Brodsky v. Yahoo! Inc.
| Decision Date | 18 June 2009 |
| Docket Number | No. C 08-02150 CW.,C 08-02150 CW. |
| Citation | 630 F.Supp.2d 1104 |
| Parties | Ellen Rosenthal BRODSKY, et al., Plaintiffs, v. YAHOO! INC., Terry S. Semel, Susan L. Decker, Farzad Nazem, and Daniel Rosensweig, Defendants. |
| Court | U.S. District Court — Northern District of California |
Anne Louise Box, Darren Jay Robbins, Henry Rosen, Laurie L. Largent, Mary K. Blasy, Nathan Bear, Patrick J. Coughlin, Spencer A. Burkholz, Coughlin Stoia Geller Rudman and Robbins, San Diego, CA, for Plaintiffs.
Anna Erickson White, Jordan Eth, Judson Earle Lobdell, Morrison & Foerster LLP, Palo Alto, CA, Mark R.S. Foster, Morrison & Foerster LLP, San Francisco, CA, for Defendants.
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS
In this securities fraud class action, Defendants Yahoo! Inc., Terry S. Semel, Susan L. Decker, Farzad Nazem and Daniel Rosensweig move to dismiss the Second Amended Consolidated Complaint (SAC). Lead Plaintiffs Pension Trust Fund for Operating Engineers and Pompano Beach Police and Firefighters' Retirement Systems oppose the motion. The motion was heard on April 23, 2009. Having considered all of the parties' papers and oral argument on the motion, the Court grants Defendants' motion.
Defendant Yahoo! is a global internet services company headquartered in Sunnyvale, California. The four individual Defendants are Terry S. Semel, former Chairman and Chief Executive Officer; Susan L. Decker, Yahoo!'s current President and former Chief Financial Officer and its Executive Vice President of Finance and Administration during the Class Period; Farzad Nazem, former Chief Technology Officer; and Daniel L. Rosensweig, former Chief Operating Officer.
Lead Plaintiffs and Ellen Brodsky purport to represent a class of persons and entities that bought common stock of Yahoo! between April 8, 2004 and July 18, 2006 (Class Period).
Plaintiffs allege that, during the Class Period, Defendants engaged in a scheme to inflate artificially the price of Yahoo! stock by falsely representing that Yahoo!'s business model and search business was succeeding. Over the course of the Class Period, Defendants Semel, Decker and Rosensweig made many public statements expressing enthusiasm for Yahoo!. These statements were in the form of Yahoo! press releases, quarterly conference calls, SEC filings, and analyst reports. See SAC ¶¶ 90-92, 98, 101-106, 111-112, 118-121, 124-127, 131-135, 139, 141, 143, 145-147, 151-156, 162-163, 165-166. Plaintiffs allege that these statements were false and misleading because they conflicted with the facts of Yahoo!'s myriad internal problems.
Plaintiffs also allege that Yahoo! inflated its revenue by relaxing the "click fraud" filtering system "to allow non-billable click activity to be passed on to customers, thereby increasing the Company's revenues at the end of the quarter." SAC ¶ 95(h). Click fraud describes activity undertaken for the sole purpose of causing Yahoo! or another search marketing business to log a click which generates a payment due from an advertiser. SAC ¶ 9. Click fraud may be committed by a search marketing business seeking to generate a payment for itself, or by an advertiser's competitor seeking to impose a cost on the advertiser. Id. Plaintiffs allege that relaxing the click fraud standards inflated Yahoo!'s revenue by at least $680 million out of $3.165 billion in search revenue. SAC ¶ 267. Plaintiffs lastly allege that Yahoo! falsely represented that "Panama," an upgrade to Yahoo!'s search marketing platform, would launch earlier than it eventually did.
Plaintiffs rely on seventeen Confidential Witnesses (CWs) to support their allegations. The CWs describe problems that arose from Yahoo!'s 2003 acquisition and integration of Overture Services, Inc., a search driven advertising company. SAC ¶ 3. Plaintiffs allege that Yahoo!'s unsuccessful integration of Overture and lack of success in a project called "solving the blob," both precursors to Panama, caused delays in releasing Panama.
On October 7, 2008, 592 F.Supp.2d 1192 (N.D.Cal.2008), the Court dismissed Plaintiffs' Consolidated Amended Complaint (CAC) because it failed to meet the heightened pleadings standards under the Private Securities Litigation Reform Act of 1995 (PSLRA). Plaintiffs filed their SAC on December 19, 2008.
The biggest change in the SAC is the addition of three new CWs, 8, 16 and 17. The import of the new CWs and other new factual allegations will be discussed below.
A complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R.Civ.P. 8(a). On a motion under Rule 12(b)(6) for failure to state a claim, dismissal is appropriate only when the complaint does not give the defendant fair notice of a legally cognizable claim and the grounds on which it rests. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
In considering whether the complaint is sufficient to state a claim, the court will take all material allegations as true and construe them in the light most favorable to the plaintiff. NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). Although the court is generally confined to consideration of the allegations in the pleadings, when the complaint is accompanied by attached documents, such documents are deemed part of the complaint and may be considered in evaluating the merits of a Rule 12(b)(6) motion. Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir.1987).
When granting a motion to dismiss, the court is generally required to grant the plaintiff leave to amend, even if no request to amend the pleading was made, unless amendment would be futile. Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911 F.2d 242, 246-47 (9th Cir.1990). The district court may deny leave to amend "due to `undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [and] futility of amendment.'" Leadsinger, Inc. v. BMG Music Publ'g, 512 F.3d 522, 532 (9th Cir.2008) (quoting Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)). Where "the plaintiff has previously been granted leave to amend and has subsequently failed to add the requisite particularity to its claims, `[t]he district court's discretion to deny leave to amend is particularly broad.'" Zucco Partners, LLC, v. Digimarc Corp., 552 F.3d 981, 1007 (9th Cir.2009); (citing In re Read-Rite Corp. Sec. Litig., 335 F.3d 843, 845 (9th Cir.2003)).
Federal Rule of Evidence 201 allows a court to take judicial notice of a fact "not subject to reasonable dispute in that it is ... capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Even where judicial notice is not appropriate, courts may also properly consider documents "whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the [plaintiff's] pleadings." Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir.1994).
The Court grants Plaintiffs' request for judicial notice of Exhibits 2 through 4 to the Rosen declaration and Defendants' request as to Exhibits 2 through 4 of the Foster declaration because these documents are public court records capable of accurate and ready determination. The Court grants Defendants' request as to Exhibits 5 through 17 and 48 through 55 to the Foster declaration because SEC filings may be judicially noticed. See Dreiling v. American Exp. Co., 458 F.3d 942, 946 (9th Cir.2006). Defendants also seek judicial notice of Exhibits 18 through 30, conference call transcripts. The Court takes judicial notice of the fact that these statements were made on the dates specified, but not of the truth of the matters asserted therein. The Court also grants Defendants' request as to Exhibits 31 through 47, Yahoo! press releases, news articles, analyst reports, and third party press releases to which the SAC refers, but not for the truth of their contents. The Court grants Defendants' request as to Exhibit 56 because historic stock prices are subject to accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.
Section 10(b) of the Exchange Act makes it unlawful for any person to "use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 78j(b); see also 17 C.F.R. § 240.10b-5 (Rule 10b-5). To state a claim under § 10(b), a plaintiff must allege: "(1) a misrepresentation or omission of material fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss." In re Gilead Sciences Securities Litig., 536 F.3d 1049, 1055 (9th Cir.2008).
Some forms of recklessness are sufficient to satisfy the element of scienter in a § 10(b) action. See Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir. 1978). Within the context of § 10(b) claims, the Ninth Circuit defines "recklessness" as
a highly unreasonable omission [or misrepresentation], involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.
Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir.1990) (en banc) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.1977)). As explained by the Ninth Circuit in In re...
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