In re Gupta Corp. Securities Litigation
| Decision Date | 06 December 1994 |
| Docket Number | C 94-1517 FMS. |
| Citation | 900 F. Supp. 1217 |
| Parties | In re GUPTA CORPORATION SECURITIES LITIGATION. |
| Court | U.S. District Court — Northern District of California |
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Blake M. Harper, Alan Schulman, William S. Lerach, Milberg Weiss Bershad Hynes & Lerach, San Diego, CA, Robert N. Kaplan, Kaplan Kilsheimer & Fox, New York City, Kevin M. Prongay, Prongay & Mikolajczyk, Pacific Palisades, CA, Mark Solomon, Los Angeles, CA, for plaintiff Jafar Hooman.
Jonathan S. Kitchen, Baker & McKenzie, San Francisco, CA, James L. Quarles, III, Geoffrey S. Stewart, Daniel Levin, Hale and Dorr, Washington, DC, for defendants Umang P. Gupta, Gupta Corporation, Nicholas Birtles, Richard J. Heaps, Richard M. Noling, D. Bruce Scott, Reed D. Taussig.
Terry T. Johnson, Aileen L. Arrieta, Tanya R. Meyers, Wilson Sonsini Goodrich & Rosati, Palo Alto, CA, for defendants Kanwal Rekhi, Novell Inc., Douglas Carlisle, Anthony Sun.
Barbara E. Small, Brenda G. Woodson, Oracle Corporation, Redwood City, CA, for third-party defendant Oracle Corporation.
ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS IN PART AND DENYING DEFENDANTS' MOTION TO DISMISS IN PART; ORDER DENYING PLAINTIFFS' MOTION TO STRIKE
Introduction
Plaintiffs in this securities fraud class action suit allege that defendants have violated Sections 10(b), 20(a), and 20A(a) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. §§ 78j(b), 78t(a), 78t-1(a). Plaintiffs bring this action on behalf of themselves and all other persons who purchased stock in Gupta Corporation ("Gupta") between September 13, 1993 and July 6, 1994 (the "class period"). The complaint names as defendants Gupta, six Gupta executives, a corporate shareholder, and two outside directors.
Defendants have filed several motions to dismiss pursuant to Fed.R.Civ.P. 12(b)(6). Plaintiffs have filed a cross-motion to strike four of the exhibits attached to defendants' motions to dismiss. For the reasons set forth below, defendants' motions are granted in part and denied in part. As the exhibits disputed in plaintiffs' motion to strike are not relevant to the Court's decision, plaintiffs' motion to strike is denied as moot.
Gupta is a California corporation that develops and sells client-server system software for personal computer networks. Gupta was founded in 1984 and went public on February 4, 1993 with an initial public offering ("IPO") of 2.2 million shares at $18 per share. The company's stock is traded on the NASDAQ Exchange. On the first day of the IPO, Gupta's share price rose to $35¼. Thereafter, however, the stock price began to decline, reaching $14½ by September 1993. In the latter part of 1993, Gupta's stock began to rebound from this low point.
On April 25, 1994, Gupta's management announced that the company had not met revenue expectations for the first quarter of 1994. In response to this announcement, Gupta's stock fell from $22 7/8 per share to $13½ per share. The stock price remained volatile, but generally continued to decline, over the next several months. On July 6, 1994, Gupta made a statement anticipating substantial losses for the second quarter of 1994. The company's share price fell to $8¾ per share the next day.
Plaintiffs filed their original complaint on May 2, 1994. On August 4, 1994, plaintiffs filed their first amended complaint, which enlarged the class period to include September 13, 1993 to July 6, 1994. During the class period, Gupta's stock traded as high as $30½ per share. By the end of the period, the price fell to $8¾ per share or lower. Plaintiffs allege that Gupta and the named defendants violated federal securities laws by issuing false and misleading information about the company in an effort to inflate the price of Gupta stock for the purpose of selling their own stock at a substantial profit.
In addition to Gupta Corporation, plaintiffs name six Gupta executives as defendants: Umang Gupta, Chairman of the Board, Chief Executive Officer, and President of Gupta; D. Bruce Scott ("Scott"), Senior Vice President of Research and Development, and a Director of Gupta; Richard M. Noling ("Noling"), Senior Vice President, Finance and Administration and Chief Financial Officer; Nicholas Birtles ("Birtles"), Senior Vice President, European Operations, and subsequently Executive Vice President, Worldwide Sales and Operations; Richard J. Heaps ("Heaps"), Vice President, Business Development and General Counsel; and Reed D. Taussig ("Taussig"), Gupta's Senior Vice President, North American Operations, for most of the class period. The plaintiffs also name as defendants Novell, Inc. ("Novell"), a corporate shareholder of Gupta; Kanwal Rekhi ("Rekhi"), an Executive Vice President and a Director of Novell, who sits on Gupta's Board of Directors; and Douglas C. Carlisle ("Carlisle"), a Director of Gupta and member of the Board of Director's committees on audit and compensation.
After the price of Gupta stock fell to $14½ per share in September 1993, defendants devised a plan to boost the stock price in order to sell portions of their personal holdings of Gupta stock at a substantial profit. To achieve this result, defendants made material misrepresentations about Gupta's revenues and general financial condition, and failed to disclose internally known adverse facts concerning Gupta's products, management and competitors. For example, defendants inflated Gupta's financial results by recognizing revenue on sales which were not completed sales under Generally Accepted Accounting Principles ("GAAP"), and defendants failed to disclose that Gupta's sales and marketing efforts were in disarray.
Defendants disseminated false information to the market through false statements of earnings and reports to shareholders, false documents filed with the Securities and Exchange Commission ("SEC"), and false press reports based on the fraudulent financial reports. In addition, defendants held numerous meetings with securities analysts in order to pass the fraudulent information to the market through the analysts' reports.
Defendants' fraud-on-the-market was a success. During the class period, defendants sold 695,000 shares in Gupta Corporation for total proceeds of $14.2 million. The individual named defendants and Novell can be held accountable for the deception of the investing public under theories of group published information, control person liability, and insider trading.
Gupta has experienced rapid growth, but fluctuating earnings, over the past several years. The price of Gupta's stock, like that of many other software securities, has been highly volatile throughout its trading history. During the class period, defendants sold only a small fraction of their Gupta stock; as a result, defendants suffered an enormous loss, along with the investing public, when the price of the stock declined.
Plaintiffs' complaint, filed after one significant drop in Gupta's stock price and amended after a second decline, is without merit. Based almost entirely on "information and belief," the complaint's allegations are non-actionable because they are alleged without the required specificity; concern mere expressions of optimism and statements about general economic conditions; and/or are general statements or omissions relating to future performance. Moreover, Gupta is not legally responsible for the statements by analysts, and Gupta's statements "bespeak caution." Finally, none of the statements made by defendants after the date on which plaintiffs filed their original complaint are actionable, because plaintiffs were aware of the company's problems by that date. The allegations against the individual Gupta defendants, the outside directors and Novell are similarly without merit.
A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of the complaint. North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578, 581 (9th Cir.1983). Dismissal of an action pursuant to Rule 12(b)(6) is appropriate only where it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1482 (9th Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957)). The Court may dismiss the complaint, or any claims within it, as a matter of law for either of two reasons: (1) lack of a cognizable legal theory, or (2) insufficient facts to support a cognizable legal theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir.1984) (citations omitted). In reviewing a motion to dismiss, the Court must assume that all factual allegations are true, and must construe them in the light most favorable to the non-moving party. North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578, 580 (9th Cir.1983). The Court need not, however, accept legal conclusions pled in the complaint even if they are asserted as "facts." Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 2944-45, 92 L.Ed.2d 209 (1986).
When ruling on a motion to dismiss, the court may consider a variety of documents in addition to the complaint. First, the court may consider documents attached to the complaint. Durning v. First Boston, Corp., 815 F.2d 1265, 1267 (9th Cir.1987), cert. denied, 484 U.S. 944, 108 S.Ct. 330, 98 L.Ed.2d 358 (1987). Second, the court may consider "documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading." Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir.1994), cert. denied, ___ U.S. ___, 114 S.Ct. 2704, 129 L.Ed.2d 832 (1994). Third, ...
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