Desert Orchid Prt, et al v. Metawave Commun Corp, et al, No. 2:2002cv00625 - Document 136 (W.D. Wash. 2009)
Court Description: ORDER denying dft 87 Liang's Motion to Dismiss, by Judge Ricardo S Martinez. (cc: I. Press, P. Kulsrud, W. Lerach)(VP)
Download PDF
<![CDATA[
Desert Orchid Prt, et al v. Metawave Commun Corp, et al Doc. 136 1 2 3 4 5 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE 6 7 8 9 IN RE METAWAVE COMMUNICATIONS CORP. SECURITIES LITIGATION 10 CASE NO. C02-625RSM 11 ORDER DENYING DEFENDANT LIANG’S MOTION TO DISMISS 12 This Document Relates to 13 ALL ACTIONS 14 15 This matter is now before the Court on the motion of Defendant Liang to dismiss Plaintiffs’ Third 16 Amended Complaint (Dkt. # 87)1, a class action complaint alleging securities fraud. Senior United 17 States District Court Judge Thomas Zilly previously granted a motion to dismiss brought by Defendant, 18 and granted Plaintiffs leave to amend to meet the heightened pleading requirements of the Private 19 Securities Litigation Reform Act of 1995 (the “PSLRA”). Dkt. # 64 (“Order”); published as In re 20 Metawave Communications Corp. Securities Litigation, 298 F. Supp. 2d 1056 (W.D.Wash. 2003). 21 Plaintiffs filed an amended complaint, which was again dismissed by Judge Zilly with leave to amend. 22 Following a second amendment and the filing of renewed motions to dismiss, the case was transferred to 23 the undersigned district judge. 24 On November 8, 2004, the Court heard oral argument on the then-pending motions to dismiss. 25 26 1 27 The motion that is on the docket is a motion to dismiss the Second Amended Complaint. It was designated by the Court as a motion to dismiss the Third Amended complaint after the complaint was amended and supplemental briefing was filed. 28 ORDER ON MOTION TO DISMISS - 1 Dockets.Justia.com 1 On February 14, 2005, before the Court finalized its written opinion on the pending motions, plaintiffs 2 requested a deferral until the Ninth Circuit Court of Appeals issued a final opinion in In re Daou Systems, 3 Inc., Securities Litigation, 411 F. 3d 1006 (9th Cir. 2005). The Supreme Court denied certiorari in 4 Daou Systems, Inc., on February 2, 2006. 546 U.S. 1172 (2006). In the meantime, a different Supreme 5 Court decision led plaintiffs to move for leave to amend to conform their complaint to the “loss 6 causation” standards articulated therein. Dura Pharmaceuticals, Inc., v. Broudo, 544 U.S. 336 (2005). 7 Plaintiffs’ motion was granted, the Third Amended Complaint was filed, and the court set a briefing 8 schedule for supplemental briefing on the renewed motion to dismiss, now directed to the Third 9 Amended Complaint (“TAC”). Dkt. ## 113, 120. 10 Plaintiffs filed this action pursuant to Section 10(b) of the Securities Exchange Act of 1934 11 (“1934 Act”), 15 U.S.C. § 78j(b), and SEC Rule 10b-5.2 Defendant has moved to dismiss the Third 12 Amended Complaint (“TAC”) pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), 13 contending that it fails to cure the pleading deficiencies previously identified by Judge Zilly. Having fully 14 considered the arguments and the memoranda of the parties, together with the Court’s previous Order, 15 the Court now DENIES Defendant Liang’s motion to dismiss. 16 BACKGROUND 17 The background of this dispute was thoroughly set forth in Judge Zilly’s Order, and will only be 18 briefly summarized here. Defendant Metawave3 manufactures “smart” antenna systems, used in the 19 cellular telephone industry. The product at issue here is the Spotlight GSM Smart Antenna (“Spotlight 20 GSM”), which uses Global System Mobile Communication technology, the standard in Europe and Asia. 21 Metawave focused its marketing effort for the Spotlight GSM on Asian markets, particularly China. This 22 complaint, like the ones preceding it, alleges that Metawave and the individual defendants made material 23 misrepresentations in three areas: (1) the quality of Metawave’s Spotlight GSM and demand for it in 24 25 26 27 28 2 Plaintiffs originally asserted a claim of controlling person liability under Section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a). This was dismissed with prejudice as to Defendant Liang in the prior Order. Dkt. # 64, p. 52. 3 This action has been stayed as to Defendant Metawave due to the corporation’s bankruptcy. ORDER ON MOTION TO DISMISS - 2 1 China, (2) revenue recognition from Spotlight GSM sales, and (3) inventory accounting. Thus, according 2 to the TAC, 3 4 5 6 7 8 [o]n April 24, 2001, the first day of the Class Period, Metawave issued a press release falsely announcing that it had earned about $1.6 million in revenue from its GSM product and an “increase in demand” for the products in Asia. For the next 11 months, defendants continued to litter the market with false statements concerning (i) the revenue and earnings attributed to purported GSM sales, (ii) the quality, performance and demand for GSM in Asia, (iii) the results of GSM field trials in China and (iv) the level of Metawave’s inventory. None of these representations were true. . . . At the conclusion of the Class Period, Metawave admitted that it had falsely booked a total of $7.1 million in GSM revenues during 2001, all of which was eliminated when Metawave restated its financial results. .... 9 10 11 12 On March 14, 2002 [the last day of the Class Period], the Company announced that due to “insufficient customer demand for its spotlight GSM product,” the Company was shutting down the entire GSM product line. The Company also announced that it would (i) restate 2001 earnings due to improper recognition of revenues on sales of GSM products, and (ii) take a $23 million charge related to the discontinuation of GSM, including $18 million to write off worthless GSM inventory and fixed assets. On that news, Metawave’s stock plummeted over 70%, falling below $1/share, a drop from which it never recovered. 13 Third Amended Complaint, ¶ ¶ 3- 4, 7 (emphasis in original). 14 In the ninety-five pages following these statements, Plaintiffs set out their supporting allegations. 15 Their assertion that Defendants violated Section 10(b) and other provisions of the Securities Acts are 16 based on a fraud-on-the-market theory. The premise of this fraud-on-the-market theory is that “the 17 market price of shares traded on well-developed markets reflects all publicly available information.” 18 Basic, Inc., v. Levinson, 485 U.S. 224, 246 (1988). Buyers and sellers of stock rely on the integrity of 19 the market price. Id. Thus, the Supreme Court created a rebuttable presumption of reliance by the 20 investors on public material statements for the purposes of a rule 10b-5 claim. Id. at 247-48. Plaintiffs 21 here contend that false and misleading statements in SEC filing, press releases, and conversations with 22 analysts resulted in artificially inflated prices for Metawave’s stock, to the detriment of the Plaintiff 23 investors. 24 LEGAL STANDARDS 25 Defendant Liang contends that Plaintiffs have not pleaded a claim under Section 10(b) and Rule 26 10b-5 of the 1934 Exchange Act. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. They argue that this TAC 27 28 ORDER ON MOTION TO DISMISS - 3 1 still fails to meet the PSLRA pleading standards, and should be dismissed under Rules 9(b) and 12(b)(6). 2 A private action under § 10(b) and Rule 10b-5 must allege and prove all of the elements for 3 primary liability for each defendant. The elements of a securities fraud claim are: (1) to use or employ any 4 manipulative or deceptive device or contrivance; (2) scienter, i.e., wrongful state of mind; (3) a 5 connection with the purchase or sale of a security; (4) reliance, often referred to in fraud-on-the-market 6 cases as “transaction causation”; (5) economic loss; and (6) loss causation, i.e., a causal connection 7 between the manipulative or deceptive device or contrivance and the loss. See Dura Pharmaceuticals, 8 Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). 9 A Rule 10b-5 claim does not receive the traditional deference a court affords a complaint in 10 resolving a motion to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6). A complaint 11 alleging a Rule 10b-5 violation is subject not only to the heightened pleading requirements of 12 Fed.R.Civ.P. 9(b), but also the pleading requirements of the Private Securities Litigation Reform Act 13 (“PSLRA”). Daou, 411 F.3d at 1014. Under Rule 9(b), the duty to plead with particularity applies only 14 to “the circumstances constituting fraud or mistake,” whereas general allegations will suffice to establish 15 “[m]alice, intent, knowledge, and other condition of mind of a person . . . ” Under the PSLRA, however, 16 a plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted 17 with the required state of mind,” and must do so for “each act or omission alleged to violate” Rule 10b-5. 18 15 U.S.C. § 78u-4(b)(2) (emphasis added). 19 To satisfy the PSLRA in the context of a Rule 10b-5 allegation, a plaintiff must plead with 20 particularity facts that create a “strong inference of, at a minimum, deliberate recklessness.” In re Silicon 21 Graphics Inc. Sec. Litig., 183 F.3d 970, 977 (9th Cir.1999) (internal quotation omitted). That is, 22 Plaintiffs must provide facts which show that Defendant knew the challenged statements were false at the 23 time they were made. Id. at 985. 24 Under Rule 10b-5, the required state of mind is “scienter,” which the Supreme Court has defined 25 as a “mental state embracing intent to deceive, manipulate, or defraud.” Id. at 975 (quoting Ernst & Ernst 26 v. Hochfelder, 425 U.S. 185, 193-94 n. 12 (1976)). In holding that scienter requires at least “deliberate 27 recklessness,” the Ninth Circuit has expressly rejected the notion that pleading “simple recklessness” 28 ORDER ON MOTION TO DISMISS - 4 1 suffices. Id. at 977. Instead, a plaintiff seeking to overcome the PSLRA's pleading hurdle must allege 2 “specific facts indicating no less than a degree of recklessness that strongly suggests actual intent.” Id. at 3 979. Thus, recklessness only satisfies the scienter requirement under § 10)(b) “to the extent that it 4 reflects some degree of intentional or conscious misconduct.” Id. at 977. If attempting to plead scienter 5 through circumstantial evidence, Plaintiffs must “plead, in great detail, facts that constitute strong 6 circumstantial evidence of deliberately reckless or conscious misconduct.” Id. at 974. 7 Finally, when determining if a complaint gives rise to a “strong inference” of scienter, the PSLRA 8 requires a court to consider “all reasonable inferences to be drawn from the [plaintiffs'] allegations, 9 including inferences unfavorable to the plaintiffs.” Gompper v. Visx, Inc., 298 F.3d 893, 897 (9th 10 Cir.2002) (emphasis in original). For a plaintiff pleading scienter, the PSLRA is the death knell for the 11 “customary latitude” a court affords a complaint in considering a motion to dismiss under Rule 12(b)(6). 12 Id. at 896 (noting that customary standard requires court to “accept plaintiff's allegations as true and 13 construe them in the light most favorable to the plaintiff”); see also Daou, 411 F.3d at 1022 (reiterating 14 Gompper ). 15 Where, as here, scienter and falsity are being inferred from the same set of facts, “these two 16 requirements may be combined into a unitary inquiry under the PSLRA.” Ronconi v. Larkin, 253 F. 3d 17 423, 429 (9th Cir. 2001). The effect is to incorporate the dual pleading requirements of 15 U.S.C. §§ 18 78u-4(b)(1) and (b)(2) into a single inquiry. Id. 19 or where they do not raise a “strong inference” that misleading statements were knowingly or with 20 deliberate recklessness made to investors, a private securities fraud complaint is properly dismissed under 21 Rule 12(b)(6). Id. at 429. Where the pleadings are not sufficiently particularized, 22 DISCUSSION 23 The Court has granted the motion to dismiss filed by two other Defendants, finding that the 24 allegations set forth in the TAC did not cure the defects identified previously by Judge Zilly. Dkt. # 135. 25 Specifically, the court found that the allegations in the TAC are inadequate to establish a strong inference 26 of deliberate recklessness as to Defendants Fuhlendorf and Hunsberrger. Id., p. 18. However, as to 27 Defendant Liang, the Court reaches a different conclusion. 28 ORDER ON MOTION TO DISMISS - 5 1 Under the standards articulated above, the Court finds that the allegations regarding Defendant 2 Liang, particularly those set forth in ¶¶ 57-66, 94-100, 105, 123-135, and 158, meet the pleading 3 standards under the PSLRA for establishing scienter. Without repeating the allegations in detail, the 4 Court finds that these paragraphs adequately allege Defendant Liang’s knowledge and actions regarding 5 the failures of the Spotlight GSM system tests, his falsification of test results, his control over other 6 Metawave employees, his leadership role in marketing in China, his signature on side letters that created 7 consignment sales, his direction of shipments which included defective equipment, and his misleading 8 statements to other Metawave employees, as well to the public as in the January 8, 2002 public 9 statement. These allegations give rise to a strong inference that Defendant Liang was the source of the 10 information (or misinformation) regarding sales and performance of the GSM system that was presented 11 to the public. And in contrast to the previously dismissed Consolidated Class Acton Complaint (Dkt # 12 28), the TAC in these and other paragraphs (¶¶ 23-42) adequately sets forth the factual basis of each 13 confidential witness’s knowledge, including the time and circumstances in which each action or statement 14 by Defendant Liang occurred. 15 As noted above, to satisfy the PSLRA in the context of a Rule 10b-5 allegation, a plaintiff must 16 plead, with particularity, the facts that create a “strong inference of, at a minimum, deliberate 17 recklessness.” In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 977 (9th Cir.1999). That is, 18 Plaintiffs must provide facts which show that Defendant knew that the challenged statements were false 19 at the time they were made. Id. at 985. The paragraphs cited above, together with others scattered 20 throughout the TAC, cure the defects identified by Judge Zilly at page 48 of the prior Order, and satisfy 21 the pleading requirements of the PSLRA for scienter. 22 Accordingly, Defendant’s Liang’s Rule 12(b)(6) motion to dismiss (Dkt. # 87) is DENIED. 23 Dated this 27th day of March, 2009. 24 26 27 28 A RICARDO S. MARTINEZ UNITED STATES DISTRICT JUDGE 25 ORDER ON MOTION TO DISMISS - 6
]]>
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You
should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
