In re Silicon Graphics, Inc. Securities Litigation

Citation970 F.Supp. 746
Decision Date23 May 1997
Docket NumberNo. C 96-0393 FMS.,C 96-0393 FMS.
CourtU.S. District Court — Northern District of California
970 F.Supp. 746
No. C 96-0393 FMS.
United States District Court, N.D. California.
May 23, 1997.

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Patrick J. Coughlin, William S. Lerach, Milberg Weiss Bershad Hynes & Lerach LLP, San Diego, CA, Richard Bemporad, William J. Ban, Lowey Dannenberg Bemporad & Selinger, P.C., White Plains, NY, for plaintiffs.

Bruce G. Vanyo, Lloyd Winawer, Jerome F. Birn, Jr., Wilson Sonsini, Goodrich & Rosati, Palo Alto, CA, for defendants.


FERN M. SMITH, District Judge.


In September 1996, the Court dismissed plaintiffs' class and derivative securities fraud actions against defendants with leave to amend. In October 1996, plaintiffs filed an amended class action complaint. Defendants now renew their motion to dismiss, arguing that plaintiffs' allegations against

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them are insufficient as a matter of law. Certain individual defendants also move for summary judgment, arguing that they did not undertake the conduct alleged by plaintiffs. These motions require the Court to discern the proper pleading standards under the Private Securities Litigation Reform Act of 1995, to apply them to plaintiffs' complaint, and to determine whether defendants' motion for summary judgment is procedurally proper.


Defendant Silicon Graphics, Inc. ("SGI") is a Delaware corporation that designs and sells desktop graphics workstations, multi-processor servers, advanced computing platforms, and application software. The company's stock is traded on the New York Stock Exchange. Plaintiffs' complaint arises out of fluctuations in SGI's stock price during the fall of 1995.

On August 21, 1995, SGI stock reached an all-time high of $44-7/8 before declining into the high $20s due to investor concern that SGI would be unable to maintain its historic high growth rates in the face of increased competition. On October 19, 1995, SGI announced the results for the first quarter of fiscal year 1996. The market viewed these results as disappointing, although they showed a thirty-three percent growth in revenue. SGI reassured analysts and investors that it still expected to meet its growth targets. In a press release, and also in a conference call with analysts, SGI provided explanations for the shortfall and suggested reasons why the second quarter results would be better. SGI issued periodic updates throughout the fall, reasserting its confidence about second quarter results. As a result, the stock price rebounded into the high $30 range.

In December 1995, on rumors that the second quarter results might also be lower than anticipated, the stock fell again, this time dipping into the mid-$20 range. When SGI confirmed the rumors in early January 1996, the stock fell to a low of approximately $22 per share. In response, plaintiffs filed their first class action complaint on January 29, 1996. A derivative action was filed on March 22, 1996. Both complaints related to the December 1995/January 1996 drop in SGI's stock price.

In September 1996, the Court dismissed the class action complaint for failure to plead scienter adequately under the Private Securities Reform Act of 1995 ("SRA"). At the same time, the Court dismissed the derivative complaint because plaintiffs had failed to make the required demand that the company's board take action. The Court gave plaintiffs leave to amend both complaints; however, plaintiffs chose to amend only the class action complaint.

In their First Amended Complaint ("FAC"), plaintiffs again allege that SGI and the individual defendants1 violated federal securities law by issuing false and misleading information about the company in an effort to inflate the price of SGI stock for the purpose of selling their own stock at a substantial profit. Plaintiffs have brought this case on behalf of themselves and all persons who purchased SGI stock during the period between September 13, 1995 and December 29, 1995.

I. Plaintiffs' Allegations

The following section is based on plaintiffs' allegations, which are taken as true for purposes of the motion to dismiss. During September 1995, SGI executives became concerned that the company would not meet its growth and revenue targets because of production problems with its most important new product, the Indigo2 IMPACT workstation. Out of fear that SGI's sales and stock price would decline if this information became public, defendants agreed to conceal the problems from the public. When revenues and stock prices declined anyway in September and October 1995, defendants devised

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a scheme to boost stock prices to protect the company's interests and their individual stakes.

As a part of their scheme, defendants made material misrepresentations about SGI's growth prospects and general financial condition, and failed to disclose adverse facts about SGI's products, management, and competitors. For example, defendants asserted a high sales volume, when in fact sales where materially below SGI's internal targets. SGI also failed to disclose that it had insufficient component parts to produce the Indigo2 IMPACT workstations required to meet demand, instead maintaining that the shortage of workstations was due to unanticipated heavy demand for the product. Defendants disseminated this false and misleading information to the market through SGI's report to shareholders, numerous press reports, and meetings with securities analysts.

Defendants' efforts to boost stock prices were a success. As a result of the misrepresentations, SGI's stock price rose to $38-3/4. Meanwhile, aided by an SGI one million share stock repurchase plan, defendants cumulatively sold nearly 400,000 shares of their own SGI stock, reaping combined profits of approximately $14 million. After defendants had collected their profits, they announced "disastrous" second quarter results, which sent the stock plummeting to $21-1/8. As a result, plaintiffs and potential class members suffered financial damages. Plaintiffs seek to impose direct liability on defendants for their individual misrepresentations, insider trading, participation in the fraudulent scheme, and under a theory of control person liability.

II. Defendants' Rebuttal

Defendants contend that SGI has experienced rapid growth in recent years, and continued to grow even during the class period. During the fall of 1995, defendants conducted business as usual, making normal statements to shareholders, the press, and industry analysts about the company's performance and anticipated performance. In hindsight, SGI's forecasts may have been optimistic, but there was no fraud involved.

Defendants argue that plaintiffs have not adequately pled their case under the Private Securities Litigation Reform Act. They point out that the FAC is pled on information and belief, and fails to provide any foundational statement of facts, as required by the Second Circuit law on which the SRA arguably is based. Moreover, they contend that even if the "facts" in the FAC are accepted as true, they do not create a strong inference of fraud. Certain individual defendants also seek summary judgment, because they did not make any allegedly false or misleading statements, and did not trade contemporaneously with plaintiffs.


I. Legal Standard

A. Federal Rule of civil Procedure 12(b)(6)

A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of the complaint. See 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.'" See 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, 102, 2 L.Ed.2d 80 (1957)).

In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court must assume all factual allegations to be true and must construe them in the light most favorable to the nonmoving party. See North Star, 720 F.2d at 580. Legal conclusions need not be taken as true merely because they are cast in the form of factual allegations, however. Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir.1981). Further, the Court need not accept as true allegations that contradict facts that have been judicially noticed. See Employers Ins. v. Musick, Peeler, & Garrett, 871 F.Supp. 381, 385 (S.D.Cal.1994).

The Court may consider documents outside of the pleadings in support of a Rule

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12(b)(6) motion to dismiss if the document is referenced in plaintiff's complaint and the document is "central" to plaintiff's claim. See Venture Assoc. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (9th Cir.1993); Glenbrook Homeowners Ass'n v. Scottsdale Ins. Co., 858 F.Supp. 986, 987 (N.D.Cal.1994). The Court may also take judicial notice of facts records outside the pleadings. See MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir.1986) (taking judicial notice of public records); Mack v. South Bay Beer Distribs., Inc., 798 F.2d 1279, 1282 (9th Cir. 1986).

B. Federal Rule of Civil Procedure 9(b)

Allegations of fraud must satisfy the requirements of Rule 9(b) to survive a motion to dismiss. Rule 9(b) provides: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." The purpose of Rule 9(b) is to prevent the filing of a complaint as a pretext for the discovery of unknown wrongs. See Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir.1985).

To satisfy Rule 9(b), securities class action plaintiffs must allege fraud with enough...

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