Barrie v. Intervoice-Brite, Inc.
| Decision Date | 12 January 2005 |
| Docket Number | No. 03-11064.,03-11064. |
| Citation | 397 F.3d 249 |
| Parties | David BARRIE, On behalf of themselves and all others similarly situated; Jill C. Richling, On behalf of themselves and all others similarly situated; Cary Alan Luskin, On behalf of themselves and all others similarly situated; Debbie Luskin, On behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. INTERVOICE-BRITE, INC., Daniel D. Hammond; Rob Roy J. Graham; David W. Brandenburg; Gordon H. Givens; Michael J. Polcyn; David A. Berger; Dwain H. Hammond; Harold D. Brown; M. Gregory Smith, Defendants-Appellees. Dominick Capuano, On behalf of himself and all others similarly situated, Plaintiff-Appellant, v. Intervoice-Brite, Inc.; Daniel D. Hammond; Rob-Roy J. Graham; David W. Brandenburg; Gordon H. Givens; Michael J. Polcyn; David A. Berger; Dwain H. Hammond; Harold D. Brown; M. Gregory Smith, Defendants-Appellees. Henry Cashman, On behalf of himself and all others similarly situated, Plaintiff-Appellant, v. Intervoice-Brite, Inc.; Daniel D. Hammond; Rob Roy J. Graham; David W. Brandenburg; Gordon H. Givens; Michael J. Polcyn; David A. Berger; Dwain H Hammond; Harold D. Brown; M. Gregory Smith, Defendants-Appellees. Richard Kearns, On behalf of himself and all others similarly situated, Plaintiff-Appellant, v. Intervoice-Brite, Inc.; Daniel D. Hammond; Rob Roy J. Graham; David W. Brandenburg; Gordon H. Givens; Michael J. Polcyn; David A. Berger; Dwain H. Hammond; Harold D. Brown; M. Gregory Smith, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Susan K. Alexander (argued), Milberg, Weiss, Bershad, Hynes & Lerach, San Francisco, CA, Roger L. Mandel, Stanley, Mandel & Iola, Dallas, TX, for Plaintiffs-Appellants.
G. Luke Ashley (argued), Timothy R. McCormick, Richard Barrett Phillips, Thompson & Knight, Dallas, TX, for Defendants-Appellees.
Appeal from the United States District Court for the Northern District of Texas.
Before BENAVIDES, DENNIS and CLEMENT, Circuit Judges.
Plaintiffs appeal from the district court's dismissal, pursuant to Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act, of their securities fraud class action alleging violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. For the reasons that follow, we reverse in part and remand.
Intervoice-Brite, Inc. ("Intervoice" or "the Company"), the corporate defendant in this securities fraud class action, develops and sells interactive voice software. Intervoice is headquartered in Dallas and its stock is traded on the NASDAQ exchange. Intervoice was formed in 1999 as the result of a merger between Intervoice, Inc. and Brite Voice Systems, Inc. Following the merger, Intervoice represented that the merger was a success, citing impressive revenues and projecting strong earnings. In June 2002, however, the Company announced that it would report a loss and lower-than-projected revenues and earnings per share. This class action lawsuit followed.
On June 5, 2001, the plaintiffs, on behalf of themselves and everyone who purchased shares of Intervoice between October 12, 1999 and June 6, 2000 (the "Class Period"), filed their original complaint. They sued Intervoice and its chief officers (collectively "defendants").1 The plaintiffs alleged that the defendants committed securities fraud by making false and misleading statements concerning the Company's August 1999 merger, its fourth quarter of 2000 and fiscal year 2001 earnings and revenue projections, and its fiscal year 2000 year-end earnings and revenue results. The plaintiffs argued that the misleading statements, based on improper accounting techniques, were made in forward-looking statements, press releases, and other corporate documents, and relied upon by analysts in their reports. The plaintiffs further alleged that the defendants made stock sales based on insider information, and relied on these sales as evidence of scienter. The plaintiffs sought to recover damages on behalf of all persons who acquired Intervoice stock during the Class Period.
This case was consolidated with substantially identical suits subsequently filed by other plaintiffs on September 5, 2001. On November 16, 2001, the plaintiffs filed their Consolidated Class Action Amended Complaint. On January 14, 2002, the defendants filed a motion to dismiss that complaint. On August 8, 2002, the district court granted the motion to dismiss without prejudice, allowing the plaintiffs to file an amended complaint in compliance with the pleading requirements of the Private Securities Litigation Reform Act ("PSLRA") and Federal Rule of Civil Procedure 9(b). The plaintiffs filed a First Amended Class Action Complaint ("Complaint") on September 23, 2002. On November 1, 2002, the defendants filed another motion to dismiss. On September 15, 2003, the district court granted the defendants' motion, dismissing the Complaint with prejudice. The plaintiffs timely appealed on October 9, 2003.
This Court exercises de novo review of a district court's dismissal of a civil complaint. Goldstein v. MCI WorldCom, 340 F.3d 238, 244 (5th Cir.2003) (citing Abrams v. Baker Hughes, Inc., 292 F.3d 424, 430 (5th Cir.2002)). We accept the facts alleged in the plaintiffs' complaint as true and construe their allegations in the light most favorable to them. Id. We will not, however, "`strain to find inferences favorable to the plaintiffs.'" Id. (quoting Westfall v. Miller, 77 F.3d 868, 870 (5th Cir.1996)). "Nor do we accept conclusory allegations, unwarranted deductions or legal conclusions." Southland Sec. Corp. v. INSpire Ins. Solutions Inc., 365 F.3d 353, 361 (5th Cir.2004) (citing Nathenson v. Zonagen Inc., 267 F.3d 400, 406 (5th Cir.2001)).
In their Complaint, the plaintiffs allege that Intervoice and its controlling directors violated Section 10(b) of the Security Exchange Act of 19342 by making false statements regarding Intervoice's revenues and earnings.3 In dismissing the Complaint, the district court held that the plaintiffs failed to plead in conformity with the pleading requirements of the PSLRA and Rule 9(b).
In 1995, Congress amended the 1934 Act by passing the PSLRA. The PSLRA sets out heightened pleading standards for securities law class action complaints, stating that a plaintiff must allege with specificity each fraudulent statement, who made the statement, why it was false, and that the statement was made with the requisite state of mind.4 "To state a securities-fraud claim under section 10(b), and Rule 10b-5, plaintiffs must plead (1) a misstatement or omission; (2) of a material fact; (3) made with scienter; (4) on which the plaintiffs relied; and (5) that proximately caused the plaintiffs' injuries." Southland Sec. Corp. v. INSpire Ins. Solutions Inc., 365 F.3d 353, 362 (5th Cir.2004) (citing Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir.1997)).
Federal Rule of Civil Procedure 9(b) also applies in securities fraud cases. See Goldstein v. MCI WorldCom, 340 F.3d 238, 245 (5th Cir.2003). Its requirements work in conjunction with those of the PSLRA.5 "To satisfy Rule 9(b)'s pleading requirements, the plaintiffs must `specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.'" Southland, 365 F.3d at 362 (quoting Williams, 112 F.3d at 177-78).
The plaintiffs now argue that the district court improperly applied these pleading requirements to the claims of fraud in revenue recognition and earnings projections, which we discuss in turn.
(1) Claims of fraud in revenue recognition
The plaintiffs allege that Intervoice's strong FY00 revenue and earnings were the result of recognizing revenue on sales of its software products in violation of Generally Accepted Accounting Principles ("GAAP") and American Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2 ("SOP 97-2"). The plaintiffs claim that the Company based its reported revenues for the fiscal year 2000 on this improper recognition of revenue. SOP 97-2, which addresses software revenue recognition, was issued in January 1998 and applies to transactions entered into in fiscal years beginning after December 15, 1997. It requires that before revenue is recognized for the sale of software, the following four conditions must obtain: 1) persuasive evidence of a contractual arrangement must exist; 2) delivery must have occurred; 3) the vendor's fee must be fixed or determinable; and 4) collectability is probable. In explaining how to determine "whether delivery has occurred," SOP 97-2 states that even "[a]fter delivery, if uncertainty exists about customer acceptance of the software, license revenue should not be recognized until acceptance occurs."
The plaintiffs alleged in the Complaint that Intervoice had recognized revenues at the time of shipment, before delivery and acceptance by customers. In the fourth quarter of 2000, the Company had been recognizing revenue on software sales prior to delivery, prior to acceptance by customers, and prior to customization. The plaintiffs contend that their allegations that the defendants stated to investors that Intervoice complied with a rule requiring revenue recognition on delivery and acceptance — but instead recognized revenue on shipment — was sufficient to state a claim. The Complaint also alleged that the Company admitted that it had improperly recognized $18.3 million in its Form 10-Q report filed on July 14, 2000. The Complaint alleged the essential elements: the existence of a rule requiring recognition on delivery and acceptance; Intervoice's acceptance of that rule;...
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