Bains v. Moores

• Decision Date: 20 March 2009
• Docket Number: No. D052533.,D052533.
• Citation: 91 Cal. Rptr. 3d 309,172 Cal.App.4th 445
• Parties: ROBERT REESE BAINS III et al., Plaintiffs and Appellants, v. JOHN J. MOORES et al., Defendants and Respondents.
• Court: California Court of Appeals Court of Appeals

172 Cal.App.4th 445

91 Cal. Rptr. 3d 309

ROBERT REESE BAINS III et al., Plaintiffs and Appellants, v. JOHN J. MOORES et al., Defendants and Respondents.

No. D052533.

Court of Appeals of California, Fourth District, Division One.

March 20, 2009.

[172 Cal.App.4th 448]

Patricia A. Meyer & Associates, Patricia A. Meyer, Trevor M. Flynn; Robert P. Ottilie; Kiesel Boucher & Larson and Raymond P. Boucher for Plaintiffs and Appellants.

Quinn Emanuel Urquhart Oliver & Hedges, John B. Quinn, Harry A. Olivar, Jr.; Kirby Noonan Lance & Hoge, David J. Noonan; Niddrie Fish & Buchanan and David A. Niddrie for Defendant and Respondent John J. Moores.

David A. Hahn; Gibbs & Bruns, Robin C. Gibbs, J. Christopher Reynolds, Ayesha Najam, Jeffry J. Cotner and Aundrea K. Frieden for Defendant and Respondent Charles E. Noell III.

Bewley, Lassleben & Miller, Leighton M. Anderson and David A. Brady for Defendant and Respondent Christopher A. Cole.

[172 Cal.App.4th 449]

OPINION

AARON, J.—

I. INTRODUCTION

In February 2003, Robert Reese Bains III and a group of former Peregrine Systems, Inc. (Peregrine), shareholders (collectively plaintiffs) filed this action against former Peregrine directors John J. Moores, Charles E. Noell III, and Christopher A. Cole (collectively defendants), as well as several former Peregrine employees, Peregrine's former outside accounting firm, and two of Peregrine's former business partners.¹ In their complaint, plaintiffs alleged that they had been induced to hold Peregrine stock from May 1997 through 2002 by Peregrine's false, fraudulent and misleading financial reports.² Plaintiffs alleged that Peregrine engaged in various fraudulent accounting practices that led to the improper recognition of revenue in Peregrine's financial statements, for the purpose of increasing Peregrine's stock price. Plaintiffs further alleged that in May 2002, after the initial public disclosure of the improper practices, Peregrine's stock price fell dramatically, causing plaintiffs to suffer damages. Plaintiffs averred that in February 2003, Peregrine issued restated financial statements for fiscal years 2000 and 2001, and for the first three quarters of 2002, and that the financial statements reduced by $509 million previously reported revenue in the amount of $1.34 billion. Of the $509 million, $259 million was deducted for nonsubstantiated transactions. Plaintiffs' complaint contained various fraud and fraud-related causes of action.

Defendants filed motions for summary judgment in which they contended that plaintiffs could not prevail on any of their fraud or fraud-related causes of action because there was no evidence from which a reasonable trier of fact could conclude that defendants participated in, or knew about, any of the fraudulent accounting practices.³ Plaintiffs filed a motion to stay the proceedings on the ground that they needed to obtain additional discovery from witnesses who had previously invoked their Fifth Amendment rights and refused to provide substantive testimony in this case. The trial court denied plaintiffs' motion for a stay, and granted defendants' motions for summary judgment.

On appeal, plaintiffs claim that the trial court erred in granting judgment for defendants as a matter of law on the fraud and fraud-related causes of action. Specifically, plaintiffs claim that the trial court erred in concluding that plaintiffs failed to identify evidence from which a jury could find that defendants knew that Peregrine's financial reports contained false information. Plaintiffs also contend that there are triable issues of material fact with respect to whether defendants are liable on these causes of action pursuant to the group published information doctrine.⁴ Plaintiffs further claim that the trial court erred in sustaining Noell's and Moores's demurrers⁵ to plaintiffs' claim that they were liable for various California statutory securities law violations pursuant to Corporations Code section 25504.⁶ Finally, plaintiffs contend that the trial court erred in denying their motion to stay the proceedings. We reject all of plaintiffs' claims and affirm the judgment.

II. FACTUAL AND PROCEDURAL BACKGROUND

In February 2003, plaintiffs filed their original complaint in this action. In November 2004, the trial court sustained Noell's and Moores's demurrers to plaintiffs' section 25504 claim.

In December 2005, plaintiffs filed a fourth amended complaint premised on the allegations of financial accounting fraud summarized in part I., ante. Among other causes of action, plaintiffs' claims included market manipulation (§§ 25400, subd. (d), 25500) (First Cause of Action), control person liability (§ 25504) (Fourth Cause of Action),⁷ fraud and deceit by active concealment (Fifth Cause of Action), fraud and deceit based on omissions and misrepresentations (Sixth Cause of Action), negligent misrepresentations (Seventh Cause of Action), aiding and abetting fraud and deceit (Ninth Cause of Action), aiding and abetting breach of fiduciary duty (Tenth Cause of Action), and common law conspiracy (Twelfth Cause of Action).

In March 2006, Cole filed a motion for summary judgment. In his motion, Cole argued that the court should grant summary adjudication as to plaintiffs' fraud and fraud-related causes of action because he had not been a participant in the use of improper revenue recognition practices at Peregrine, and was not aware of such practices until the board of directors conducted an internal investigation that led to the discovery of the practices in April through May 2002. Cole further argued that any statements he made, on which plaintiffs may have relied, were based on credible assurances Cole had received from Peregrine management and auditors that the matters stated were true. Finally, Cole maintained that he could not be held liable pursuant to the group published information doctrine.

In June 2007, Noell and Moores filed a joint motion for summary judgment. Noell and Moores argued that plaintiffs' fraud and fraud-related causes of action failed because plaintiffs could not demonstrate either that Noell or Moores knew of the financial statement fraud at Peregrine, or that they had reason to believe that Peregrine's financial statements contained false information.

In August 2007, plaintiffs filed a combined opposition to defendants' motions for summary judgment. Plaintiffs also filed a motion to stay the proceedings and a request to continue the summary judgment hearing on the ground that they had been unable to obtain necessary discovery due to related pending or threatened criminal proceedings. In September 2007, after hearing oral argument, the trial court denied plaintiffs' motion to stay the proceedings and their request to continue the summary judgment proceedings.

In December 2007, after hearing oral argument, the trial court entered an order granting defendants' motions for summary judgment. In its order, the court reviewed the material allegations in the fourth amended complaint, and noted that plaintiffs alleged that "defendants engaged in a fraudulent financial scheme . . . to inflate Peregrine's stock price." The court continued, summarizing plaintiffs' claims as follows: "Plaintiffs contend that the heart of the fraud was the recording of hundreds of millions of dollars of revenue despite non-binding arrangements with customers, in violation of Generally Accepted Accounting Principles (`GAAP') and Peregrine's revenue recognition policy. Moores . . . Noell . . . and Cole directed deceptive practices to artificially inflate Peregrine's revenue resulting in increased stock value in order to sell their own stock at overstated prices. (FAC [Fourth Amended Complaint] ¶ 15). Beginning in 1999, defendants<sup>8</sup> engaged in improper revenue recognition, especially in connection with software sales to resellers known as `channel partners' and directed the employees and agents to engage in deceptive sales and accounting practices to create the illusion of growth, including secretly adding material sale contingencies and side agreements to what on their face appeared to be binding contacts. (FAC ¶¶ 16, 18.)"

In reviewing the evidence presented on these issues, the trial court concluded, "[Moores, Noell, and Cole] have met their burden of proof to show they had no actual knowledge of the financial fraud committed by the employees and officers of Peregrine. Plaintiffs have failed to raise a material fact that defendants, as outside directors, should be held liable for fraud." (Original formatting omitted.) Specifically, the trial court observed that plaintiffs' fraud and fraud-related causes of action required proof that defendants had made statements that they knew to be false, or that defendants had made statements with reckless disregard for their truth or falsity. The court observed that defendants had presented direct evidence that they did not know about the fraud committed by Peregrine employees at the time they signed various financial statements. Defendants also presented evidence that they had relied on the recommendations of Peregrine's in-house counsel, outside counsel, and outside accounting firm, in signing these statements. With respect to plaintiffs' evidence, the court concluded, "Plaintiffs have not raised a triable issue of fact that defendants intended to defraud or that they, as outside directors, had knowledge of the fraud [sufficient] to raise a duty to disclose the true facts to plaintiffs."⁹

The trial court subsequently entered judgment in favor of defendants. Plaintiffs timely appeal from the judgment.¹⁰

III. DISCUSSION

A. The trial court did not err in concluding that plaintiffs failed to identify evidence from which a jury could find that defendants knew about the fraud at Peregrine

Plaintiffs claim that the trial court erred in concluding that there was no evidence from which a reasonable fact finder could find that defendants knew about the fraud committed at...