Desaigoudar v. Meyercord

• Citation: 223 F.3d 1020
• Decision Date: 17 February 2000
• Docket Number: HOVER-SMOOT,No. 98-17154,98-17154
• Parties: (9th Cir. 2000) AARATHI DESAIGOUDAR, as Trustee of the Chan Desaigoudar Charitable Foundation, a California charitable trust, Plaintiff-Appellant, v. WADE MEYERCORD; SCOTT; ANGEL JORDAN; JEFFREY KALB; C. KUMAR PATEL; STUART SCHUBE; JOHN SPRAGUE; and JOHN TREWIN, Defendants-Appellees. Office of the Circuit Executive
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1020

223 F.3d 1020 (9th Cir. 2000)

AARATHI DESAIGOUDAR, as Trustee of the Chan Desaigoudar Charitable Foundation, a California charitable trust, Plaintiff-Appellant, v. WADE MEYERCORD; SCOTT HOVER-SMOOT; ANGEL JORDAN; JEFFREY KALB; C. KUMAR PATEL; STUART SCHUBE; JOHN SPRAGUE; and JOHN TREWIN, Defendants-Appellees.

No. 98-17154

Office of the Circuit Executive

U.S. Court of Appeals for the Ninth Circuit

Argued and Submitted February 17, 2000--San Francisco, California

Filed September 8, 2000

Richard J. Archer, Occidental, California, for the plaintiff-appellant.

Valerie M. Wagner, Palo Alto, California, for the defendants-appellees.

Appeal from the United States District Court for the Northern District of California, D.C. No. CV-97-21003-JW; James Ware, District Judge, Presiding

Before: Joseph T. Sneed, Mary M. Schroeder, and A. Wallace Tashima, Circuit Judges

SNEED, Circuit Judge:

The question in this appeal is whether the district court should have dismissed Desaigoudar's second amended complaint with prejudice for repeated failure to satisfy Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), 15 U.S.C. S 78u4(b). Our jurisdiction over this question is described at 28 U.S.C. S 1291. We review de novo an order dismissing a case for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). See Burgert v. Lokelani Bernice Pauahi Bishop Trust, 200 F.3d 661, 663 (9th Cir. 2000). The usual practice in Rule 12(b)(6) cases is to take all well-pleaded allegations of material fact as true and construe them in the light most favorable to the plaintiff. See id. However, the PSLRA has modified the liberal, notice pleading standard found in the Federal Rules of Civil Procedure. See In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970, (9th Cir. 1999). Accordingly, we now examine a securities fraud complaint to determine whether the plaintiff has complied with the more stringent pleading requirements of the PSLRA. See id. De novo review is also appropriate when, as here, the district judge denied leave to amend. See Franklin v. Terr, 201 F.3d 1098, 1101 (9th Cir. 2000).

We affirm.

I.

A. PROCEDURAL HISTORY

Aarathi Desaigoudar, in her capacity as the trustee of the Chan Desaigoudar Charitable Foundation (the "Foundation"), sued officials of California Micro Devices Corporation ("CMD")¹ in 1997 for securities fraud. When Appellees moved to dismiss under Rule 12(b)(6), Desaigoudar offered an "Amended Complaint." Like the original, it alleged violations of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rules 10b-5 and 14a9 of the Securities Exchange Commission (the "SEC"). See 15 U.S.C. SS 78j(b), 78n(a); 17 C.F.R. SS 240.10b-5, 240.14a-9. The district court found this pleading also deficient and dismissed the Section 10(b), Rule 10b-5 claim with prejudice. However, it granted leave to amend the Section 14(a), Rule 14a-9 claim, subject to the following admonition:

[I]n preparing a second amended complaint , Plaintiff must adhere to the strict requirements of Rule 9(b) and the Private Securities Litigation Reform Act. Plaintiff's counsel must also comply with Rule 11, Fed.R.Civ.P. Repeated failure to comply with these pleading requirements will result in the dismissal of the claim, with prejudice.

Id. (citations omitted) (emphasis added).

Desaigoudar subsequently filed what the district court labeled a "Second Amended Complaint." The entire complaint was dismissed with prejudice. Desaigoudar then filed this timely appeal.

B. FACTUAL HISTORY

CMD sells microprocessors and related products. Its sales revenues reached $33 million in 1997. As of October 1998, the Foundation owned 72,580 shares of CMD stock, which were valued at approximately $372,000.

In September 1994, CMD entered into a one-year research and development contract with CellAccess, Inc., a company involved in developing asynchronous transfer mode technology.² In exchange for a 56% interest in CellAccess' technology and the option to renew the contract after the year, CMD agreed to make monthly payments of $90,000. CMD terminated these payments in April 1995 and relinquished its 56% interest. Sometime thereafter, for a reason not revealed by the record, CMD received a $1.5 million termination fee. In November 1995, CellAccess was acquired by FORE Systems, Inc. ("FORE Systems"), a Pittsburgh, Pennsylvania company. The purchase price was $60 million.

CMD held its 1995 Annual Shareholder Meeting on September 15th, prior to FORE Systems' purchase of CellAccess. The agenda included the re-election of the individual Appellees and a vote on a stock option plan for their benefit. A proxy solicitation in anticipation of these votes had been previously posted on June 12th, and a press release had followed on July 27th.³ These materials explained that CMD had registered a quarterly profit for the first time in two years.

II.

To repeat, the second amended complaint alleges that Appellees, as officers and directors of CMD, intentionally violated Exchange Act Section 14(a) and SEC Rule 14a-9. These disallow the solicitation of a proxy by a statement that contains either (1) a false or misleading declaration of material fact, or (2) an omission of material fact that makes any portion of the statement misleading. See 15 U.S.C. S 78j(b); 17 C.F.R. S 240.14a-9. In addition, a Section 14(a), Rule 14a9 plaintiff must demonstrate that the misstatement or omission was made with the requisite level of culpability and that it was an essential link in the accomplishment of the proposed transaction.⁴ See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 444 & n.7 (1976).

The complaint clearly sounds in fraud.⁵ Thus, Federal Rule of Civil Procedure 9(b) and the PSLRA require Desaigoudar to plead her case with a high degree of meticulousness. See Yourish v. California Amplifier, 191 F.3d 983, 993 (9th Cir. 1999) (noting applicability of Rule 9(b) to securities fraud claims); In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970, 996 (9th Cir. 1999) (describing heightened pleading standard of the PSLRA). Rule 9(b) mandates that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The PSLRA modifies Rule 9(b), providing that a securities fraud plaintiff shall identify: (1) each statement alleged to have been misleading; (2) the reason or reasons why the statement is misleading; and (3) all facts on which that belief is formed. See In re Silicon Graphics, 183 F.3d at 996; 15 U.S.C. S 78u-4(b)(1). The district court found that Desaigoudar did not comply with these standards. We agree.

III.

The complaint alleges that Appellees: (1) misled shareholders when they announced a quarterly profit in CMD's proxy materials; (2) failed to disclose that Appellee Jordan had a conflict of interest; and (3) misrepresented Jordan's qualifications for reelection as a director of CMD. None of these allegations, which we shall discuss seriatim, constitutes a valid claim.

A. ALLEGATION ONE: MISREPRESENTATION OF "PROFIT"

Desaigoudar argues that the proxy statements the Appellees issued in June and July of 1995 misled shareholders because they described CMD's quarterly performance as "profitable." In her view, the shareholders should have been told that CMD's quarterly performance was a loss. She asserts that Appellees engineered the profit, in part, when they caused CMD to cancel monthly funding for CellAccess and thereby abandoned CMD's 56 percent interest in the venture. Desaigoudar reasons from FORE Systems' November 1995 purchase of CellAccess that the cancellation and abandonment of the venture caused CMD to forego 56 percent of a $60 million opportunity, or $36 million. She then alleges that the Appellees knowingly and intentionally failed to inform shareholders that CMD had forfeited an asset worth many millions of dollars in order to generate a portion of the profit that they claimed. Her argument is flawed.

Rule 14a-9 requires a complainant to demonstrate why a challenged proxy statement was misleading "at the time . . . made." C.F.R. S 240.14a-9. Thus, the issue here is whether the Appellees could have known how much CellAccess was worth to CMD when it ceased funding for CellAccess. If there was no way to know, it is impossible to fault the Appellees. Failure to disclose information that does not yet exist cannot be the predicate for Rule 14a-9 liability. See 17 CFR S 240.14a-9. Obviously Desaigoudar has suspicions, but that is not enough. We can therefore eliminate FORE Systems' purchase of CellAccess as a possible source for knowledge of the company's value. That transaction, which appears to be the only exchange that actually involved CellAccess, took place several months after the proxy statements were issued in the summer of 1995.

Desaigoudar relies on three other reasons why the Appellees would have known CellAccess' value at the time they posted the proxy statements. They are that: (1) Appellee Jordan performed a due diligence investigation of CellAccess in 1994; (2) an unidentified "high technology publication" mentioned CellAccess as a "promising new company " in March 1995; and (3) sometime just prior to that favorable mention CISCO Systems paid $120 million for a company that, like CellAccess, was developing asynchronous transfer mode technology. We think these reasons are not enough to substantiate Desaigoudar's claim. Not one of the described events occurred contemporaneously with the proxy solicitations or CMD's cessation of the CellAccess project. There is also no indication that the Appellees knew about the "recognition" CellAccess received or about CISCO Systems' purchase of a CellAccess "competitor."

Ultimately, the greatest flaw in Desaigoudar's case is the fact that any estimate that the Appellees could have fabricated based on these...