Stac Electronics Securities Litigation, In re

Decision Date17 July 1996
Docket NumberNo. 94-56232,94-56232
Citation89 F.3d 1399
PartiesFed. Sec. L. Rep. P 99,272, 96 Cal. Daily Op. Serv. 5268, 96 Daily Journal D.A.R. 8535 In re STAC ELECTRONICS SECURITIES LITIGATION. Timothy J. ANDERSON; Neil Singer; Arthur Singer, on Behalf of Themselves and All Others Similarly Situated, Plaintiffs-Appellants, v. Gary W. CLOW; Douglas Whiting; Robert Johnson; Alex Brown & Sons Incorporated; Lawrence Finch, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

William S. Lerach and Leonard B. Simon, Milberg Weiss Bershad Hynes & Lerach, San Diego, California, for plaintiffs-appellants.

Steven M. Schaltz, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, California, and Charlene S. Shimada, McCutchen, Doyle, Brown & Enersen, San Francisco, California, for defendants-appellees.

Appeal from the United States District Court for the Southern District of California, John S. Rhoades, District Judge, Presiding. D.C. No. CV-92-1120-JSR.

Before: WALLACE, FERGUSON, and T.G. NELSON, Circuit Judges.

ORDER

T.G. NELSON, Circuit Judge:

The opinion filed May 7, 1996, is withdrawn, and the enclosed opinion is substituted in its place. With this new opinion, appellant's petition for rehearing is denied and the suggestion for rehearing en banc is rejected as moot.

OPINION

The opinion filed May 7, 1996, is withdrawn, and the enclosed opinion is substituted in its place. With this new opinion, appellants' petition for rehearing is denied and the suggestion for rehearing en banc is rejected as moot.

OVER VIEW

Timothy J. Anderson and other class representatives (collectively "Anderson") who purchased stock in Stac Electronics ("Stac") between May 7 and July 20, 1992, appeal the district court's dismissal of their class action under Sections 11 and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77o, and Sections 10(b) and 20 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t. Anderson alleges that Stac, certain of its officers and directors, and its lead underwriters, Alex. Brown & Sons, Inc., and Montgomery Securities ("Alex. Brown" and "Montgomery," respectively; collectively, "Underwriters"), made material misrepresentations or omissions regarding Stac's initial public offering ("IPO") of May 7, 1992. We have jurisdiction under 28 U.S.C. § 1291, and we affirm.

FACTS AND PROCEDURAL HISTORY

This case arises from Stac's May 7, 1992, IPO of stock in its computer products company. Stac's most prominent product was the "Stacker," a data-compressing device which doubles storage capacity of disk drives in computers using Microsoft's MS-DOS and compatible systems.

The district court related the following facts, which are not disputed by the parties:

Before it went public, Stac's performance was mixed: it reported net losses per share in 1988, 1989, and 1990, and a net income per share of $.01 in 1991. It also reported revenues hovering around three quarters of a million dollars for 1988 and 1989, with increased revenues in 1990 (to $1.7 million) and 1991 (to $8.3 million).

There was a pronounced move upward-in both revenues and earnings per share-immediately prior to the initial public offering of Stac stock. While Stac reported revenues of $2.3 million and a loss of $.04 per share in the six months prior to March 31, 1991, it reported revenues of $17 million and earnings of $.21 per share in the six months prior to March 31, 1992. The increased revenues and earnings for the 1992 six month period derived from sales of Stacker.

On May 7, 1992, Stac went public, with an initial offering of 3,000,000 shares of common stock. The stock was sold to the public at $12.00 a share, with the individual named Defendants-except for Hoff, Finch and Robelen-selling some 508,000 shares. Neither Hoff, Finch, Robelen nor any of the venture capital Defendants is alleged to have sold any Stac stock during the class period [May 7 to July 20, 1992]. Defendants Alex. Brown & Sons, Inc. and Montgomery Securities acted as co-lead underwriters for the offering; they received substantial fees-some $2.5 million-for their services.

In connection with the IPO, Stac issued a Registration Statement and Prospectus ("Prospectus"), dated May 7, 1992, which included a four-page section on risk factors warning investors, inter alia, of Stac's competition, its dependence on Stacker, its reliance on distributors, its limited source of supply, and the potential volatility of its stock price. [See Prospectus at 5-8.] The Prospectus specifically discussed Microsoft's competitive threat, Stac's return policy and return allowances, and the possible effects on revenues of "channel fill," or heavy purchasing by distributors immediately following the introduction of a new product. [Id.]

Apart from the Prospectus, information about Stac was disseminated to the public through "roadshow" presentations preceding the IPO and through analysts' reports and press statements by Stac officers and Underwriters following the IPO. All of these portrayed Stac as a good investment. While these portrayals at first seemed accurate-Stac rose to $15 after the IPO-success was short-lived. Stac's stock price fell on July 2, 1992, on the heels of another computer software company's announcement of poor third quarter results.

Stac Director Gary Clow ("Clow") and both Underwriters made statements to Dow Jones News Wire distinguishing Stac from the faltering software company. While Alex. Brown continued to rate Stac highly, Montgomery reduced its rating and earnings estimate for Stac on July 6, 1992. On July 20, 1992, Stac disclosed a disappointing third quarter performance, and on July 21, 1992, Stac stock declined to $5.50 per share. Within two days, plaintiffs filed suit. This initial suit was consolidated in the First Amended Class Action Complaint ("the FAC"), filed December 4, 1992.

The FAC asserted four claims for relief: I) against all defendants, alleging violation of Section 11 of the Securities Act, 15 U.S.C. § 77k(a); II) against all individual defendants and venture capital defendants, alleging controlling person liability under Section 15 of the Securities Act, 15 U.S.C. § 77o; III) against all defendants, alleging violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5; and IV) against all individual defendants and venture capital defendants, alleging controlling person liability 1 under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t.

The complaint basically alleged that Stac went public knowing, but without disclosing, that Microsoft was about to come out with a competitive product (a new version of DOS incorporating Stacker-like data compression capabilities) that would take away Stac's market; that Stac engaged in sham licensing negotiations with Microsoft in order to stall introduction of its new product until Stac could make an IPO and unload stock; and that Stac insiders artificially inflated Stac's stock price prior to the IPO through channel "stuffing" and other fraudulent practices.

The district court dismissed the FAC with leave to amend in a detailed order dated September 17, 1993. Anderson v. Clow, Fed. Sec. L. Rep. (CCH) p 97,807 at 97,994-95 (S.D.Cal.1993). The district court held that plaintiffs had failed to state a claim against Stac, the Underwriters, or any other named defendant, primarily on the basis of its finding that, to the extent it was required to do so, Stac had adequately disclosed all purported omissions in its Prospectus in a way that rendered the Prospectus not misleading. The order also stayed discovery.

On November 18, 1993, the plaintiffs filed a Second Amended Complaint ("the SAC"), asserting the same claims as the FAC and adding nine new individual defendants. The district court dismissed the SAC with prejudice for failure to state a claim under Fed.R.Civ.P. 12(b)(6) and for failure to meet the particularity requirements of Fed.R.Civ.P. 9(b). Anderson v. Clow, Fed. Sec. L. Rep. (CCH) p 98,367 (S.D.Cal.1994). Like the first order, the order appealed from is extremely thorough. Anderson's appeal was timely.

DISCUSSION

Standard of review.

Dismissal pursuant to Fed.R.Civ.P. 12(b)(6) is reviewed de novo. In re VeriFone Sec. Litig., 11 F.3d 865, 868 (9th Cir.1993). "All allegations of material fact are taken as true and construed in the light most favorable to the plaintiff." In re Wells Fargo Sec. Litig., 12 F.3d 922, 925 (9th Cir.1993), cert. denied, --- U.S. ----, 115 S.Ct. 295, 130 L.Ed.2d 209 (1994). However, "[c]onclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim." VeriFone, 11 F.3d at 868.

I

Primary Liability.

Anderson argues that by "falsifying" its financial statements and failing to disclose pertinent information in its possession regarding Microsoft's plans to include data compression in its newest version of DOS, Stac misled investors and violated Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k(a), Section 10(b) of the Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5. The district court held that the SAC failed to state a claim under Section 11, Section 10(b), or Rule 10b-5. It further held that the SAC failed to plead with sufficient particularity its Section 10(b) and Rule 10b-5 claims, as required by Fed.R.Civ.P. 9(b). We address the adequacy of Anderson's claims de novo. Id.

On appeal, Anderson stresses the following: Stac and its officers: 1) failed to disclose imminent competition from Microsoft and deliberately stalled licensing negotiations with Microsoft in order to delay Microsoft's market entry; and 2) falsified its financial statements by artificially inflating reported results through...

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