Opinion
Case No. 2:99CV995C.
April 3, 2002.
ORDER
This is a securities class action suit brought by stockholders of Novell, Inc. against Novell and certain Novell directors. Plaintiffs allege that between November 1, 1996 and April 22, 1997 ("the Class Period"), Defendants issued materially false financial statements and other public statements concerning Novell's business performance and prospects, in violation of: (1) § 10 of the Securities and Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78j(b): and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 (brought against all Defendants) and (2) § 20 of the 1934 Act (brought against Defendants Young, Marengi, and Novell).
The individual Defendants are:
a. John Young: prior to August 1996 — director of Novell and a m ember of its Audit Committee; after August 1996 — Chairman of the Board and Novell's interim CEO;
b. Joseph Marengi: Novell Executive Vice-President-Worldwide Sales and President and CEO of the Company during the Class Period (until May 1997);
c. James Tolonen: Executive Vice-President and CFO of Novell;
Jack Messman and Elaine Bond had been named as defendants in the first consolidated complaint but have been dropped as defendants in the Am ended and Consolidated Complaint.
Section 10(b) makes it unlawful for any person:
[t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.15 U.S.C. § 78j(b). Rule 10b-5 declares it unlawful for a person:
to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.17 C.F.R. § 240.10b-5.
Section 20 states, in pertinent part, that:
[e]very person who, directly or indirectly controls any person liable under any provision of this chapter . . . shall also be liable jointly and severally with and to the same extent as such controlled person. . . .15 U.S.C. § 78t(a).
This action comes before the court on Defendants' motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) on the ground that Plaintiffs' amended and consolidated complaint fails to state a claim. The court previously dismissed the Plaintiffs' complaint without prejudice on the ground that it failed to comply with the heightened pleading standards under Private Securities Litigation Reform Act ("Reform Act"). As discussed below, because the amended and consolidated complaint lacks particularity and fails to allege the requisite scienter on the part of the Defendants, Defendants' motion is GRANTED.
Discussion
A. Standard of Review
For purposes of a 12(b)(6) motion, the court generally confines itself to the text of the complaint and accepts all well-plead facts as true. Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1251 (10th Cir. 1997). Dismissal pursuant to Rule 12(b)(6) is appropriate only when it appears that plaintiffs can prove no set of facts in support of the claims asserted. Grossman v. Novell, Inc., 120 F.3d 1112, 1118 (10th Cir. 1997).
In the securities fraud context, a plaintiff is held to a strict standard of pleading. Id. at 1124. Traditionally, plaintiffs alleging securities fraud had to meet the heightened pleading requirement of Rule 9(b). Under Rule 9(b), a plaintiff is required to "set forth what is false or misleading about a statement, and why it is false. In other words, the plaintiff must set forth an explanation as to why the statement or omission complained of was false or misleading." Id.
In 1995, Congress passed the Private Securities Litigation Reform Act in an effort to heighten Rule 9(b)'s pleading standards. "The Reform Act imposes even more rigorous pleading requirements on plaintiffs alleging fraud in the securities context." Karacand v. Edwards, 53 F. Supp.2d 1236, 1242 (D.Utah 1999); see also In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 983-84 (9th Cir. 1999); Caprin v. Simon Transp. Servs., 112 F. Supp.2d 1251, 1255 (D. Utah 2000); Schaffer v. Evolving Sys., Inc., 29 F. Supp.2d 1213, 1219 (D.Colo. 1998) ("[t]he Reform Act substantially modified, among other things, the standard for pleading securities fraud claims").
After the Reform Act, a securities complaint must first "specify each statement alleged to have been misleading" as well as "the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1); see also Karacand, 53 F. Supp.2d at 1242; Caprin, 112 F. Supp.2d at 1255. "Mere conclusory allegations of falsity are insufficient." Grossman, 120 F.3d at 1124.
Second, and of particular significance here, a "complaint shall, . . . state with particularity facts giving rise to a strong inference that the defendant[s] acted with the required state of mind" and must do so with respect to each act or omission alleged to be a violation of the securities laws. 15 U.S.C. § 78u-4(b)(2); see also Karacand, 53 F. Supp.2d at 1242; Caprin, 112 F. Supp. 2 d at 1255. To establish that a defendant acted with the requisite state of mind, or scienter, a plaintiff must demonstrate that: "(1) the defendant knew of the potentially material fact, and [that] (2) the defendant knew that failure to reveal the potentially material fact would likely mislead investors." City of Philadelphia v. Fleming Cos., Inc., 264 F.3d 1245, 1261 (10th Cir. 2001). Recklessness can satisfy the scienter requirement under § 10(b). Id. But scienter may not be pled through "fraud by hindsight" because corporate officials are liable only for failing to reveal "those material facts reasonably available to them." Id. However, "evidence of motive and opportunity may be relevant to a finding of scienter, and thus may be considered as part of the mix of information that can come together to create the `strong inference' of scienter. . . ." Id. at 1263. Therefore, "[w]hen reviewing a plaintiff's allegations of scienter [the court should] examine the plaintiff's [sic] allegations in their entirety, without regard to whether those allegations fall into defined, formalistic categories such as `motive and opportunity,' and determine whether the plaintiffs' allegations, taken as a whole, give rise to a strong inference of scienter." Id.
Finally, for allegations 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); see also Karacand, 53 F. Supp.2d at 1242; Caprin, 112 F. Supp.2d at 1255. "The Reform Act mandates dismissal, upon motion of the defendant, if the complaint fails to meet these requirements." Karacand, 53 F. Supp.2d at 1242; see also 15 U.S.C. § 78u-4(b)(3)(A).
B. Section 10(b) Claim
To state a claim under § 10(b) of the Act of 1934, a plaintiff must allege:
(1) a misleading statement or omission of a material fact; (2) made in connection with the purchase or sale of securities; (3) with intent to defraud or recklessness; (4) reliance; and (5) damages.
Grossman, 120 F.3d at 1118; see also Karacand, 53 F. Supp.2d at 1242.
1. Fraudulent Representations of Positive Company Forecast
Plaintiffs allege that every positive statement Defendants made about Novell was false and misleading and made with the intent to defraud. (See generally Am. Consol. Compl ¶¶ 37-77). Specifically, Plaintiffs identify three types of positive misstatements by Defendants: (1) statements that "Novell had achieved its strong 4Q sales without engaging in any special promotional pricing, discounting or other unusual inducements to distributors to accept product. . . ." (Id. ¶ 41); (2) statements that Novell had cleaned out its channel inventory (See id. 66 37-77); and (3) general statements about positive demand for new products and the financial security of Novell. (See id ¶ 41). According to Defendants, these allegations are not actionable for several reasons: (a) Plaintiffs' conclusory references to unspecified product problems and product demand issues are not detailed and fail to provide facts showing that the statements were false; (b) Plaintiffs fail to sufficiently allege that Defendants knew the alleged statements were false (scienter); (c) Plaintiffs fail to establish materiality; (d) Defendant Young's two statements regarding Novell's financial health were mere puffery rather than materially false statements. (See Defs.' Memo. in Supp. of Mot. to Dismiss at 16-24).
The parties use shorthand for each financial quarter. For example, the First Quarter of 1996 is referred to as 1Q F96.
The parties disagree on Defendants' liability for statements made by third-parties. Because the amended and consolidated com plaint fails to state a claim of securities fraud even if the court assum es Defendants are liable for third-party statements, this issue need not be resolved.
a. Failure to Adequately Show that Novell's Statements Were False When Made
At the base of a securities claim is the requirement that Plaintiffs allege Defendants made a misleading statement or omission of a material fact. See Karacand, 53 F. Supp.2d at 1242. Here, however, Plaintiffs have failed to give the source or factual basis for the argument that Defendants' statements were false when they were made. Rather than plead facts, Plaintiffs merely assert that Novell's alleged positive statements about product demand, promotional pricing, and channel inventory maintenance were false because the opposite was true. Two examples help shed light on the insufficiency of this argument. First, Plaintiffs do not make any allegations concerning the amount of inventory in the channel at any time, identify which products were involved, explain how they determined that there was an excess inventory, who wrote and received the reports, or when the reports were issued. Such specificity is required under the heightened pleading burdens of the Reform Act. See In re Silicon Graphics Inc. Sec. Litig., 183 F.3d at 985 ("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.").
As a second example, Plaintiffs allege that Novell knew "end-users were unenthusiastic" about Novell's products. Again, Plaintiffs' allegations fail to show how Novell knew the demand for its products was poor or how severe the demand problems were. As Defendants correctly observe:
Plaintiffs assert that defendants had access to negative internal information contained in unspecified "beta and market testing reports," "internal Novell data," and "Distribution Inventory" and "Pull Side" reports. . . .Plaintiffs' allegations lack any specificity whatsoever about these reports. . . . Plaintiffs may not merely list types of reports and assert that they are incriminating. Under the Reform Act, they must provide details. Courts routinely dismiss allegations that negative information was contained in internal reports without details of their dates, contents, or authors. . . .Plaintiffs' failure to identify the source of their allegations with particularity mandates dismissal of plaintiffs' claims.
(Defs' Mem in Supp. at 16.) In essence, Plaintiffs' have not provided the requisite basis for their factual allegations. Plaintiffs failed to adequately allege that the reports were in fact deficient, but have also not plead which Defendants falsely use the information in those reports, and, as discussed below, Plaintiffs do not adequately allege that the Defendants knew that the forecasts were faulty. See In re Silicon, 183 F.3d at 985 (complaint based on negative internal reports dismissed where allegations lacked details of reports, such as how plaintiffs learned of them and who drafted them); Karacand, 53 F. Supp.2d at 1248 (dismissing allegations without contemporaneous statement or document indicating why alleged product problems were serious or could not be remedied); Plevy v. Haggerty, 38 F. Supp.2d 816, 826 (C.D.Cal. 1998) (dismissing allegations that products were riddled with technical problems or fatally flawed).
b. Failure to Show Scienter
As stated above, Plaintiffs are required to plead particularized facts giving rise to "a strong inference of knowing or intentional misconduct." Karacand, 53 F. Supp.2d at 1244. Merely pleading that a defendant had a motive and opportunity to commit fraud is not sufficient: "Motive, opportunity, and non-deliberate recklessness may provide some evidence of intentional wrongdoing, but are not alone sufficient to support scienter unless the totality of evidence creates a strong inference of fraud." Id. at 1244.
Plaintiffs' allegations that the Defendants committed fraud to enhance their credibility and maintain their executive positions in the face of an unspecified takeover threat are insufficient. See Grossman v. Novell, Inc., 909 F. Supp. 845, 851 (D.Utah 1995) (allegation that "defendants wanted to keep their jobs and maintain their stature in the community is legally insufficient to establish motive to commit fraud"); Chill v. General Elec. Co., 101 F.3d 263, 268 (2d Cir. 1996) (motive to maintain the appearance of corporate profitability insufficient).
Moreover, Plaintiffs argue that the court must presume scienter because the Plaintiffs have alleged that certain material statements were false when made. Even assuming that Plaintiffs have sufficiently alleged that Defendants made incorrect statements, they have not pointed the court to any evidence that would support a finding that Defendants knew the statements were false when they made them.
Plaintiffs' specific allegations about misstatements or omissions on the part of Defendants regarding (1) channel inventory, (2) side deals and discounts, (3) high demand for Novell products, are discussed below.
i. Channel Inventory
The amended and consolidated complaint alleges that, at various times during the Class Period, Defendants stated that Novell's distribution channel was not "stuffed." According to Plaintiffs,
The inventory channel is the "river" of goods from Novell to (ultimately) end-users. Since Novell used several layers of customers above end-users, it was possible for the channel to become full or stuffed when interm ediary customers had a large amount of inventory.
Marengi and Tolonen stated [during November 26, 1996 and February 26, 1997 conference calls that] Novell had maintained its channel inventories at levels even with [Second Quarter] and [Third Quarter] and thus channel inventory remained lean and reflective of end-user demand for Novell's products. There were no excessive inventories at the Company or in the distribution channel.
(Am. Consol. Compl. ¶ 46 (emphasis added).) The amended and consolidated complaint alleges that Defendants' channel inventory statements are actionable because when Marengi and Tolonen made those statements, the channels were stuffed, the Defendants knew the channels were stuffed, and Defendants made the statements with the intent to defraud.
The amended and consolidated complaint discusses channel inventory in two places. First, according to Plaintiffs, Novell stated in May 1997 that the "[c]urrent levels of product inventories are no longer appropriate. . . ." (Id. ¶ 71). At some unspecified date (but apparently after Novell's 3Q F97), Eric Schmidt, Chairman of Novell's Board and its CEO as of April 1, 1997, allegedly admitted, "we . . . had too much overhead in the company," and "there was too much inventory . . . [n]ot only did we not ship anything into the channel in [3Q F97], but we actually took quite a bit back." (Id. ¶ 72).
Plaintiffs ask the court to infer, based on Schmidt's statements that the product inventories were not appropriate in 3Q F97, that the channel was stuffed on November 26, 1996, and February 26, 1997. Schmidt's statements, however, do not necessarily contradict Marengi and Tolonen's earlier statements, since Schmidt did not say anything about the channel inventory during the Class Period. His statements, therefore, do not support an inference that Defendants' statements were false when made, nor do they create a strong inference that the Defendants acted with the requisite scienter.
The amended and consolidated complaint's second reference to a stuffed channel concerns Tech Data, one of Novell's distributors. According to Plaintiffs,
By 4Q F96, Tech Data had a six-month inventory supply already stockpiled. Typically, large distributors such as Tech Data only maintained 30-45 days of inventory. Defendants knew — when Marengi directed the Tech Data representative to offer the side agreement in 4Q F96 — that Tech Data had excess inventory and that it would be unable to resell the additional product shipped because defendants constantly monitored Tech Data's excess inventory via Distribution Inventory Reports and pull side reports, which delineated product held by distributors, total sales to distributors, shipping trends to distributors and the amount of product being sold by distributors to end-users.
(Id. ¶ 111.) The amended and consolidated complaint offers no explanation of what the "Distribution Inventory Reports and pull side reports" are, when they were made, how they were made, who made them, what they said, who read them, what "constantly monitored" means, why Plaintiffs believe Defendants read them, or when Defendants supposedly read them.
Since the Plaintiffs fail to specify reasons why Defendants' channel inventory statements were misleading when made and fail to state particular facts showing that the Defendants acted with the requisite scienter, these allegations in the amended and consolidated complaint fail to satisfy the pleading requirements of the Reform Act. Accord Karacand, 53 F. Supp.2d 1236; Caprin v. Simon Transportation Services, 112 F. Supp.2d 1251 (D.Utah 2000).
ii. Side Deals, Discounts, and Inducements
The amended and consolidated complaint alleges that, during the Class Period, Defendants stated that Novell did not offer any unusual side deals, discounting, or inducements to distributors to accept its products. (Hereinafter, these are collectively termed "unusual side deals"). The complaint gives two comments Defendants made about unusual side deals. The first comment was allegedly made by Marengi and Tolonen during a November 26, 1996 conference call: "Marengi and Tolonen stated . . . Novell had achieved its strong 4Q sales without engaging in any special promotional pricing, discounting or other unusual inducements to distributors to accept product, except for limited exchange rights for distributors who accepted NetWare 4.0 earlier in 4Q, which was not significant." (Am. Consol. Compl. ¶ 46.) The second statement was allegedly made during a February 26, 1997 conference call: "Marengi and Tolonen stated . . . Novell had achieved its strong 1Q F97 results without engaging in any special promotional pricing, discounting or other unusual inducements to distributors to accept product." (Id. ¶ 61). Plaintiffs allege that these statements are actionable because when the statements were made, Novell had entered into various unusual side deals with distributors, the Defendants knew such deals had been made, and Defendants made the statements with the intent to defraud. (See id. 6 69).
The amended and consolidated complaint discusses unusual side deals in two places. First, the complaint quotes Schmidt's acknowledgment (at some point after 3Q F97) of such deals: "[W]hen we did the initial account reviews, we discovered . . . there would be deals that were in place but there was a side letter. Or there was a verbal understanding." (Id. 6 72.) Schmidt's statements are vague and conclusory. There is no indication, for example, what side letters or verbal understandings Schmidt is talking about, when such agreements were entered into, or whether those agreements were "unusual inducements," as Plaintiffs allege. Schmidt's comments do not support an inference that Defendants' statements were false when made.
The second reference to unusual side deals is the following:
Following Marengi's edict to make the targeted sales numbers, Novell offered further inducements, various side agreements with customers, favored distributors and OEM customers during 4Q F96, including Ingram Micro, Tech Data, Dell and Compaq, which granted them the right to return 100% of the product or rotate product if they could not resell the product to the end-user. Hence, payment was not required from the distributor until such resale occurred making such sales contingent. For example, at the end of 4Q F96, at Marengi's direction, Novell's distributor representative for Tech Data prepared a side agreement granting Tech Data extended payment terms, increased Marketing Development Fund credits (thus effectively decreasing the price to Tech Data) and liberal rights of return. In exchange for these terms, Tech Data having no risk in taking the product, allowed Novell to ship approximately $20 million of product that Tech Data did not need and knew it could not resell.
(Id. ¶ 111.) The only side deal alleged with any degree of specificity is the single agreement between Novell and Tech Data. Even this allegation, however, fails to meet the pleading requirements under the Reform Act. Instead of alleging specifics, the amended and consolidated complaint uses the following vague terms: "extended payment terms," "increased Marketing Development Fund credits," and "liberal rights of return." The paragraph fails to include specific and particular facts that would show that the Tech Data side agreement was an "unusual inducement." In sum, this paragraph provides no factual support for Plaintiffs' allegations that Defendants gave unusual side deals during the Class Period, that Defendants knew such agreements were given, or that Defendants acted with scienter.
Since the Plaintiffs fail to specify reasons why Defendants' statements about unusual side deal were misleading when made and fail to state particular facts showing that the Defendants acted with the requisite scienter, these allegations in the amended and consolidated complaint fail to satisfy the pleading requirements of the Reform Act. Accord Karacand, 53 F. Supp.2d 1236; Caprin v. Simon Transportation Services, 112 F. Supp.2d 1251 (D.Utah 2000).
iii. Demand
In several places, the amended and consolidated complaint alleges that Defendants made several statements touting the high demand for Novell's new products. (See, e.g., Am. Consol. Compl. ¶ 44, "Novell Inc. today reported broad market acceptance of its intranet and Internet platform. . . ." (bolding in original); id. ¶ 46, "Demand was also good for Novell's new GroupWise 5.0 and ManageWise products.") Plaintiffs allege that these statements were false when made, because demand for some or all of Novell's products was not high. (See, e.g., id. ¶ 40(g), "GroupWise 5.0, upon release, had several `bugs' resulting in increasing high product failure and malfunctions which not only hurt demand . . . [but also] hurt its results in the future."; id. ¶ 60 (same).)
The amended and consolidated complaint fails to specify reasons why Defendants' statements about product demand were misleading when made and fails to state particular facts showing that the Defendants acted with the requisite scienter. The unsupported accusation that product demand was weak is insufficient to state a claim of securities fraud. See Grossman, 120 F.3d at 1123 ("Mere conclusory allegations of falsity are insufficient."). Hence, the amended and consolidated complaint fails to satisfy the pleading requirements of the Reform Act. Accord Karacand, 53 F. Supp.2d 1236; Caprin v. Simon Transportation Services, 112 F. Supp.2d 1251 (D.Utah 2000).
2. Improper Accounting
Plaintiffs allege that Novell's reported 4Q F96 and 1Q F97 results, filed with the SEC and signed by Marenig, Tolonen, Messman, and Bond, were the result of improper accounting. (See Am. Consol. Compl.6 75-76.) The amended and consolidated complaint alleges that Defendants prematurely recognized OEM customer revenue (see id. ¶ 81-109); entered into certain improper side agreements with distributors (see id. 6 110-112); made certain improper "in transit sales" (see id. ¶ 113); sold products in the gray market (see id. ¶ 114-119); and failed to increase Novell's reserve accounts (see id. ¶ 120-122). Plaintiffs allege that some or all of these activities violated the Generally Accepted Accounting Principles ("GAAP") and were materially misleading. (See id. 6 76.)
a. Premature Recognition of OEM Customer Revenue
i. Violation of GAAP
According to the amended and consolidated complaint, "Novell improperly recorded revenue from purported `sales' to OEM customers and distributors which should not have been recorded pursuant to GAAP. . . ." (Id. ¶ 83.) The complaint alleges that Marengi told Novell's sales division to ignore the possibility that OEM customers might not pay for certain products. (See id. ¶ 84)
Many of the allegations about improper revenue recognition are vague, unspecific and unsupported. (See, e.g., id. ¶ 87, "During Q4-1996 and Q1-1997, numerous OEM deals were prematurely and improperly recognized."; id. ¶ 88, "I believe in late fiscal 1996 and early 1997, revenue was improperly and prematurely recognized on several OEM transactions. . . .") These unsupported statements are clearly not actionable. See Karacand, 53 F. Supp.2d at 1242.
Paragraphs 89 through 112 are preceded by the heading "Improper Deals During Q4 F96 and Q1 F97" and describe nine improper deals. (See Am. Consol. Compl. ¶ 47-55.) The most specific and detailed allegation concerns a contract between Novell and Ansel, an OEM customer. According to paragraph 90: "For example, according to the president of one of Novell's major OEM customers, Ansel, this OEM customer did not receive any of the necessary disks or manuals for about a month after the end of 4Q F96. Despite this, Novell recognized all $4 million in revenue under that OEM contract as if full delivery had occurred, in violation of GAAP." (Id. ¶ 90 (bolding in original); see also id. ¶ 92-95 (repeating this allegation).)
Citing "SFAS No. 48 and SOP 91-1," Plaintiffs contend that GAAP requires that "revenue from Novell's software should not be recognized until delivery has occurred and it is determined that payment is probable and the reseller is willing and able to pay for the product — even if the OEM cannot resell the product." (Id. ¶ 78.)
Even assuming that Plaintiffs sufficiently allege that Novell's practices violated GAAP, they have not stated a claim under the securities laws. When a company's filings with the SEC fail to comport entirely with GAAP, the company is not automatically liable under the securities laws. See In re Comshare, Inc. Sec. Litig., 183 F.3d 542, 553 (6th Cir. 1999) (failure to follow GAAP does not, by itself, establish a securities fraud claim, because plaintiffs must also show scienter). In this case, Plaintiffs offer no facts which give rise to a "strong inference that the defendant acted with the required state of mind," as required under the Reform Act. Caprin, 2000 WL 1455296 at *2. At best, the amended and consolidated complaint alleges mere motive and opportunity to defraud, which are insufficient to maintain a claim for securities fraud. See Karacand, 53 F. Supp.2d at 1244.
It is not entirely clear that Plaintiffs adequately allege that Novell's practices violated GAAP. Plaintiffs' allegations that D efendants knew the OEM customers were unreliable are slim . Indeed, although two former Novell employees apparently believed the OEM customers to be unreliable, three of the eight OEM customers apparently fulfilled parts of their contracts and ultimately paid Novell. (See, e.g., Am. Consol. Compl. para. 97, "Ultimately, Fountain Technologies paid the contract in full.")
Plaintiffs cite In re The Baan Comp. Sec. Litig., 103 F. Supp.2d 1 (D.D.C. 2000), for the proposition that GAAP violations may constitute a securities fraud claim. In that case, the court concluded that plaintiffs' allegations of GAAP violations adequately pled the existence of a materially misleading statement or omission where Defendants improperly reported revenue on consignment transactions. See id. at 15. Since the instant case does not involve consignment transactions, In re The Baan Comp. Sec. Litig. is inapposite.
Plaintiffs' factual basis for the Ansel deal are the most specific and complete. The allegations concerning the other OEM deals, therefore, must also fail. (See Am. Consol. Compl. ¶¶ 97-112.)
ii. Violation of Internal Policies
Some paragraphs seem to allege a violation of internal Novell policies. (See, e.g., Am. Consol. Compl. ¶¶ 100-101.) According to paragraph 100, for example, "The Pacific Rim was considered to be extremely volatile, and a decision had been made to never record revenues from the Pacific Rim until the money had been collected." (Id. ¶ 100) These allegations fail to specify who adopted such a rule, whether this rule was ever written down or published, who knew about the rule, or whether Defendants violated the rule with the requisite scienter. In sum, these allegations are not pled with sufficient particularity.
b. Improper Side Agreements
As discussed above, the amended and consolidated complaint fails to adequately allege that Defendants entered into any improper side agreements or that Defendants entered into such agreements with the requisite scienter.
c. In Transit Sales
The amended and consolidated complaint alleges that Defendants improperly recognized revenue from "in transit" sales, a revenue category that "represented product that had not been sold but which corporate sales anticipated would be sold in the future." (Id. ¶ 113.) According to the Plaintiffs, "During 4Q F96, the amount of revenue recognized under this category was up to $100 million." (Id.)
Plaintiffs fail to adequately plead particular facts to support this allegation. The complaint fails to identify specific facts or figures that would show that recognition of "in transit sales" was misleading and that would create a strong inference that Defendants acted with the requisite scienter. See Karacand, 53 F. Supp.2d at 1242.
d. Failure to Increase Reserve Account
In a separate but related allegation, Plaintiffs claim that Defendants failed to increase the reserve account. (See Am. Consol. Compl. 66 120-122.) Plaintiffs fail to provide any specific facts about the reserve account, explain why a failure to increase the reserve account would be materially misleading, or allege facts that support an inference about Defendants' scienter with respect to this allegation.
Conclusion
The amended and consolidated complaint fails to meet the heightened pleading requirements required under the securities laws. The Defendants' motion to dismiss is, therefore, GRANTED.
SO ORDERED this 3rd day of April, 2002.
BY THE COURT:
TENA CAMPBELL United States District Judge