Neal v. Polycom, Inc. et al

Filing 72

ORDER by Judge Samuel Conti granting in part and denying in part 51 , 53 motions to dismiss. To the extent the motions are granted, the dismissal is without prejudice and leave to file an amended complaint is granted. Plaintiff shall file any amended complaint within thirty (30) days. (sclc2, COURT STAFF) (Filed on 4/3/2015).

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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United States District Court

For the Northern District of California

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)
)
MARK NATHANSON, individually and )
on behalf of all others
)
similarly situated,
)
)
Plaintiff,
)
)
v.
)
)
POLYCOM, INC., ANDREW M. MILLER, )
MICHAEL R. KOUREY, and ERIC F. )
BROWN,
)
)
Defendants.
)
)

Case No. 13-3476 SC
ORDER GRANTING IN PART AND
DENYING IN PART MOTIONS TO
DISMISS

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I.

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INTRODUCTION
Now before the Court are two motions to dismiss Plaintiff's

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first amended complaint ("FAC" or "Complaint"), ECF No. 47, in this

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securities fraud case.

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Defendants Polycom, Inc. and Polycom's last two Chief Financial

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Officers ("CFOs"), Michael Kourey and Eric Brown.

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("Polycom Mot.").

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Defendants as "the Polycom Defendants."

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dismiss was filed by Defendant Andrew Miller, Polycom's former CEO.

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ECF No. 53 ("Miller Mot.").

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///

The first motion to dismiss was filed by

ECF No. 51

Collectively the Court will refer to these
The second motion to

These motions are fully briefed1 and appropriate for

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resolution without oral argument under Civil Local Rule 7-1(b).

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explained below, the motions are GRANTED IN PART and DENIED IN

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As

PART.

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II.

BACKGROUND
This is a putative class action alleging securities fraud

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under Sections 10(b) and 20(a) of the Securities Exchange Act of

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1934 and Rule 10b-5 against Polycom, Inc., a San Jose-based

United States District Court

For the Northern District of California

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provider of video and telecommunication systems, two former Polycom

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CFOs and Polycom's former CEO, Andrew Miller.
During Miller's tenure as CEO, he allegedly claimed

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reimbursements for numerous extravagant personal expenses with no

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legitimate business purpose.

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expenses was prohibited by Polycom's Code of Business Ethics and

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Conduct, which bars the use of Polycom funds for individual

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purposes and requires individuals seeking reimbursements file

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detailed expense reports.

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process is irrelevant here, Polycom required its CFO to sign off on

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expense reports

Seeking reimbursement for these

While Polycom's general reimbursement

Eventually these improper expenses caught up with Miller, and

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22

after an investigation by Polycom's Audit Committee uncovered

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irregularities with his expense reports, Miller resigned.

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Miller's departure was announced, Polycom's stock dropped

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significantly, losing over fifteen percent of its value.

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after his departure was announced, the SEC began an investigation

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After

Also

Plaintiff filed a consolidated opposition, ECF No. 58 ("Opp'n"),
and Defendants filed replies, ECF Nos. 59 ("Polycom Reply"), 60
("Miller Reply").

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into Miller's expenses and his resignation.

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were fully briefed, the SEC entered into a cease-and-desist order

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with Polycom, finding that Polycom violated Sections 13(a) and

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14(a) of the Exchange Act and related SEC rules, and failed to

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adequately disclose executive compensation under Item 402 of

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Regulation S-K.

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recently filed an enforcement action against Miller alleging

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violations of, among other things, Section 10(b) of the Exchange

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Act and Rule 10b-5.

United States District Court

ECF No. 71-2 ("Cease-and-Desist").2

The SEC also

ECF No. 71-1 ("SEC Compl.").3

In January, the Court granted a motion to dismiss a related

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For the Northern District of California

Since these matters

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derivative case alleging breaches of fiduciary duty, concluding

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that plaintiffs there had failed to adequately plead demand

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futility.

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3d --, 2015 WL 164198 (N.D. Cal. Jan. 13, 2015).

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Plaintiff takes a different tack, alleging that Polycom, the CFOs,

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and Miller made various false or misleading statements or omissions

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regarding, among other things, Miller's future at the company, his

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expense reimbursements, Miller's compliance with Polycom's expense

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reimbursement policy, and the reliability of Polycom's internal

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controls.

In this case,

Both Miller and the Polycom Defendants have moved to dismiss

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22

See In re Polycom, Inc. Derivative Litig., -- F. Supp.

these allegations, arguing that Plaintiff has failed to adequately

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2

Plaintiff's counsel submitted a letter on April 3, 2015 attaching
this and other filings and requesting the Court take judicial
notice. Because these documents are "not subject to reasonable
dispute," and "can be accurately and readily determined from
sources whose accuracy cannot reasonably be questioned," Federal
Rule of Evidence 201(b), the request is GRANTED and the Court takes
judicial notice of these documents.
3

The Court notes that the SEC matter, SEC v. Miller, 3:15-cv-1461HSG, is likely related to this case. See Civ. L.R. 3-12(a)(1).

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plead various elements of a securities fraud cause of action.

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Plaintiff opposes.

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4

III. LEGAL STANDARDS

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A.

Motion to Dismiss

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A motion to dismiss under Federal Rule of Civil Procedure

Block, 250 F.3d 729, 732 (9th Cir. 2001).

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on the lack of a cognizable legal theory or the absence of

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United States District Court

12(b)(6) "tests the legal sufficiency of a claim."

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For the Northern District of California

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Navarro v.

sufficient facts alleged under a cognizable legal theory."

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Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.

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1988).

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should assume their veracity and then determine whether they

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plausibly give rise to an entitlement to relief."

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Iqbal, 556 U.S. 662, 679 (2009).

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must accept as true all of the allegations contained in a complaint

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is inapplicable to legal conclusions.

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elements of a cause of action, supported by mere conclusory

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statements, do not suffice."

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Twombly, 550 U.S. 544, 555 (2007)).

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complaint must be both "sufficiently detailed to give fair notice

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to the opposing party of the nature of the claim so that the party

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may effectively defend against it" and "sufficiently plausible"

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such that "it is not unfair to require the opposing party to be

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subjected to the expense of discovery."

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1202, 1216 (9th Cir. 2011).

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///

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///

"Dismissal can be based

"When there are well-pleaded factual allegations, a court

Ashcroft v.

However, "the tenet that a court

Threadbare recitals of the

Id. (citing Bell Atl. Corp. v.

4

The allegations made in a

Starr v. Baca, 652 F.3d

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B.

Exchange Act and Rule 10b-5

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Section 10(b) of the Exchange Act makes it unlawful "[t]o use

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or employ, in connection with the purchase or sale of any security

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registered on a national securities exchange . . . any manipulative

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or deceptive device or contrivance in contravention of such rules

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and regulations as the [Securities and Exchange] Commission may

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prescribe . . . ."

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by the SEC is Rule 10b-5.

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employ any device, scheme, or artifice to defraud; (b) make an

15 U.S.C. § 78j(b).

One such rule prescribed

Rule 10b-5 makes it unlawful to (a)

United States District Court

For the Northern District of California

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untrue statement of material fact or omit a material fact necessary

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to make a statement not misleading; or (c) engage in an act,

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practice, or course of business which operates as a fraud or deceit

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in connection with the purchase or sale of any security.

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§ 240.10b–5.

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17 C.F.R.

To establish a violation of Section 10(b) or Rule 10b–5,

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Plaintiff must plead five elements: "(1) a material

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misrepresentation or omission of fact, (2) scienter, (3) a

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connection with the purchase or sale of a security, (4) transaction

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and loss causation, and (5) economic loss."

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F.3d 1006, 1014 (9th Cir. 2005).

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In re Daou Sys., 411

To survive a motion to dismiss on such claims, Plaintiff must

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meet the heightened pleading standards of Federal Rule of Civil

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Procedure 9(b) and the Private Securities Litigation Reform Act of

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1995 ("PSLRA"), 15 U.S.C. § 78u–4.

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to "specify each statement alleged to have been misleading [and]

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the reason or reasons why the statement is misleading."

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§ 78u–4(b)(1).

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particularity facts giving rise to a strong inference that the

The PSLRA requires plaintiffs

15 U.S.C.

Additionally, the complaint must "state with

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defendant acted with the required state of mind."

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4(b)(2).

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allege the defendant acted intentionally or with deliberate

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recklessness.

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standard for pleading scienter naturally results in a stricter

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standard for pleading falsity, because falsity and scienter in

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private securities fraud cases are generally strongly inferred from

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the same set of facts, and the two requirements may be combined

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into a unitary inquiry under the PSLRA."

United States District Court

For the Northern District of California

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Id. § 78u–

To satisfy the state of mind element, the complaint must

See Daou, 411 F.3d at 1014–15.

"The stricter

Id. at 1015 (internal

quotation marks omitted).

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IV.

DISCUSSION
Plaintiff's allegations are essentially two-fold.

First,

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Plaintiff argues that, as a result of Miller's improperly claimed

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personal expenses, Polycom's publicly reported operating expenses

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were materially false or misleading.

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asserts that because Miller and Polycom failed to disclose that

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Miller was misappropriating Polycom funds and thus might be

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terminated at any time, Miller and Polycom made materially false or

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misleading statements in various SEC filings or, in one case, on an

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earnings phone call.

FAC ¶ 6.

Second, Plaintiff

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The Polycom Defendants and Miller move to dismiss the

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Complaint on the grounds that Plaintiff has inadequately pleaded

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various elements of his cause of action.

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Defendants and Miller argue first that even if classifying Miller's

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expenses as operating expenses was misleading, the amounts involved

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were too miniscule to be material.

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the allegedly false or misleading statements not material, false or

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Specifically, the Polycom

Second, Defendants argue that

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misleading, or are otherwise not actionable.

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Defendants argue that Plaintiff has inadequately pleaded the

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requisite "strong inference" of scienter required by the PSLRA.

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Finally, because (in the Polycom Defendants and Miller's view) the

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Complaint fails to plead a predicate violation of Rule 10b-5,

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Plaintiff also fails to plead a Section 20(a) claim.

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Third, the Polycom

The Court discusses the materiality of the allegedly false

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statements or omissions about Miller's expenses and Polycom's

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revenues first before addressing individually each of the allegedly

United States District Court

For the Northern District of California

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false or misleading statements.

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A.

Materiality

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A statement must be both material and misleading to be

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actionable under the PSLRA.

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Council Pension Fund v. Hewlett Packard Co., 964 F. Supp. 2d 1128,

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1138 (N.D. Cal. 2013).

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a reasonable investor the 'impression of a state of affairs that

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differs in a material way from the one that actually exists.'"

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Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th Cir.

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2008) (quoting Brody v. Transitional Hosps. Corp., 280 F.3d 997,

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1006 (9th Cir. 2002)).

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"substantial likelihood that the disclosure of the omitted fact

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would have been viewed by the reasonable investor as having

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significantly altered the 'total mix' of information made

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available."

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(1976).

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Cement & Concrete Worker District

A statement is misleading "if it would give

A statement is material if there is a

TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449

Only conduct that is deceptive or manipulative violates

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Section 10(b) of the Exchange Act or Rule 10b-5.

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Inc. v. Green, 430 U.S. 462, 474 (1977).

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Santa Fe Indus.,

Consequently, neither

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Section 10(b) nor Rule 10b-5 "reach breaches of fiduciary duty,

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which are only actionable under state law," Cement & Concrete, 964

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F. Supp. 2d at 1138 (citing Santa Fe, 430 U.S. at 473-74; Vaughn v.

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Teledyne, Inc., 628 F.2d 1214, 1222 (9th Cir. 1980)), and

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securities plaintiffs cannot "bootstrap" such breach of fiduciary

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duty claims into a securities fraud suit "by alleging that the

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disclosure philosophy of the statute obligates defendants to reveal

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either the culpability of their activities, or their impure

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motives."

United States District Court

For the Northern District of California

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Panter v. Marshall Field & Co., 646 F.2d 271, 288 (7th

Cir. 1981).
1.

Misstatement or Omission with Respect to Polycom's
Operating Expenses

The Polycom Defendants and Miller's central argument is that

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Plaintiff has failed to adequately plead a material misstatement or

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omissions with respect to Polycom's expenses because he has not

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adequately pleaded that the amounts of Miller's expense

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reimbursements were material.

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Polycom announced Miller's resignation, Polycom also disclosed that

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the Audit Committee had investigated Miller's improper expense

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reports and concluded that "[t]he amounts involved did not have a

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material impact on the Company's previously reported financial

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statements for any period."

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on cases like Parnes v. Gateway 2000, Inc., 122 F.3d 539, 547 (8th

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Cir. 1997), which held that an overstatement of assets that

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represented only two percent of the company's total assets was

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immaterial as a matter of law, Defendants argue that no matter how

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Miller's improper expenses are calculated they are so insignificant

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as to be immaterial as a matter of law.

As Defendants point out, when

FAC ¶ 100 (emphasis added).

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Relying

See also, e.g., Gavish v.

1

Revlon, Inc., No. 00-CIV-7291(SHS), 2004 WL 2210269, at *16

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(S.D.N.Y. Sept. 30, 2004); In re First Union Corp. Sec. Litig., 128

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F. Supp. 2d 871, 895 (W.D.N.C. 2001); In re Newell Rubbermaid Inc.

4

Sec. Litig., No. 99-C-6853, 2000 WL 1705279, at *8 (N.D. Ill. Nov.

5

14, 2000).

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Plaintiff ripostes that materiality is not merely a

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quantitative inquiry, and the Court must consider qualitative

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factors in assessing whether a misstatement or omission was

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material.

ECA, Local 134 IBEW Joint Pension Tr. of Chi. v. JP

United States District Court

For the Northern District of California

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Morgan Chase Co., 553 F.3d 187, 203-04 (2d Cir. 2009) ("[B]oth

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quantitative and qualitative factors must be considered in

12

determining materiality.").

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case states that misrepresentations involving insignificant

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percentages of financial disclosures "when taken in context, could

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be immaterial as a matter of law."

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Defendants conclude, any misstatement or omission regarding

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Polycom's operating expenses was so miniscule as to be immaterial

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as a matter of law.

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Plaintiff is right.

But as Defendants point out, that very

Id. at 204.

In this context,

Even assuming, as Defendants argue, that

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these misstatements or omissions were "minor or technical in

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nature," Daou, 411 F.3d at 1020, and thus quantitatively

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immaterial, Plaintiff has adequately pleaded materiality because

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"[i]nvestors have a right to know -- and would consider it

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important -- when the head of a publicly-owned company is stealing

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any quantity of money from their company."

26

Supp. 2d 30, 33 (D.D.C. 2001) (citing United States v. Fields, 592

27

F.2d 638, 650 (2d Cir. 1978)).

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classifies personal expenses as operating expenses because its CEO

SEC v. Pace, 173 F.

In other words, when a corporation

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is (even if surreptitiously) improperly claiming reimbursement for

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substantial amounts (at least $190,000 according to the SEC, see

3

Cease-and-Desist at ¶ 3) of personal expenses, a reasonable

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investor would consider that fact as having "significantly altered

5

the 'total mix' of information made available."

6

Levinson, 485 U.S. 224, 231 (1988) (quoting TSC Indus., 426 U.S. at

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449); cf. SEC v. Das, 2010 WL 4615336, at *8 (D. Neb. Nov. 4, 2010)

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("[I]nvestors may base their investment decisions, at least in

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part, on factors such as . . . management ethics and

United States District Court

For the Northern District of California

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11

See Basic, Inc. v.

accountability.").
Miller attempts to distinguish these cases, pointing out that

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Pace involved a CEO who was criminally convicted of illegally

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diverting funds and keeping those diversions off the corporate

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books.

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expenses were on the books and approved by Polycom's CFOs.

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result, Miller concludes, "[m]isclassifying expenses, which were

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known about and approved by Polycom's CFOs, does not amount to

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corporate theft."

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labeled "corporate theft" or "improperly claiming reimbursement for

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personal expenses," is irrelevant.

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"substantial likelihood that the disclosure of [Miller's improper

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expense reports] would have been viewed by a reasonable investor as

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having significantly altered the total mix of information made

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available."

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Plaintiff has adequately pleaded materiality as to this claim.

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27
28

Miller Reply at 4-5.

2.

Id. at 5.

Here, as Miller notes, his improper
As a

However, whether Miller's actions are

What matters is the

Basic, 485 U.S. at 231-32 (quotation omitted).

Hence

False or Misleading Statements

Second, while Plaintiff's complaint cites several allegedly
materially false or misleading statements, Defendants argue these

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1

statements are immaterial or otherwise not actionable, bootstrapped

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breach of fiduciary duty claims.

3

Complaint fails to plead any actionable misstatements or omissions

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with respect to these statements.

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address each allegedly materially false or misleading statement in

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turn.
a.

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United States District Court

For the Northern District of California

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As a result, they conclude the

The Court agrees, and will

Risk Disclosures Regarding Executive Retention

First, several of Polycom's annual and quarterly filings with
the SEC contained the following statement:
Our future success will depend in part on our continued
ability to hire, assimilate and retain highly qualified
senior executives and other key management personnel.
For example, in September 2010, we announced the hiring
of six new executives with responsibilities including
strategy, technology, products, development, EMEA sales
and marketing, global services and human resources and we
continue to search for a worldwide sales leader.
As
these
new
executives
assess
their
areas
of
responsibilities and define their organizations, it will
likely result in additional organizational changes or
restructuring actions and charges. Future changes to our
executive leadership team, including new executive hires
or
departures,
or
other
organizational
changes
implemented by our executive leadership team, could cause
disruption to the business and have an impact on our
ability to execute successfully in future periods while
these operational areas are in transition. For example,
our Chief Marketing officer has recently left the
Company.
Competition for qualified executive and other
management personnel is intense, and we may not be
successful in attracting or retaining such personnel,
which could harm our business.

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FAC ¶ 71; see also id. ¶¶ 75, 77, 79, 82, 86, 88, 90, 94, 98

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(quoting the same or a substantially similar statement).

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alleges this statement was materially false or misleading because

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it failed to disclose that Miller was misappropriating Polycom

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funds and submitting false expense reports, thus risking his

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termination from the company and jeopardizing Polycom's plans for

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future success.

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Plaintiff

1

This statement is not actionable for several reasons.

First,

2

as other courts have found, this sort of vague, routine, and

3

general statement is immaterial.

4

F. Supp. 2d at 1141 (rejecting as immaterial a risk factor stating

5

that "the loss of executives and key employees could have a

6

significant impact on our operations").

7

material, this statement is not false or misleading and did not

8

trigger a duty to disclose Miller's misappropriation of Polycom

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funds.

See, e.g., Cement & Concrete, 964

Moreover, even if

As several other courts in this District have found in

United States District Court

For the Northern District of California

10

rejecting similar allegations, "the disclosure here, if anything

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suggests that some personnel might leave, not that [Miller] would

12

stay."

13

06-cv-4595-PJH, 2008 WL 2220600, at *18-19 (N.D. Cal. May 27,

14

2008), aff'd, 359 F. App'x 802, 805, n.1 (9th Cir. 2009)("[T]he

15

risk disclosure statements cited by plaintiff [would not] have

16

reasonably led anyone to conclude that FoxHollow intended to retain

17

management.

18

-- that FoxHollow's management was subject to change, that

19

personnel might be replaced, and that investors should be aware of

20

that possibility.")).

21

Id. (citing In re FoxHollow Techs., Inc. Sec. Litig., No.

Instead, the statements convey the opposite impression

This is true even though, as Plaintiff points out, some

22

versions of this statement specifically reference Polycom's "go-to-

23

market" strategy, which Miller was hired to take over.

24

79, 82, 86, 88, 90.

25

to-market" strategy, which stated that "[f]uture changes to our

26

executive and senior management teams . . . could cause disruption

27

to the business and have an impact on our ability to execute

28

successfully in future periods, particularly with respect to the

See FAC ¶¶

In Plaintiff's view, the reference to the "go-

12

1

execution of our go-to-market strategy . . . ,"

2

sufficient to render these statements material and to create a duty

3

to disclose Miller's misconduct.

4

id. at ¶ 79, is

Opp'n at 12-13 & n.3.

But even with the reference to the "go-to-market" strategy,

5

these statements are not sufficiently specific to be material and,

6

even if material, are not misleading.

7

mention any employee by name," nor is there anything contained in

8

any of the executive retention statements "sufficiently specific to

9

have created an 'impression' that became false" because of Miller's

The statements do "not

United States District Court

For the Northern District of California

10

misconduct.

FoxHollow, 2008 WL 2220600, at *18.

On the contrary,

11

"[n]o rational investor would conclude from such statements of

12

corporate optimism" that Polycom intended to retain Miller or that

13

Miller was not misappropriating Polycom funds.

14

anything, these statements merely remind investors that Miller or

15

any other member of the senior executive or management teams might

16

leave Polycom, not that Miller's position was secure or no

17

misconduct was afoot.

18

Plaintiff cites involving material misrepresentations coupled with

19

non-disclosure, and makes clear this statement is not actionable.

20

See, e.g., Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167,

21

1181 (9th Cir. 2009) (finding similar statements actionable where

22

they failed to indicate that the risk "may already have come to

23

fruition"), aff'd, 131 S. Ct. 1309 (2011); Berson v. Applied Signal

24

Tech., Inc., 527 F.3d 982, 987 (9th Cir. 2008) ("But learning that

25

stop-work orders might be issued is quite different from knowing

26

they were in fact issued.") (emphasis in original); Provenz v.

27

Miller, 102 F.3d 1478, 1489 (9th Cir. 1996); Voit v. Wonderware

28

Corp., 977 F. Supp. 363, 370-71 (E.D. Pa. 1997) (concluding that

See id.

If

This distinguishes this case from those

13

1

cautionary warnings about the loss of key employees were actionable

2

where the Defendant had specific plans to replace the CEO at the

3

time the statements were made).
b.

4

Second, several of Polycom's SEC filings contained a reference

5
6

to Polycom's Code of Business Ethics, which provides that:

7

Protecting Polycom's assets is a key responsibility of
every employee, agent and contractor.
Care should be
taken to ensure that assets are not misappropriated,
loaned to others, or sold or donated without appropriate
authorization.
All Polycom employees, agents and
contractors are responsible for the proper use of Polycom
assets, and must safeguard such assets against loss,
damage,
misuse
or
theft.
Employees,
agents
or
contractors who violate any aspect of this policy or who
demonstrate poor judgment in the manner in which they use
any Polycom asset will be subject to disciplinary action,
up to and including termination of employment or business
relationship at Polycom's sole discretion.

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9

United States District Court

10
For the Northern District of California

Polycom's Code of Business Ethics

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12
13
14

* * *
Polycom funds must be used only for Polycom business
purposes.
Every Polycom employee, agent and contractor
must take reasonable steps to ensure that Polycom
receives good value for Polycom funds spent, and must
maintain accurate and timely records of each and every
expenditure.
Expense reports must be accurate and
submitted in a timely manner. Polycom employees, agents
and contractors must not use Polycom funds for any
personal purpose.

15
16
17
18
19
20

Id. at ¶¶ 72, 83, 95 (emphasis omitted) (quoting the same or

21

substantially similar language).

22

was false or misleading because Miller expressly acknowledge his

23

"understanding of, and commitment to, the standards and policies"

24

in the Code of Business Ethics in his offer letter, filed with the

25

SEC.

26

statements about its ethics code became false or misleading because

27

they did not disclose Miller's violations, and that Polycom had a

28

duty to update these statements because they "bec[a]me misleading

FAC ¶ 46.

Plaintiff alleges this statement

Plaintiff argues this acknowledgment and Polycom's

14

1

as a result of intervening events."

2

Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993).

3

See In re Time Warner Inc.

This language, whether in the Code of Business Ethics itself,

4

or Miller's acknowledgement of his "understanding of, and

5

commitment to" the standards contained therein are "inherently

6

aspirational" and hence immaterial.

7

Gourmet Burgers, Inc., 505 F. Supp. 2d 662, 685-86 (D. Colo. 2007);

8

see also Retail Wholesale & Dept. Store Union Local 338 Retirement

9

Fund v. Hewlett-Packard Co., -- F. Supp. 2d --, 2014 WL 2905387, at

See Andropolis v. Red Robin

United States District Court

For the Northern District of California

10

*6 (N.D. Cal. 2014); Cement & Concrete, 964 F. Supp. 2d at 1138.

11

No reasonable investor would have construed either the statement in

12

Miller's offer letter or Polycom's Code of Business Ethics as "not

13

just an aspirational statement of intention, but a warranty that

14

[Miller was] compliant."

15

Nor are these statements the kind of "clear, factual, and forward-

16

looking" statements that trigger a duty to update.

17

FoxHollow, 359 F. App'x at 804-05.

18

of and commitment to Polycom's Code of Business Ethics is simply

19

not the same as warranting that Miller would never violate the

20

policy in the future.

21

(distinguishing cases finding actionable misrepresentations

22

regarding compliance with company policy because the defendant "did

23

not make affirmative representations that it was in compliance with

24

its" internal ethics rules) (emphasis added).
c.

25
26

Retail Wholesale, 2014 WL 2905387, at *6.

In re

Acknowledging an understanding

Cf. Retail Wholesale, 2014 WL 2905387, at *7

Internal Controls

Third, Polycom's annual SEC filings contained this statement

27

(or a similar statement for subsequent years) about Polycom's

28

internal controls:

15

1
2
3
4
5
6

We conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the
framework in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the
Treadway Commission.
Based on the results of this
evaluation, management has concluded that, as of December
31, 2010 our internal control over financial reporting
was effective to provide reasonable assurance regarding
the
reliability
of
financial
reporting
and
the
preparation of financial statements for external purposes
in
accordance
with
generally
accepted
accounting
principles.

7
8

Id. at ¶¶ 70, 81, 93.

Plaintiff alleges this statement was false

9

because "[e]ffective internal controls would have, at the very

United States District Court

For the Northern District of California

10

least, included procedures to verify that the Company's chief

11

executives did not misappropriate Polycom's assets."

12

Opp'n at 25.

This allegation is nothing more than a non-actionable

13

"generalized claim[] of mismanagement . . . ."

See In re The First

14

Marblehead Corp. Sec. Litig., 639 F. Supp. 2d 145, 161 (D. Mass.

15

2009); see also In re Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d

16

628, 638-39 (3d Cir. 1989) (warning against allowing "artful legal

17

draftsmanship" to work around the general rule that "claims

18

essentially grounded on corporate mismanagement are not cognizable

19

under federal law"); Andropolis, 505 F. Supp. 2d at 683-84

20

(discussing allegations of corporate mismanagement, which "do[es]

21

not support a federal cause of action").

22

Robin Gourmet Burgers, the court addressed similar allegations

23

based on "representations in Red Robin's Form 10-Q's [sic] and

24

press releases that management had evaluated the Company's

25

disclosure and financial reporting controls and found them to be

26

effective were false and misleading when made" because they

27

"omitted . . . that these systems were significantly deficient."

28

Id. at 683.

In Andropolis v. Red

Noting the Supreme Court's holding in Santa Fe

16

1

Industries v. Green, 430 U.S. 462, 474-79 (1977) that the

2

securities laws do not create a federal remedy for corporate

3

misconduct, and the "now clearly established rule that a plaintiff

4

may not 'bootstrap' a claim for internal corporate mismanagement or

5

breach of fiduciary duty by alleging that the corporation or its

6

directors failed to disclose that mismanagement or breach," the

7

Court concluded that the "'central thrust' of Plaintiff's

8

allegations . . . allege[d] nothing more than corporate

9

mismanagement and, thus, do[es] not support a federal cause of

United States District Court

For the Northern District of California

10

action."

11

Telecommc'ns, Inc. Sec. Litig., 781 F. Supp. 696, 699 (D. Kan.

12

1991)).

13

Id. (citing Panter, 646 F.2d at 289; In re United

Here too, the "central thrust" of Plaintiff's allegations is

14

that Polycom's board failed to correctly assess the adequacy of its

15

internal controls -- not that it sought to deceive investors about

16

the quality of those controls.

17

Plaintiff's argument is that even though there were numerous

18

signals, as reported by confidential witnesses, of [Polycom's]

19

corporate deficiencies, [Polycom] misstated that management had

20

evaluated and approved the Company's disclosure procedures and

21

internal reporting controls, and omitted to state that these

22

systems were significantly deficient."

23

not actionable.

24

As in Andropolis, "[t]he crux of

Id.

Simply put, these are

Moreover, "[t]here is no securities fraud by hindsight."

City

25

of Livonia Emps. Retirement Sys. & Local 295/Local 851 v. Boeing

26

Co., 711 F.3d 754, 758 (7th Cir. 2013) (Posner, J.).

27

what Plaintiff has pleaded here.

28

knowing the details of Miller's misconduct and the failure of

Yet that is

Today, with the benefit of

17

1

Polycom's internal controls to catch that misconduct, it might seem

2

misleading for Polycom to have stated its internal controls were

3

adequate.

4

mismanagement and internal controls were inadequate simply because

5

Miller managed to steal from Polycom.

6

of supervisory mechanisms to oversee a company" may fail to uncover

7

misconduct or fraud.

8

Armstrong, No. Civ.A. 1449-N, 2006 WL 391931, at *5 (Del. Ch. Feb.

9

13, 2006), aff'd, 911 A.2d 802 (Del. 2006).

But the Court cannot simply assume there was

After all, even a "full set

David B. Shaev Profit Sharing Acct. v.

Moreover, even if the

United States District Court

For the Northern District of California

10

Court could make such an assumption, Plaintiff still has not

11

pleaded how, if at all, Polycom's internal controls were actually

12

inadequate.

13
14

In short, these allegations are simply insufficient to give
rise to a claim of securities fraud.
d.

15
16

Conference Call Statement

Finally, on a conference call in February 2013, while

17

discussing the departure of another executive, Sudhakar

18

Ramakrishna, Miller said:

19
20
21

Like anything else, Rama has aspirations; one day he'd
like to be a CEO. And right now, I am and I'm planning
on being here for quite a period of time. So this has no
implications on anything outside of being able to focus
on software, focus on our next-generation platform, and
to do it with style.

22
23

Id. at ¶ 92.

24

misleading because, at the time the statement was made, Miller's

25

position was in jeopardy by virtue of his misappropriation of

26

Polycom funds.

27
28

Plaintiff alleges this statement is false and

This statement was not false or misleading when made.

All

Miller's statement communicates is his then-present plan to stay at

18

1

Polycom for "quite a period time."

Unlike other cases finding

2

similar statements actionable, here there is no allegation that

3

Miller actually was not planning on remaining at Polycom for the

4

foreseeable future.

5

363, 370 (E.D. Pa. 1997) (finding a similar statement false and

6

misleading where the company issued a press release suggesting the

7

CEO would remain when in fact his replacement had already been

8

hired), abrogated on other grounds, In re Advanta Corp. Sec.

9

Litig., 180 F.3d 525 (3d Cir. 1999).

See Voit v. Wonderware Corp., 977 F. Supp.

Instead, the fact that a

United States District Court

For the Northern District of California

10

person might be fired if his misconduct is uncovered does not make

11

it false or misleading that he plans not to be fired (and thus to

12

remain at the company).

13

B.

Scienter

14

Both Miller and the Polycom Defendants argue that Plaintiff

15

has failed to adequately plead the requisite "strong inference" of

16

that they acted intentionally or deliberately to deceive investors.

17

Tellabs, 551 U.S. at 313-14.

18

allegations give rise to a "strong inference" of scienter, the

19

Court must look at all the facts alleged and consider "plausible

20

opposing inferences."

21

allegations are to go forward, the Court must conclude that "a

22

reasonable person would deem the inference of scienter cogent and

23

at least as compelling as any opposing inference one could draw

24

from the facts alleged."

In determining whether Plaintiff's

Id. at 322-23.

In short, if Plaintiff's

Id. at 324.

The Court will address the allegations of Miller's scienter

25
26

first, before turning to the CFOs' scienter, and finally, Polycom's

27

scienter.

28

///

19

1.

1
2

Miller's Scienter

Miller argues that Plaintiff has failed to plead his scienter

3

because Plaintiff has not pleaded facts giving rise to a strong

4

inference that, in making statements in press releases or SEC

5

filings Miller "either intended to mislead investors or knew (or

6

should have known) that failing to disclose his [alleged

7

mis-]conduct would artificially inflate [Polycom's] stock."

8

& Concrete, 964 F. Supp. 2d at 1143.

9

had a culpable state of mind in submitting his expense reports,

Cement

In Miller's view, even if he

United States District Court

For the Northern District of California

10

that is insufficient absent "some degree of subjective

11

understanding of the risk of misleading others . . . ."

12

Platforms Wireless Int'l Corp., 617 F.3d 1072, 1092 (9th Cir.

13

2010).

SEC v.

14

However, the very case on which Miller relies, Cement &

15

Concrete Workers District Council Pension Fund v. Hewlett Packard

16

Company, belies his position.

17

found that statements about risk factors and executive retention or

18

the issuance and updating of Hewlett Packard's business conduct

19

policies were immaterial even though they did not communicate that

20

HP's CEO had violated the policies and was at risk of termination

21

for concealing improper expense submissions, allegedly sexually

22

harassing a consultant, and inappropriately revealing confidential

23

information.

24

Cement & Concrete court concluded that, as Miller points out, the

25

plaintiff inadequately alleged scienter, the court also noted that

26

"assuming the Court had determined that the statements and

27

omissions at issue were material, it is probable that the Court

In Cement & Concrete, the court

964 F. Supp. 2d at 1134-35, 1138-42.

28

20

While the

1

would reach a different conclusion as to the scienter

2

requirement . . . ."

Id. at 1143.

This is a crucial distinction.

3

Unlike the Cement & Concrete

misstatement or omission -- the misstatement of Polycom's operating

6

expenses.

7

Miller was no shrinking violet.

8

Wireless, 617 F.3d at 1094 ("When the defendant is aware of the

9

facts that made the statement misleading, he cannot ignore the

10

United States District Court

court, the Court has already concluded Defendants made a material

5

For the Northern District of California

4

facts and plead ignorance of the risk.") (quotation omitted)).

11

does not claim as business expenses the cost of charter flights,

12

expensive meals, $500 ties, or luxury cars for personal use when

13

that conduct is expressly prohibited by company policies and hide

14

those numerous inappropriate expense claims without intent to

15

defraud.

16

Nature's Sunshine Prods. Sec. Litig., 486 F. Supp. 2d 1301, 1311

17

(D. Utah 2007) ("Evidence that a defendant has taken steps to

18

cover-up [sic] a misdeed is strong proof of scienter.").

19

Furthermore, Miller resigned once his misconduct became clear, "a

20

fact that 'provides minimal non-dispositive supporting evidence of

21

scienter.'"

22

re Impax Labs., Inc., Sec. Litig., No. C 04-04802 JW, 2007 WL

23

7022753, at *10 (N.D. Cal. July 18, 2007), reconsideration granted

24

on different grounds, 2008 WL 1766943 (N.D. Cal. Apr. 17, 2008)).

25

These allegations are sufficient to give rise to "a reasonable

26

belief of [Miller's] knowledge of false or misleading statements

27

that were either reckless or intended to defraud," Cement &

28

///

Furthermore, as with the CEO in Cement & Concrete,
See id. at 1143 (citing Platforms

One

See Cement & Concrete, 964 F. Supp. 2d at 1143; In re

Cement & Concrete, 964 F. Supp. 2d at 1143 (quoting In

21

1

Concrete, 964 F. Supp. 2d at 1143, and give rise to a strong

2

inference that Miller acted with the requisite state of mind.

3
4

2.

The CFOs' Scienter

The CFOs also argue that the Complaint fails to give rise to a

5

strong inference that they acted with scienter.

6

Plaintiff's allegations that Miller concealed his misconduct and

7

deficiencies with Plaintiff's confidential witnesses ("CWs"), the

8

CFOs contend that the strongest inference is not that they were

9

complicit in Miller's misconduct or misleading shareholders, but

United States District Court

For the Northern District of California

10
11

rather that they too were duped by Miller.

Pointing to

The Court agrees.

Plaintiff's allegations of scienter against the CFOs are

12

primarily based on the contentions of Plaintiff's seven CWs.

13

However, as Defendants point out (and Plaintiff largely does not

14

dispute) the CWs' allegations are rife with defects.

15

Plaintiff does not allege anything more than speculation about the

16

CFOs' state of mind.

17

uncorroborated hearsay and office gossip or other "impressions

18

[from] witnesses who lacked direct access to the [CFOs] but claim

19

that" the CFOs must have known of Miller's misconduct by virtue of

20

their position, without providing any "first hand knowledge

21

regarding what the [CFOs] knew."

22

Surgical, Inc., 759 F.3d 1051, 1063 (9th Cir. 2014).

23

courts have found, these sorts of "generalized claims about

24

corporate knowledge [that] offer[] no reliable personal knowledge

25

concerning the individual defendants' mental state" are

26

insufficient to satisfy the scienter requirement.

27

Sw. Water Co., No. 2:08-cv-7844-JHN-AGRx, 2011 WL 10756419, at *12

28

(C.D. Cal. June 30, 2011), aff'd in part & rev'd in part on other

Chiefly,

Instead, Plaintiff's CWs largely repeat

Police Ret. Sys. v. Intuitive

22

As other

See Perrin v.

1

grounds sub nom., Hemmer Grp. v. Sw. Water Co., 527 F. App'x 623

2

(9th Cir. 2013); see also Zucco, 552 F.3d at 998 (rejecting CW

3

allegations stating, among other things, that by virtue of an

4

executive's role he "had to have known what was going on" with

5

respect to a misrepresentation or omission).

6

Furthermore, Plaintiff's CWs suffer from two additional

7

defects.

First, four of the seven CWs do not even mention either

8

of the CFOs, let alone make allegations about their states of mind.

9

FAC ¶¶ 48-50, 57, 60, 63-65.

Second, at the relevant times, the

United States District Court

For the Northern District of California

10

remaining three CWs were not even employed by Polycom.

11

¶ 51 (stating that the fourth CW left Polycom seven months before

12

the Class Period began); ¶ 52 (stating the fifth CW left Polycom

13

eight months before the Class Period began), ¶¶ 26, 53 (discussing

14

allegations by Plaintiff's sixth CW regarding CFO Brown despite

15

leaving Polycom four months before Brown became CFO).

16

Circuit has rejected the allegations of CWs under similar

17

circumstances, finding that, while these individuals may have had

18

relevant information at the time they were employed, they lacked

19

reliable information after that point.

20

In short, as in Zucco, "[s]ome of the confidential witnesses were

21

simply not positioned to know the information alleged, many report

22

only unreliable hearsay, and others allege conclusory assertions of

23

scienter."

24

sufficiently reliable or compelling to give rise to a strong

25

inference of scienter by the CFOs.

26

Id.

See id. at

The Ninth

See Zucco, 552 F.3d at 996.

As a result, these allegations are not

Nor can Plaintiff's remaining allegations against the CFOs

27

save their claims.

While Plaintiff points to certifications signed

28

by the CFOs on Polycom's financial statements, the Ninth Circuit

23

1

has found this boilerplate language "add[s] nothing substantial to

2

the scienter calculus."

3

allegations that the CFOs had motive and opportunity to ignore

4

Miller's misconduct are clearly insufficient standing alone to give

5

rise to a strong inference of scienter.

6

F.3d at 974 (holding that while "facts showing mere recklessness or

7

a motive to commit fraud and opportunity to do so may provide some

8

reasonable inference of intent, they are not sufficient to

9

establish a strong inference of deliberate recklessness.")

United States District Court

For the Northern District of California

10
11

Id. at 1003-04.

Similarly, Plaintiff's

See Silicon Graphics, 183

(emphasis in original).
In conclusion, none of these allegations are sufficient to

12

raise the requisite strong inference of scienter against the CFOs.

13

Hence, Plaintiff's claims against Kourey and Brown are DISMISSED.

14

3.

Polycom's Scienter

15

Plaintiff's allegations of Polycom's scienter rest on the

16

general rule that the scienter of a corporation's executives can be

17

imputed to the corporation.

18

Supp. 2d 1190, 1204-05 (N.D. Cal. 2012).

19

presumption, Plaintiff argues Miller's scienter should be imputed

20

to Polycom.

21

See Cho v. UCBH Holdings, Inc., 890 F.
As a result of this

This general rule itself stems from another general rule in

22

the agency context that an agent has a duty to inform his principal

23

of all material information.

24

his principal of all material facts, the law presumes that the

25

agent has in fact done so.

26

Litig., No. CV 12-4621-JFW (PLAx), 2012 WL 6136746, at *9 (C.D.

27

Cal. Dec. 7, 2012) (citing In re Cendent Corp. Sec. Litig., 109 F.

28

Supp. 2d 225, 232 (D.N.J. 2000)).

Because an agent has a duty to inform

See In re ChinaCast Educ. Corp. Sec.

24

However, as other courts have

1

recognized, a presumption like this is only useful insofar as it

2

accurately describes human behavior.

3

at 232 ("But legal presumptions ought to be logical inferences

4

from" human behavior).

5

their principals apprised of material information, a faithless

6

agent, pursuing his own selfish interests and seeking to defraud

7

his principal, will obviously not inform his principal of that

8

plan.

9

See Cendent, 109 F. Supp. 2d

While faithful agents will ordinarily keep

See id.
As a result, courts have frequently refused to impute the

United States District Court

For the Northern District of California

10

scienter of executives to their corporation where the executive

11

"act[ed] out of [nothing] other than [his] own self interest," and

12

his conduct did not benefit the corporation.

13

WL 6136746, at *10; see also In re Refco Sec. Litig., 779 F. Supp.

14

2d 372, 376 (S.D.N.Y. 2011); In re JPMorgan Chase & Co. Sec.

15

Litig., C.A. No. 06 C 4674, 2007 WL 4531794, at *9 (N.D. Ill. Dec.

16

18, 2007); Alpern v. Utilicorp United, Inc., No. 92-0538-CV-W-1,

17

1994 WL 682861, at *3 (W.D. Mo. Nov. 14, 1994).

18

this trend, other courts have refused to apply the exception and

19

instead imputed scienter to the principal where the agent did not

20

"completely abandon the principal's interests and act entirely for

21

his own purposes."

22

764 F. Supp. 2d 1210, 1218 (D. Nev. 2011); see also In re Spear &

23

Jackson Sec. Litig., 399 F. Supp. 2d 1350, 1361 (S.D. Fla. 2005);

24

In re Crazy Eddie Sec. Litig., 802 F. Supp. 804, 817 (E.D.N.Y.

25

1992); 3 Fletcher Cyclopedia of Private Corp. § 789.

26

with the ordinary allocation of the burdens on a motion to dismiss,

27

where the court cannot conclude from the four corners of a

28

plaintiff's complaint that the agent's actions were so adverse to

See ChinaCast, 2012

In keeping with

USACM Liquidating Tr. v. Deloitte & Touche LLP,

25

In keeping

1

the principal as to "practically destroy the relation of

2

agency . . . ," applying the adverse interest exception on a motion

3

to dismiss is inappropriate.

4

2d at 1144 (quotation omitted).

See Cement & Concrete, 964 F. Supp.

5

If this were the full extent of the adverse interest

6

exception, the Court would have little difficulty concluding it

7

applies in this case.

8

embezzlement' . . . is the classic example of the adverse interest

9

exception," Refco, 779 F. Supp. 2d at 376 (quotation omitted); see

After all, "'theft or looting or

United States District Court

For the Northern District of California

10

also USACM, 764 F. Supp. 2d at 1218, and that is precisely what

11

Plaintiff alleges Miller did.

12

argues that another agency doctrine -- apparent authority -- may

13

rescue their claims.

14

concluded "the adverse interest exception is inapplicable where a

15

corporate officer or director makes a material misstatement or

16

omission to an innocent third-party while acting with the apparent

17

authority of the corporation for whom he works."

18

Ltd., No. MDL 02-1335-B, 2004 WL 2348315, at *6 (D.N.H. Oct. 14,

19

2004); see also Puskala v. Koss Corp., 799 F. Supp. 2d 941, 947

20

(E.D. Wis. 2011) (finding "even if the adverse interest exception

21

applies, that "does not mean that [the agent's] fraud cannot be

22

imputed to the company under principles of apparent

23

authority . . . .").

24

interest exception even where the allegedly faithless agent made a

25

material misstatement or omission to a third party with the

26

apparent authority of the corporation.

27

2007 WL 4531794, at *8-9.

See FAC ¶¶ 6, 16.

But Plaintiff

As Plaintiff notes, some courts have

In re Tyco Int'l,

However, other cases have applied the adverse

28

26

See, e.g., JPMorgan Chase,

1

In the end, the Court finds the adverse interest exception

2

applies, and hence the Court will not impute Miller's scienter to

3

Polycom.

4

interrelationship between the adverse interest exception,

5

respondeat superior, and apparent authority in this context is

6

severely muddled, and both sides have compelling arguments.

7

However the facts alleged in this case most closely mirror those

8

cases that applied the adverse interest exception.

9

Plaintiff alleges that Polycom experienced a fleeting and

Admittedly, this is a close question: the

To be sure,

United States District Court

For the Northern District of California

10

unintended period of stock price inflation, however it is Polycom

11

that paid Miller's improper expenses, and it is Polycom that lost a

12

significant percentage of its value when Miller's misconduct was

13

revealed.

14

Ninth Circuit case that concluded that because the plaintiff's

15

allegations "tend to paint [Polycom] as a victim of [Miller's]

16

behavior, rather than as a potentially culpable perpetrator of

17

fraud," scienter was inadequately pleaded.

18

Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1056-57 (9th Cir.

19

2011).

20

In this way, Polycom is like the defendant in a recent

See Luxembourg Gamma

As a result, the Court finds that the adverse interest

21

exception bars the imputation of Miller's scienter to Polycom.

22

Thus, Defendants' motions are GRANTED as to Polycom.

23

C.

24

Next, Miller argues that Plaintiff has inadequately pleaded

25
26

Loss Causation

loss causation.
The loss causation element tests whether a "causal connection

27

[exists] between the material misrepresentation and the loss," Dura

28

Pharmaceutical, Inc. v. Broudo, 544 U.S. 336, 341 (2005), and is

27

1

akin to the concept of proximate cause in tort law.

See Daou, 411

2

F.3d at 1025.

3

allegations of loss causation, and hence loss causation must be

4

pleaded with particularity.

5

Grp., Inc., 774 F.3d 598, 605 (9th Cir. 2014); see also Katyle v.

6

Penn Nat'l Gaming, Inc., 637 F.3d 462, 471 (4th Cir. 2011) ("We

7

review allegations of loss causation for 'sufficient specificity,'

8

a standard largely consonant with Fed. R. Civ. P. 9(b)'s

9

requirement that averments of fraud be pled with particularity.")

Federal Rule of Civil Procedure 9(b) applies to

Or. Pub. Emp. Ret. Fund v. Apollo

United States District Court

For the Northern District of California

10

(quotation omitted).

In so doing, a plaintiff need not plead

11

"'that a misrepresentation was the sole reason for the investment's

12

decline in value . . . ,'"

13

v. Koger Props., Inc., 116 F.3d 1441, 1447 n.5 (11th Cir. 1997))

14

(emphasis in original), and so long as "'the misrepresentation is

15

one substantial cause of the investment's decline in value, other

16

contributing forces will not bar recovery under the loss causation

17

requirement,' but will play a role 'in determining recoverable

18

damages.'"

Daou, 411 F.3d at 1025 (quoting Robbins

Id. (quoting Robbins, 116 F.3d at 1447 n.5).

Plaintiff's loss causation allegations center around an

19
20

approximately 15 percent drop in Polycom's stock price on the heels

21

of a Polycom press release announcing that the "Audit Committee of

22

the Board completed a review of certain of Mr. Miller's expense

23

submissions . . . and . . . found certain irregularities in these

24

submissions.

25

responsibility and submitted [a resignation] letter . . . ."

26

100.

27

reported financial statements, and stated that the amounts involved

28

in Miller's expense submissions "did not have a material impact on

At the conclusion of the review, Mr. Miller accepted
FAC ¶

The press release also referenced Polycom's previously

28

1

the Company's previously reported financial statements . . . ."

2

Id.

3

percent, to $9.50 per share . . . ."

4

wiped out over $275 million in market value."

"On this news, shares of Polycom fell $1.68 . . . or over 15[]
Id. ¶ 102.

"This decline

Id.

At the same time Polycom announced this news, it also

5
6

announced disappointing financial results, downgraded revenue

7

guidance for the following quarter, and pointed out several other

8

causes of concern for the future.

9

Exs. 1, 2, 9.4

ECF No. 54 ("Besirof Decl.")

Analysts questioned Polycom's "organizational

United States District Court

For the Northern District of California

10

stability," management's credibility, and whether additional

11

management changes would follow.

12

downgraded Polycom to "underperform," or "underweight," and

13

suggested that Miller's departure "raises red flags."

14

Plaintiff concludes "[a]s a result of Defendants' wrongful acts and

15

omissions, and the precipitous decline in the market value of the

16

Company's securities, Plaintiff and other Class members have

17

suffered significant losses and damages."

FAC ¶ 103.

Analysts also

Id.

Thus,

Id. ¶ 105.

Relying heavily on Metzler Investments GMBH v. Corinthian

18
19

Colleges, Inc., 540 F.3d 1049, 1062 (9th Cir. 2008), Miller argues

20

that Plaintiff's loss causation allegations are insufficient for

21

three reasons: (1) Plaintiff "makes no attempt to isolate that

22

portion of the $1.68 stock drop allegedly caused by the revelation

23

4

24
25
26
27
28

These exhibits and others are the subject of a request for
judicial notice, ECF No. 55 ("RJN"). Courts routinely take
judicial notice of these types of documents (SEC filings, analyst
reports, stock price data, and news reports) without converting the
motion to dismiss into a motion for summary judgment. See In re
Netflix Sec. Litig., 964 F. Supp. 2d 1188, 1190 n.1 (N.D. Cal.
2013). Because these documents are "not subject to reasonable
dispute," are not disputed by Plaintiff, and "can be accurately and
readily determined from sources whose accuracy cannot reasonably be
questioned," Federal Rule of Evidence 201(b), the request is
GRANTED and the Court takes judicial notice of these documents.

29

1

of 'fraud' from this 'tangle of [other] factors' affecting the

2

share price," Miller Mot. at 18; (2) Polycom's stock price was

3

either not inflated by the alleged misrepresentations or gained

4

back its value in short order; or (3) Plaintiff has not alleged a

5

corrective disclosure in which "the practices that the plaintiff

6

contends are fraudulent were revealed to the market and caused the

7

resulting losses."

8
9

Metzler, 540 F.3d at 1063.

First, the Court can find no support Ninth Circuit precedent
for Miller's contention that Plaintiff must isolate what portion of

United States District Court

For the Northern District of California

10

the stock drop was caused by the revelation the alleged fraud as

11

opposed to Polycom's simultaneously-announced poor financial

12

results at the pleading stage.

13

Ninth Circuit citation for this proposition is an out of context

14

quote from Metzler simply stating that it would be an unwarranted

15

to infer that stock drops following two events -- a newspaper story

16

discussing an investigation of potential misconduct at one of the

17

88 for-profit colleges owned by defendant, and an announcement of

18

"higher than anticipated attrition" -- that the market was reacting

19

to a scheme involving company-wide manipulation of student records

20

to obtain funding from the federal government when the much more

21

plausible conclusion was the market was reacting to negative

22

earnings news.

23

response to this disclosure, there is nothing "unwarranted" or

24

implausible about concluding that, as Plaintiff alleges, Plaintiff

25

and the class "suffered significant losses and damages" as a result

26

of the revelation of Miller's improper expense reports.

27

On the contrary, an analyst responses quoted in the Complaint

28

suggests that the market was responding to the disclosure of

Id. at 1065.

On the contrary, Miller's sole

Unlike Metzler, on these facts and in

30

FAC ¶ 105.

1

Miller's misconduct.

2

Miller . . . raises red flags and we believe management credibility

3

(at all executive levels) comes into question . . . .") (emphasis

4

added).

5

losses of which Plaintiff complains, that is an issue for

6

resolution in the later stages of this case.

7

Aluminum Sec. Litig., 749 F. Supp. 2d 964, 975 (N.D. Cal. 2010);

8

see also In re Oracle Corp. Sec. Litig., 627 F.3d 376, 392 (9th

9

Cir. 2010) (addressing loss causation on summary judgment).

United States District Court

For the Northern District of California

10

See FAC ¶ 103 ("The departure of CEO Andy

If, as Miller argues, there are alternative causes for the

Miller's second argument is baseless.

See In re Century

Contrary to Miller's

11

apparent misconception, a stock price can decline during the class

12

period (even on the days after allegedly material misstatements or

13

omissions were issued) and still be artificially inflated.

14

another court put it, "price declines [are] not inconsistent with

15

the theory that the price was artificially inflated, since the

16

misrepresentations may well have buoyed a price that would

17

otherwise have sunk much faster, thus raising the price at which

18

plaintiffs purchased the stock."

19

Inc., 318 F. Supp. 2d 110, 124 (S.D.N.Y. 2004).

20

Miller's suggestion that Plaintiff suffered no loss because

21

Polycom's stock price recovered significant amounts of its lost

22

value within two months of the alleged corrective disclosure.

23

Again, Miller bases this argument on dicta from Metzler, and again

24

basic economic principles preclude dismissing a complaint on these

25

grounds.

26

692 F.3d 34, 36 (2d Cir. 2012) (concluding that price recovery

27

after the class period "does not negate the inference that

28

[plaintiff] has suffered economic loss" because the price rebound

As

Demarco v. Robertson Stephens,
The same goes for

See Acticon AG v. China N.E. Petroleum Holdings, Ltd.,

31

1

could be explained by external events).
Finally, Miller claims that Polycom's press release is not a

2
3

corrective disclosure because it did not reveal to the market "the

4

practices that the plaintiff contends are fraudulent . . . ."

5

Metzler, 540 F.3d at 1063.

6

corrective disclosure need not precisely mirror the misstatement or

7

admit fraud.

8

recent case in this District, In re Montage Technology Group Ltd.

9

Securities Litigation, -- F. Supp. 3d --, 2015 WL 392669, at *8

However, as Plaintiff points out, a

See Daou, 411 F.3d at 1026.

As is made clear by a

United States District Court

For the Northern District of California

10

(N.D. Cal. Jan. 29, 2015), Polycom's press release is a sufficient

11

corrective disclosure.

12

defendant Montage's revenues came through independent distributors,

13

with 50 percent coming from a company called LQW.

14

However, an analyst firm published a report revealing that LQW was,

15

in fact, owned and controlled by an undisclosed affiliate of

16

Montage.

17

plaintiffs filed suit alleging that various SEC filings by Montage

18

were materially false or misleading because they did not reveal the

19

transactions with LQW were related party transactions, as required

20

by generally accepted accounting principles.

21

relying on the Ninth Circuit's recent decision in Loos v. Immersion

22

Corp., 762 F.3d 880 (9th Cir. 2014), concluded that loss causation

23

was sufficiently pleaded even though the analyst report did not

24

identify fraudulent aspects of Montage's prior SEC filings.

25

*8.

26

less than certain terms, absolute certainty is not required to

27

adequately plead loss causation."

28

(citing Loos, 762 F.3d at 888-89).

Id.

In Montage Technology, most of the

Id. at *1.

After stock prices fell over 25 percent on the news,

Id.

Judge Illston,

Id. at

"While the [analyst report] may have phrased its accusation in

32

Id. at *8 (emphasis omitted)

1

Here, Polycom did not announce that Miller resigned in the

2

wake of expense submissions that caused it to overstate its

3

operating expenses through the class period, but such "absolute

4

certainty" is not required.

5

disclosure make clear that Polycom's prior financial statements

6

misstated operating expenses would effectively require what the

7

Ninth Circuit has expressly disavowed: that Plaintiff plead "an

8

outright admission of fraud [to survive] a motion to dismiss."

9

Loos, 762 F.3d at 888-89.

Id.

Indeed, requiring the corrective

To put it another way, simply because a

United States District Court

For the Northern District of California

10

corrective disclosure does not admit securities fraud does not mean

11

that such a disclosure cannot form the basis of loss causation

12

allegations in a complaint alleging violations of the securities

13

laws not obviously disclosed in the corrective disclosure.

14

at 890 n.3 ("To the extent an announcement contains an express

15

disclosure of actual wrongdoing, the announcement alone might

16

suffice.").

17
18

See id.

Accordingly, the Court finds that Plaintiff has sufficiently
pleaded both a corrective disclosure and loss causation.

19

D.

Regulation S-K

20

Additionally, Plaintiff argues in his opposition brief that

21

Item 402 of SEC Regulation S-K required Polycom to disclose all

22

compensation provided to Miller in Form 10-Ks and proxy statements.

23

17 C.F.R. § 229.402.

24

allegations in his Complaint.

25

address them.

26

1062, 1078 (N.D. Cal. 2013) ("[I]n determining the propriety of a

27

Rule 12(b)(6) dismissal, a court may not look beyond the complaint

28

to a plaintiff's moving papers, such as a memorandum in opposition

However, Plaintiff has not pleaded these
As a result the Court does not

See Bruton v. Gerber Prods. Co., 961 F. Supp. 2d

33

1

to a motion to dismiss.").

Instead, along with leave to amend to

2

cure the deficiencies set forth in this order, the Court GRANTS

3

leave to amend to plead a violation of Item 402 within thirty (30)

4

days of the signature date of this order.

5

E.

Section 20(a) Claim

6

Defendants' sole argument against Plaintiff's claims under

7

Section 20(a) is that Plaintiff failed to plead the required

8

predicate violation of the securities laws.

9

78t(a); Howard v. Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir.

See 15 U.S.C. Section

United States District Court

For the Northern District of California

10

2000).

However, as described above, Plaintiff has sufficiently

11

pleaded a primary violation, and as a result, Defendants' motion to

12

dismiss the Section 20(a) claims is DENIED.

13
14
15

V.

CONCLUSION
For the reasons set forth above, Defendants' motions are

16

GRANTED IN PART and DENIED IN PART.

17

dismissed, the dismissal is WITHOUT PREJUDICE, and leave to amend

18

is GRANTED both to cure the deficiencies set forth above and to

19

plead the previously unpleaded legal theories described in

20

Plaintiff's opposition.

21

within thirty (30) days of the signature date of this order.

22

Failure to do so within thirty days may result in dismissal with

23

prejudice.

24

To the extent claims are

Plaintiff may file an amended complaint

IT IS SO ORDERED.

25
26

Dated: April 3, 2015

27

UNITED STATES DISTRICT JUDGE

28

34