International Brotherhood of Electrical Workers Local 697 Pension Fund v. International Game Technology et al, No. 3:2009cv00419 - Document 61 (D. Nev. 2011)
Court Description: ORDER DENYING Defendants' 50 Motion to Dismiss. Signed by Judge Edward C. Reed, Jr on 3/15/2011. (Copies have been distributed pursuant to the NEF - DRM)
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International Brotherhood of Electrical Workers Local 697 Pension Fund v...nal Game Technology et al Doc. 61 1 2 3 4 UNITED STATES DISTRICT COURT DISTRICT OF NEVADA RENO, NEVADA 5 6 7 INTERNATIONAL BROTHERHOOD OF 8 ELECTRICAL WORKERS LOCAL 697 PENSION FUND, Individually and On 9 Behalf of All Others Similarly Situated, 10 Plaintiff, 11 vs. 12 INTERNATIONAL GAME TECHNOLOGY, 13 et al., 14 Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 3:09-CV-419-ECR-RAM Order 15 16 This case arises out of alleged violations of the federal 17 securities laws. Now pending is a motion to dismiss (#50) the 18 consolidated complaint. The motion is ripe, and we now rule on it. 19 20 21 I. Background On July 30, 2009, Plaintiffs filed a class action complaint for 22 violations of the federal securities laws against International Game 23 Technology (“IGT” or the “Company”), and individual officers of IGT. 24 On March 11, 2010, the Court granted (#41, amended by #44) 25 Plaintiffs’ unopposed motion (#14) to appoint The Iron Workers 26 District Counsel of Western New York and Vicinity Pension Fund 27 (“Iron Workers”) as lead plaintiff. 28 Dockets.Justia.com 1 On April 26, 2010, Plaintiffs filed a consolidated class 2 complaint (#45), alleging securities fraud in violation of Section 3 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and 4 Rule 10b-5 promulgated thereunder, as well as control person claims 5 under Section 20(a) of the Exchange Act against IGT, Thomas J. 6 Matthews (“Matthews”), and Patrick W. Cavanaugh (“Cavanaugh”) 7 (collectively, “Defendants”). The action is filed on behalf of a 8 class of all persons and entities who purchased or otherwise 9 acquired IGT securities between November 1, 2007 and October 30, 10 2008, inclusive (the “Class Period”). 11 The facts as alleged in the complaint are as follows. Defendant 12 IGT is a Nevada corporation specializing in the design, manufacture, 13 and marketing of electronic gaming equipment and network systems, as 14 well as licensing and services. (Consol. Class Compl. ¶ 12 (#45).) 15 Defendant Matthews served as IGT’s President, CEO, and Chairman of 16 the Board of Directors during the Class Period. (Id. ¶ 13.) 17 Defendant Cavanaugh served as IGT’s Vice President of Corporate 18 Finance and Investor Relations during the Class Period. (Id. ¶ 14.) 19 Both Matthews and Cavanaugh are alleged to have made false and 20 misleading statements about IGT, and failed to disclose material 21 facts about IGT during the Class Period. 22 (Id. ¶¶ 13-14.) The Class Period commenced on November 1, 2007. (Id. ¶ 24.) 23 On that date, IGT issued a press release announcing record financial 24 results for its fourth fiscal quarter and year ended September 30, 25 2007. (Id.) Plaintiffs allege that Defendants “painted a picture 26 of a bright future for IGT.” (Id. ¶ 26.) Specifically, Defendant 27 Matthews forecasted that IGT’s earnings per share (“EPS”) for the 28 2 1 next two quarters would be $0.35 to $0.40. (Id.) Defendant 2 Cavanaugh represented that IGT’s fiscal 2008 total operating 3 expenses would be between 26 and 28% of total revenues. 4 IGT’s stock price rose over the next several days. (Id.) (Id.) 5 Defendants continued to portray a bright future for IGT in the 6 following days. 7 On November 28, 2007, IGT filed its Securities and Exchange 8 Commission (“SEC”) Form 10-K for the fiscal year that ended 9 September 30, 2007. (Id. ¶ 31.) Therein, IGT represented that it 10 expected continued growth during 2008, notwithstanding that domestic 11 replacement sales are expected to remain at historically low levels. 12 (Id.) Defendants also represented that its new server-based (“SB”) 13 technology would aid in IGT’s growth in the future. 14 stock price rose after the Form 10-K was filed. 15 (Id.) IGT’s (Id.) Plaintiffs allege, however, that Defendants were aware that 16 things were not as rosy as Defendants were portraying. (Id. ¶ 34.) 17 Relying on several confidential witness statements, Plaintiffs 18 allege that play levels, a metric indicative of IGT’s business 19 success, began to rapidly decrease in November 2007, which 20 Plaintiffs claim Defendants were aware of but misrepresenting to its 21 investors. (Id.) IGT’s new SB technology was also, according to 22 Plaintiffs, facing numerous problems that Defendants did not 23 disclose to investors. Operating expenses also exceeded 30% of 24 revenues, and confidential witnesses claim that Defendants were 25 “repeatedly wast[ing] money” as if IGT had a “bottomless purse.” 26 (Id.) 27 28 3 1 IGT achieved its EPS forecasts in the first and third fiscal 2 quarters of 2008. (Id. ¶¶ 36, 58) In the first quarter, IGT 3 reported that it generated EPS of $0.36, in line with prior 4 forecasts of $0.35-$0.40. (Id. ¶ 36.) After announcing the first 5 quarter results, Defendant Cavanaugh stated that “on the surface, 6 all we’re seeing at this point is normal seasonality” in reference 7 to the low play levels. (Id. ¶ 39.) Defendant Matthews represented 8 that “play levels are very much in line with what we normally see 9 due to seasonal factors.” (Id.) Defendants predicted that the 10 Company’s EPS forecasts in the range of $0.35 to $0.40 would likely 11 be exceeded in Q3 and Q4, and perhaps “a little bit to the weak 12 side” in Q2. (Id. ¶ 40.) In February 2008, IGT announced that 13 Harrah’s Entertainment, Inc. had selected IGT’s SB technology for 14 installation. (Id. ¶ 44.) In April of 2008, IGT announced that it 15 had signed a memorandum of understanding with the CityCenter in Las 16 Vegas for installation of SB technology products for CityCenter’s 17 casino scheduled to open in late 2009. 18 (Id. ¶ 50.) On April 17, 2008, IGT announced that its second fiscal quarter 19 EPS was $0.22, below the forecasts of $0.35-$0.40 or “slightly 20 below.” (Id. ¶ 51.) Defendants continued to represent that IGT’s 21 products were “probably . . . slightly less impacted by the overall 22 economic impact on play levels.” (Id. ¶ 52.) Defendants continued 23 to maintain their EPS guidance at $0.35 to $0.40 for upcoming 24 quarters, and forecasted that operating expenses would be between 26 25 and 28 percent of total revenues. (Id. ¶ 53.) Defendant Matthews 26 also stated that IGT was comfortable that it would accomplish 27 28 4 1 delivery of version 4.0 of the SB technology to CityCenter. (Id. ¶ 2 55.) 3 On July 17, 2008, IGT announced an EPS of $0.35 for its third 4 fiscal quarter of 2008, in line with prior guidance. (Id. ¶ 58.) 5 Defendant Matthews represented that play level declines were 6 unprecedented and could affect IGT. (Id. ¶ 60.) Matthews adjusted 7 IGT’s EPS forecast to a range of $0.30 to $0.35. (Id. ¶ 61.) IGT’s 8 common stock declined by nearly 8 percent on July 17, 2008 to $22.77 9 per share, and then declined more than 2 percent on July 18 and 21, 10 2008. (Id. ¶ 64.) In September 2008, following rumors of layoffs, 11 IGT’s stock price declined nearly six percent to $17.70 per share. 12 (Id. ¶ 71.) 13 On October 30, 2008, IGT reported an EPS of $0.18 per share, 14 lower than its previous forecast of $0.30 to $0.35 per share. (Id. 15 ¶ 72.) IGT’s stock price fell nearly five percent, to $12.01 per 16 share. (Id.) 17 On July 30, 2009, Plaintiffs filed suit in federal court. On 18 June 17, 2010, Defendants filed a motion to dismiss (#50) the 19 consolidated complaint. 20 (#58). On August 9, 2010, Plaintiffs opposed On September 9, 2010, Defendants replied (#59). 21 22 23 II. Motion to Dismiss Standard Plaintiffs’ claims are brought under Sections 10(b) and 20(a) 24 of the Exchange Act, as well as under Rule 10b-5 of the Rules and 25 Regulations of the Exchange Act, 17 C.F.R. § 240.10b-5. To state a 26 valid claim under Section 10(b) and Rule 10b-5, a plaintiff must 27 plead “(1) a material misrepresentation or omission of fact, (2) 28 5 1 scienter, (3) a connection with the purchase or sale of a security, 2 (4) transaction and loss causation, and (5) economic loss.’” Zucco 3 Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009) 4 (quoting In re Dao Systems, Inc., 411 F.3d 1006, 1014 (9th Cir. 5 2005)). These claims are subject to the heightened pleading 6 standards of Federal Rule of Civil Procedure 9(b) and the Private 7 Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u8 4(b). Federal Rule of Civil Procedure 9(b) provides that “[i]n 9 alleging fraud or mistake, a party must state with particularity the 10 circumstances constituting fraud or mistake.” FED. R. CIV. P. 9(b). 11 The PSLRA also provides that “a complaint shall specify each 12 statement alleged to have been misleading, the reason or reasons why 13 the statement is misleading” and should also state “with 14 particularity all facts” on which any allegation rests, including 15 any allegations regarding scienter. 15 U.S.C. § 78u-4(b). The 16 court must dismiss complaints that do not meet these requirements. 17 15 U.S.C. § 78u-4(b)(3). 18 The United States Supreme Court recently clarified the standard 19 by which a court must consider a Rule 12(b)(6) motion to dismiss a 20 Section 10(b) action. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 21 551 U.S. 308, 322 (2007). First, a court must accept all factual 22 allegations in the complaint as true. Id. Second, a court must 23 also consider the complaint in its entirety, as well as other 24 sources such as “documents incorporated into the complaint by 25 reference, and matters of which a court may take judicial notice.” 26 Id. Third, in determining whether a plaintiff has sufficiently pled 27 28 6 1 scienter, a court “must take into account plausible opposing 2 inferences.” Id. 3 4 5 III. Discussion Defendants seek to dismiss Plaintiffs’ claims pursuant to the 6 PSLRA and Federal Rules of Civil Procedure 9(b) and 12(b)(6) for 7 failure to demonstrate material misrepresentation and scienter. 8 Plaintiffs argue that they properly pled causes of action sufficient 9 to withstand dismissal under the PSLRA. Specifically, Plaintiffs 10 allege that (1) Defendants knowingly misrepresented the conditions 11 IGT faced, such as the economic impact on play levels; (2) 12 Defendants knowingly announced unrealistic EPS forecasts that were 13 not met in the second and fourth quarters of 2008; (3) Defendants 14 knowingly misrepresented that their operating expenses would be 15 between twenty-six and twenty-nine percent of total revenues; and 16 (4) Defendants knowingly misrepresented that the SB technology was 17 on track and would generate revenue through deals struck with 18 Harrah’s and CityCenter. Plaintiffs rely on confidential witness 19 statements, statements by the Defendants, and stock sales by 20 insiders and Defendant Matthews to support their claim of scienter. 21 A. Economic Impact on IGT 22 Defendants claim that the complaint fails to demonstrate fraud 23 regarding Defendants’ statements about play levels and the overall 24 impact of the economy on IGT. The complaint alleges that Defendants 25 misrepresented that IGT was impervious to the economic downturn and 26 uniquely positioned for continued growth. The complaint also 27 alleges that Defendants repeatedly claimed that any decline in play 28 7 1 levels was due to normal seasonality, rather than the economic 2 downturn. 3 As evidence that Defendants knowingly misrepresented the 4 economic impact on IGT, Plaintiffs cite statements by Defendants 5 made on October 30, 2008. During a conference call, Defendant 6 Cavanaugh disclosed that IGT’s financial results in the fourth 7 quarter were caused by “lower play levels resulting from the current 8 economic condition.” During the same call, Defendant Matthews 9 stated that “we have seen play levels decline really since last 10 November [2007] that accelerated a bit in April [2008] and appears 11 to have accelerated even a bit further in October [2008].” 12 Compl. ¶ 73.) (Consol. Defendants’ statements appear to contradict 13 Defendants’ numerous reassurances, made during the Class Period 14 through April 2008, that lower play levels were due to seasonality 15 as opposed to the overall economic downturn. In light of these 16 statements, we find that Plaintiffs have provided evidence of 17 scienter. 18 Defendants argue that the game play level statements are 19 protected by the PSLRA’s safe harbor. We disagree. Defendants’ 20 statements that all they were seeing is normal seasonality were not 21 forward-looking, and therefore fall outside of the protection of the 22 safe harbor. Nor are the statements protected because information 23 about game play levels may have been available in the public domain. 24 While companies are under no obligation to disclose information 25 readily available to investors, Defendants’ insistence that any 26 decline they were seeing is due to normal seasonality was not merely 27 28 8 1 a matter of omission, but of misrepresentation and direct 2 contradiction to any readily available information. 3 Plaintiffs also claim that Defendants’ statement that the 4 latter half of the fiscal year was the best six months of the year 5 for game play levels was misleading. 6 Plaintiffs. Here, we disagree with Plaintiffs have not shown that this statement is false 7 as a description of historical data or past performance.1 8 B. EPS Forecast 9 Plaintiffs claim that Defendants’ EPS forecasts for the second 10 and fourth fiscal quarters of 2008 were knowingly false because 11 Defendants knew that the forecasts were not achievable when they 12 announced them. Defendants’ EPS forecasts, however, are protected 13 by the safe harbor, and cannot form the basis for a securities fraud 14 suit. 15 Under the PSLRA, “forward-looking statements” are protected by 16 a safe harbor when certain conditions are met. The PSLRA provides 17 that a person shall not be liable with respect to any forward18 looking statement, written or oral, if the statement is “(i) 19 identified as a forward-looking statement, and is accompanied by 20 meaningful cautionary statements identifying important factors that 21 could cause actual results to differ materially from those in the 22 23 1 27 Even if we were to find that the statement is considered a forward-looking prediction rather than a statement of past performance, it is protected by the PSLRA’s safe harbor for forwardlooking statements, as long as it is accompanied by meaningful cautionary language. Defendants warned that historical results are not necessarily indicative of future prospects, and also that reported results should not be considered an indication of future performance. These warnings are sufficient to protect Defendants’ statements about the best six months of the year. 28 9 24 25 26 1 forward-looking statement.” 15 U.S.C. § 78u-5(c). The PSLRA also 2 protects forward-looking statements if a plaintiff fails to prove 3 that the statement was made with actual knowledge that the statement 4 was false or misleading, or if made by or with the approval of an 5 executive officer of a business entity. Id. The PSLRA defines 6 forward-looking statements to mean, inter alia, statements of future 7 economic performance, such as the EPS forecasts challenged here. 15 8 U.S.C. § 78u-5(i). 9 Defendants’ EPS forecasts were accompanied by meaningful 10 cautionary language. The forecasts were identified as forward- 11 looking through statements such as “our forward-looking statements, 12 including any comments regarding our earnings expectations.” 13 to Dismiss, Exhibit 4, at 1 (#52-4).) (Mot. Defendants accompanied the 14 EPS forecasts with language warning that IGT’s business is 15 vulnerable to changing economic conditions such as recessions. 16 Defendats also warned that economic slowdowns may result in reduced 17 play levels, which could result in lower revenues. There were 18 additional warnings that the rate of growth of the gaming market in 19 North America has diminished, which could reduce the demand for 20 IGT’s products. These warnings meaningfully covered the risks that 21 IGT’s business was subject to in the economic downturn. 22 The statute itself protects forward-looking statements as long 23 as the requirement of cautionary language is met. 24 b(5). 15 U.S.C. §78u- The second prong of the safe harbor, the requirement of 25 actual knowledge of falsity is independent. See id. (safe harbor 26 protects forward looking statements accompanied by meaningful 27 cautionary language, or when plaintiff fails to prove actual 28 10 1 knowledge of falsity). Because we rule that the forward-looking 2 statements were accompanied by meaningful cautionary language, we do 3 not examine the argument that the statements are protected under the 4 second prong of actual knowledge.2 5 C. Operating Expenses 6 In the complaint, Plaintiffs challenged “IGT’s forecasts of 7 total operating expenses.” (Consol. Compl. ¶ 54.) Such forecasts 8 are forward-looking statements, falling under the category of “a 9 statement containing a projection of . . . financial items.” 10 U.S.C. § 78u-5(i). 15 Plaintiffs also challenged Defendants’ 11 representations that IGT will be prudent in its capital deployment. 12 Defendants claim that statements regarding operating expenses 13 as a percentage of total revenues are protected by the safe harbor 14 because the warnings concerning factors that could affect revenue 15 were clearly applicable to statements that operating expenses were 16 expected to be a certain percentage of total revenues. On July 17, 17 2008, Defendants also warned that “[o]ur target range for operating 18 expense has been 25% to 28% of revenues, depending on quarterly 19 fluctuation in demand with the goal to maintain if not exceed 30% 20 operating income margins.” (Mot. to Dismiss, Exhibit 17, at 4 (#52- 21 2 27 Some courts disagree. See, e.g., In re SeeBeyond Tech. Corp. Sec. Litig., 266 F.Supp. 2d 1150, 1164 (C.D. Cal. 2003) (holding that knowledge of actual falsity will negate any safe harbor protection). The majority of courts, however, hold that the two prongs of the safe harbor are independent. See, e.g., Harris v. Ivax Corp., 182 F.3d 799, 803 (11th Cir. 1999) (noting that “if a statement is accompanied by ‘meaningful cautionary language,’ the defendants’ state of mind is irrelevant.”). The majority reading of the statute is consistent with the legislative history. See H.R. Conf. Rep. 104-369, at 44 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 743 (“[t]he first prong of the safe harbor requires courts to examine only the cautionary statement accompanying the forward-looking statement.”) 28 11 22 23 24 25 26 1 17).) Defendants acknowledged that “operating expense are not at 2 optimal levels. . . . if we aren’t going to have the revenue growth 3 breakout that we were hoping for this year . . . we need to manage 4 expenses in a much more prudent and careful way.” 5 (Id. at 5.) However, as Defendants concede, there were no tailored warnings 6 to Defendants’ earlier statements regarding operating expenses. For 7 instance, in January, Defendants announced that “[f]or the remainder 8 of fiscal 2008, we anticipate our total operating expenses to remain 9 between 26 and 29% of total revenues.” 10 10, at 3 (#52-10).) (Mot. to Dismiss, Exhibit Before that announcement, Defendants did warn 11 that for the second quarter of 2008, IGT “anticipate[d] replacement 12 demand will remain at historically low levels.” (Id.) However, 13 this warning does not accompany IGT’s statements about operating 14 expenses. 15 Because Defendants’ statements regarding operating expense 16 forecasts were not accompanied by meaningful cautionary language, 17 they are not protected by the first prong of the safe harbor. The 18 second prong protects forward-looking statements if the plaintiff 19 fails to prove that the statement is made with actual knowledge that 20 the statement was false or misleading. Plaintiffs rely on a 21 confidential witness statement to prove that the statements were 22 made with actual knowledge of falsity. A complaint relying on 23 statements from a confidential witness must pass two hurdles to 24 satisfy the heightened pleading requirements of PSLRA. 25 552 F.3d at 995. Digimarc, First, the confidential witness “must be described 26 with sufficient particularity to establish [his] reliability and 27 personal knowledge,” and the statements by a confidential witness 28 12 1 “must [itself] be indicative of scienter.” Id. The first prong is 2 only required if there is no additional evidence providing an 3 adequate basis for believing that the defendants’ statements were 4 false. Id. In this case, Plaintiffs have provided no additional 5 evidence that Defendants knew the statements were false when made. 6 Therefore, Plaintiffs must satisfy both requirements relating to 7 confidential witness statements. 8 CW#6, allegedly a former Engineering Manager for IGT Labs until 9 December 2008, stated that IGT spent like it had a “bottomless 10 purse” and repeatedly wasted money on items that became useless. 11 (Consol. Compl. ¶ 34.) CW#6's statement, however, is insufficient 12 to prove actual knowledge of falsity. While the complaint describes 13 CW#6's job title and employment information briefly, it fails to 14 allege with particularity facts supporting the necessary assumption 15 that Defendants knew that their statements about projected operating 16 expenses were false when made. Digimarc, 552 F.3d at 996. We 17 conclude that the complaint fails to allege facts in sufficient 18 detail to create a strong inference that Defendants’ forward-looking 19 statements concerning operating expenses were knowingly false when 20 made. 21 D. SB Technology 22 Finally, Defendants claim that Plaintiffs have failed to plead 23 a claim of securities fraud based on Defendants’ statements 24 regarding the SB technology. Plaintiffs pled that Defendants 25 repeatedly made statements that SB technology was on track when it 26 was not, and announced deals with Harrah’s and CityCenter without 27 disclosing that the deals were not expected to create revenue for at 28 13 1 least two years. Plaintiffs also challenge Defendants’ statement 2 that IGT expected to deliver version 4.0 of the SB technology to 3 CityCenter upon its opening. 4 Plaintiffs concede that Defendants announced that IGT did not 5 expect to begin commercializing SB technology until 2009. 6 Defendants’ statements that SB technology was on track are forward7 looking statements, and furthermore, cannot serve as the basis of a 8 securities fraud claim because Plaintiffs do not allege that the SB 9 technology was not installed on time. Defendants’ statement that 10 IGT expected to deliver version 4.0 at CityCenter’s opening is also 11 a forward-looking statement, and Plaintiffs properly pled that the 12 forward-looking statement was untrue, because version 4.0 was not 13 installed when CityCenter opened. The statement, however, is 14 protected by the first prong of the safe harbor, because it was 15 accompanied by meaningful cautionary language. For instance, when 16 Defendant Matthews made the statement, he accompanied it by warning 17 that IGT was “developing a very broad system from scratch, and so 18 just maintaining proper product definition and meeting those 19 internal timelines is really the challenge.” He made additional 20 warnings, and concluded that “if everything goes well, we have 21 perhaps version 4.0 in advance of that opening, or maybe shortly 22 thereafter.” This cautionary language is sufficient to put 23 investors on notice that the statement that 4.0 may be ready in time 24 was subject to various risks of delay, and therefore, this statement 25 does not pass muster as grounds for a securities fraud claim under 26 the PSLRA. 27 28 14 1 Plaintiffs also claim that Defendants’ announcements about 2 deals struck with Harrah’s and CityCenter were misleading because 3 Defendants did not disclose that IGT was required to provide the SB 4 technology for free for as long as two years. Defendants’ 5 announcements about the deals did not reference any expected 6 revenues. The announcement regarding the deal with Harrah’s stated 7 that the deal was “subject to Harrah’s corporate approvals, 8 execution of definitive agreements and receipt of required 9 regulatory approvals.” 10 12).) (Mot. to Dismiss, Exhibit 12, at 1 (#52- The press release regarding the CityCenter agreement 11 disclosed that IGT signed “a formal memorandum of understanding 12 pertaining to installing a server-based network and related IGT 13 sb(TM) and gaming management system products” at CityCenter’s casino 14 “scheduled to open in late 2009.” 15 1 (#52-15).) (Mot. to Dismiss, Exhibit 15, at Plaintiffs claim that these announcements, combined 16 with Defendants’ representations that SB technology would result in 17 higher or expanded margins, created the false expectation that SB 18 technology “would begin contributing to IGT’s financial results in 19 the not-too-distant future.” 20 (Pls’ Opp. at 9 (#58).) Plaintiffs argue that Defendants had no basis to represent that 21 the SB technology would create higher margins, because Defendants 22 had not developed a pricing model for the SB technology during the 23 Class Period, nor determined what customers would be willing to pay 24 for it. Plaintiffs’ allegations concerning higher margins are 25 insufficient to plead either falsity or scienter as required under 26 the PSLRA. Plaintiffs have not pled that the SB technology has 27 proven to be unprofitable; indeed, it would be premature if they 28 15 1 were to so plead on the basis of the facts presented in the 2 complaint. Nor do we find that Defendants’ statements regarding 3 their expectations of the new technology were made with the 4 requisite state of mind. Furthermore, such statements are protected 5 as forward-looking statements under the PSLRA, and therefore cannot 6 provide the basis for a securities fraud action.3 7 Defendants’ allegedly deficient announcements regarding 8 agreements made with Harrah’s and CityCenter, however, are not 9 protected by the PSLRA. In separate announcements regarding the SB 10 technology, Defendants stated that IGT was “on target to begin 11 commercializing this product in 2009" and that “pricing will remain 12 a private conversation . . . We feel fairly comfortable that the 13 pricing is going to sort itself out . . . .” 14 Exhibit 4, at 12 (#52-4).) (Mot. to Dismiss, While a generous view of Defendants’ 15 statements regarding SB technology and its expected profits might 16 excuse Defendants’ failure to disclose that the deals with Harrah’s 17 and CityCenter were not made for profit, we find it equally 18 compelling that Defendants may have intentionally misled the public 19 and its investors when it failed to disclose that the agreements, 20 when made, were not expected to generate any revenue for a number of 21 years. 22 23 24 25 3 27 IGT’s warnings that the pricing model was not set on SB technology suffice to serve as meaningful cautionary language for IGT’s statements that SB technology was expected to provide a higher margin of profits. 28 16 26 1 E. Insider Stock Sales 2 Plaintiffs allege that suspicious stock sales by Defendant 3 Matthews and other Company insiders during the Class Period provide 4 additional indicia of scienter to commit fraud. 5 The Ninth Circuit considers three factors to evaluate the 6 suspiciousness of stock sales. Nursing Home Pension Fund, Local 144 7 v. Oracle Corp., 380 F.3d 1226, 1232 (9th Cir. 2004). These factors 8 are: “(1) the amount and percentage of shares sold; (2) timing of 9 the sales; and (3) consistency with prior trading history.” Id. 10 Additionally, stock sales are “only suspicious when ‘dramatically 11 out of line with prior trading practices at times calculated to 12 maximize the personal benefit from undisclosed inside information.’” 13 Id. (quoting In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 14 986 (9th Cir. 1999) (superceded by statute on other grounds)). 15 Plaintiffs challenge several insiders’ stock sales, but the 16 only Defendant alleged to have made such sales is Defendant 17 Matthews. Five of the six alleged sellers are not defendants in 18 this action and are not alleged to have made any misstatements. 19 Their sales, therefore, are not probative of scienter. See, e.g., 20 In re First Union Corp. Sec. Litig, 128 F.Supp.2d 871, 898 (W.D.N.C. 21 2001); Plevy v. Haggerty, 38 F.Supp.2d 816, 832 n.12 (C.D. Cal. 22 1998). 23 Plaintiffs’ calculation of the amount of Defendant Matthews’ 24 sales is also in error. Plaintiffs allege that the amount of the 25 sales was comprised twenty-seven percent of Defendant Matthews’ IGT 26 stock. The Ninth Circuit, however, does not distinguish between 27 vested stock options and shares, and held that actual stock shares 28 17 1 and exercisable stock options must be combined when evaluating the 2 amount of allegedly suspicious stock sales. In re Silicon Graphics, 3 183 F.3d at 986 (superceded by statute on other grounds). 4 Defendants aver that the correct amount of Defendant Matthews’ sales 5 is, therefore, thirteen percent rather than twenty-seven percent. 6 The Ninth Circuit has held that where the CEO of a company sold only 7 thirteen percent of his stock and vested options over a fifteen8 month long period, “the amount is not suspicious, and does not 9 support a strong inference of fraud.” In re Vantive Corp. Sec. 10 Litig, 283 F.3d 1079, 1094 (9th Cir. 2002) (abrogated on other 11 grounds). 12 Nor do we find that the timing of Defendant Matthews’ sales is 13 suspicious. Defendant Matthews’ sales occurred in November 2007, 14 two months prior to IGT’s announcement that it had achieved its 15 financial forecast for the first quarter of fiscal 2008. 16 Furthermore, IGT’s stock price closed lower on November 19, 2007 17 than on any other day between September 13, 2007 and January 11, 18 2008. (Mot. to Dismiss, Exhibit 1, at 8 (#52-1).) The Ninth 19 Circuit found that when share price rose two months after allegedly 20 suspicious sales, and the below-expectation earnings report is not 21 released until three months after the sales, the timing of the stock 22 sales is not suspicious. Ronconi v. Larkin, 253 F.3d 423, 435 (9th 23 Cir. 2001). 24 Finally, Defendant Matthews’ stock sales of November 2007 are 25 not inconsistent with his prior trading history. Plaintiffs merely 26 allege that Defendant Matthews sold no stock in the twelve-month 27 period preceding November 2007. This allegation is insufficient in 28 18 1 light of Defendant Matthews’ sales of 580,000 shares of IGT stock in 2 February 2006. The allegedly suspicious sales in November 2007, in 3 comparison, were comprised of 379,658 shares. It does not appear 4 that these sales were “dramatically out of line with prior trading 5 practices.” 6 Digimarc, 552 F.3d at 1002. We conclude, therefore, that the insider stock sales cannot 7 serve as indicia of scienter. 8 9 10 IV. Conclusion Viewed as a whole, we find that Plaintiffs have alleged 11 inferences that Defendants intentionally misled investors to the 12 investors’ detriment at least as compelling as any plausible 13 opposing inference. While Plaintiffs’ allegations based on 14 Defendants’ EPS forecasts, SB technology schedule forecast, 15 operating expense forecast and stock sales are insufficient to 16 allege fraud under the PSLRA, Plaintiffs’ allegations based on 17 Defendants’ statements concerning play levels and omissions relating 18 to the CityCenter and Harrah’s agreements create an inference of 19 scienter at least sufficient to survive a motion to dismiss. 20 21 IT IS, THEREFORE, HEREBY ORDERED that Defendants’ motion to 22 dismiss (#50) is DENIED. 23 24 15th 25 DATED: March ______, 2011. 26 ____________________________ UNITED STATES DISTRICT JUDGE 27 28 19
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