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Case 8:11-cv-01404-AG-RNB Document 110 Filed 05/08/13 Page 1 of 34 Page ID #:2560
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UNITED STATES DISTRICT COURT
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FOR THE CENTRAL DISTRICT OF CALIFORNIA
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RICHARD GAMMEL, Individually CASE NO. SACV 11-1404 AG(RNBx)
and on Behalf of All Others Similarly 11
Situated, ORDER GRANTING IN PART AND
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DENYING IN PART MOTION TO Plaintiff, DISMISS
13 v.
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HEWLETT-PACKARD COMPANY, et al.
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Defendants.
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19 Lead Plaintiffs Arkansas Teacher Retirement System, Union Asset Management Holding
20 AG, Labourers’ Pension Fund of Central and Eastern Canada, and the LIUNA National Pension
21 Fund and LIUNA Staff & Affiliates Pension Fund (together, “Plaintiffs”) filed this securities
22 fraud class action against Defendants Hewlett Packard Company (“HP”), Leo Apotheker, and R.
23 Todd Bradley (together, “Defendants”). In August 2012, the Court issued an order (the “August
24 Order”) granting Defendants’ Motion to Dismiss Plaintiffs’ first amended complaint (“FAC”).
25 Gammel v. Hewlett-Packard Co. , SACV 11-1404 AG RNBX, 2012 WL 5945089 (C.D. Cal.
26 Aug. 29, 2012). Plaintiffs filed a second amended complaint (“SAC”). Before the Court is
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Case 8:11-cv-01404-AG-RNB Document 110 Filed 05/08/13 Page 2 of 34 Page ID #:2561
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Defendants’ Motion to Dismiss Plaintiffs’ SAC (the “Motion”). The Motion is GRANTED in
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part and DENIED in part.
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I BACKGROUND
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The following facts are taken from Plaintiffs’ SAC, and as it must for purposes of this
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I Motion, the Court assumes them to be true.
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HP is one of the world’s largest information technology companies and the world’s
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leading vendor of personal computers (“PCs”) and printers. (SAC ¶¶ 2, 3.) Apotheker served as
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HP’s President and Chief Executive Officer from November 2010 until his termination in
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September 2011. (Id. ¶ 25.) Bradley has been the Executive Vice President of HP’s largest
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business segment, the Personal Systems Group (“PSG”), since 2005. ( Id. ¶¶ 26.) Plaintiffs
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purchased HP common stock during the proposed Class Period – February 9 to August 18, 2011
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This lawsuit arises out of HP’s failed strategy to develop an “ecosystem” of integrated
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mobile computing devices – including PCs, printers, smartphones, and tablets – running on an
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As Plaintiffs allege in their SAC, HP’s hardware products have traditionally run on
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Microsoft’s ubiquitous Windows operating system. ( Id. ¶ 4.) By contrast, hardware products
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made by HP’s competitors, like Apple and Google, run on non-Windows operating systems. ( Id.
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¶ 4.) In July 2010, for $1.2 billion, HP bought Palm, Inc. (“Palm”) – maker of the once-popular
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PalmPilot handheld computing device – and exclusive rights to Palm’s WebOS operating
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system. (Id. ¶ 5.)
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“With webOS,” say Plaintiffs, “HP would, for the first time, gain the ability to control
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both its hardware and software. WebOS would be the key ‘building block’ in HP’s strategy to
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not only enter and compete successfully in the smartphone and tablet markets, but also to create
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6.) Thus, “[l]ike Apple, HP would offer its customers a unified user experience across a range of
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Case 8:11-cv-01404-AG-RNB Document 110 Filed 05/08/13 Page 3 of 34 Page ID #:2562
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elegant devices, with webOS ultimately supporting and connecting the user’s smartphone, tablet,
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PC and printer in a fully integrated and flexible ensemble of devices.” ( Id. ¶ 8.)
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But while Defendants were publicly touting that HP “would expand the webOS
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ecosystem of devices and introduce ‘millions’ of webOS-enabled PCs and printers” within two
5 years, Plaintiffs allege that things were very different behind the scenes. ( Id. ¶ 6.) According to
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Plaintiffs, “no resources were available during the Class Period for PCs or printers” because
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“HP’s webOS software team was stretched to capacity trying to ready the problematic TouchPad
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for launch” in summer 2011. ( Id. ¶¶ 10-11, 60.) Meanwhile, HP’s development of WebOS PCs
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and printers never progressed beyond the “concepting” stage. ( Id. ¶¶ 10-11.)
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Plaintiffs allege that the WebOS house of cards came crashing down on August 18, 2011,
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when “HP abruptly reversed course and announced that it was shutting down all of its webOS
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hardware operations.” (Id. ¶ 12.) HP’s stock dropped six percent that day and an additional 20
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percent on August 19, 2011, resulting in a $16 billion loss in shareholder value. ( Id. ¶ 13.)
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Apotheker was fired less than a month later, and in December 2011, after writing off more than
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$3 billion in webOS-related costs, HP “contribut[ed] webOS to the public as ‘open-source’
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software.” (Id. ¶ 14.)
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Based on these allegations and others, Plaintiffs assert claims against Defendants under
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§§ 10(b) and 20(a) and Rule 10b-5 of the Securities and Exchange Act of 1934 (“Exchange
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Act”). 15 U.S.C. §§ 78j(b), 78t(a); 17 C.F.R. § 240.10b-5.
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PRELIMINARY MATTERS
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To support their Motion, Defendants ask the Court to take judicial notice of 15 items, or
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consider them under the doctrine of incorporation by reference. (Defendants’ Request for
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Judicial Notice and for Incorporation of Documents by Reference (“RJN”), Dkt. No. 97;
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Defendant’s Supplemental Request for Judicial Notice (“SRJN”), Dkt. No. 102.) Specifically,
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Defendants ask the Court to consider Items 1-7: (1) a March 14, 2011 HP press release; (2) a
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July 11, 2011 HP press release; (3) excerpts of HP’s Form 10-Q for the fiscal quarter that ended
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Case 8:11-cv-01404-AG-RNB Document 110 Filed 05/08/13 Page 4 of 34 Page ID #:2563
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January 31, 2011; (4) excerpts of HP’s Form 10-Q for the fiscal quarter that ended April 30,
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2011; (5) excerpts of HP’s Form 10-K for the fiscal year that ended on October 31, 2010; (6) the
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SEC Form 4 for Bradley, filed with the SEC on March 8, 2011; and (7) an April 4, 2011 email
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from Justin Manus to employees in HP’s Imaging and Printing (“IPG”) division. (RJN.)
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Defendants also ask the Court to consider Items 8-15, which the Court previously
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considered because Plaintiffs referred to them in their FAC: (8) a transcript of HP’s February 22,
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2011 Earnings Call; (9) a transcript of HP’s March 14, 2011 Summit Press Conference; (10) a
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transcript of HP’s March 14, 2011 Strategy Summit; (11) a transcript of HP’s May 17, 2011
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Earnings Call; (12) a June 1, 2011 All Things Digital article titled “HP CEO Leo Apotheker Says
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He Won’t Ship TouchPad Till It’s Perfect”; (13) a transcript of HP’s August 18, 2011 Earnings
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Call; (14) excerpts from HP’s December 14, 2011 Form 10-K; (15) an August 19, 2011 All
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Things Digital article titled “With HP’s Raising of the World’s Biggest White Flag, Will Jon
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Rubinstein and Todd Bradley Surrender too?” (the “August 19, 2011 Article”); and (16) the
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defendants’ request for judicial notice and related filings in In re Rigel Pharmaceuticals
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Securities Litigation , No. 09-cv-00546 (N.D. Cal). (RJN; SRJN.)
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Plaintiffs object to the Court’s consideration of five of the items. (Lead Plaintiffs’
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Response and Partial Objection to Defendants’ Request for Judicial Notice and for Incorporation
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of Documents by Reference (“RJN Response”), Dkt. No. 99.)
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Under Federal Rule of Evidence 201, “[a] judicially noticed fact must be one not subject
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to reasonable dispute in that it is either (1) generally known within the territorial
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jurisdiction of the trial court or (2) capable of accurate and ready determination by resort
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to sources whose accuracy cannot reasonably be questioned.” Fed. R. Evid. 201. Courts
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may take judicial notice of “ undisputed matters of public record,” but generally may not
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take judicial notice of “ disputed facts stated in public records.” Lee v. City of Los
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Angeles , 250 F.3d 668, 690 (9th Cir. 2001) (emphasis in original). Facts subject to
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judicial notice may be considered on a motion to dismiss. Mullis v. U.S. Bankr. Ct. , 828
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F.2d 1385, 1388 (9th Cir. 1987).
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Although often conflated, the doctrine of incorporation by reference is distinct from
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judicial notice. “That doctrine permits a district court to consider documents ‘whose
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contents are alleged in a complaint and whose authenticity no party questions, but which
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are not physically attached to the . . . pleadings.’” In re Silicon Graphics Sec.
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Litig. , 183 F.3d 970, 986 (9th Cir. 1999) (quoting Branch v. Tunnell , 13 F.3d 449, 454
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(9th Cir. 1994)).
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I 1. UNOPPOSED ITEMS
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The Court first considers requests for judicial notice that were unopposed. Plaintiffs do
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not object to the Court considering Items 1-4, and 8-13. (RJN Response, at 2:3-13.) The SAC
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references or quotes Items 1, 2, 4, and 8-13 and Plaintiffs do not question their authenticity.
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(See, e.g. , SAC ¶¶ 150-53, 155-67, 170-72, 174-77, 183-86, 189-91.) The Court therefore
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considers the contents of Items 1, 2, 4, and 8-13 under the incorporation by reference doctrine,
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but not for the truth of the matters they assert. See generally Maiman v. Talbott , 2010 U.S. Dist.
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LEXIS 142712 (C.D. Cal. Aug. 9, 2010).
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I 2. OPPOSED ITEMS
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The Court next considers requests for judicial notice that were opposed.
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Plaintiffs first oppose Defendants’ request for judicial notice and consideration of Items 5
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and 14, excerpts of Form 10-Ks filed by HP in December 2010 and December 2011. Plaintiffs
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say consideration of these items are inappropriate because they were filed before and after the
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class period. Plaintiffs do not otherwise dispute that judicial notice of these items are
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appropriate. Setting aside the question of whether these items are relevant, the Court finds that
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they are appropriate for judicial notice. See, e.g. , In re Hansen Natural Corp. Sec. Litig. , 527 F.
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Supp. 2d 1142, 1149 n.2 (C.D. Cal. 2007) (considering Form 10-Ks filed outside the class period
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because they contained potentially relevant risk disclosures); In re Netflix, Inc. Sec. Litig. , No.
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Case 8:11-cv-01404-AG-RNB Document 110 Filed 05/08/13 Page 6 of 34 Page ID #:2565
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C04-2978, 2005 WL 1562858, at *5 (N.D. Cal. June 28, 2005) (same); Dreiling v. Am. Exp. Co. ,
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458 F.3d 942, 947 n.2 (9th Cir. 2006) (approving judicial notice of an SEC filing). The Court
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therefore takes judicial notice of Items 5 and 14, but not for the truth of what they assert.
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Plaintiffs next oppose Defendants’ request for judicial notice and consideration of Item 6,
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Bradley’s March 8, 2011 Form 4, which shows Bradley exercised HP stock options. This was
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not referenced in the SAC, so it may not be considered under the incorporation by reference
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doctrine. The Court finds that it is also not appropriate for judicial notice for the reasons
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explained at length in the Court’s decision in Maiman v. Talbott , 2010 U.S. Dist. LEXIS 142712
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(C.D. Cal. Aug. 9, 2010). The cases Defendants cite are either distinguishable or unpersuasive.
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See, e.g. , In re Rigel Pharm. Inc. Sec. Litig ., No. 09-cv-00546, 2010 WL 8816155, at *1 n.1
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(N.D. Cal. Aug. 24, 2010) (taking judicial notice of 17 documents, including a Form 4s that
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showed no stock sales, in a footnote without analysis); In re Rigel Pharm. Inc. Sec. Litig. , 697
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F.3d 869, 884-85 (9th Cir. 2012) (discussing fact that defendants did not sell stock, apparently
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based on evidence at trial court, but without discussing issue of judicial notice; holding that lack
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of stock sales was inconsistent with plaintiff’s theory that defendants committed fraud to
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increase value of stock options); Allison v. Brooktree Corp. , 999 F. Supp. 1342, 1352 (S.D. Cal
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1998) (plaintiff alleged defendants committed fraud “in order to sell stock and to cash-out their
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options in a later acquisition”).
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Plaintiffs next oppose Defendants’ request for consideration of Item 7, an April 4, 2011
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email from HP employee Justin Manus to other HP employees in the IPG division (the “April
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2011 Email”). Defendants say this email is the one paraphrased by CW10 and CW13 in the
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SAC. (SAC ¶¶ 91, 93.) Plaintiffs argue the Court should not consider the April 2011 Email
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because this is only appropriate “where the authenticity of the documents is not in question.”
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(RJN Response, at 17 (quoting Mata v. Citimortgage, Inc. , CV 10-9167 DSF (PLAx), 2012 WL
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1075699, at *1 (C.D. Cal. Mar. 8, 2012).) Because there is a question about the authenticity of
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this document and because it is not generally known within this Court’s territorial jurisdiction or
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“capable of accurate and ready determination” based on sources of unquestionable accuracy, the
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Court refuses to judicially notice it. Fed. R. Evid. 201.
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Plaintiffs next oppose Defendants’ request for judicial notice and consideration of Item
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15, the August 19, 2011 Article, which reports that Bradley did not learn of HP’s decision to
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discontinue webOS until mid-August 2011. Because the FAC referenced the August 19, 2011
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Article, the Court previously considered it under the incorporation by reference doctrine. The
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SAC deletes any reference to the August 2011 Article. Defendants say Plaintiffs “carefully
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omitted” the reference because the August 2011 Article “also raises inferences tending to negate
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any scienter on the part of Mr. Bradley.” (Defendants’ Reply in Support of their Request for
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Judicial Notice, Dkt. No. 101, at 8:24-25.) Specifically, the article states that “Bradley did not
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learn of the decision to discontinue webOS until August 14, 2011–long after his last challenged
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statement.” (Motion, at 42:28-43:1.)
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Courts may consider allegations in previous complaints “in determining the plausibility of
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the current pleadings,” Fasugbe v. Willms , CIV 2:10-2320 WBS, 2011 WL 2119128 (E.D. Cal.
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May 26, 2011) (emphasis in original), and “as part of [the Court’s] ‘context-specific’ inquiry
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based on its judicial experience and common sense . . . as required under Iqbal,” Cole v.
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Sunnyvale , C-08-05017 RMW, 2010 WL 532428 (N.D. Cal. Feb. 9, 2010); see also Stanislaus
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Food Products Co. v. USS-POSCO Indus. , 782 F. Supp. 2d 1059, 1075 (E.D. Cal. 2011)
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(considering allegations of first amended complaint in evaluating plausibility of allegations in
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second amended complaint). Plaintiffs rely on the principle established in Forsyth v. Humana,
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Inc. , 114 F.3d 1467, 1474 (9th Cir. 1997), that an “amended complaint supersedes the original,
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the latter being treated thereafter as non-existent,” but Defendants point out that Forsyth was
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recently overruled by the Ninth Circuit in Lacey v. Maricopa Cnty. , 693 F.3d 896, 925-28 (9th
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Cir. 2012). Because amendment of the pleadings does not bar consideration of the August 2011
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Article, the Court considers whether it is appropriate for judicial notice. The August 2011
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Article became part of the public record when the Court previously considered it, so in that sense
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it is part of the public record. But its lodging in the record of this case does not make the article
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itself a “source[] whose accuracy cannot reasonably be questioned.” Fed. R. Evid. 201. The
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Court therefore refuses to take judicial notice of the August 2011 Article.
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Lastly, Plaintiffs object to Defendants’ request for judicial notice of the parties’ request
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for judicial notice and related filings in In re Rigel Pharm. Sec. Litig. , No. 09-cv-00546 (N.D.
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Cal). Plaintiffs oppose. Because these are court filings, the Court may take judicial notice of
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them, but not for the truth of the facts they assert. See Lee , 250 F.3d at 690.
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I LEGAL STANDARD
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A court should dismiss a complaint when its allegations fail to state a claim upon which
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relief can be granted. Fed. R. Civ. P. 12(b)(6). A complaint need only include “a short and plain
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statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).
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“‘[D]etailed factual allegations’ are not required.” Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009)
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(citing Bell Atl. Corp. v. Twombly , 550 U.S. 554, 555 (2007) (stating that “a complaint attacked
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by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations”)). The Court
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must accept as true all factual allegations in the complaint and must draw all reasonable
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inferences from those allegations, construing the complaint in the light most favorable to the
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plaintiff. Pollard v. Geo Group, Inc. , 607 F.3d 583, 585 n.3 (9th Cir. 2010).
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But the complaint must allege “sufficient factual matter, accepted as true, to ‘state a claim
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to relief that is plausible on its face.’” Iqbal, 556 U.S. at 678 (quoting Twombly , 550 U.S. at
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570). “A claim has facial plausibility when the pleaded factual content allows the court to draw
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the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing
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Twombly , 550 U.S. at 556). A court should not accept “threadbare recitals of a cause of action’s
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elements, supported by mere conclusory statements,” id. , or “allegations that are merely
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conclusory, unwarranted deductions of fact, or unreasonable inferences.” Sprewell v. Golden
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State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). “[A]nalyzing the sufficiency of a complaint’s
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allegations is a ‘context-specific task that requires the reviewing court to draw on its judicial
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experience and common sense.’” Sheppard v. David Evans and Associates , 694 F.3d 1045,
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1051 (9th Cir. Sept. 12, 2012). The Ninth Circuit also addressed post- Iqbal pleading standards
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in Starr v. Baca, 652 F.3d 1202, 1204 (9th Cir. 2011). The Starr court held that allegations
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“must contain sufficient allegations of underlying facts to give fair notice and to enable the
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opposing party to defend itself effectively . . . [and] plausibly suggest an entitlement to relief,
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such that it is not unfair to require the opposing party to be subjected to the expense of discovery
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and continued litigation.” Id. at 1216; see also Moss v. U.S. Secret Serv. , 10-36152, 2013 WL
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674059, at *20 (9th Cir. Feb. 26, 2013) (holding that plaintiffs stated a claim because no
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alternative explanation “render[ed] ‘ implausible ’ the plaintiffs’ claim of viewpoint
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discrimination”).
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If the Court decides to dismiss a complaint, it must also decide whether to grant leave to
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amend. “A district court may deny a plaintiff leave to amend if it determines that allegation of
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other facts consistent with the challenged pleading could not possibly cure the deficiency . . . or
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if the plaintiff had several opportunities to amend its complaint and repeatedly failed to cure
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deficiencies.” Telesaurus VPC, LLC v. Power , 623 F.3d 998, 1003 (9th Cir. 2010) (internal
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citations omitted); see also Steckman v. Hart Brewing , 143 F.3d 1293, 1298 (9th Cir. 1998)
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(holding that pleadings may be dismissed without leave to amend if amendment “would be an
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exercise in futility”).
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Fraud claims must meet the heightened pleading standard of Federal Rule of Civil
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Procedure 9(b), which requires enough specificity to give a defendant notice of the particular
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misconduct to be able to defend against the charge. Bly-Magee v. California, 236 F.3d 1014,
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1019 (9th Cir. 2001) (internal citations omitted). To satisfy this specificity requirement, “the
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who, what, when, where, and how” of the misconduct must be alleged. Cooper v. Pickett, 137
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F.3d 616, 627 (9th Cir. 1997) (internal citation omitted). Thus, factual allegations must include
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“the time, place, and specific content of the false representations as well as the identities of the
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parties to the misrepresentations.” Swartz v. KPMG LLP , 476 F.3d 756, 764 (9th Cir. 2007).
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Beyond Rules 8(a)(2) and 9(b), the Private Securities Litigation Reform Act of 1995
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(“PSLRA”) imposes heightened pleading requirements. These requirements are discussed more
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fully in the following analysis.
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ANALYSIS
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Defendants argue that the Court should dismiss Plaintiffs’ claim for violation of § 10(b)
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and Rule 10b-5 of the Exchange Act. To state a claim under § 10(b) and Rule 10b-5 of the
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Exchange Act, a plaintiff must allege “(1) a material misrepresentation or omission of fact, (2)
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scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss
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causation, and (5) economic loss.” In re Daou Sys. Inc. , 411 F.3d 1006, 1014 (9th Cir. 2005)
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(citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)). Defendants argue that
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Plaintiffs’ § 10(b) and Rule 10b-5 claim fails because Plaintiffs do not sufficiently allege falsity
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or scienter. Before considering these arguments, the Court first identifies and categorizes the
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misstatements alleged in the SAC.
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I 1. ALLEGED MISSTATEMENTS
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Plaintiffs allege that Defendants made dozens of materially false and misleading
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statements during the proposed six-month Class Period. Plaintiffs group these alleged
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misstatements – which fill more than 30 page of the SAC – into the following eleven categories:
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(1) statements made by Bradley during HP’s February 9, 2011 “WebOS Announcement”; (2)
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statements made by Apotheker during HP’s February 22, 2011 Earnings Call; (3) statements
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made by Apotheker and Bradley during HP’s March 14, 2011 Summit; (4) statements made in
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the March 14, 2011 Summit Press Release; (5) statements made by Apotheker during HP’s May
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17, 2011 Earnings Call; (6) statements made by Apotheker in an interview with the Wall Street
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Journal during the June 1, 2011 All Things Digital D9 Conference (the “June 1, 2011
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Interview”); (7) statements made by Apotheker at the June 2, 2011 Sanford C. Bernstein & Co.
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Strategic Decisions Conference (the “June 2, 2011 Conference”); (8) statements made in HP’s
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June 8, 2011 Form 10-Q signed by Apotheker; (9) statements made by Bradley and reported in a
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July 6, 2011 All Things Digital article (the “July 6, 2011 Article”); (10) statements made by
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Bradley in a July 11, 2011 Press Release; and (11) statements made by Bradley during a July 20,
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2011 Bloomberg News interview (the “July 20, 2011 Interview”).
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The principal theme in Plaintiffs’ 122-page, 280-paragraph SAC is that Defendants
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misrepresented HP’s intention to develop PCs and printers running on webOS software.
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Plaintiffs allege there was no plan of record (“POR”) and “no resources [] available . . . for PCs
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or printers, given the entire [WebOS division] team’s singular focus on the TouchPad.” (SAC ¶
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10.) Defendants argue that these allegations are not entirely consistent with other allegations in
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the SAC. For example, Plaintiffs allege that HP had “a very small group of HP employees (no
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more than 10) in the San Diego [office] who were brainstorming ways of putting webOS on
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printers.” (Id. ¶ 72.) And “the PC division (located in Fort Collins, Colorado) had a concepting
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team that was exploring webOS-enabled PCs.” ( Id. ¶ 71.) But, according to Plaintiffs, these
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“small exploratory teams . . . could not progress past the ‘concepting’ stage without a POR and
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the involvement of the webOS group,” which was “told not to accept any calls from the PC or
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printer groups, and to focus solely on the TouchPad.” ( Id. ¶ 11.)
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Unlike their FAC, Plaintiffs’ SAC focuses more squarely on their argument that
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Defendants misrepresented when webOS would be put on PCs and printers. This argument is
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based primarily on following four alleged misstatements.
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(1) Bradley’s statements at the February 9, 2011 “WebOS
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Announcement” that “I’m excited to announce our plans to bring
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WebOS to the HP device that has the biggest reach of all: the
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personal computer. So across HP, we have phenomenal people
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working hard to enhance our customers’ already familiar experience
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with the PC to add a rich set of applications and services that only
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WebOS offers, and as we introduce that WebOS to our millions of
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PC customers later this year . . . . (Id. ¶ 140 (emphasis added).)
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(2) Bradley’s statement at HP’s March 14, 2011 Summit that “[o]ur goal
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with web OS and our unique opportunity is really to extend web OS
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to the broadest range of products available . . . . With this in mind,
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we’ll be extending the ecosystem beyond phones and tablets.
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Development teams across HP are working to bring web OS and the
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web OS experience to the Windows PCs. Next year , we’ll migrate
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tens of millions of web connected printers into the ecosystem. . . .
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In the figure [sic], across smart phones, TouchPads, PCs, printers,
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we have the potential to deliver tens if not hundreds of millions of
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web OS enabled devices annually into a huge installed base. ( Id. ¶
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158 (emphasis added).)
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(3) Apotheker’s statement at the March 14, 2011 Summit that
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“[t]here will be a beta version for web OS running on a browser on
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PCs available at the end of the year and you will see us putting web
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OS on the (inaudible) technology on PCs, on Windows PCs I should
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add, starting from that point onwards. And we hope to reach 100
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million devices a year.” (Id. ¶ 162 (emphasis added).)
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(4)
Apotheker’s statement during an interview at the June 2, 2011
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Conference. (Id. ¶ 179.) During the interview, Apotheker and the
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analyst discussed “when webOS would be on the Company’s PCs.”
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(Id. )
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[Analyst:] “Do you have a date for that? webOS on the
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PC?”
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[Apotheker:] “2012. I know there are 12 months in 2012, even in
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Germany. And then we have — and we are going to put webOS also
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on printers. So we can create the kind of a platform of about 100
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million, 110 million devices a year .” (Id. (emphasis added).
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Having identified and categorized the numerous misstatements alleged in the FAC, the
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Court must consider whether any of them were knowingly false when made. But before
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addressing the issues of falsity and scienter, the Court must first determine whether any of the
12
28
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1
alleged misstatements are protected by the PSLRA’s safe-harbor or constitute non-actionable
2
puffery.
3
4
I 2. THE PSLRA SAFE HARBOR
5
6
The PSLRA “provides a safe harbor for: [1] identified forward-looking statements with
7
sufficient cautionary language; [2] immaterial statements; and [3] unidentified forward-looking
8
statements . . . lacking sufficient cautionary language where the plaintiff fails to prove actual
9
knowledge that the statement was false or misleading.” In re Cutera Sec. Litig. , 610 F.3d 1103,
10
1113 (9th Cir. 2010) (citing 15 U.S.C. § 78u-5(c)(1)). When forward-looking statements are
11
accompanied by meaningful cautionary language, a “defendant’s state of mind is irrelevant.” Id.
12
at 1112-13 (quoting Harris v. Ivax Corp. , 182 F.3d 799, 803 (11th Cir. 1999)).
13
In its August Order, the Court held that the following statements were protected by the
14
PSLRA’s safe harbor because they are forward-looking and accompanied by meaningful
15
cautionary language: (1) statements made during the February 22, 2011 Earnings Call; (2)
16
statements during the March 14, 2011 Summit; (3) statements made during the May 17, 2011
17
Earnings Call; and (4) statements in the June 8, 2011 Form 10-Q. The Court finds no reason to
18
change these rulings.
19
Plaintiffs argue the Court should reverse course because these and other “statements
20
touching on HP’s plans and intentions” regarding webOS are not forward-looking. According to
21
Plaintiffs, the statements “were inextricably intertwined with, and dependent upon, statements of
22
presently existing facts that grounded those plans and portrayed them as specific and feasible.”
23
(Opp’n, at 22:12-23:2.) Plaintiffs point to statements in which the speakers used present tense,
24
such as “We believe that we have a great strategy to execute towards our connectivity approach,
25
and we are very excited about our TouchPads coming out in particular in the summer.” (SAC ¶
26
170; Opp’n, at 20:4-6.) When it comes to the PSLRA’s safe harbor, tense is not conclusive. See
27
In re LeapFrog Enters., Inc. Sec. Litig. , 527 F. Supp. 2d 1033, 1046 (N.D. Cal. 2007). As the
28
Court has previously concluded, such statements concerning readiness for future events are
13
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1
sufficiently forward-looking to be protected by the PSLRA’s safe harbor, particularly when
2
considering the context of the statements. See In re Wet Seal, Inc. Sec. Litig. , 518 F. Supp. 2d
3
1148, 1167-69 (C.D. Cal. 2007) (statement that the company was “on track to meet estimates
4
and goals” was forward-looking); In re Lockheed Martin Corp. Sec. Litig. , 272 F. Supp. 2d 944,
5
949 (C.D. Cal. 2003) (“[P]redictions of future events [do not] become actionable merely because
6
they happen to have some basis in present facts.”) The Court also is not persuaded to change its
7
conclusion that the statements were accompanied by sufficient cautionary language.
8
Defendants argue that, for reasons explained by the Court in its August Order, the PSLRA
9
also protects the statements in HP’s press releases on March 14, 2011 and July 11, 2011
10
(Declaration of Jennifer Bagosy, Dkt. No. 97, Exh. 1, 2). The Court agrees that these statements
11
are forward-looking and accompanied by sufficient cautionary language that they are protected
12
by the PSLRA’s safe harbor and cannot be used to establish Defendants’ liability under § 10(b)
13
or Rule 10b-5 of the Exchange Act.
14
15
I 3. PUFFERY
16
17
In the August Order, the Court analyzed whether several of Defendants’ alleged
18
misstatements constituted “immaterial, inactionable puffery” and therefore could not support
19
Plaintiffs’ securities fraud claims. “[V]ague, generalized assertions of corporate optimism or
20
statements of ‘mere puffing’ are not actionable material misrepresentations under federal
21
securities laws.” In re Impac Mortg. Holdings, Inc., Sec. Litig. , 554 F. Supp. 2d 1083, 1096
22
(C.D. Cal. 2008) (citing Glen Holly Ent., Inc. v. Tektronix, Inc. , 352 F.3d 367, 379 (9th Cir.
23
2003) (finding no liability under federal securities laws where the alleged misstatements “were
24
generalized, vague and unspecific assertions, constituting mere puffery upon which a reasonable
25
consumer could not rely”) (internal citations omitted)).
26
The “defining question is . . . whether the statement is so ‘exaggerated’ or ‘vague’ that no
27
reasonable investor would rely on it when considering the total mix of available information.”
28
In re Impac, 554 F. Supp. 2d at 1096 (quoting In re Splash Tech. Holdings, Inc., Sec. Litig. , 160
14
Case 8:11-cv-01404-AG-RNB Document 110 Filed 05/08/13 Page 15 of 34 Page ID #:2574
1
F. Supp. 2d 1059, 1076 (N.D. Cal. 2001)). Generally, “forward-looking or generalized
2
statements of optimism that are ‘not capable of objective verification’” constitute inactionable
3
puffery. In re Cornerstone Propane Partners, 355 F. Supp. 2d 1069, 1087-88 (N.D. Cal. 2005)
4
(quoting Grossman v. Novell, Inc. , 120 F.3d 1112, 1119 (10th Cir. 1997)).
5
In its August Order, the Court concluded that the following statements were puffery:
6
(1) Apotheker’s statement at the June 1, 2011 Interview that “[t]he one lesson I have learned
7
from this, and I’m driving my engineers crazy with this, is that we will not release a [TouchPad]
8
product that isn’t perfect”; (2) Apotheker’s statement at the June 2, 2011 Conference that
9
“webOS is ready for prime time”; (3) the statements in HP’s July 11, 2011 Press Release, that
10
HP “underscores [its] strategy to provide a seamless, secure, context-aware experience across
11
[its] product portfolio and to deliver innovation at unmatched scale” and will “draw[] on [its]
12
deep executive bench to position the right leaders in the right roles to accelerate the long-term
13
growth of webOS”; and (4) Apotheker’s statement in the July 6, 2011 Article that “[w]e’ve got
14
lots of capabilities that we have to bring to scale. We’ve just got to do it” (together, the “Puffing
15
Statements”). (SAC ¶¶ 177, 178, 181, 187, 189, 190.) But the Court rejected Defendants’
16
contention that statements about the timing for developing webOS PCs and printers were mere
17
puffery. (See, e.g. , id. ¶ 174 (Apotheker’s statements at the June 1, 2011 Conference that
18
“[w]e’ll put webOS on PCs. It will go on every PC that we’ll ship. . . . It will also be on every
19
printer we ship above $100. . . . Add printers and PC and TouchPad, we’re talking 100 to 110
20
million devices a year”).)
21
Defendants argue that the Court should stick with its decision that the Puffing Statements
22
identified in its August Order are not actionable. The Court agrees. The Court also reaffirms
23
that Defendants’ statements about the timing for developing webOS PCs and printers cannot be
24
dismissed as puffery.
25
Defendants also identify several other statements they argue constitute inactionable
26
puffery. (Motion, at 17:26-18:14.) The Court agrees that the following aspirational statements
27
made by Apotheker at the June 2011 Conference are too vague for a reasonable investor to rely
28
on them: statements (1) that Apotheker hopes HP “can disrupt the market” with WebOS; (2) that
15
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1
“we are all about WebOS”; (3) that “[i]t’s about the webOS much more than about device A or
2
device B”; and (4) that “we are doing really well on the PSG side of the house [with] webOS.”
3
(SAC ¶¶ 181-82). But Defendants have not convinced the Court that Apotheker’s description of
4
WebOS as “end-to-end” or Bradley’s statements regarding the webOS family of devices and
5
connectivity are so vague or undefined that they constitute mere puffery. ( Id. ¶¶ 176, 192.)
6
7
I 4. FALSITY
8
9
Defendants argue that Plaintiffs fail to adequately allege that Defendants’ statements were
10
false when made. Because many of the misstatements alleged in the SAC are protected by the
11
PSLRA’s safe harbor or are inactionable puffery, only the following are potentially actionable:
12
(1) Bradley’s February 9, 2011 statements, and (2) some of Apotheker and Bradley’s June and
13
July 2011 statements.
14
“The PSLRA has exacting requirements for pleading ‘falsity.’” Metzler Inv., GMBH v.
15
Corinthian Colls., Inc. , 540 F.3d 1049, 1070 (9th Cir. 2008). A complaint must “specify each
16
statement alleged to have been misleading, the reason or reasons why the statement is
17
misleading, and, if an allegation regarding the statement or omission is made on information and
18
belief, the complaint shall state with particularity all facts on which that belief is formed.” Id.
19
(quoting 15 U.S.C. § 78u–4(b)(1)) (emphasis added).
20
“The stricter standard for pleading scienter [under the PSLRA] naturally results in a
21
stricter standard for pleading falsity, because falsity and scienter in private securities fraud cases
22
are generally strongly inferred from the same set of facts.” Daou, 411 F.3d at 1015 (internal
23
citations omitted). “A litany of alleged false statements, unaccompanied by the pleading of
24
specific facts indicating why those statements were false, does not meet this standard.” Metzler ,
25
540 F.3d at 1070; see also Falkowski , 309 F.3d 1123, 1133 (9th Cir. 2002) (“Although the
26
allegations here are voluminous, they do not rise to the level of specificity required under the
27
PSLRA.”).
28
16
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1
Because many of Plaintiffs’ allegations come from accounts of confidential witnesses,
2
their “use in satisfying the PSLRA’s standard of particularity must be addressed” before the
3
Court turns to parties’ arguments concerning falsity. Daou, 411 F.3d at 1015-16.
4
5
4.1 Confidential Witnesses
6
7
Confidential witnesses “relied upon in a complaint should be described . . . with sufficient
8
particularity to support the probability that a person in the position occupied by the source would
9
possess the information alleged.” Id. at 1015-16 (internal citations omitted). To determine
10
whether a confidential witness is sufficiently reliable, courts look to “the level of detail provided
11
by the confidential sources, the corroborative nature of the other facts alleged (including from
12
other sources), the coherence and plausibility of the allegations, the number of sources, the
13
reliability of the sources, and similar indicia.” Zucco Partners, LLC v. Digimarc Corp. , 552
14
F.3d 981, 995 (9th Cir. 2009) (internal citations omitted); see also Daou, 411 F.3d at 1016
15
(holding that plaintiffs “sufficiently met the PSLRA’s requirements for confidential witnesses”
16
by (1) “describing [their] job description and responsibilities”; (2) “provid[ing] the witnesses’
17
exact title”; and (3) identifying “to which . . . executive the witness reported,” among other
18
things).
19
In the August Order, the Court concluded that Plaintiffs had described CW1, CW2, and
20
CW3 with sufficient particularity in the FAC. They have also done so in the SAC. The Court,
21
however, found that there was insufficient indicia of CW4’s reliability in the FAC. Plaintiffs
22
have rectified this deficiency by adding allegations about CW4's supervisors and job duties
23
(SAC ¶ 121), so it is now proper to consider CW4's statements. Plaintiffs’ SAC adds 13 more
24
confidential witnesses. Defendants do not dispute that Plaintiffs have described these additional
25
confidential witnesses with sufficient particularity, but instead contend that the confidential
26
witness’ statements fail to establish falsity and scienter. ( See Motion, at 23:4-19.) The Court
27
has reviewed Plaintiffs’ descriptions of the 13 new confidential witnesses and concludes that
28
they are sufficient to allow the Court to consider the confidential witness’ statements.
17
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1
4.2 Whether Plaintiffs Adequately Allege that Bradley’s February 9, 2011
2
Statements Concerning the Timeframe for Putting WebOS on PCs and
3
Printers Were False When Made
4
5
As noted in Section 1, on February 9, 2011, Bradley stated:
6
We have a commitment to extend the WebOS footprint even further
7 as the year progresses , taking WebOS to other connected devices,
8
including printers. . . . [A]cross HP, we have phenomenal people
9
working hard to enhance our customers’ already familiar experience
10
with the PC to add a rich set of applications and services that only
11
WebOS offers, and as we introduce that WebOS to our millions of
12
PC customers later this year , we’ll clearly expand the reach for our
13
developers as well, and we’ll expand it exponentially.
14
(SAC ¶ 140 (emphasis added).) In the August Order, the Court concluded that Plaintiffs had
15
failed to adequately allege that Bradley’s February 2011 statements were false. Plaintiffs have
16
corrected these deficiencies in their SAC. In their FAC, CW1 and CW2 stated that Bradley’s
17
February 2011 statements were false because plans for developing webOS PCs and printers “had
18
not been discussed internally” and “the Company did not know if or when it would be able to put
19
webOS on PCs.” (FAC ¶¶ 64-66 (CW1); see also FAC ¶ 76 (CW2).) The Court found these
20
statements unpersuasive primarily because CW1's and CW2's statements were based on the
21
assumption that, if there had been discussions, they would have known. The allegation that
22
small teams in San Diego and Fort Collins had begun “concepting” discussions on WebOS-
23
based PCs and printers also undermined CW1's and CW2's assertions.
24
While the SAC drops CW2's statement on this subject, the SAC alleviates the problems
25
with CW1's statements by providing the reasons behind CW’s assertions. CW1 explains that
26
CW1 would have known about any WebOS-enabled device that had progressed beyond
27
“concepting” because “ no other team was ‘cutting’ codes for webOS during the Class Period.”
28
(SAC ¶ 68 (emphasis in original).) Other confidential witnesses corroborate CW1's assertion
18
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1
that only the WebOS team had access to the WebOS code. For example, CW10, a former
2
Director of Product Delivery Engineering who held two different positions within the WebOS
3
division, stated that “the webOS division maintained only one set of source codes and one
4
operating system for all personnel.” ( Id. ¶ 69.) The purpose of keeping the source code within
5
the WebOS division, according to CW10, was “provid[ing] a ‘coherent story’ for all the
6
developers [across divisions within HP], such that the webOS division could make any necessary
7
adaptations for a particular product.” ( Id. ; see also id. ¶ 73 (CW9, WebOS division employee:
8
“anything related to webOS ‘stayed within the [WebOS division] building’”), ¶ 81 (CW13,
9
employee within IPG: “IPG required the webOS division to provide them with a version of
10
webOS [for printers] because IPG could not have done that without the webOS team’s
11
involvement”). CW1 also describes personal interactions with the Fort Collins team that led
12
CW1 to believe that they were still in the concepting phrase. ( Id. ¶ 71 (describing CW1's
13
attendance at “staff meeting in late winter/early spring 2011 where the PC division presented
14
their concept” and CW1's understanding that the PC division should only be given WebOS
15
codes if they move beyond concepting).)
16
Besides adding more explanation for CW1's opinions, the SAC provides a more solid
17
basis for Plaintiffs’ theory that HP could not have released WebOS PCs and printers by the end
18
of 2011 because these products had never progressed beyond “concepting,” did not have a POR,
19
and did not have sufficient resources to make up that gap. Confidential witnesses explain that
20
“concepting” is the earliest stage of development. ( See Id. ¶¶ 62 (CW1), 64 (CW6).) After the
21
“concepting team” develops the product concept, presents the idea to a high-level manager, and
22
gets approval, that manager asks the Engineering Project Manager to create the official POR,
23
which is sent to the product team to implement. ( Id. ¶¶ 62 (CW1), 64 (CW6).) Confidential
24
witnesses describe the POR as “a commitment to build something; what we intended to sell in
25
stores,” (Id. ¶ 62 (CW1)), the “operational and ‘architectural document’” containing “a timeline
26
as well as budget details and schedules,” (Id. ¶ 63 (CW5)), and “an actual plan of
27
‘implementation’ that would include ‘specs, actual people,’ requirements and specific dates” ( Id.
28
¶67 (CW9)). (See also Id. ¶ 65 (CW 7).)
19
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1
As noted, CW1 believed that neither the WebOS division nor other HP divisions,
2
including those in San Diego and Fort Collins, had progressed beyond concepting to obtain a
3
POR for WebOS PCs or printers because this would have required obtaining WebOS codes from
4
the WebOS division. CW1’s belief was also based on CW1's attendance at a presentation by the
5
Fort Collins team that showed only concepting work. ( Id. ¶¶ 68, 71.) Other confidential
6
witnesses from the WebOS division and other departments corroborated CW1's belief that the
7
Fort Collins and San Diego teams were just concepting, that there was no POR for WebOS PCs
8
or printers, and that development was at a very early stage. ( Id. ¶ 70 (CW10, WebOS division),
9
¶ 73 (CW9, WebOS division), 75 (CW12, WebOS division), ¶ 82 (CW6, WebOS division
10
employee who interacted with other HP divisions), ¶ 85 (CW14, regional solution specialist
11
involved in promotion of webOS products), ¶ 86 (CW7, WebOS division), ¶ 87 (CW8, supply
12
chain operator responsible for repair services for printers), ¶ 99 (CW15, WebOS division).)
13
Significantly, the SAC also adds a statement from a former Product Manager (CW13) working
14
in the printer group in San Diego, who described the stage of development for WebOS-enabled
15
printers as concepting. ( Id. ¶¶ 79 (“[T]he printer group had a webOS printer concept and
16
discussions within their division, but that there was ‘never a commitment’ to support the concept
17
from the webOS division.”).)
18
Plaintiffs adequately connect their allegations that WebOS PCs and printers were at the
19
“concepting stage” to their assertion that Bradley’s February 2011 statements were false because
20
HP could not produce these products by the end of 2011. In the SAC, CW10, the Director of
21
Product Delivery Engineering in the WebOS division, stated that “printers (with webOS) . . .
22
would take 2-3 years to produce.” (Id. ¶ 89 (emphasis in original).) Defendants argue this
23
statement is unreliable because in the FAC CW1 stated that “it generally takes at least a year
24
from concept to delivery.” (FAC ¶ 70.) While these statements are arguably inconsistent, it is
25
equally plausible to view CW1's statement as describing a general baseline for development and
26
CW10's statement as a more specific estimate of the development time needed for WebOS
27
printers, which would have to “be adapted to a different form factor and input modality.” (SAC
28
¶ 90.) Although CW10 doesn’t directly estimate the timeline for developing WebOS-enabled
20
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1
PCs, statements by confidential witnesses support Plaintiffs’ contention that Bradley’s February
2
2011 statement regarding WebOS PCs was also misleading, given the very early stage of
3
development for such products and the WebOS division’s focus on the TouchPad. For example,
4
CW15, Director of Engineering, webOS System & UI Platform, stated that the WebOS division
5
stopped supporting HP printer and PC divisions “around August 2010" because “all ‘energy’ had
6
to be spent on the TouchPad.” (Id. ¶ 100.) Other confidential witnesses corroborate CW15's
7
assertion that resources were limited due to the focus on getting ready for the TouchPad launch,
8
although it is unclear from their statements whether this focus shift occurred before or after
9
Bradley’s February 2011 statements. ( See, e.g. , ¶¶ 96 (CW12), ¶ 97 (CW9), ¶ 103 (CW5), ¶ 104
10
(CW6), ¶ 105 (CW17).)
11
Defendants argue that the confidential witnesses’ assertions about the early development
12
phase of WebOS PCs and printers are too speculative, particularly concerning efforts that might
13
have been happening in different HP divisions. “Tellingly, none of the CWs – not even CW, a
14
printer division employee, or CW6, a PC division employee – states that the PC or printer
15
divisions did not have PORs for webOS PCs or printers.” (Motion, at 24:22-24 (emphasis
16
omitted); see also Motion, at 25:5-8 (referring to confidential witness’ statements about WebOS
17
PCs and printers being in the “concepting” stage as “bald, conclusory” and “vague and
18
unsupported by a basis for personal knowledge”).) The Court agrees that Plaintiffs’ allegations
19
would be stronger if confidential witnesses could definitively say that no POR existed across all
20
of HP’s many divisions and teams, but a witness’ knowledge is understandably limited to his or
21
her own work experiences. Here, as the Court has explained, Plaintiffs have provided an
22
adequate basis for the confidential witness’ conclusion about the development stage of WebOS
23
PCs and printers.
24
Defendants also opine that it is “illogical” to assume that other HP divisions, which were
25
experienced in PC and printer development, would not be working on WebOS PCs and printers.
26
(See Reply at 17:9-18:1). Plaintiffs allege that it is “implausible” to assume that HP would
27
“farm out webOS development to groups that had no prior experience with the operating
28
system” after spending billions of dollars to acquire Palm and hiring its engineers. (Opp’n at
21
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1
38:23-24.) On their face, both theories are plausible, but at this stage, the Court is evaluating the
2
plausibility of Plaintiffs’ allegations, and Plaintiffs’ explanation adequately demonstrates the
3
plausibility of inferring that there was no POR for WebOS PCs and printers and that these
4
products were merely in the concepting stage.
5
Aside from the statements of their confidential witnesses, Plaintiffs support falsity with
6
an internal business plan called “Plan V2–Palm GBY FY 11 Operational Plan” (the “V2").
7
(SAC ¶ 83.) CW1 states that “the V2 covered the entire webOS division” but “there was
8
nothing in the V2 for 2011 or 2012 for printers or PCs.” ( Id. ¶ 84.) It is unclear when the V2
9
was created, so it may not have an impact on the falsity of Bradley’s February 2011 statements.
10
And, as Defendants point out, “Plaintiffs [do not] explain why a Palm GBU plan that included
11
‘financial analytics and projections’ would have included revenue for products in development
12
by other HP divisions,” which might be developing WebOS PCs and printers. (Opp’n at 26:5-7
13
(emphasis omitted).) This gives minimal support for Plaintiffs’ falsity allegations.
14
Overall, Plaintiffs’ improved allegations regarding the early development phase of
15
WebOS PCs and printers, the inability of other divisions to develop WebOS PCs and printers
16
without code from the WebOS team, and related allegations are sufficient for Plaintiffs to allege
17
that Bradley’s February 2011 statements were misleading.
18
19
4.3 Whether Plaintiffs Adequately Allege that Apotheker’s June 2, 2011
20
Statements Concerning the Timeframe for Putting WebOS on PCs and
21
Printers Were False When Made
22
23
As noted in Section 1, the SAC alleges that on June 2, 2011 Apotheker gave an interview
24
during the Bernstein Conference. (SAC ¶ 179.) During the interview, Apotheker and the
25
analyst discussed “when webOS would be on the Company’s PCs.” (Id. )
26
[Analyst:] Do you have a date for that? webOS on the
27
PC?
28
22
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1
[Apotheker:] 2012. I know there are 12 months in 2012, even in
2
Germany. And then we have — and we are going to put webOS also
3
on printers. So we can create the kind of a platform of about 100
4
million, 110 million devices a year.
5
(Id. (emphasis in original) (the “June 2011 Conference” statement). The Court finds that, at this
6
pleading stage, Plaintiffs have adequately alleged the falsity of this statement.
7
The falsity of this statement is supported by many of the same allegations that support the
8
falsity of Bradley’s February 2011 Statement. For example, the numerous confidential witness
9
statements regarding the very early stage of development for WebOS PCs and printers also
10
indicate the falsity of Apotheker’s promise to develop these products by 2012. In one sense,
11
Plaintiffs have a stronger case that the June 2011 Conference statement was false than that the
12
February 2011 was false. The June 2011 Conference statement was made barely two months
13
before HP announced that it was scrapping the whole WebOS venture. This temporal proximity
14
makes it less likely that, at the time Apotheker made this promise, HP was able to fulfill it. See
15
In re Stratosphere Corp. Sec. Litig. , 1 F. Supp. 2d 1096, 1112 (D. Nev. 1998) (“The shortness of
16
time between later revealed truth and prior statements can be circumstantial evidence that the
17
optimistic statements were false or misleading when made.”). But, in another sense, Plaintiffs
18
have a weaker case for the falsity of the June 2011 Conference Statement than the February 2011
19
statements because the February 2011 Statement promised results within a shorter timeframe.
20
For the reasons described in this section and many of the reasons described in Section 4.2,
21
the Court finds that Plaintiffs have adequately alleged that Apotheker’s statement at the June
22
2011 Conference was false.
23
24
25
26
27
28
23
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1
4.4 Whether Plaintiffs Adequately Allege that Bradley and Apotheker’s “Late
2
Class Period” Statements Concerning HP’s Commitment to Developing
3
WebOS-based PCs and Printers
4
5
Plaintiffs’ allegations that Bradley and Apotheker misrepresented their commitment to
6 webOS-based PCs and printers is not limited to the timeframes Bradley and Apotheker gave.
7
Plaintiffs also attack Bradley and Apotheker’s “late class” statements during June and July 2011
8 relating the quantity of webOS PCs and printers they planned to produce and HP’s general
9 readiness and commitment to WebOS PCs and printers. For example, this theme is reflected in
10
the following statements by Apotheker and Bradley in June and July 2011:
11
(1) “We’ll put webOS on PCs. It will go on every PC that we’ll ship.
12 . . . Add printers and PC and TouchPad, we’re talking 100 to 110
13 million devices a year” (Apotheker, interviewed June 1, 2011 at the
14
All Things Digital D9 Conference) (SAC ¶ 174 (emphasis omitted));
15
(2) “I am happy to reconfirm that webOS will be available on PCs, on
16
top of Windows, which creates a whole new market dynamic for
17 webOS. . . . So we can create the kind of a platform of about 100
18 million, 110 million devices a year” (Apotheker, at the “June 2011
19
Conference”) (Id. ¶ 178 (emphasis omitted)); and
20
(3) “[W]e’ve talked about, very publicly, our intention to enable all of
21 our PC users to access their WebOS environment, their applications
22 on their PCs, and we’re the largest PC manufacturer in the world,
23 and we know bringing that volume to our developers will further
24
build out our ecosystem.” (Bradley, quoted in a July 20, 2011
25
Bloomberg News article) (Id. ¶ 192 (emphasis omitted).
26
In these statements, Apotheker and Bradley specifically reaffirmed HP’s commitment to
27 not only put WebOS on PCs and printers, but also to integrate them into a cohesive WebOS
28 platform and produce a large volume of such devices—100 to 110 million annually. ( Id. ¶¶ 174,
24
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1 178, 192.) For many of the reasons stated in Sections 4.2 and 4.3, Plaintiffs have adequately
2 alleged that these statements were false when made. As noted in Section 4.2, the temporal
3 proximity between the August 18, 2011 decision to scrap WebOS and the June and July
4 statements, made only 4-11 weeks before HP discontinued WebOS development, also support
5
Plaintiffs’ falsity allegations.
6
7
4.5 Conclusion
8
9
The Court finds that Plaintiffs have adequately alleged the falsity of the statements by
10
Bradley in February 2011, by Apotheker at the June 2011 Conference, by Apotheker during the
11
June 2011 Interview, and by Bradley in the July 2011 Article, to the extent that these statements
12 are not inactionable puffery.
13
14
I 5. SCIENTER
15
16
In their SAC, Plaintiffs’ new falsity allegations overcame the deficiencies the Court
17
identified in the FAC. The same is true of Plaintiffs’ scienter allegations, but only for the
18 remaining June and July statements examined holistically. Plaintiffs’ scienter allegations for the
19
March statements are still inadequate to state a claim under the PSLRA’s heightened pleading
20 standards.
21
Under the PSLRA, a securities fraud complaint “must raise a ‘strong inference’ of
22 scienter – i.e., a strong inference that the defendant acted with an intent to deceive, manipulate,
23 or defraud.” Metzler , 540 F.3d at 1061 (quoting 15 U.S.C. § 78u-4(b)(2)); see also Matrixx
24
Initiatives, Inc. v. Siracusano , 131 S. Ct. 1309, 1324 (2011) (To plead scienter under the
25
PSLRA, “a plaintiff must ‘state with particularity facts giving rise to a strong inference that the
26
defendant acted with the required state of mind.’”) (quoting 15 U.S.C. § 78u-4(b)(2)(A))
27
(emphasis added)).
28
25
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1
“[I]n determining whether the pleaded facts give rise to a ‘strong’ inference of scienter,
2
‘the court must take into account plausible opposing inferences,” including inferences
3
“unfavorable to the plaintiffs.” Metzler , 540 F.3d at 1061, 1066 n.10 (quoting Tellabs, Inc. v.
4
Makor Issues & Rights, Ltd. , 551 U.S. 308, 310 (2007)). “A complaint adequately pleads
5 scienter under the PSLRA ‘only if a reasonable person would deem the inference of scienter
6 cogent and at least as compelling as any opposing inference one could draw from the facts
7 alleged.” Matrixx , 131 S. Ct. at 1324 (citations omitted). But “[t]he inference that the defendant
8 acted with scienter need not be irrefutable, i.e. , of the ‘smoking-gun’ genre, or even the ‘most
9 plausible of competing inferences.’” Tellabs, 551 U.S. at 324 (citations omitted).
10
In pleading scienter, a securities fraud plaintiff “must ‘allege that the defendants made
11
false or misleading statements either intentionally or with deliberate recklessness.’” Siracusano
12 v. Matrixx Initiatives, Inc. , 585 F.3d 1167, 1180 (9th Cir. 2009), aff’d sub nom Matrixx
13
Initiatives, Inc. v. Siracusano , 131 S. Ct. 1309 (2011) (quoting Zucco , 552 F.3d at 991); see also
14
Matrixx , 131 S. Ct. at 1312-13 (“This Court assumes, without deciding, that the scienter
15 requirement may be satisfied by a showing of deliberate recklessness.”). Reckless conduct
16 satisfies the scienter standard “to the extent it reflects some degree of intentional or conscious
17 misconduct.” South Ferry LP, No. 2 v. Killinger , 542 F.3d 776, 782 (9th Cir. 2008) (quoting
18
Silicon Graphics, 183 F.3d at 977). In the scienter context, the Ninth Circuit defines
19 recklessness as
20 a highly unreasonable omission, involving not merely simple, or
21 even inexcusable negligence, but an extreme departure from the
22 standards of ordinary care, and which presents a danger of
23 misleading buyers or sellers that is either known to the defendant or
24
is so obvious that the actor must have been aware of it.
25
Siracusano, 585 F.3d at 1180 (quoting Silicon Graphics, 183 F.3d at 976).
26
On a motion to dismiss, courts “must first ‘determine whether any of the plaintiff’s
27 allegations, standing alone, are sufficient to create a strong inference of scienter.’” Siracusano,
28
585 F.3d at 1180 (quoting Zucco , 552 F.3d at 992). If they do not, the court then conducts a
26
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1
holistic review of the complaint’s allegations “to determine whether the insufficient allegations
2 combine to create a strong inference of intentional conduct or deliberate recklessness.” Id.
3
(quoting Zucco , 552 F.3d at 992); accord Matrixx, 131 S. Ct. at 1324 (“In making this
4
determination, the court must review ‘all the allegations holistically.’”) (quoting Tellabs, 551
5
U.S. at 326).
6
Plaintiffs’ allegations in the SAC that Defendants’ misstatements were intentional or
7
deliberately reckless are similar to those made in the FAC: (1) Defendants can be inferred to
8
have known their statements were false because they related to “core operations” and because
9
Defendants were “hands on” managers; (2) the “temporal proximity” between the alleged
10 misstatements and HP’s decision to discontinue webOS development; (3) the magnitude of HP’s
11 webOS write-downs; (4) Apotheker’s termination one month after HP’s decision to discontinue
12 webOS development; and (5) statements by confidential witnesses that WebOS PCs and printers
13
had not progressed beyond the “concepting” stage. (Opp’n, at 39:19-50:11.) The Court
14 considers whether any of these allegations, standing alone, are sufficient to create a strong
15
inference of scienter before examining them holistically.
16
17
5.1 Whether Plaintiffs’ Allegations Concerning the Core Operations Inference
18
Are Sufficient to Establish Scienter
19
20
Plaintiffs first argue that scienter should be inferred because “given the significance of
21 webOS to HP’s PC and printer business . . . it would be patently ‘absurd to suggest’ that the
22
Company’s President and CEO [Apotheker] and Executive Vice President of PSG [Bradley], the
23
division that included Palm and webOS operations, did not know or did not recklessly disregard
24
the truth about when webOS realistically would appear on PCs and printers.” (Opp’n at 42:18-
25
22.) This is Plaintiffs’ strongest argument for inferring scienter, but it not sufficient, standing
26 alone, to satisfy the PSLRA.
27
As the Ninth Circuit explained in South Ferry, 542 F.3d at 785, “[a]llegations regarding
28 management’s role in a corporate structure” and allegations concerning “the importance of the
27
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1 corporate information about which management made false or misleading statements” may raise
2 an inference of scienter “when made in conjunction with detailed and specific allegations about
3 management’s exposure to [such] information.” Id. (emphasis added) . The allegations may
4 also satisfy the PSLRA “in rare circumstances where the nature of the relevant fact is of such
5 prominence that it would be ‘absurd’ to suggest that management was without knowledge of the
6 matter.” South Ferry, 542 F.3d at 786; Zucco Partners, 552 F.3d at 1000 (quoting South Ferry).
7
In the August Order, the Court rejected a similar argument by Plaintiffs that Defendants
8 must have known that their statements concerning HP’s commitment to webOS were false
9
because HP’s PC and printing operations were core to the company’s business and Defendants
10
had touted the importance of WebOS. The Court stated: “[I]t does not automatically follow
11
from the ‘core’ nature of HP’s PC and printer businesses or the anticipated volume of webOS
12 sales that each Individual Defendant was immediately aware of developments in HP’s webOS
13 strategy.” Gammel , 2012 WL 5945089, at *19. Plaintiffs have still not presented any direct
14 allegations that Apotheker or Bradley knew or were informed that WebOS PCs and printers were
15 still in the “concepting stage,” that there was no POR for WebOS PCs and printers, or other facts
16
that would have made Apotheker and Bradley aware of the falsity of the alleged misstatements.
17
For example, CW1 states that “[l]eading up to the February 9 Event, CW1 was meeting with
18
Bradley twice a day in preparation to showcase the TouchPad, the Pre3 and the Veer,” but
19
Plaintiffs don’t connect the dots between these conversations regarding the TouchPad, Pre3, and
20
Veer and development of WebOS PCs and printers. (SAC ¶¶ 114, 237.) CW3 and CW4 say
21
that Apotheker and Bradley “held regular Sunday meetings during the Class Period to discuss
22
the webOS product line” (Id. ¶ 239), but they don’t give any “detailed and specific allegations
23 about management’s exposure to information” at these meetings, which could, for example, have
24
been focused on the TouchPad rather than the WebOS PCs and printers. South Ferry, 542 F.3d
25 at 785. Other confidential witnesses give vague third-hand information about what Bradley or
26
Apotheker knew. (See, e.g. , id. ¶ 237 (“[Jon] Rubinstein [the former Palm CEO who joined HP
27 after Palm’s acquisition] notified Bradley that the webOS division would no longer support the
28
28
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1
PC and printer divisions but would focus only on the TouchPad”); ¶ 98 (concluding that
2
“Apotheker and Bradley would have received the roadmap” for webOS products).)
3
Plaintiffs also contend that Apotheker knew WebOS PCs and printers would not arrive
4 under his timeline because Plan V2, which “provided the product roadmap, financial analytics
5 and projections for each planned Palm GBU product, including expected release dates” did not
6 project revenue for WebOS PCs and printers for 2011 or the entirety of 2012. (SAC ¶ 83.)
7
CW1 states that he knew Apotheker reviewed the Plan V2 and referenced it during weekend
8 meetings because his boss, the senior vice president of WebOS, had told him so. ( Id. )
9
Defendants point out that CW1's knowledge about Apotheker’s awareness of the Plan V2 is
10
indirect and there is a possibility that revenue projections existed elsewhere within HP. Still, the
11
Plan V2 allegations provide some support and corroboration for the allegations of Plaintiffs’
12 confidential witnesses.
13
The “core operations” inference can also be supported by allegations that defendants were
14
“hands-on” managers. See In re Verifone Holdings, Inc. Sec. Litig. , 704 F.3d 694, 710 (9th Cir.
15
Dec. 21, 2012) (concluding that the fact that defendants were “hands-on managers with respect
16
to operational details and financial statements” supported scienter); In re Diamond Foods, Inc.
17
Sec. Litig. , No. C 11-05386 WHA, 2012 WL 6000923, at *11 (N.D. Cal. Nov. 30, 2012)
18
(mentioning CFO’s “hands-on approach” in scienter analysis). Plaintiffs claim Bradley and
19 especially Apotheker were “deeply engaged in the daily management and progress of webOS.”
20
(Opp’n, at 43:11-12.) For example, on August 18, 2011, Apotheker himself stated in a
21 conference call that “we have been tracking closely the progress of webOS and analyzing its
22 operational performance.” ( Id. ¶ 241.) In June 2011, he stated that he was “driving [his]
23 engineers crazy with” his insistence that HP would “not release a [WebOS] product that isn’t
24 perfect.” (Id. ¶ 239.) As noted, Plaintiffs also allege that Apotheker and Bradley attended
25 regular meetings concerning WebOS, although the content of these meetings is unclear. ( Id. ¶
26
239.) These allegations all support Plaintiffs theory that Apotheker and Bradley were personally
27
involved with WebOS development.
28
29
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1
Plaintiffs’ argument for applying the core operations inference also finds some additional
2 support in Plaintiffs’ improved falsity allegations, which provide more explanation and context
3
for their concepting stage theory. This is because Plaintiffs’ bolstered allegations that the early
4 stage of development was widely known among WebOS division employees increase the
5
likelihood that a manager working with those employees would also be aware that these products
6 were in very early stages of development.
7
While such allegations provide considerably more support for applying the core
8 operations inference than with the FAC, Plaintiffs’ allegations still fall short of showing either
9
“detailed and specific allegations about management’s exposure to information” or facts “of
10 such prominence that it would be ‘absurd’ to suggest management was without knowledge of the
11 matter.” South Ferry, 542 F.3d at 786; Zucco Partners, 552 F.3d at 1000. Thus, the core
12 operations inference, standing alone, is insufficient to allege scienter under the PSLRA.
13
14
5.2 Whether Plaintiffs’ Allegations Concerning the Temporal Proximity of
15
Defendants’ Alleged Misstatements to the Discontinuation of WebOS Are
16
Sufficient to Establish Scienter
17
18
Plaintiffs next argue that the temporal proximity between Defendants’ June and July
19 statements and their decision to discontinue webOS development supports a strong inference of
20 scienter for these late-class statements only. Plaintiffs made this same argument while defending
21
their FAC. The Court found that, while temporal proximity could “bolster” the inference that
22
Defendants’ June and July 2011 statements were intentional, proximity alone was insufficient to
23 establish that Defendants knowingly lied. See Berson v. Applied Signal Tech., Inc. , 527 F.3d
24
982, 988 n.5 (9th Cir. 2008); Ronconi v. Larkin , 253 F.3d 423, 437 (9th Cir. 2001). The
25 allegations in Plaintiffs’ SAC more strongly support an inference of scienter than the allegations
26
in the FAC because the SAC provides a more solid foundation for Plaintiffs’ concepting phase
27
theory, as described in detail in Sections 4.2 and 5.1.
28
30
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1
But temporal proximity, standing alone, is still insufficient to establish the required
2
I scienter.
3
4
5.3 Whether Plaintiffs’ Allegations Concerning the Magnitude of HP’s Write-
5
Downs Are Sufficient to Establish Scienter
6
7
Plaintiffs next argue that “[t]he magnitude of HP’s webOS write-downs underscores the
8
importance of webOS to the Company’s operations” and thus supports a strong inference of
9 scienter, “in conjunction with other allegations.” (SAC ¶ 234; Opp’n, at 45:3-5.) Plaintiffs
10 made the same argument while defending their FAC. In the August Order, the Court
11 acknowledged that Courts can consider write-downs in the scienter analysis, but stated that
12 write-downs generally play a minor role. See In re Terayon Comm. Sys. , 2002 WL 989480
13
(N.D. Cal. Mar. 29, 2002) (finding that a 94% write-down in intangible assets was sufficient to
14 establish scienter when combined with insider trading that “could hardly be more suspicious”);
15
Freudenberg v. E*Trade Fin., 712 F. Supp. 2d 170 (S.D. New York 2010) (holding that a large
16 write-off combined with insider stock sales, among other things, was sufficient to establish
17 scienter).
18
Accordingly, the Court again finds that Plaintiffs’ allegations concerning the magnitude
19 of HP’s write-downs, standing alone, are insufficient to establish scienter.
20
21
5.4 Whether Plaintiffs’ Allegations Concerning the Timing of Apotheker’s
22
Termination Are Sufficient to Establish Scienter
23
24
Plaintiffs next argue that Apotheker’s termination, coming just one month after HP
25
discontinued webOS operations, supports a strong inference of scienter. Plaintiffs made the
26 same argument while defending their FAC. In the August Order, the Court rejected this
27 argument, instead siding with other courts that have found that “notable departures are not in
28 and of themselves evidence of scienter.” Gammel, 2012 WL 5945089, at *21 (citing In re
31
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1 Cornerstone Propane Partners, L.P., 355 F. Supp. 2d 1069, 1093 (N.D. Cal. 2005)).
2
Accordingly, the Court again finds that Apotheker’s termination does not support scienter.
3
4
5.5 Whether Plaintiffs’ Allegations by Confidential Witness Are Sufficient to
5
Establish Scienter
6
7
Plaintiffs next argue that their allegations by new confidential witnesses support a strong
8
inference of scienter. This argument is largely a repetition of Plaintiffs’ claims that Defendants’
9 statements were false based on the early stage of development for WebOS-based PCs and
10 printers. As the Court noted in Section 5.1, describing the new witness’ effect on the core
11 operations inference, these new allegations provide more circumstantial support for scienter than
12
Plaintiffs had in their FAC. But the usefulness of these statements is also somewhat limited by
13
their lack of specificity and directness when it comes to Apotheker’s and Bradley’s knowledge
14 about WebOS PCs and printers. Thus, the allegations of the confidential witnesses do not,
15 standing alone, support a strong inference of scienter.
16
17
5.6 Whether Plaintiffs’ Allegations as a Whole Are Sufficient to Establish
18
Scienter
19
20
Having decided that none of Plaintiffs’ allegations, in isolation, are sufficient to raise a
21 strong inference of scienter, the Court now reviews “all the allegations holistically,” Matrixx ,
22
131 S. Ct. at 1324, “to determine whether the insufficient allegations combine to create a strong
23
inference of intentional conduct or deliberate recklessness.” Siracusano, 585 F.3d at 1180
24
(quoting Zucco , 552 F.3d at 992). While it is a close question, the Court finds that the
25 allegations concerning the June and July statements, viewed holistically, raise a sufficiently
26
“strong inference” of scienter to satisfy the pleading requirements of the PSLRA. 15 U.S.C. §
27
78u-4(b)(2). The March statements, on the other hand, still do not satisfy this standard.
28
32
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1
As noted, Plaintiffs’ improved SAC provides considerably more allegations suggesting
2
that Apotheker and Bradley knew their June and July statements regarding WebOS PCs and
3 printers were false or deliberately reckless. Scienter is also supported by allegations related to
4
the core operations inference, the hands-on management style of Apotheker and Bradley, and the
5
temporal proximity between the June and July statements and HP’s decision to discontinue
6
WebOS development. Together, these allegations persuade the Court that the inference of
7 scienter is “at least as compelling as any opposing inference one could draw from the facts
8 alleged.” Matrixx , 131 S. Ct. at 1324 (citations omitted).
9
According to Defendants, the more likely inference is that Defendants genuinely believed
10
that HP would produce WebOS-based PCs and printers and “that webOS was nothing but a
11
business strategy that ultimately failed” after the unsuccessful TouchPad launch tainted plans for
12
future WebOS products. (Motion, at 48:25-26.) Defendants argue that Plaintiffs have offered
13 no plausible motive for Apotheker and Bradley to mislead investors, in contrast to other
14 securities fraud cases where defendants personally benefitted through insider trading. While it is
15
true that Plaintiffs have not alleged Apotheker and Bradley benefitted personally by making the
16 alleged misstatements, motive is not required to adequately plead scienter, as Defendants
17 acknowledge. See In re Wet Seal, Inc., Sec. Litig. , 518 F. Supp. 2d at 1178-79. In response,
18
Plaintiffs posit that “a senior corporate executive might recklessly misrepresent the Company’s
19 operational affairs to the public while simultaneously hoping for a miraculous turnaround that
20 would eventually cause reality to catch up to their false statements.” (Opp’n, at 50:2-5.) This
21
theory provides much less support for scienter than allegations in other cases that defendants
22 engaged in inside trading or sought other personal benefits. But the theory is also consistent
23 with the themes Plaintiffs have laboriously articulated throughout their 122-page FAC. It is far
24
from implausible that a corporate executive who had spent months building excitement and
25 momentum around important, new technology products might recklessly misrepresent the
26
inability to deliver on those promises.
27
The Court notes that, although the Court determined that it was not appropriate in this
28 case to consider Items 7 and 15, those items would not have changed the decision here because
33
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
motive is not required and Plaintiffs’ accumulated allegations adequately support scienter. Thus,
Plaintiffs’ allegations, viewed holistically, support a “strong inference that the [Defendants]
acted with the required state of mind” for the June and July statements, but not for the March
statements. Mafrixx , 131 S. Ct. at 1324 (quoting 15 U.S.C. § 78u-4(b)(2)(A)).
I 6. CONCLUSION
The Court has considered the parties’ remaining arguments and finds them unpersuasive.
Plaintiffs’ § 10(a) and Rule 10b-5 claim survives as to the June and July statements, to the extent
described in this Order, but fails as to the other statements. Because Plaintiffs’ § 20(a) claim is
derivative of its § 10(b) and Rule 10b-5 claim, the § 20(a) claim also survives only for the June
and July statements. See Zucco , 552 F.3d at 990 (“Section 20(a) claims may be dismissed
summarily . . . if a plaintiff fails to adequately plead a primary violation of section 10(b).”)
I DISPOSITION
Defendants’ Motion is GRANTED in part and DENIED in part. Plaintiffs may file an
amended pleading within 30 days of this Order if they so choose.
IT IS SO ORDERED.
DATED: May 8, 2013
_______________________________ Andrew J. Guilford
United States District Judge
34