Nathanson v. Polycom, Inc.

• Decision Date: 03 April 2015
• Docket Number: Case No. 13–3476 SC
• Citation: 87 F.Supp.3d 966
• Parties: Mark Nathanson, individually and on behalf of all others similarly situated, Plaintiff, v. Polycom, Inc., Andrew M. Miller, Michael R. Kourey, and Eric F. Brown, Defendants.
• Court: U.S. District Court — Northern District of California

87 F.Supp.3d 966

Mark Nathanson, individually and on behalf of all others similarly situated, Plaintiff

v.Polycom, Inc., Andrew M. Miller, Michael R. Kourey, and Eric F. Brown, Defendants.

Case No. 13–3476 SC

United States District Court, N.D. California.

Signed April 03, 2015

Jeremy A. Lieberman, Emma Gilmore, Pomerantz LLP, New York, NY, Michael M. Goldberg, Glancy Binkow & Goldberg LLP, Los Angeles, CA, for Plaintiff.

Keith E. Eggleton, Kelley Moohr Kinney, Wilson Sonsini Goodrich & Rosati A Professional Corporation, Palo Alto, CA, Paul T. Friedman, Philip T. Besirof, Paul T. Friedman, Philip T. Besirof, Morrison & Foerster LLP, San Francisco, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS

SAMUEL CONTI, District Judge

I. INTRODUCTION

Now before the Court are two motions to dismiss Plaintiff's first amended complaint (“FAC” or “Complaint”), ECF No. 47, in this securities fraud case. The first motion to dismiss was filed by Defendants Polycom, Inc. and Polycom's last two Chief Financial Officers (“CFOs”), Michael Kourey and Eric Brown. ECF No. 51 (“Polycom Mot.”). Collectively the Court will refer to these Defendants as “the Polycom Defendants.” The second motion to dismiss was filed by Defendant Andrew Miller, Polycom's former CEO. ECF No. 53 (“Miller Mot.”).

These motions are fully briefed¹ and appropriate for resolution without oral argument under Civil Local Rule 7–1(b). As explained below, the motions are GRANTED IN PART and DENIED IN PART.

II. BACKGROUND

This is a putative class action alleging securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b–5 against Polycom, Inc., a San Jose-based provider of video and telecommunication systems, two former Polycom CFOs and Polycom's former CEO, Andrew Miller.

During Miller's tenure as CEO, he allegedly claimed reimbursements for numerous extravagant personal expenses with no legitimate business purpose. Seeking reimbursement for these expenses was prohibited by Polycom's Code of Business Ethics and Conduct, which bars the use of Polycom funds for individual purposes and requires individuals seeking reimbursements file detailed expense reports. While Polycom's general reimbursement process is irrelevant here, Polycom required its CFO to sign off on expense reports

Eventually these improper expenses caught up with Miller, and after an investigation by Polycom's Audit Committee uncovered irregularities with his expense reports, Miller resigned. After Miller's departure was announced, Polycom's stock dropped significantly, losing over fifteen percent of its value. Also after his departure was announced, the SEC began an investigation into Miller's expenses and his resignation. Since these matters were fully briefed, the SEC entered into a cease-and-desist order with Polycom, finding that Polycom violated Sections 13(a) and 14(a) of the Exchange Act and related SEC rules, and failed to adequately discloseexecutive compensation under Item 402 of Regulation S–K. ECF No. 71–2 (“Cease–and–Desist”).² The SEC also recently filed an enforcement action against Miller alleging violations of, among other things, Section 10(b) of the Exchange Act and Rule 10b–5. ECF No. 71–1 (“SEC Compl.”).³

In January, the Court granted a motion to dismiss a related derivative case alleging breaches of fiduciary duty, concluding that plaintiffs there had failed to adequately plead demand futility. See In re Polycom, Inc. Derivative Litig., 78 F.Supp.3d 1006, 2015 WL 164198 (N.D.Cal.2015). In this case, Plaintiff takes a different tack, alleging that Polycom, the CFOs, and Miller made various false or misleading statements or omissions regarding, among other things, Miller's future at the company, his expense reimbursements, Miller's compliance with Polycom's expense reimbursement policy, and the reliability of Polycom's internal controls.

Both Miller and the Polycom Defendants have moved to dismiss these allegations, arguing that Plaintiff has failed to adequately plead various elements of a securities fraud cause of action. Plaintiff opposes.

III. LEGAL STANDARDS

A. Motion to Dismiss

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) “tests the legal sufficiency of a claim.” Navarro v. Block, 250 F.3d 729, 732 (9th Cir.2001). “Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.1988). “When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). However, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). The allegations made in a complaint must be both “sufficiently detailed to give fair notice to the opposing party of the nature of the claim so that the party may effectively defend against it” and “sufficiently plausible” such that “it is not unfair to require the opposing party to be subjected to the expense of discovery.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir.2011).

B. Exchange Act and Rule 10b–5

Section 10(b) of the Exchange Act makes it unlawful “[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe....” 15 U.S.C. § 78j(b). One such rule prescribed by the SEC is Rule 10b–5.

Rule 10b–5 makes it unlawful to (a) employ any device, scheme, or artifice to defraud; (b) make an untrue statement of material fact or omit a material fact necessary to make a statement not misleading; or (c) engage in an act, practice, or course of business which operates as a fraud or deceit in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b–5.

To establish a violation of Section 10(b) or Rule 10b–5, Plaintiff must plead five elements: “(1) a material misrepresentation or omission of 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 Daou Sys., 411 F.3d 1006, 1014 (9th Cir.2005).

To survive a motion to dismiss on such claims, Plaintiff must meet the heightened pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u–4. The PSLRA requires plaintiffs to “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u–4(b)(1). Additionally, the complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id. § 78u–4(b)(2). To satisfy the state of mind element, the complaint must allege the defendant acted intentionally or with deliberate recklessness. See Daou, 411 F.3d at 1014–15. “The stricter standard for pleading scienter naturally results in a stricter standard for pleading falsity, because falsity and scienter in private securities fraud cases are generally strongly inferred from the same set of facts, and the two requirements may be combined into a unitary inquiry under the PSLRA.” Id. at 1015 (internal quotation marks omitted).

IV. DISCUSSION

Plaintiff's allegations are essentially two-fold. First, Plaintiff argues that, as a result of Miller's improperly claimed personal expenses, Polycom's publicly reported operating expenses were materially false or misleading. FAC ¶ 6. Second, Plaintiff asserts that because Miller and Polycom failed to disclose that Miller was misappropriating Polycom funds and thus might be terminated at any time, Miller and Polycom made materially false or misleading statements in various SEC filings or, in one case, on an earnings phone call.

The Polycom Defendants and Miller move to dismiss the Complaint on the grounds that Plaintiff has inadequately pleaded various elements of his cause of action. Specifically, the Polycom Defendants and Miller argue first that even if classifying Miller's expenses as operating expenses was misleading, the amounts involved were too miniscule to be material. Second, Defendants argue that the allegedly false or misleading statements not material, false or misleading, or are otherwise not actionable. Third, the Polycom Defendants argue that Plaintiff has inadequately pleaded the requisite “strong inference” of scienter required by the PSLRA. Finally, because (in the Polycom Defendants and Miller's view) the Complaint fails to plead a predicate violation of Rule 10b–5, Plaintiff also fails to plead a Section 20(a) claim.

The Court discusses the materiality of the allegedly false statements or omissions about Miller's expenses and Polycom's revenues first before addressing individually each of the allegedly false or misleading statements.

A. Materiality

A statement must be both material and misleading to be actionable under the PSLRA.

Cement & Concrete Workers District Council Pension Fund v. Hewlett Packard Co., 964 F.Supp.2d 1128, 1138 (N.D.Cal.2013). A statement is misleading “if it would give a reasonable investor the ‘impression of a state of affairs that differs in a material way from the one that actually exists.’ ” Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th Cir.2008) (quoting Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir.2002) ). A statement is material if there is a “substantial likelihood that the disclosure of the omitted fact would have...