In re Read-Rite Corp., 00-17098.

Citation335 F.3d 843
Decision Date03 July 2003
Docket NumberNo. 00-17098.,00-17098.
PartiesIn re READ-RITE CORP. Securities Litigation James C. Nevius; William Molair, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. Read-Rite Corp.; Cyril J. Yansouni; Fred Schwettmann, Dr.; Lori Holland; Peter G. Bischoff; H. Vaughan Blaxter, III; Rex S. Jackson; Michael A. Klyszeiko; Sherry F. McVicar, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Solomon B. Sera, San Francisco, CA, for plaintiffs-appellants James C. Nevius, et al.

Sherrie R. Savett, Stuart J. Guber, Phyllis M. Parker, Philadelphia, PA, for plaintiffs-appellants James C. Nevius, et al.

Boris Feldman, Jared L. Kopel, Cheryl W. Foung, Gregory L. Watts, Palo Alto, CA, for the defendants-appellees.

Appeal from the United States District Court for the Northern District of California; Jeremy Fogel, District Judge, Presiding. D.C. No. CV-98-20434-JF.

Before: BRUNETTI and TASHIMA, Circuit Judges, and EZRA,* District Judge.

OPINION

EZRA, District Judge:

Plaintiffs, owners of Read-Rite Corporation ("Read-Rite") common stock between March 2, 1996, and June 19, 1996 (the "Class Period"), appeal the district court's dismissal of their securities class action for failure to state a claim pursuant to the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4 (2002). Plaintiffs contend that the district court improperly concluded that they did not allege scienter with the particularity required by the PSLRA. We affirm.

I. BACKGROUND

Plaintiffs initiated their lawsuit against Read-Rite, its Chairman and CEO Cyril J. Yansouni, and Read-Rite COO and Director Frederic Schwettmann (collectively, "Defendants"). Read-Rite manufactured and sold ferrite metal-in-gap ("MIG") recording heads and Tripad thin film inductive recording heads for hard-disk drives. In late 1994 and early 1995, Read-Rite reported growing revenues and profits.

By 1995, four customers purchased 90 percent of Read-Rite's product. Western Digital represented 37 percent of Read-Rite's sales, making it Read-Rite's largest customer. Conner Peripherals ("Conner") represented another 13 percent of Read-Rite's sales. In late September 1995, Seagate Technology ("Seagate") announced its planned acquisition of Conner. The extent to which Conner remained a primary customer was of material concern to Read-Rite's investors. As a result of Seagate's acquisition, as well as other alleged pressures, Plaintiffs allege that Defendants made several fraudulent statements during the Class Period regarding the status of product development and the demand for Read-Rite's products. Specifically, Plaintiffs allege that Defendants made the following false statements:

1. In an interview with Barron's, published in the March 4, 1996 issue (disseminated on March 2, 1996), Defendant Yansouni stated: "I can't prove that Seagate will continue to buy our products. But we're being designed into some Conner products right now that survived Seagate's rationalization of its product line after the merger. If we execute, we'll continue to have business with Seagate."

2. On April 17, 1996, Read-Rite issued a press release in which Defendant Yansouni stated: "We enter the third quarter of fiscal 1996 having achieved designins for a number of new products using our advanced inductive Tripad heads."

3. On April 18, 1996, as reported in a Solomon Brothers analyst report, the Company stated during a conference call with investment professionals: (a) demand for Read-Rite products "continues to be good"; (b) Read-Rite has completed its transition to its Tripad II product and was at that time ramping up to high volume production of those products; and (c) Read-Rite had completed its development of its 850 MB Tripad III recording head, was in the final testing phase for this product, and expected to ramp up production of this product in the quarter ending June 30, 1996.

4. On May 20, 1996, "Read-Rite made a presentation at the Smith Barney Technology Conference in which the Company stated that it was in final qualification trials for Tripad III."

II. STANDARD OF REVIEW

"Dismissal without leave to amend is improper unless it is clear, upon de novo review, that the complaint could not be saved by any amendment." Polich v. Burlington N., Inc., 942 F.2d 1467, 1472 (9th Cir.1991). Thus, "leave to amend should be granted unless the district court determines that the pleading could not possibly be cured by the allegation of other facts." United States v. SmithKline Beecham, Inc., 245 F.3d 1048, 1052 (9th Cir.2001). "The district court's discretion to deny leave to amend is particularly broad where plaintiff has previously amended the complaint." In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1097-98 (9th Cir.2002).

III. DISCUSSION

This case provides us with yet another opportunity to visit § 10(b) of the Securities Exchange Act of 1934 (the "'34 Act"), which provides that it is unlawful "to use or employ in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance...." 15 U.S.C. § 78j(b) (2002). Scienter is an essential element of a § 10(b) claim. Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1035 n. 15 (9th Cir.2002).

The PSLRA imposes a heightened pleading standard for alleging violations under the '34 Act. See 15 U.S.C. § 78u-4 (2002). Under the PSLRA:

In any private action arising under this chapter in which the plaintiff alleges that the defendant

(A) made an untrue statement of a material fact; or

(B) omitted to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading; the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.

15 U.S.C. § 78u-4(b)(1) (2002) (emphasis added). Additionally, with regard to pleading scienter, the PSLRA provides:

In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.

15 U.S.C. § 78u-4(b)(2) (2002) (emphasis added). If the complaint fails to meet the above-quoted requirements, the court must dismiss the complaint. 15 U.S.C. § 78u-4(b)(3)(A) (2002).

We incorporate the dual pleading requirements of §§ 78u-4(b)(1) and (b)(2) into a single inquiry, because falsity and scienter are generally inferred from the same set of facts. Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir.2001). Thus, "[i]n considering whether a private securities fraud complaint can survive dismissal under Rule 12(b)(6), we must determine whether particular facts in the complaint, taken as a whole, raise a strong inference that defendants intentionally or [with] deliberate recklessness made false or misleading statements to investors." Id. (internal quotation marks omitted). The requirement to "plead all the `facts' with particularity" means that "a plaintiff must provide a list of all relevant circumstances in great detail." In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 984 (9th Cir.1999). "To meet this pleading requirement, the complaint must contain allegations of specific `contemporaneous statements or conditions' that demonstrate the intentional or the deliberately reckless false or misleading nature of the statements when made." Ronconi, 253 F.3d at 432. Thus, if a plaintiff's "pleadings are not sufficiently particularized or where, taken as a whole, they do not raise a `strong inference' that misleading statements were knowingly or deliberate recklessness made to investors, a private securities fraud complaint is properly dismissed under Rule 12(b)(6)." Id. at 429.

Here, the district court concluded that Plaintiffs had failed to "provide specific allegations of ... contemporaneous information in order to satisfy the Reform Act standard." Plaintiffs challenge the district court's holding, relying on post-class period admissions, which allegedly indicate Defendants' "contemporaneous knowledge about these subjects during the Class Period when they made the false and misleading statements." A later statement may suggest that a defendant had contemporaneous knowledge of the falsity of his statement, if the later statement directly contradicts or is inconsistent with the earlier statement. Yourish v. Cal. Amplifier, 191 F.3d 983, 996-97 (9th Cir. 1999). However, "[i]t is clearly insufficient for plaintiffs to say that a later, sobering revelation makes an earlier, cheerier statement a falsehood." Id. at 997.

Plaintiffs rely upon post-class-period "admissions" by Defendants to establish a "strong inference" that Defendants knowingly, or with deliberate recklessness, made misleading statements to investors. First, Plaintiffs argue that Defendants had contemporaneous knowledge of the falsity of their statements when they admitted on Read-Rite's form 10K for fiscal year 1996, filed with the Securities and Exchange Commission, that they had learned prior to March 30, 1996, that Read-Rite needed "to develop the new `undershoot reduction' feature to participate in the Western Digital programs." Plaintiffs argue that this statement is proof of the falsity of Defendants' class-period statements regarding the status of the development of Read-Rite's Tripad II and Tripad III recording heads.

These statements, however, do not specifically address Western Digital's need for the ...

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