Nursing Home Pension v. Oracle Corp.

• Citation: 380 F.3d 1226
• Decision Date: 01 September 2004
• Docket Number: No. 03-15883.,03-15883.
• Parties: NURSING HOME PENSION FUND, LOCAL 144; UCFW Local 56 Retail Meat Pension Fund; Drifton Finance Corporation; Robert D. Sawyer; Oleg Alex Trepetin; Thomas Wright; Dzung Chu; Ryan Kuehmichel; Misop Lessard; Ke Wan, Plaintiffs-appellants, v. ORACLE CORPORATION; Lawrence J. Ellison; Jeffrey O. Henley; Edward J. Sanderson, Defendants-appellees, v. State Derivative Actions Judicial Council Coordination Proceeding No. 4180, Plaintiff-intervenor.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

380 F.3d 1226

NURSING HOME PENSION FUND, LOCAL 144; UCFW Local 56 Retail Meat Pension Fund; Drifton Finance Corporation; Robert D. Sawyer; Oleg Alex Trepetin; Thomas Wright; Dzung Chu; Ryan Kuehmichel; Misop Lessard; Ke Wan, Plaintiffs-appellants, v. ORACLE CORPORATION; Lawrence J. Ellison; Jeffrey O. Henley; Edward J. Sanderson, Defendants-appellees, v. State Derivative Actions Judicial Council Coordination Proceeding No. 4180, Plaintiff-intervenor.

No. 03-15883.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 12, 2004.

Filed September 1, 2004.

Sanford Svetcov, Lerach, Coughlin, Stoia, Geller, Rudman & Robbins LLP, San Francisco, CA, for the plaintiffs-appellants.

Donald M. Falk, Mayer, Brown, Rowe & Maw, Palo Alto, CA, for the defendants-appellees.

Appeal from the United States District Court for the Northern District of California, Martin J. Jenkins, District Judge, Presiding. D.C. No. CV-01-00988-MJJ.

Before: FERGUSON, REINHARDT, and PAEZ, Circuit Judges.

FERGUSON, Circuit Judge:

A number of purchasers of Oracle Corporation stock (collectively referred to as "Plaintiffs") appeal the District Court's dismissal under Rule 12(b)(6) of their revised second amended complaint ("the Complaint") against Oracle Corporation and three of its top executive officers (collectively referred to as "Oracle" or "Defendants"). Plaintiffs' Complaint alleged that Defendants violated section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, promulgated thereunder. Plaintiffs further alleged that Oracle is liable under section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a).

On appeal, Plaintiffs contend that the District Court erred in dismissing their Complaint because the Complaint set forth allegations that raised a strong inference of scienter, as required by the Private Securities Litigation Reform Act ("PSLRA") and Federal Rule of Civil Procedure 9(b). Plaintiffs also contend that the District Court erred in ruling that certain statements contained in analyst reports were not actionable.

BACKGROUND

Oracle designs and markets computer software that enables businesses to manage information. It is the second-largest software company in the world, and, since the 1980s, has been the market leader in the arena of database management systems. Plaintiffs allege that by the year 2000, however, the database market had become substantially saturated.

In the late 1990s, Oracle developed the 11i Suite, which was designed to permit businesses to manage their financial, manufacturing, sales, logistics, e-commerce, and supplier information without having to purchase and integrate separate software from different vendors. According to Oracle, the benefit to customers of the 11i Suite was that "it's like Lego blocks. Once you have one piece in, the other pieces just snap together. There's no systems integration required."

Plaintiffs allege that Oracle released the 11i Suite in May 2000 without sufficient technical development and that numerous defects in the program soon became apparent. Around the same time, the national economy began to decline. Plaintiffs allege that growing customer awareness of the defects in the 11i Suite and the declining economy had hurt Oracle's sales by the second quarter of Oracle's fiscal year (September 1-November 30, 2000), but that Oracle covered up its losses by creating phony sales invoices and improperly recognizing past customer overpayments as revenue. Because of this alleged cover-up, Oracle was able to report revenues of $2.66 billion as well as earnings of eleven cents per share, rather than the 8.5 cents per share that Oracle allegedly actually earned. Oracle's second quarter report came out on December 14, 2000, and Oracle's stock price rose from $27.50 on December 14 to $32 on December 18.

Oracle predicted that, in the third quarter of its fiscal year, it would earn twelve cents per share and have revenues of $2.9 billion. It also predicted that applications sales (i.e., sales of the 11i Suite) would grow 75% and that database sales would grow 25%. Moreover, during the Class Period, December 15, 2000-March 1, 2001, Oracle made several statements that it would achieve its growth estimates because the 11i Suite was functioning well, a strong number of sales were in the "pipeline" in the United States, Europe, and Asia, and the declining U.S. economy was not affecting Oracle's overall performance. For example, Executive Vice President and Chief Financial Officer Jeffrey Henley said in a radio interview on December 15 that "the economy right now even though it's slowing doesn't seem to be affecting us. We see no difference in demand for our upcoming third fiscal quarter," and Lawrence Ellison, Chief Executive Officer of Oracle, was quoted as saying, "The economic slowdown isn't hurting Oracle... because the company has spent the past three years updating its product line to focus on software that helps companies use the internet to cut costs and boost efficiency." On January 8, 2001, Executive Vice-President Edward Sanderson reportedly told analysts at Salomon Smith Barney that Oracle was seeing "robust demand for both its database and applications businesses... Oracle says it is also seeing sustained demand for its database product, despite industry-wide concern over contracting IT budgets." Oracle spokeswoman Stephanie Aas told reporters that, as of January 11, 2001, "Oracle has yet to see any sign that its business is being hurt by the economic slowdown or reported cuts to information-technology budgets." Further, analysts reported that, on February 7, Oracle management was "not seeing the effects of a slowing economy at this point," and was not changing its third-quarter forecasts. Two days later, Oracle spokeswoman Jennifer Glass reiterated that Oracle had not changed its projections and said that the "slowdown is going to provide new opportunities for Oracle as companies need to streamline and be more strategic about the technology they buy."

Between January 22 and January 31, 2001, Ellison sold more than 29 million shares of Oracle stock for almost $900 million. It was the first time he had sold Oracle shares in five years. Twenty-three million of the shares were options that Ellison had acquired for 23 cents per share; he sold the stock for $30-32 per share. Chief Financial Officer Jeff Henley sold one million shares of Oracle stock on January 4 for $32 per share; he had paid between $1.04 and $1.69 for the shares.

On March 1, 2001, approximately one month after Ellison's stock sales, Oracle revealed that it would earn only ten cents per share and would post revenues of only $2.67 billion in the third quarter. It also reported that applications sales would grow significantly less than predicted, and that database sales would show either flat or negative growth. The next day, Oracle stock prices fell from $19.50 to $16.88. Plaintiffs allege that Oracle had known much earlier in the quarter that its sales were declining due to the slowing economy and the 11i Suite defects and that it would not meet its growth estimates.

The first complaint was filed by Local 144 Nursing Home Pension Fund on March 9, 2001. Following certification and consolidation of related actions, Plaintiffs filed a consolidated class action complaint against Oracle alleging violations of section 10(b) of the 1934 Act and Rule 10b-5 on August 3. Plaintiffs also alleged that Oracle was liable under section 20(a) of the 1934 Act.

A series of dismissals and filings of amended complaints ensued until, on March 24, 2003, the District Court granted Oracle's motion to dismiss Plaintiffs' revised second amended complaint (the operative "Complaint") with prejudice for failure to state a claim under Fed.R.Civ.P. 12(b)(6) because the pleadings did not meet the heightened pleading requirements of the PSLRA.

Plaintiffs filed timely notice of appeal. We have jurisdiction under 28 U.S.C. § 1291.

LEGAL STANDARDS

A dismissal for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure is reviewed de novo. Zimmerman v. City of Oakland, 255 F.3d 734, 737 (9th Cir.2001). The general rule for 12(b)(6) motions is that allegations of material fact made in the complaint should be taken as true and construed in the light most favorable to the plaintiff. Burgert v. Lokelani Bernice Pauahi Bishop Trust, 200 F.3d 661, 663 (9th Cir.2000). A complaint should not be dismissed unless it appears beyond doubt that the plaintiff cannot prove any set of facts that would entitle him or her to relief. Williamson v. Gen. Dynamics Corp., 208 F.3d 1144, 1149 (9th Cir.2000).

Section 10(b) states, in relevant part:

It shall be unlawful for any person, directly or indirectly, by the use ... of any facility of any national securities exchange ... [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities..., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. §§ 78j, 78j(b).

Rule 10b-5 is the regulation promulgated under Section 10(b). 17 C.F.R. § 240.10b-5. It provides that it is unlawful to use any facility of the national securities exchange "[t]o employ any device, scheme, or artifice to defraud." Id. § 240.10b-5(a). It further provides that it is unlawful "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." Id. § 240.10b-5(b).

Rule 9(b) imposes a particularized pleading requirement on a plaintiff alleging fraud or any claim premised on fraud. Fed.R.Civ.P. 9(b). In addition, this action is brought under the PSLRA, which amended the 1934 Act to apply a heightened...