Opinion
No. CV 03-02094 PA (Ex).
May 10, 2004
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS THE CONSOLIDATED COMPLAINT
Before the Court is the Motion to Dismiss the Consolidated Complaint ("CC") filed by the defendants in this putative securities class action. The CC alleges causes of action against Skechers U.S.A., Inc. ("Skechers"), Robert Greenberg, Skechers' Chairman of the Board and Chief Executive Officer, Michael Greenberg, Skechers' President, Jeffrey Greenberg, Skechers' Vice President, and David Weinberg, Skechers' Chief Financial and Strategic Officer, for violations of the Securities and Exchange Act of 1934 (the "Exchange Act"). The CC alleges a class period beginning on April 3, 2002 and continuing through December 9, 2002. Defendants contend that the CC fails to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act ("PSLRA").
Collectively, Skechers, Robert Greenberg, Michael Greenberg, Jeffrey Greenberg, and David Weinberg will be referred to as "Defendants." Weinberg and the Greenbergs will be referred to as the "Individual Defendants."
I. Factual Background
Skechers designs and markets a collection of footwear for men, women, and children. In April 2002, Skechers prepared and completed a $90 million note offering. CC, ¶ 21. Additionally, on April 1, 2002, Skechers filed its annual Form 10-K with the Securities and Exchange Commission for the period ending December 31, 2001. Id., ¶ 22. Then, on April 3, 2002, Skechers issued a press release announcing that its first quarter sales would exceed $235 million and that its earnings would exceed analysts expectations by at least 25%. Id., ¶ 23. Skechers released its first quarter results on April 24, 2002. The press release announcing those results reported net sales of $244.9 million, net earnings of $20.3 million, and increased earnings per share ("EPS") guidance to $1.69 for fiscal year 2002. Id., ¶ 29 30. The press release contained optimistic projections for the future. Id., ¶ 25 ("As we look ahead, we are excited by the many opportunities that we see for the brand and strive to build our presence. . . ."); see also id., ¶ 29 ("Internationally, Skechers is quickly gaining momentum. For the remainder of 2002, our plans are to intensify our presence in those European Countries where we have assumed direct control of our distribution."). In addition to the optimistic predictions, however, the press release cautioned:
This announcement may contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as "may," "will," "believe," "belief," or other comparable terminology. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected in forward-looking statements and reported results shall not be considered an indication of the Company's future performance. Factors that might cause or contribute to such differences include, among others, a decrease in sales during the back-to-school or holiday selling season, change in consumer demands and fashion trends, potential disruptions in manufacturing related to overseas sourcing, cancellation of order commitments and decreased demand by industry retailers, and the inability to sustain prior growth and other factors affecting retail market conditions, including the events of September 11, 2001 and uncertainties related to the ongoing conflict.
Supplemental Declaration of J. Cacila Kim, Ex. B. During an April 24, 2002 conference call with securities analysts which coincided with the release of the financial results, Weinberg stated that Skechers "reported higher mark down allowance than our historical norm. These mark down allowances were given to move our merchandise in a timely manner through our current retail channels. Going forward, mark down and allowances are expected to return to normal levels, which would contribute to our extremely clean inventory both at retail and within our company." CC, ¶ 85. Several securities analysts then issued reports conveying the information contained in the press release and discussed during the conference call. Id., ¶¶ 31 32.
Plaintiff objected to Defendants' Request for Judicial Notice of documents referenced in the CC and additional documents filed with the Securities and Exchange Commission. The Court finds that all of the documents attached to the Declaration and Supplemental Declaration of J. Cacila Kim are appropriate subjects of judicial notice. The Court therefore grants the Defendants' Request for Judicial Notice. See In re Silicon Graphics, Inc. Securities Litigation, 183 F.3d 970, 986 (9th Cir. 1999).
Starting on May 3, 2002 and continuing through June 24, 2002, the Individual Defendants sold 1,538,284 of their Skechers stock at prices between $21.08 and $23.07 per share. Id. ¶¶ 34 93. Robert Greenberg sold one million shares — nearly two-thirds of the total stock sold by the Individual Defendants — on a single day, May 3, 2002, at a price of $21.88. Id., ¶ 93. On July 24, 2002, Skechers announced record financial results for the second quarter of 2002. Id., ¶ 39. The press release announcing the results indicated that Skechers' sales "benefitted from $20 million of retail requests for early shipment of merchandise that was previously slated for delivery during the third quarter. Of the $0.11 [in EPS] that we exceeded the First Call consensus estimate, we estimate that $0.06 per share was due to our ability to surpass our internal goals and that $0.05 per share was related to these retail requests for the early delivery of our products." Id. The press release contained a cautionary statement nearly identical to the one issued on April 24, 2002. Declaration of J. Cacila Kim, Ex. I. As they had before, several securities analysts then issued reports conveying the information contained in the press release and discussed during a July 24, 2002 conference call. CC, ¶¶ 40 42-43.
The CC contains allegations made by seven confidential witnesses, all former Skechers employees involved in sales, indicating that because Skechers' clients typically ordered the company's shoes months in advance, Defendants had to have known at the time the April and July statements were issued that Skechers would experience decreased demand during the second half of the year. Id., ¶¶ 59, 63-68, 76, 78-80.
On September 10, 2002, Skechers revised its third quarter 2002 and 2002 fiscal year estimates downward. Id., ¶ 46. A press release issued by Skechers attributed "the revision in our third quarter estimates to the generally weak domestic retail sales environment within the apparel and footwear sectors. . . . Given the soft back-to-school season, our August sales were below our original expectations, as we did not generate the reorder volume that we had initially expected when we began the quarter." Id. The press release also anticipated flat fourth quarter sales and reduced EPS guidance from $1.71 to a range between $1.45 and $1.54. Id. Several securities analysts then issued reports conveying the information contained in the press release. Id., ¶ 48 49. Skechers announced its third quarter 2002 financial results and warned of reduced earnings for the fourth quarter in a press release and conference call on October 23, 2002. Id., ¶¶ 50 51. Then, on December 9, 2002, Skechers announced that increased competition and decreased consumer demand would cause it to fail to meet even its reduced estimates of a profit of $0.05 per share and would instead report a loss of $0.25 to $0.35 per share. Id., ¶ 52. Skechers stock, which had traded above $23 per share in May 2002 dropped, from $12.05 per share to $7.02 per share on December 9, 2002.
II. Discussion
Consistent with the PSLRA, the Court previously appointed the Municipal Employees' Retirement System of Michigan ("MERSM" or "Plaintiff") as Lead Plaintiff, consolidated the five putative securities class actions into a single case, and ordered MERSM to file the CC. The CC alleges two causes of action: 1) violations of Section 10(b) of the Exchange Act against Skechers and the Individual Defendants arising out of Skechers' allegedly false and misleading financial statements; and 2) violations of Section 20 of the Exchange Act against the Individual Defendants as control persons responsible for Skechers' alleged violations of Section 10(b). Both of those causes of action implicate the heightened pleading standards of the PSLRA.
A. Private Securities Litigation Reform Act
In an effort to deter abusive and frivolous securities fraud claims, Congress enacted the PSLRA and raised the pleading standards for private securities fraud claims alleging violations under the Exchange Act. See No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Corp., 320 F.3d 920, 931 (9th Cir. 2003) ("America West"). The PSLRA imposes a heightened pleading standard for alleging violations under the Exchange Act. See 15 U.S.C. § 78u-4. Under the PSLRA:
In any private action arising under this chapter in which the plaintiff alleges that the defendant —
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading;
the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.15 U.S.C. § 78u-4(b)(1). Section 10(b) of the Exchange Act "provides that it is unlawful `to use or employ in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance. . . .'" In re Read-Rite Corp., 335 F.3d 843, 845 (9th Cir. 2003) (quoting 15 U.S.C. § 78j(b)). Scienter is an essential element of a Section 10(b) claim. In re Read-Rite, 335 F.3d at 845 (citingLipton v. PathoGenesis Corp., 284 F.3d 1027, 1035 n. 15 (9th Cir. 2002)). With regard to pleading scienter, the PSLRA provides:
Securities and Exchange Commission Rule 10b-5 provides that it is unlawful "[t]o make any untrue statement of a material fact or to omit to state a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b).
In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.15 U.S.C. § 78u-4(b)(2). If the complaint fails to meet the above-quoted requirements, the court must dismiss the complaint. 15 U.S.C. § 78u-4(b)(3)(A).
Courts in the Ninth Circuit incorporate the dual pleading requirements of sections 78u-4(b)(1) and (b)(2) into a single inquiry because falsity and scienter are generally inferred from the same set of facts. Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001). Thus, "[i]n considering whether a private securities fraud complaint can survive dismissal under Rule 12(b)(6), we must determine whether particular facts in the complaint, taken as a whole, raise a strong inference that defendants intentionally or [with] deliberate recklessness made false or misleading statements to investors." Id. The requirement to "plead all the `facts' with particularity" means that "a plaintiff must provide a list of all relevant circumstances in great detail." In re Silicon Graphics, Inc. Securities Litigation, 183 F.3d 970, 984 (9th Cir. 1999). To satisfy the PSLRA's pleading requirements, a complaint must contain allegations of "`specific `contemporaneous statements or conditions' that demonstrate the intentional or the deliberately reckless false or misleading nature of the statements when made.' Thus, if a plaintiff's `pleadings are not sufficiently particularized or where, taken as a whole, they do not raise a `strong inference' that misleading statements were knowingly or [with] deliberate recklessness made to investors, a private securities fraud complaint is properly dismissed under Rule 12(b)(6).'" In re Read-Rite, 335 F.3d 843, 846 (9th Cir. 2003) (quoting Ronconi, 253 F.3d 429); see also In re Vantive Corp. Securities Litigation, 283 F.3d 1079, 1084-85 (9th Cir. 2002) ("The purpose of this heightened pleading requirement was generally to eliminate abusive securities litigation and particularly to put an end to the practice of pleading "fraud by hindsight.") (quoting In re Silicon Graphics, 183 F.3d at 988).
Additionally, where a plaintiff seeks to impose liability for forward-looking statements, the safe harbor provisions of the PSLRA may apply. Under the PSLRA:
[I]n any private action arising under this chapter that is based on an untrue statement of a material fact or omission of a material fact necessary to make the statement not misleading, a person . . . shall not be liable with respect to any forward-looking statement, whether written or oral, if and to the extent that —
(A) the forward-looking statement is —
(i) identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or
(ii) immaterial; or
(B) the plaintiff fails to prove that the forward-looking statement —
(i) if made by a natural person, was made with actual knowledge by that person that the statement was false or misleading; or
(ii) if made by a business entity; was —
(I) made by or with the approval of an executive officer of that entity; and
(II) made or approved by such officer with actual knowledge by that officer that the statement was false or misleading.15 U.S.C. § 78u-5(c)(1); see also Employers Teamsters Local Nos. 157 505 Pension Trust Fund, 353 F.3d 1125, 1132 (9th Cir. 2004) ("Clorox") ("`The bespeaks caution doctrine provides a mechanism by which a court can rule as a matter of law (typically in a motion to dismiss for failure to state a cause of action or a motion for summary judgment) that defendants' forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud.' The PSLRA created a statutory version of this doctrine by providing a safe harbor for forward-looking statements identified as such, which are accompanied by meaningful cautionary statements.") (quoting In re Worlds of Wonder Securities Litigation, 35 F.3d 1407, 1413 (9th Cir. 1994)). "[U]nder the language of 15 U.S.C. § 78u-5, a defendant is insulated from liability if it satisfies either subsection (A) or subsection (B); either prong is sufficient for immunity." In re Seebeyond Tech. Corp. Securities Litigation, 266 F. Supp. 2d 1150, 1165 (C.D. Cal. 2003); but see America West, 320 F.3d at 936-37 n. 15 (implying in dicta that actual knowledge of the falsity removes the protections of the safe harbor provision even when accompanied by cautionary language).
B. Section 10(b) Claim
The CC's Section 10(b) allegations fall into one of five categories: (1) misrepresentations concerning Skechers' earnings projections for the second half of 2002; (2) false statements concerning $20 million in sales shifted from the third quarter into the second quarter; (3) misleading statements indicating that previously increased customer discounts would return to normal levels; (4) misrepresentations concerning sales growth associated with Skechers' assumption of international distribution; and (5) suspicious sales of Skechers' stock by the Individual Defendants.
1. Misleading Earnings Projections
Plaintiff contends that the optimistic projections contained in the press releases issued on April 24, 2002, July 24, 2002, and made during the conference calls on those same days were false and misleading because Defendants already knew that they were experiencing decreased demand from their customers for the second half of the year. The statements contained in the press releases do not provide a basis for a Section 10(b) claim because they are forward-looking statements accompanied by meaningful cautionary statement and are therefore entitled to protection under the PSLRA's safe harbor provision. 15 U.S.C. § 78u-5(c)(1)(A)(i). The cautionary statements specifically reference the potential for declining demand and the importance of the back-to-school and holiday shopping seasons. Given such cautionary statements, the fact that demand during those sales periods turned out to be lower than expected does not remove the more optimistic projections from the protections of the safe harbor provision.See Clorox, 353 F.3d at 1133.
Because neither party provided transcripts of the conference calls, the Court cannot determine if the forward-looking statements made during those calls were identified as such and either accompanied by meaningful cautionary statements or included references to the cautionary statements contained in readily available written documents. 15 U.S.C. § 78u-5(c)(2). As a result, the Court will not assess the statements made during the conference calls under section 78u-5(c)(1)(A)'s absolute protection. Instead, the conference call statements will only qualify for safe harbor protection if Plaintiff fails to allege sufficient facts to establish that the Defendants made or approved the statements with actual knowledge of the falsity of the statements. 15 U.S.C. § 78u-5(c)(1)(B). To prove that Defendants had actual knowledge of the falsity of the statements, Plaintiff relies exclusively on the statements of the confidential witnesses. The conclusory allegations made by the confidential witnesses, however, do not provide the facts necessary to satisfy the pleading requirements of the PSLRA:
The complaint does not allege contemporaneous facts in sufficient detail and in a manner that would create a strong inference that the alleged adverse facts were known at the time of the challenged statements. Indeed, the bulk of the alleged adverse facts are generic, subjective, difficult to prove or refute, and could be alleged against almost any company that has experienced a drop in sales revenue.In re Vantive, 283 F.3d at 1085. Vague allegations by confidential witnesses do not satisfy the PSLRA's pleading requirements any more than conclusory statements concerning internal financial reports:
We would expect that a proper complaint which purports to rely on the existence of internal reports would contain at least some specifics from those reports as well as such facts as may indicate their reliability.
. . .
In the absence of such specifics, we cannot ascertain whether there is any basis for the allegations that the officers had actual or constructive knowledge of [the defendant's] problems that would cause their optimistic representations to the contrary to be consciously misleading. In other words, in the absence of such specifics, we cannot determine whether there is any basis for alleging that the officers knew that their statements were false at the time they were made — a required element in pleading fraud.In re Silicon Graphics, 183 F.3d at 985; see also In re Vantive, 283 F.3d at 1088 ("[T]he plaintiffs have failed to cite to any specific report, to mention any dates or contents of reports, or to allege their sources of information about any reports."). The CC does not contain any factual allegations concerning any particular sale that Defendants knew would not take place or any particular customer planning to purchase fewer Skechers' products. Standing alone, the unsupported allegations of the confidential witnesses do not satisfy the PSLRA's pleading requirements.
Finally, Plaintiff argues that Defendants are liable for the optimistic projections contained in the analysts' reports because those reports quoted the Individual Defendants and the forward-looking statements contained in Skechers' press releases. "[A] defendant may be liable for statements made by an analyst if the defendant, or a company or its officers or directors puts an express or implied imprimatur on the projections by endorsing or adopting them." In re Stratosphere Corp. Securities Litigation, 1 F. Supp.2d 1096, 1115 (D. Nev. 1998). A defendant "adopts" an analysts' report or forecast when he or she "`sufficiently entangled himself [or herself] with the analysts' forecasts.'"Id. (quoting In re Caere Corp. Securities Litigation, 837 F. Supp. 1054, 1059 (N.D. Cal. 1993)). "A one way flow of information from insiders to the analysts and from analysts to their customers is insufficient to impose liability based on the analysts' statements." Id. In order to sufficiently plead adoption of an analyst's statement, a plaintiff must:
1) identify specific analysts, forecasts and name the insider who adopted them; 2) point to specific interactions between the insider and the analyst which gave rise to entanglement; and 3) state when these interactions occurred.Id. (citing Zeid v. Kimberley, 930 F. Supp. 431, 435 (N.D. Cal. 1996)). The CC does not allege any facts tending to show that Defendants adopted the analysts reports. Instead, the passages from the reports tend to show that those reports were based on the forward-looking statements made in the press releases and conference calls which are protected under the PSLRA's safe harbor provision. Plaintiff may not evade the safe harbor merely by recharacterizing Defendants' otherwise protected statements as unprotected statements made by analysts and adopted by Defendants. See id. ("Plaintiffs have merely alleged liability based on the same facts and statements as those made to the general public. There are no additional specific or unique statements made to securities analysts. Therefore, there is no additional liability on this basis.").
The CC fails to allege sufficient particularized facts to prevent the application of the PSLRA's safe harbor provision to Defendants' optimistic forward-looking statements. Even without the safe harbor, the allegations in the CC are not sufficiently particularized to raise a strong inference that the allegedly misleading statements were made knowingly or with deliberate recklessness. As pled in the CC, Defendants' April and July statements concerning anticipated financial results, do not satisfy the heightened pleading standards of the PSLRA.
2. Sales Shifted into the Second Quarter
Plaintiff contends that Defendants made false statements about $20 million in third quarter 2002 sales which were shipped in the second quarter. The $20 million in "pull-ins" was announced in the July 24, 2002 press release which stated:
Our second quarter net sales benefitted from $20 million of retail requests for early shipment of merchandise that was previously slated for delivery during the third quarter. Of the $0.11 that we exceeded the First Call consensus estimate, we estimate that $0.06 per share was due to our ability to surpass our internal goals and that $0.05 per share was related to these retail requests for the early delivery of our products.
CC, ¶ 39. Plaintiff claims that the press release created the false impression that the pull-ins resulted from heightened demand for Skechers' products. Id., ¶ 75 ("We view this shift as extremely positive, as it is reflective of the heightened demand for our footwear at retail and by consumers heading into the back-to-school season."). The CC alleges that the statements about the pull-ins were false because Skechers, not its customers, requested the early shipments, and the impact of the early sales was closer to $0.10 per share rather than the $0.05 per share announced in the press release. In support of these allegations, the CC contains allegations by two of Plaintiff's confidential witnesses that Skechers was offering discounts to entice customers to take earlier delivery. Id., ¶¶ 76, 78-80.
Defendants argue that the early shipments resulted at least in part from a desire by Skechers' customers to avoid disruptions caused by a then-impending longshoreman's strike. Defendants also contend that the confidential witnesses' allegations fail to adequately support a strong inference of scienter because the confidential witnesses' statements only generally allege that Skechers requested the early shipments rather than provide specific details about any particular customers. Finally, Defendants point out that the CC lacks any facts creating a strong inference that Defendants knew or recklessly disregarded information concerning the falsity of the $0.05 per share impact of the early sales.
Plaintiff's allegations concerning the $20 million in early sales lack the specificity necessary to satisfy the PSLRA's pleading requirements. The CC contains no allegations that any specific customer accepted early delivery at Skechers' — rather than its own — request. In re Silicon Graphics, 183 F.3d at 985. The CC is also devoid of allegations giving rise to a strong inference that Defendants knowingly misstated the impact of the early sales. Accordingly, Plaintiff's claims based upon the sales shifted into the second quarter fail to satisfy the pleading requirements of the PSLRA.
3. Customer Discounts
Plaintiff alleges that Weinberg stated during the April 24, 2002 conference call with securities analysts that Skechers "reported higher mark down allowance than our historical norm. These mark down allowances were given to move our merchandise in a timely manner through our current retail channels. Going forward, mark down and allowances are expected to return to normal levels, which would contribute to our extremely clean inventory both at retail and within our company." CC, ¶ 85. Plaintiff claims that Weinberg's statement was false and misleading because markdowns were not returning to normal levels. CC, ¶ 86. Weinberg's statement, however, which specifically applies "[g]oing forward" and discusses what is "expected" is a forward-looking statement. Plaintiff provides no specific facts establishing that the statement was made with "actual knowledge . . . that the statement was false or misleading." 15 U.S.C. § 78u-5(c)(1)(B). The allegations concerning customer discounts therefore fail to satisfy the pleading requirements of the PSLRA.
4. International Distribution
The CC contends that Skechers misrepresented that international sales were accelerated when it assumed the role of distributor. CC, ¶ 55(d). The CC alleges no specific facts concerning the international sales allegations. As Plaintiff admits, "[t]hese international allegations, while not as detailed as other claims are relevant to the consideration of the Complaint as a whole and the `totality of the circumstances' of fraud." Plaintiff's Opposition, p. 16 n. 3. These cursory international sales allegations fail to satisfy the PSLRA's heightened pleading requirements.
5. Insider Stock Sales
Starting on May 3, 2002 and continuing through June 24, 2002, the Individual Defendants sold 1,538,284 of their Skechers stock at prices between $21.08 and $23.07 per share. Id. ¶¶ 34 93. Robert Greenberg sold one million shares — nearly two-thirds of the total stock sold by the Individual Defendants — on a single day, May 3, 2002, at a price of $21.88. Id., ¶ 93. Plaintiff contends that these stock sales amounted to 95% of the shares they were permitted to sell under Securities and Exchange Commission Rule 144 which limits the sale, during any three-month period, of an insiders' unregistered stock. 17 C.F.R. § 230.144(e). Plaintiff also argues that the Individual Defendants sold 769% more stock during the 250 day class period than they did during the preceding 250 day period.
Defendants counter that insider trading allegations generally provide only weak evidence of scienter. Ronconi, 253 F.3d at 434 ("Insider trading goes more directly toward proving that the defendants knew the statement was false than proving that the statement itself was false."); see also id. at 434-35 ("If insiders owning much of a company's stock make rosy characterizations of company performance to the market while simultaneously selling off all their stock for no apparent reason, their sales may support inferences both that their rosy characterizations are false and that they knew it. We have considered insider trading as circumstantial evidence that a statement was false when made."). In assessing if insider trading allegations provide strong evidence of scienter, the Ninth Circuit requires a plaintiff to allege "unusual" or "suspicious" stock sales:
"Insider trading is suspicious only when it is `dramatically out of line with prior trading practices at time calculated to maximize the personal benefit from undisclosed inside information.'" We have identified three relevant factors: "(1) the amount and percentage of shares sold by insiders; (2) the timing of the sales; and (3) whether the sales were consistent with the insider's prior trading history."Id. at 435 (quoting In re Silicon Graphics, 183 F.3d at 986).
Here, the 1,538,284 shares of stock sold by the Individual Defendants during May and June of 2002 is nearly identical to the 1,482,500 shares of stock sold during the same time period in 2001. See Defendants' Motion to Dismiss, p. 15, ll. 1-11. Plaintiff argues that the proper comparison period is limited to the length of the class period. See America West, 320 F.3d at 941 ("In response, Plaintiffs urge us to limit our review to the ten months prior to the class period, citing to Apple Computer Securities Litigation, 886 F.2d [1109, 1117 (9th Cir. 1989)], in which we compared sales that occurred during the ten-month class period with the sales during the ten months preceding. In light of our prior case law, we accept this limitation as appropriate."). America West, however, does not adopt an inflexible rule limiting the length of the comparison period.See id. ("However, even without limiting our discussion to the ten months preceding, the sales during the class period appear suspicious. None of the prior sales were comparable to those that occurred during the class period."). To adopt such an inflexible rule would invite plaintiffs to expand or contract a class period merely to augment insider trading allegations and would ignore the Ninth Circuit's examination of annual sales and other particularized circumstances which can explain seemingly suspicious stock sales. See Ronconi, 253 F.3d at 435 ("[N]ot every sale of stock by a corporate insider shows that the share price is about to decline. A corporate insider may sell stock to fund major family expenses, diversify his portfolio, or arrange his estate plan. He may sell stock twice a year when the college tuition for his children is due."). Here, that the Individual Defendants made similar sales during the same time period in the prior year, argues against a finding of scienter.
Additionally, the 2002 sales by the Greenbergs accounted for between 7% and 17% of their total holdings and 42% of Weinberg's much smaller stake in the company. See Defendants' Motion to Dismiss, p. 16, ll. 2-5. Such sales generally fail to provide sufficient evidence of scienter. Compare Ronconi, 253 F.3d at 435 (finding that sales of 10% and 17% of insiders' shares were not suspicious), and In re Silicon Graphics, 183 F.3d at 987 (holding that sales of 43.6% of an individual's shares was not suspicious where the sales represented "an insignificant portion of the allegedly suspicious sales") with America West, 320 F.3d at 940 (finding strong inference of scienter where insiders sold between 88% and 100% of their shares). Securities and Exchange Commission Rule 144 does not bolster the insider trading allegations. By limiting its application to registered stock which can be sold during a three-month period, reliance on Rule 144 is contrary to the Ninth Circuit's instruction that "stock options should be considered in calculating the percentage of shares sold unless the insider could not have exercised them."Ronconi, 253 F.3d at 435 n. 25.
Acting either alone or in combination with the other allegations, the CC's insider trading allegations are insufficient to create the strong inference of scienter required under the PSLRA.
C. Section 20 Claim
The CC also alleges a Section 20 claim against the Individual Defendants as "control persons" liable for Skechers' Section 10(b) violations. Section 20(a) of the 1934 Securities and Exchange Act provides for controlling person liability for every person who, directly or indirectly, controls any person liable under any of the provisions of this title. 15 U.S.C. § 78t(a). To establish control person liability, a plaintiff must show that a primary violation occurred, and that the defendant exercised actual power or control over the primary violator. Howard v. Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000). Because the CC's Section 10(b) claim does not satisfy the heightened pleading standards of the PSLRA, the Section 20 claim fails.
The Court notes that the CC does not plead facts indicating that Jeffrey Greenberg exercised sufficient control over Skechers to make him a "control person" under Section 20.
III. Conclusion
For the foregoing reasons, the Court grants Defendants' Motion to Dismiss the CC. Because a complaint "should not be dismissed unless it appears beyond a doubt that the plaintiff cannot prove any set of facts in support of the claim," the Court grants Plaintiff leave to amend the CC. America West, 320 F.3d at 931. Plaintiff shall file an amended consolidated complaint within thirty (30) days of the date of this Order. Defendants shall have thirty (30) days to answer or otherwise respond to an amended consolidated complaint.
IT IS SO ORDERED.