Health’s default on the prepayments 27 came to light. Plaintiff, however, has failed to allege facts giving rise to an inference that these 28 statements were materially false or misleading. 23 1 First, Plaintiff challenges a number of statements made by Defendants in January 2016 that 2 Natus Medical’s 2015 revenue shortfall was due to a “delay” in the Supply Contract’s prepayment. 3 (See FAC ¶¶ 75, 80, 82.) This statement was literally true and it disclosed to investors the fact that 4 the prepayment—which Defendants had previously announced was expected by the end of 2015— 5 had not been received. In both the FAC and the opposition, Plaintiff argues that Defendant failed 6 to disclose that the “Ministry of Health was actually late on all three of its pre-payments under the 7 terms of the Supply Contract.” (FAC ¶ 77.) Plaintiff, however, does not explain why it was 8 materially false or misleading for Defendants to refer to a “delay” in the Supply Contract’s 9 prepayment as opposed to providing the more granular detail Plaintiff now contends should have been given. See, e.g., Brody, 280 F.3d at 1006 (“Rule 10b-5 . . . in terms prohibit[s] only 11 United States District Court Northern District of California 10 misleading and untrue statements, not statements that are incomplete.”). Second, Plaintiff contends that Defendants’ inclusion of Supply Contract revenue in Natus 12 13 Medical’s 1Q and full year 2016 revenue guidance was false or misleading. In various January 14 filings and conference calls, Defendants announced that the first quarter and full year 2016 15 revenue guidance would include $5.0 million and $60.0 million, respectively, from the Supply 16 Contract. (See FAC ¶ 75, see also Dkt. No. 29- 14.) In arguing that this was misleading, Plaintiff 17 relies entirely on the prior failure of the Ministry of Health to make the prepayment installments. 18 As just discussed, however, the fact that the prepayment had not been received as initially 19 expected was disclosed to investors. Plaintiff alleges no facts, known to Defendants but unknown 20 to investors, which would give rise to an inference that it was misleading for Defendants to 21 include Supply Contract revenue in the guidance figures. The Court also notes that the Supply 22 Contract provided for a three year term; the missed prepayments did not constitute the entire, or 23 even a majority, of that agreement.3 Third, Plaintiff challenges a March 14, 2016 conference call statement by Defendant 24 25 Hawkins. Specifically, Plaintiff alleges it was false or misleading for Hawkins to state “[W]e 26 3 27 28 The Court also believes that Defendants have a strong argument that the 2016 guidance would be protected by the PSLRA’s safe harbor. Because the Court concludes Plaintiff has failed to allege sufficient facts showing this revenue guidance was false or misleading when made, however, the Court need not address this question at this time. 24 1 really believe this is going to happen” (referring to the Supply Contract) after noting that analysts 2 could discount the expected revenues from the Supply Contract. (FAC ¶ 97.) The Court finds this 3 statement to be non-actionable puffery. See, e.g., In re Cutera, 610 F.3d at 1111 (“This mildly 4 optimistic, subjective assessment hardly amounts to a securities violation. Indeed, professional 5 investors, and most amateur investors as well, know how to devalue the optimism of corporate 6 executives.” (internal quotation marks omitted)); see also Robb v. Fitbit Inc., 216 F. Supp. 3d 7 1017, 1028 (N.D. Cal. 2016) (“[S]tatements that merely express confidence in a company’s 8 business and outlook are vague assertions of corporate optimism and are not actionable under 9 federal securities laws.”). 7. 11 United States District Court Northern District of California 10 Summary. For the reasons just stated, the Court does finds that Plaintiff has sufficiently alleged that 12 the November and December 2015 statements regarding (1) the anticipated timing for receipt of 13 the prepayment under the Supply Contract, and (2) restatement of increased revenue guidance 14 were materially false or misleading. Plaintiff, however, has failed to allege sufficient facts 15 showing that the various other statements he challenges in the FAC were materially false or 16 misleading within the meaning of the PSLRA. The Court, however, will afford Plaintiff leave to 17 file a second amended complaint to plead additional facts giving rise to an inference that 18 Defendants’ other statements were, in fact, false or misleading. If Plaintiff intends to abandon his 19 arguments that certain statements or omissions were misleading (for example, the choice of forum 20 provision or the “exchange risk” statement), he shall not replead those in the second amended 21 complaint. 22 B. Plaintiff Has Failed to Raise a Strong Inference of Scienter. 23 The Court has found that Plaintiff’s FAC sufficiently alleges that certain statements made 24 by Defendant Hawkins in November and December 2015 were false or misleading. The PSLRA 25 requires that Plaintiff “state with particularity facts giving rise to a strong inference that the 26 defendant acted with the required state of mind” in making those statements. 15 U.S.C. § 78u- 27 4(b)(2)(A). 28 The Ninth Circuit has explained that the “required state of mind” is “a mental state that not 25 1 only covers ‘intent to deceive, manipulate, or defraud,’ but also ‘deliberate recklessness.’” In re 2 Quality Sys., 865 F.3d at 1144 (quoting Schueneman v. Arena Pharms., 840 F.3d 698, 705 (9th 3 Cir. 2016)). To determine whether Plaintiff has adequately plead a “strong inference” of scienter, 4 the Court must ask: “When the allegations are accepted as true and taken collectively, would a 5 reasonable person deem the influence of scienter as least as strong as any opposing inference?” 6 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007). This requires a dual 7 inquiry. First, the Court must “determine whether any of the plaintiff’s allegations, standing 8 alone, is sufficient to create a strong inference of scienter.” In re NVIDIA Corp. Securities Litig., 9 768 F.3d 1046, 1056 (9th Cir. 2014). Second, if no allegation is alone sufficient, the Court then “consider[s] the allegations holistically to determine whether they create a strong inference of 11 United States District Court Northern District of California 10 scienter taken together.” (Id.) 12 Plaintiff first argues that the fact that the Supply Contract was not executed provides strong 13 evidence of scienter. This argument fails because Plaintiff has not adequately alleged that the 14 Supply Contract was unexecuted. Plaintiff relies almost exclusively on CW1’s statements to 15 support his conclusion that the Supply Contract was unexecuted. As detailed above, however, 16 Plaintiff has failed to allege sufficient facts from which it can be inferred that CW1’s based his 17 statements on his own personal knowledge or other reliable sources. As such, Plaintiff’s 18 contention that the Supply Contract was unexecuted does not give rise to a strong inference of 19 scienter. See, e.g., Zucco Partners, 552 F.3d at 996 (“Some of the confidential witnesses were 20 simply not positioned to know the information alleged, many report only unreliable hearsay, and 21 others allege conclusory assertions of scienter. These allegations are not sufficient to raise a 22 strong inference of scienter because they demonstrate that the confidential witnesses are not 23 reliable.”). 24 Plaintiff also contends that Defendants’ “subtl[y] shifting” representations regarding the 25 Supply Contract’s prepayment terms supports a finding of scienter. The Court has found that 26 Plaintiff has adequately alleged that Hawkins’ November and December 2015 statements that the 27 prepayment was “expected” by the end of 2015 were misleading due to his failure to disclose the 28 Ministry of Health’s default. Plaintiff, however, has failed to allege any facts supporting an 26 1 inference that Hawkins was deliberately reckless in making this statement or intended to mislead 2 investors. See In re Quality Sys., 865 F.3d at 1144. Given the nature of these allegedly 3 misleading statements, the Court cannot strongly infer scienter simply from the fact the statements 4 were made. Even as alleged by Plaintiff, they are not direct falsehoods which conflict with a clear 5 provision of the Supply Contract. Rather, they are statements regarding Hawkins’ “expectations” 6 which, taking all inferences in Plaintiff’s favor, implicitly created a misleading impression about 7 the Supply Contract’s prepayment schedule. While Plaintiff claims that Hawkins’ statements 8 reflect a “deliberate effort to conceal the true state of affairs,” the statements are also subject to a 9 competing inference that they were intended to be nothing more than Hawkins’ then-held belief about when payments actually would be received, and that any misleading implication was 11 United States District Court Northern District of California 10 inadvertent or the result of an oversight. See, e.g., Zucco Partners, 552 F.3d at 991 (plaintiff must 12 plead a “highly unreasonable omission, involving not merely simple, or even inexcusable 13 negligence” (citation omitted)). In sum, these challenged statements may give rise to a possible 14 (or even reasonable) inference of scienter, but the Court finds that they do not give rise to the 15 necessary strong inference based on the facts alleged.4 Finally, in the FAC, Plaintiff relies on Hawkins’ and Kennedy’s stock purchases to 16 17 establish scienter. “‘Unusual’ or ‘suspicious’ stock sales by corporate insiders may constitute 18 circumstantial evidence of scienter. . . .” In re Quality Systems, 865 F.3d at 1146 (citation 19 omitted). To determine whether a stock sale is suspicious, the Court considers, inter alia, three 20 factors: “(1) the amount and percentage of shares sold; (2) timing of the sales; and (3) consistency 21 with prior trading history.’” Id. (quoting Nursing Home Pension Fund, Local 144 v. Oracle Corp., 22 380 F.3d 1226, 1232 (9th Cir. 2004)). The Ninth Circuit has explained that stock sales by a 23 company’s insiders are “‘suspicious only when [they are] dramatically out of line with prior 24 trading practices at times calculated to maximize the personal benefit from undisclosed inside 25 information.’” Align Tech, 856 F.3d at 621 (quoting Zucco Partners, 552 F.3d at 1005). 26 4 27 28 For similar reasons, Plaintiff’s reliance on Hawkins’ statement that “[w]e have been told the money is set aside” (and related statements) is unavailing. Plaintiff pleads no facts which give rise to a strong inference (as opposed to speculation) that the statements were made with the requisite state of mind. 27 Plaintiff alleges that in October 2015, Kennedy sold 28,958 shares of Natus Medical stock, 1 2 worth a total of $1,323,905. (FAC ¶ 104.) During October and November 2015, Hawkins sold 3 200,000 shares worth a total of $9,422,055. (Id. ¶ 106.) This is around the time that Natus 4 Medical’s share price allegedly reached its all-time high and after Defendants had announced the 5 Supply Contract. (See id. ¶ 12.) However, “[e]ven assuming Defendants sold their stocks at a 6 price that was close to the stock’s all-time high, ‘this alone is not sufficient for scienter 7 purposes.’” Fadia v. FireEye, Inc., 14-cv-05204-EJD, 2016 WL 6679806, at *16 (N.D. Cal. Nov. 8 14, 2016) (quoting In re Tut Sys., Inc., 2002 WL 35462358, at *11). The FAC argues that the suspiciousness of Defendants’ fourth quarter 2015 sales is 9 highlighted by the fact that Defendants’ gross proceeds from the sale “are more than three times 11 United States District Court Northern District of California 10 greater than the gross proceeds from [Defendants’] stock sales during the six months preceding the 12 Class Period.” (FAC ¶ 103.) In fact, comparing the purportedly suspicious sales to Defendants’ 13 trading history over a longer period of time suggests the fourth quarter 2015 stock sales were not 14 “dramatically out of line” with Defendants’ prior practices. During the fourth quarter of 2014 (one 15 year prior to the announcement of the Supply Contract), Defendant Hawkins sold 270,000 shares 16 of Natus Medical stock, while Defendant Kennedy sold 45,833 shares. (Dkt. No. 29-21; 29-22.) 5 17 Both figures are significantly higher than the number of shares these Defendants sold as part of 18 their allegedly “suspicious” stock transactions. Further, during the fourth quarter of 2013, 19 Hawkins sold 206,878 shares of Natus Medical stock, further reinforcing the inference that it was 20 not unusual for him to make large fourth quarter sales of Natus Medical stock. (See Dkt. No. 29- 21 21, at 2.) In the face of this prior trading history, Plaintiff contends that the fourth quarter 2015 sales 22 23 5 24 25 26 27 28 Defendants have submitted copies of the SEC Form 4 filed by both Defendants in the fourth quarter of 2014 and (for Defendant Hawkins) fourth quarter of 2013 to show the Defendants’ stock sales during this time. Even though these documents (or the information contained therein) were not directly referenced in the FAC, the Court may consider them. Plaintiff does not challenge the authenticity of these documents. Further, Plaintiff’s scienter allegations in the FAC rely extensively on Defendants’ allegedly suspicious trading patterns, information which is disclosed to the public through the Form 4. Under these circumstances, the Court may take judicial notice of the Form 4. See, e.g., In re Solarcity Corp. Securities Litig., 274 F. Supp. 3d 972, 988 (N.D. Cal. 2017); City of Royal Oak Retirement Sys. v. Juniper Networks, Inc., 880 F. Supp. 2d 1045, 1059 (N.D. Cal. 2012) 28 1 are still suspicious because the gross proceeds realized from the sale far exceeded those of prior 2 sales. Plaintiff, however, does not cite any case for the authority that courts should look to the 3 realized proceeds of a sale, and the Court has located none. Instead, the relevant authority directs 4 the Court to examine “the amount and percentage of shares sold.” In re Quality Systems, 865 F.3d 5 at 1146. As stated above, the number of shares sold by these Defendants during the fourth quarter 6 of 2015 does not appear suspicious in light of Defendants’ trading history. Further, Plaintiff has 7 not plead any facts regarding the percentage of their holdings Hawkins and Kennedy sold during 8 the fourth quarter 2015, so the Court cannot compare this to the Defendants’ prior sales. On this 9 record, the Court finds that the evidence of Defendants’ prior trading history undermines any inference of scienter that may otherwise have arisen from Defendants’ fourth quarter 2015 stock 11 United States District Court Northern District of California 10 sales.6 See, e.g., Kovtun v. VIVUS, Inc., No. 10-cv-4957-PJH, 2012 WL 4477647, at *21 (N.D. 12 Cal. Sept. 27, 2012); In re Tibco Software, Inc., No. 05-cv-2146-SBA, 2006 WL 1469654, at *21 13 (N.D. Cal. May 25, 2006). In light of the above, the Court finds that Plaintiff has failed to plead facts giving rise to a 14 15 “strong” inference of scienter.7 Specifically, the Court believes Plaintiff has not demonstrated that 16 the “malicious inference is at least as compelling as any opposing innocent inference.” Zucco 17 Partners, 552 F.3d at 1006. Accordingly, Defendants’ motion to dismiss Plaintiff’s section 10(b) 18 claim is granted and the claim will be dismissed. The Court will, however, afford Plaintiff leave 19 to amend to plead additional facts relevant to the question of scienter.8 20 C. Because Plaintiff has failed to adequately allege a violation of Section 10(b), his section 21 22 Because the Section 10(b) Claim Fails, the Section 20(a) Claim Also Fails. 20(a) claim necessarily fails. See, e.g., Align Tech., 856 F.3d at 623 (“Plaintiff has not sufficiently 23 6 24 25 This ruling is obviously without prejudice to Plaintiff alleging additional facts in his amended complaint which would suggest that, notwithstanding Defendant Hawkins’ and Defendant Kennedy’s prior fourth quarter stock sales, the fourth quarter 2015 sales were suspicious. 7 26 27 The Court does not address, because it need not at this stage, Defendant’s argument that Natus Medical’s repurchase of stock between October 2015 and March 2016 negates a finding of scienter. 8 28 Because the Court has found that Plaintiff has failed to adequately allege scienter, it need not address the parties’ loss causation arguments. 29 1 alle eged violatio of Sectio 10(b) and Rule 10b-5 And, with ons on d 5. hout ‘a prima violation of federal ary n 2 sec curities law,’ Plaintiff ca ’ annot establis control pe sh erson liabilit (citation omitted)). ty.” n 3 Ac ccordingly, Defendants’ motion to di D m ismiss this cl laim is grant but Plain will be afforded ted, ntiff 4 lea to amend ave d. CONCLU USION 5 6 For the reasons stat above, th Court find that while Plaintiff ha alleged tha certain ted he ds e as at 7 statements mad in Novem de mber and Dec cember 2015 were false or misleadin he has fa 5 ng, ailed to 8 alle that Def ege fendants mad those state de ements with the requisit state of mi h te ind. As a result, 9 De efendant’s motion to dism is GRA m miss ANTED and P Plaintiff’s Section 10(b) and Section 20(a) ) n cla aims are DISMISSED. The Court, however, affo T ords Plaintif leave to am ff mend the FA so he may AC y 11 United States District Court Northern District of California 10 atte empt to cure the deficien e ncies identifi by this O fied Order. 12 Plaintif shall file his second am ff h mended com mplaint by Fr riday, April 6, 2018. l 13 IT IS SO ORDER S RED. 14 15 16 Da ated: Februar 26, 2018 ry ___ __________ ___________ __________ ________ JEF FFREY S. W WHITE Un nited States D District Judg ge 17 18 19 20 21 22 23 24 25 26 27 28 30 0
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