Rieckborn v. Velti plc et al

Filing 205

ORDER by Judge William H. Orrick granting 161 and 164 Motions to Dismiss and denying 160 , 163 , 164 , 182 and 183 Administrative Motion to File Under Seal. Defendants' motions to dismiss are GRANTED WITH LEAVE TO AMEND except tha t to the extent plaintiffs' Section 11 claims are based on the allegation that Velti's DSO figure was misrepresented in the registration statements, those claims are time-barred and are DISMISSED WITH PREJUDICE. All sealing motions filed in conjunction with defendants' motions to dismiss are DENIED. Plaintiffs shall file an amended complaint within 30 days of the date of this order. The Clerk shall UNSEAL the ACC, Dkt. No. 144, as well as each of the parties' sealing motions, Dkt. Nos. 160, 163, 182, 183. (jmdS, COURT STAFF) (Filed on 2/27/2015)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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United States District Court
Northern District of California

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ANIKA R. RIECKBORN, et al.,

Case No. 13-cv-03889-WHO

Plaintiffs,

ORDER REGARDING DEFENDANTS’
MOTIONS TO DISMISS

v.
JEFFERIES LLC (F/K/A JEFFERIES AND
COMPANY, INC.), et al.,

Re: Dkt. Nos. 160, 161, 163, 164, 182, 183

Defendants.

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INTRODUCTION

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This is a securities class action brought on behalf of a putative class of persons who

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purchased or otherwise acquired Velti plc (“Velti”) securities between January 27, 2011 and

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August 20, 2013. On the last day of the putative class period, Velti announced its Q2 2013

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financial results and disclosed that it had decided to write off approximately $111 million in

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outstanding accounts receivable. Plaintiffs allege that Velti’s reserves and revenues were

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materially misrepresented throughout the putative class period and bring claims against Velti’s

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accounting firm – Baker, Tilly, Virchow & Krause, LLP (“Baker Tilly”) – and the underwriters of

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Velti’s initial and secondary public offerings – Jefferies LLC, RBC Capital Markets, LLC,

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Needham & Company, LLC, and Canaccord Genuity Inc. (collectively, the “Underwriters”) –

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under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934

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(the “Exchange Act”).

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As plaintiffs announce at the start of their opposition brief, “this case is about receivables.”

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Opp. 1 (Dkt No. 183). Most if not all of plaintiffs’ claims are founded on the charge that Velti’s

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financial reporting during the putative class period failed to account for millions of dollars of

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uncollectible receivables on Velti’s books. Accordingly, plaintiffs must plead facts indicating that

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these uncollectible receivables existed when the alleged misrepresentations were made, and that

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Velti failed to account for them. Plaintiffs have not done so. The motions to dismiss are

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GRANTED.

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BACKGROUND
I.

FACTUAL BACKGROUND
Except where otherwise noted, the following facts are taken from plaintiffs’ Amended

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Consolidated Complaint (“ACC”) or documents incorporated therein and are presumed true for

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the purposes of these motions.

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A.

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Velti was founded in Athens, Greece in 2000. ACC ¶ 8 (Dkt. No. 144). It is a provider of

Velti’s Business Model

“mobile marketing and advertising technology and solutions” for businesses around the world.

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ACC ¶ 6. As a regular part of its business, Velti entered contracts pursuant to which it provided

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services but did not get paid until its work had been completed, the customer had been invoiced,

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and the customer had delivered payment. Id. Between the time the work was completed on a

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contract and the time the customer delivered payment, the amount due on a contract represented an

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account receivable. Id.
Velti classified its receivables in one of two ways. ACC ¶ 11 n.4-5. From the time a

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receivable was booked as revenue1 to the time the customer was invoiced, Velti classified the

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receivable as an “accrued contract receivable.” Id. From the time the receivable was invoiced to

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the time the customer delivered payment, Velti classified the receivable as a “trade receivable.”

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Id. “Day sales outstanding” (“DSO”) is a metric that measures the number of days it takes to

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collect a receivable. ACC ¶ 11. From the start of the putative class period until May 2012, Velti

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calculated its reported DSO only on the basis of its trade receivables, thereby excluding from the

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calculation the period of time between when a receivable was booked as revenue and when the

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customer was invoiced. Id.

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Velti booked its receivables as revenue around the time that its work on the underlying contract
had been completed. ACC ¶ 89.
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Plaintiffs allege that because Velti operated heavily in Greece, it was particularly impacted

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by the 2010 Greek economic crisis through increasing numbers of unpaid invoices. They assert

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that Velti hid this from the public in part by calculating its reported DSO only on the basis of its

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trade receivables. See ACC ¶ 12. They contend that this method of calculating the reported DSO

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“left investors unaware that [Velti] had very . . . old receivables sitting on its books for which it

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was not carrying an appropriate reserve for bad debts.” ACC ¶ 11.

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B.

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Velti’s registration statement and prospectus for its initial public offering (“IPO”) was

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Velti’s Initial and Secondary Public Offerings

declared effective by the SEC on January 27, 2011. ACC ¶ 147; Baker Tilly RJN, Ex. A (Dkt. No.
168-1). The IPO registration statement included Baker Tilly’s August 3, 2010 audit report on

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Velti’s 2008-2009 financial statements.2 ACC ¶ 433; Baker Tilly RJN, Ex. B (Dkt. No. 168-2).
Velti’s registration statement and prospectus for its secondary public offering (“SPO”) was

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declared effective by the SEC on June 14, 2011. ACC ¶ 151; Baker Tilly, RJN Ex. C (Dkt. No.

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168-3). The SPO registration statement included Baker Tilly’s April 11, 2011 audit report on

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Velti’s 2008-2010 financial statements. Baker Tilly RJN, Ex. D (Dkt. No. 168-4).
Baker Tilly’s August 3, 2010 audit report included in the IPO registration statement

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contained the following certification regarding Velti’s financial reporting:

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In our opinion, the consolidated financial statements and financial statement
schedule referred to above present fairly, in all material respects, the consolidated
financial position of Velti plc and its subsidiaries as of December 31, 2009 and
2008, and the results of their operations and cash flows for each of the three years
ended December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America.

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ACC ¶¶ 148, 168. Baker Tilly’s April 11, 2011 audit report included in the SPO registration

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statement contained a substantially identical certification regarding Velti’s financial reporting for

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“each of the three years ending December 31, 2010.” ACC ¶ 202.

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The IPO registration statement reported that Velti had never failed to collect on any
significant receivable or incurred any bad debt expense:

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Two portions of the Baker Tilly audit report included in the IPO registration statement are dated
September 3, 2010 instead of August 3, 2010. See ACC ¶ 433; Baker Tilly RJN, Ex. B.
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We have not historically incurred bad debt expense, none of our significant
customers have historically failed to pay amounts due to us, and we do not believe
that any of the customers contributing to our increased accounts receivable aging
will fail to pay us in full.

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ACC ¶¶ 160, 163; Baker Tilly RJN, Ex. A at 48. The SPO registration statement similarly

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reported: “We have historically collected all amounts due from our customers, . . . as evidenced

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by our insignificant bad debt expense for 2010, 2009, and 2008.” ACC ¶ 196, Baker Tilly RJN,

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Ex. C at 71.

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C.

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Although plaintiffs claim that the 2010 Greek economic crisis triggered an increase in the

Velti’s Switch to Comprehensive DSO

number of Velti’s unpaid invoices, plaintiffs do not specifically identify any collectability

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problems until Q1 2012. According to the ACC, Velti’s DSO began to accelerate in that quarter.

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See ACC ¶¶ 119, 128. A confidential witness who joined Velti in June 2011 informed plaintiffs

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that “sometime in Q1 2012” he or she “began to hear that . . . [Velti] was having trouble collecting

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receivables.” ACC ¶ 119. The confidential witness also recalled “emails sent around [Velti]

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discussing DSOs and how they needed to be shorter.” Id.
Shortly before Velti’s Q1 2012 earnings call, which occurred on May 15, 2012, a stock

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market research firm specializing in forensic accounting issues published a report stating that

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Velti’s reported DSO only accounted for trade receivables.3 ACC ¶ 12. Plaintiffs allege that the

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report “revealed” Velti’s “DSO machinations” which had been previously “hidden.” Id. Plaintiffs

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state that the report was “slowly digested by the market,” and that Velti’s securities declined in

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value over the next several days. Id.
On May 22, 2012, Velti confirmed that the information in the report was accurate and

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announced that it was changing its method of calculating its reported DSO. ACC ¶ 13. The new

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method, which calculated what Velti called “comprehensive DSO,” accounted for both trade

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Plaintiffs do not identify the the title or author of the report or the specific date on which the
report was published. See ACC ¶ 12. The Underwriters assert, and plaintiffs do not dispute, that
the report was published by “CFRA” on May 10, 2012. See Underwriters Opp. 8; Underwriters
RJN, Ex. H.
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receivables and accrued contract receivables. ACC ¶¶ 99, 277. Velti’s reported DSO more than

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doubled as a result, from 116 days to 272 days. ACC ¶ 13. Plaintiffs assert that

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[b]ecause the trade DSO figure was less than half of the comprehensive DSO,
until May 22, 2012, Velti was able to mislead investors into believing that it was
taking a much shorter time to collect on outstanding receivables. Disclosing only
the trade DSO figure also enabled Velti to conceal that it had a large sum of
aging, undisclosed receivables sitting in its accrued contract receivables.
ACC ¶ 280.
On November 14, 2012, Velti announced that due to its inability to timely collect
receivables from certain of its customers in Greece, the Balkans, and various North African and
Middle Eastern countries, it was transitioning its business away from those regions and into the
United States and Western Europe. ACC ¶ 14. Plaintiffs allege that at the time this announcement
was made, the DSO for customers in those regions had risen to 450 days. ACC ¶ 14. Velti
subsequently represented that only 10 percent of its receivables were attributable to customers in
Greece or the Balkans. ACC ¶ 15.
D.

Deloitte’s Audit and Collapse of Velti’s Stock Value

In June 2013, Velti hired Deloitte LLP (“Deloitte”) to review and evaluate Velti’s
operations in Greece and Cyprus, with a specific eye to determining the collectability of
receivables in those regions. ACC ¶ 139. After two weeks, “with access to the same information
available to Baker Tilly,” Deloitte presented its initial findings, which were ultimately confirmed
in Deloitte’s final report. ACC ¶ 140. Among other things, Deloitte’s final report concluded that
(i) a “large amount” of Velti’s receivables were “very old;” (ii) 85 percent of Velti’s receivables in
Greece and Cypress were attributable to only 26 customers; and (iii) the receivables attributable to
those customers were uncollectible. Id.
Deloitte recommended that Velti write off more than $100 million to account for its
uncollectible receivables. ACC ¶ 142. Velti followed Deloitte’s advice. On August 20, 2013,
Velti announced its Q2 2013 financial results and disclosed that it had decided to write off
approximately $111 million in outstanding receivables. ACC ¶¶ 23, 401. It disclosed that some of
the written off receivables were “substantially old” and had been due since “before 2012.” ACC ¶
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23. Plaintiffs describe this disclosure as “a de facto admission that the [$111 million] write off was

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long overdue.” ACC ¶ 23. Velti also disclosed that, despite its earlier representation that only 10

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percent of its receivables were with customers in Greece and the Balkans, the true proportion was

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about 66 percent. ACC ¶ 23. Velti shares declined $0.66 per share, or 66 percent, to close on

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August 21, 2013 at $0.34 per share. Id. Velti’s United States-based operations filed for

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bankruptcy on November 4, 2013. Dkt. No. 170-1 at ¶ 39. Its European-based operations did the

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same on August 18, 2014. Dkt. No. 150.
Except for the information stated in the preceding two paragraphs, plaintiffs do not allege

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the specific contents or findings of Deloitte’s final report and have not provided a copy of the
report to defendants.

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II.

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PROCEDURAL BACKGROUND
Between August 22, 2013 and October 4, 2013, four securities class actions were filed in

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this district in connection with the collapse of Velti’s stock value. On December 3, 2013, the cases

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were consolidated. Dkt. No. 81. On January 24, 2014, a fifth securities class action was filed. See

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Yadegar v. Velti plc, No. 14-cv-00372-WHO (N.D. Cal. filed Jan. 24, 2014) at Dkt. Nos. 1, 6.

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Baker Tilly was first named as a defendant on January 24, 2014. See id. at Dkt. No. 1. The

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Underwriters were first named on October 4, 2013. See Manabat v. Velti plc, No. 13-cv-04606-

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WHO (N.D. Cal. filed Oct. 4, 2013) at Dkt. No. 1.

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Plaintiffs filed a Consolidated Complaint on April 22, 2014. Dkt. No. 105. The

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Consolidated Complaint identified three groups of defendants: (1) Velti and four of its

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officers/directors – Wilson Cheung, Nicholas Negroponte, Jeffrey Ross, and Winnie Tso; (2) five

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other Velti officers/directors – Jerry Goldstein, David Hobley, Chris Kaskavelis, David Mann, and

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Alex Moukas; and (3) Baker Tilly and the Underwriters. Id. It asserted five causes of action: (1)

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violations of Section 11 of the Securities Act against all defendants; (2) violations of Section

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12(a)(2) of the Securities Act against Velti, Goldstein, Hobley, Kaskavelis, Mann, Moukas,

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Negroponte, and the Underwriters; (3) violations of Section 15 of the Securities Act against all of

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the individual defendants; (4) violations of Section 10(b) against Velti, Cheung, Kaskavelis,

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Moukas, Ross, Tso, and Baker Tilly; and (5) violations of Section 20(a) of the Exchange Act

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against Cheung, Kaskavelis, Moukas, Ross, and Tso. Id.
On May 23, 2014, Velti, along with Cheung, Negroponte, Ross, and Tso, entered a

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settlement agreement with plaintiffs. See Dkt. No. 170-2. I granted preliminary approval of the

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settlement on August 19, 2014 and final approval on February 3, 2015. Dkt. Nos. 147, 199. In

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addition to Velti, Cheung, Negroponte, Ross, and Tso, the settlement agreement and resulting

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judgment released the other five Velti officers/directors named in this action – i.e., Goldstein,

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Hobley, Kaskavelis, Mann, and Moukas – leaving only Baker Tilly and the Underwriters as active

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defendants. See Dkt. Nos. 199, 200.
Plaintiffs filed the ACC on August 12, 2014. Dkt. No. 144. The ACC asserts three causes

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of action relevant here: (i) violations of Section 11 against Baker Tilly and the Underwriters; (ii)

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violations of Section 12(a)(2) against the Underwriters; and (iii) violations of Section 10(b) against

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Baker Tilly. Dkt. No. 44. Defendants filed their respective motions to dismiss on October 15,

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2014. Dkt. Nos. 161, 164. I heard argument from the parties on February 18, 2015.

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III.

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REQUESTS FOR JUDICIAL NOTICE
In connection with their motions to dismiss, defendants request judicial notice of a number

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of documents, including SEC filings, NASDAQ reports of Velti’s historical daily stock prices,

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accounting standards issued by the Financial Accounting Standards Board and the American

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Institute of Certified Public Accountants, and the May 10, 2012 CFRA report on Velti. See Dkt.

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Nos. 162, 168, 188, 191. Plaintiffs ask that I take judicial notice of the documents only for their

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existence and the existence of their contents, not for the truth of the information contained in them.

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Opp. 28 n.21.

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Federal Rule of Evidence 201 authorizes courts to “judicially notice a fact that is not

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subject to reasonable dispute because it: (1) is generally known within the trial court’s territorial

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jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot

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reasonably be questioned.” Fed. R. Evid. 201(b). “[F]acts subject to judicial notice may be

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considered on a motion to dismiss.” Mullis v. U.S. Bankr. Court for Dist. of Nevada, 828 F.2d

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1385, 1388 (9th Cir. 1987). In addition, “[a]lthough generally the scope of review on a motion to
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dismiss for failure to state a claim is limited to the complaint, a court may consider evidence on

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which the complaint necessarily relies if: (1) the complaint refers to the document; (2) the

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document is central to the plaintiff’s claim; and (3) no party questions the authenticity of the copy

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attached to the . . . motion.” Daniels-Hall v. Nat’l Educ. Ass’n, 629 F.3d 992, 998 (9th Cir. 2010)

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(internal quotation marks omitted). “The court may treat such a document as part of the complaint,

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and thus may assume that its contents are true for purposes of a motion to dismiss.” Marder v.

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Lopez, 450 F.3d 445, 448 (9th Cir. 2006) (internal quotation marks omitted).
Because the documents submitted by defendants for judicial notice are either appropriate

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for judicial notice, incorporated into the ACC, or both, the requests for judicial notice are
GRANTED. See City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc.,

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No. 12-cv-06039-WHO, 2013 WL 6441843, at *5 (N.D. Cal. Dec. 9, 2013) (taking judicial notice

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of SEC filings, NASDAQ reports of historical daily stock prices, accounting standards, and analyst

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reports); see also, In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999)

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(affirming judicial notice of SEC filings alleged in plaintiff’s complaint even though plaintiff

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questioned their veracity). To accommodate plaintiffs’ request, and because the truth of the

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information contained in the documents submitted for judicial notice is not necessary to resolve

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this motion, I take judicial notice of the documents only for their existence and the existence of

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their contents, not for the truth of their contents.

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LEGAL STANDARDS
I.

RULE 12(b)(6): MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

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A motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure

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12(b)(6) tests the legal sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th

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Cir.2001). A complaint “must contain sufficient factual matter, accepted as true, to state a claim

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to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal

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quotation marks omitted). A claim is facially plausible when it “allows the court to draw the

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reasonable inference that the defendant is liable for the misconduct alleged.” Id. In considering

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whether the complaint is sufficient to state a claim, the court accepts as true all factual allegations

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contained in the complaint. Id. However, the court need not accept as true “allegations that
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contradict matters properly subject to judicial notice.” In re Gilead Scis. Sec. Litig., 536 F.3d

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1049, 1055 (9th Cir. 2008) (internal quotation marks omitted). “Nor is the court required to accept

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as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable

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inferences.” Id. “[I]t is within [the court’s] wheelhouse to reject, as implausible, allegations that

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are too speculative to warrant further factual development.” Dahlia v. Rodriguez, 735 F.3d 1060,

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1076 (9th Cir. 2013).

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II.

Claims sounding in fraud or mistake are subject to the heightened pleading standard of

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RULE 9(b): HEIGHTENED PLEADING STANDARD FOR FRAUD OR MISTAKE

Federal Rule of Civil Procedure 9(b), which requires that such claims “state with particularity the
circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). To satisfy this standard, a

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plaintiff must identify “the time, place, and content of [the] alleged misrepresentation[s],” as well

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as the “circumstances indicating falseness” or “manner in which the representations at issue were

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false and misleading.” In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1547-48 (9th Cir. 1994)

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(internal quotation marks and modifications omitted). “In other words, the plaintiff must set forth

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an explanation as to why the statement or omission complained of was false or misleading.”

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Siegel v. Lyons, No. 95-cv-03588-DLJ, 1996 WL 438793, at *3 (N.D. Cal. Apr. 26, 1996)

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(internal quotation marks omitted). The allegations of fraud “must be specific enough to give

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defendants notice of the particular misconduct which is alleged to constitute the fraud charged so

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that they can defend against the charge and not just deny that they have done anything wrong.”

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Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007).
The Ninth Circuit has held in the securities fraud context that “[a] plaintiff may . . . satisfy

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Rule 9(b) with allegations of circumstantial evidence if the circumstantial evidence alleged

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explains how and why the statement was misleading when made.” Fecht v. Price Co., 70 F.3d

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1078, 1083 (9th Cir. 1995).

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DISCUSSION
I.

SECTION 11 CLAIMS AGAINST BAKER TILLY AND THE UNDERWRITERS

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Section 11 creates a private right of action for any purchaser of a security where “any part

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of the registration statement, when such part became effective, contained an untrue statement of a
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material fact or omitted to state a material fact required to be stated therein or necessary to make

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the statements therein not misleading.” 15 U.S.C. § 77k(a). To prevail on a Section 11 claim, a

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plaintiff must demonstrate (1) that the registration statement contained a misrepresentation or

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omission; and (2) that the misrepresentation or omission was material. In re Daou Sys., Inc., 411

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F.3d 1006, 1027 (9th Cir. 2005). A misrepresentation or omission is material where it “would

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have misled a reasonable investor about the nature of his or her investment.” Id.

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Accountants and underwriters may be held liable under Section 11 for material
misrepresentations or omissions in registration statements. See Monroe v. Hughes, 31 F.3d 772,

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774 (9th Cir. 1994); In re Software Toolworks Inc., 50 F.3d 615, 621 (9th Cir. 1994); 15 U.S.C. §

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77k(a)(4)-(5). When brought against an accountant, a Section 11 claim must be based on “those

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portions of the [registration] statement that purport to have been prepared or certified by the

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accountant.” Monroe, 31 F.3d at 774. Section 11 liability does not require a showing of scienter,

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and defendants will be held liable for innocent or negligent material misrepresentations or

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omissions. In re Stac Electronics Sec. Litig., 89 F.3d 1399, 1404 (9th Cir. 1996); Kaplan v. Rose,

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49 F.3d 1363, 1371 (9th Cir. 1994). However, because Section 11 provides both accountants and

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underwriters with a “due diligence” defense, see 15 U.S.C. § 77k(b), the statute effectively

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“imposes a negligence standard” for their liability, Monroe, 31 F.3d at 774; see also, Software

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Toolworks, 50 F.3d at 621. In most cases, due diligence is a jury question unsuitable for

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determination on a motion to dismiss. See, e.g., In re Morgan Stanley Info. Fund Sec. Litig., 592

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F.3d 347, 359 n.7 (2d Cir. 2010); Feyko v. Yuhe Int’l, Inc., No. 11-cv-05511, 2013 WL 3467067,

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at *4 (C.D. Cal. July 10, 2013) (“[B]ecause due diligence should generally be reserved for a jury

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to determine, [plaintiff] has alleged sufficient facts for a Section 11 claim.”).

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A.

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Defendants contend that plaintiffs’ Section 11 claims are time-barred. Baker Tilly Mot.

Statute of Limitations

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18-20; Underwriters Mot. at 20-21. Section 11 claims must be brought “within one year after the

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discovery of the untrue statement or the omission, or after such discovery should have been made

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by the exercise of reasonable diligence.” 15 U.S.C. § 77m. This one year statute of limitations

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begins to run when the plaintiff discovered or should have discovered the untrue statement or
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omission. See F.D.I.C. v. Countrywide Fin. Corp., No. 12-cv-04354, 2012 WL 5900973, at *3

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(C.D. Cal. Nov. 21, 2012); In re Bare Escentuals, Inc. Sec. Litig., 745 F. Supp. 2d 1052, 1082

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(N.D. Cal. 2010) (noting that “discovery . . . occurs not only once a plaintiff actually discovers the

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facts, but also when a hypothetical reasonably diligent plaintiff would have discovered them”).

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The statute does not begin to run when the plaintiff merely “should have begun investigating.”

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Countrywide, 2012 WL 5900973, at *3; see also, Merck & Co. v. Reynolds, 559 U.S. 633, 652-53

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(2010) (holding for the purpose of Section 10(b)’s limitations period that “the discovery of facts

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that put a plaintiff on inquiry notice does not automatically begin the running of the limitations

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period”) (internal quotation marks omitted). A fact is considered “discovered” when “a
reasonably diligent plaintiff would have sufficient information about that fact to adequately plead

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it in a complaint . . . with sufficient detail and particularity to survive a 12(b)(6) motion to

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dismiss.” City of Pontiac Gen. Employees’ Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 175 (2d Cir.

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2011); see also, Booth v. Strategic Realty Trust, Inc., No. 13-cv-04921-JST, 2014 WL 3749759, at

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*4 (N.D. Cal. July 29, 2014); Countrywide, 2012 WL 5900973, at *3.

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Defendants argue that the statute of limitations on plaintiffs’ Section 11 claims began to

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run in May 2012, when CFRA issued the report stating that Velti’s reported DSO accounted only

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for trade receivables and Velti subsequently announced that it had switched to reporting

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“comprehensive DSO.” Baker Tilly Mot. 18-20; Underwriters Mot. at 20-21. Plaintiffs respond

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that while the May 2012 disclosures revealed that Velti had been excluding accrued contract

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receivables from its reported DSO, they did not reveal the extent of the problems that Velti had

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experienced and would continue to experience in collecting its receivables, or that Velti was

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understating reserves, overstating revenues, and lacked adequate internal controls. Opp. 40.

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Courts in this district have held that the determination of “discovery” for the purpose of

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Section 11’s limitations period “is fact intensive and is usually not appropriate at the pleading

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stage.” Booth, 2014 WL 3749759, at *4 (internal quotation marks omitted); see also, Rafton v.

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Rydex Series Funds, No. 10-cv-01171-LHK, 2011 WL 31114, at *9 (N.D. Cal. Jan. 5, 2011); Bare

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Escentuals, 745 F. Supp. 2d at 1080-81; see also, Betz v. Trainer Wortham & Co., 519 F.3d 863,

28

877 (9th Cir. 2008) (reversing district court’s grant of summary judgment for defendants on the
11

1

ground that plaintiff’s Section 10(b) claims were untimely; stating that “the defendant bears a

2

considerable burden in demonstrating, at the summary judgment stage, that the plaintiff’s claim is

3

time-barred”) (emphasis added). A defendant seeking to establish, on a motion to dismiss, that a

4

plaintiff’s Section 11 claim is time-barred faces an “especially high hurdle.” Rafton, 2011 WL

5

31114, at *10. “At the pleading stage, the question is whether it is plausible that [the] disclosures

6

were insufficient to supply a reasonably diligent plaintiff with the information necessary to plead

7

the Section 11 claims with sufficient detail and particularity to survive a 12(b)(6) motion.” Booth,

8

2014 WL 3749759, at *6.

9

In light of the high hurdle to establishing untimeliness at this juncture, the May 2012
disclosures are not enough to completely bar plaintiffs’ Section 11 claims. The CFRA report and

11
United States District Court
Northern District of California

10

the subsequent switch to reporting “comprehensive DSO” made plain that Velti had been

12

excluding accrued contract receivables from its reported DSO. But neither disclosure made plain

13

the linkages between Velti’s method of calculating its reported DSO and its alleged

14

understatement of reserves and overstatement of revenues. Plaintiffs’ Section 11 claims are based

15

primarily on these alleged misrepresentations, not on the undisputed fact that until May 2012,

16

Velti’s reported DSO accounted only for trade receivables.

17

In this way, the instant case is distinguishable from those cited by defendants, in which the

18

disclosures at issue concerned “precisely” the information the defendants had allegedly

19

misrepresented or concealed. See, e.g., Freidus v. Barclays Bank PLC, 734 F.3d 132, 138 (2d Cir.

20

2013) (affirming district court’s dismissal of Securities Act claims as time-barred where the

21

“corrective disclosures provided precisely the information [defendant] should have disclosed

22

earlier such that [plaintiffs] should have discovered their alleged claims on the dates of those

23

disclosures”) (internal quotation marks and modifications omitted). Defendants have not

24

identified any information disclosed in May 2012 that specifically indicated that Velti’s reserves

25

or revenues were misrepresented at the time of the IPO or SPO. The CFRA report did warn that

26

the 4Q 2011 jump in Velti’s comprehensive DSO “appear[s] to indicate the presence of lower

27

quality revenues during 4Q 2011” and “could imply rising revenue risk.” Underwriters RJN, Ex.

28

H at 2-3. But it is not at all clear that these speculative warnings regarding Velti’s revenues in 4Q
12

1

2011 would have supplied a reasonably diligent plaintiff with the information necessary to plead

2

viable Section 11 claims based on alleged misrepresentations of reserves and revenues in Velti’s

3

IPO and SPO registration statements, which were issued months earlier, in January and June

4

2011. Baker Tilly’s alleged Section 11 misrepresentations were made even longer before 4Q 2011

5

– i.e., in Baker Tilly’s August 2010 and April 2011 audit reports.

6

That said, to the extent plaintiffs’ Section 11 claims are based on the allegation that Velti

7

“improperly excluded” accrued contract receivables from its reported DSO, see Opp. 27-28, the

8

claims are time-barred. The CFRA report plainly stated that Velti “only include[d] trade

9

receivables within [its] calculation of DSO.” Underwriters RJN, Ex. H at 4. According to the
ACC, the CFRA report “revealed” that Velti’s reported DSO “only included trade receivables and

11
United States District Court
Northern District of California

10

excluded accrued receivables,” information that was “digested by the market” and that triggered a

12

significant decline in Velti’s stock value. ACC ¶ 12. On May 22, 2012, Velti confirmed that the

13

CFRA report was accurate and announced that it had modified its reported DSO to include

14

accrued contract receivables. ACC ¶¶ 13, 99, 277. In addition, according to both the ACC and the

15

documents submitted for judicial notice by defendants, the SPO registration statement reported

16

that Velti’s DSO was “calculated based on trade receivables.” ACC ¶ 196; Baker Tilly RJN, Ex.

17

C at 71. In short, by the end of May 2012, Velti’s allegedly misleading method of calculating its

18

reported DSO had been explicitly disclosed to the public on at least three different occasions.

19

While defendants face a high hurdle in establishing untimeliness on a motion to dismiss,

20

these facts are sufficient to satisfy that burden with respect to plaintiffs’ allegation that Velti’s

21

DSO figure was misrepresented in the registration statements. As in Freidus v. Barclays Bank

22

PLC, the disclosures in May 2012 and in the SPO registration statement “provided precisely the

23

information” that plaintiffs claim should have been disclosed earlier. 734 F.3d at 138. In this

24

situation, fact discovery and development of the factual record are not necessary to determine

25

when “discovery” occurred for the purpose of Section 11’s limitations period.

26

There is no dispute that defendants were not sued within one year of May 2012.

27

Accordingly, to the extent plaintiffs’ Section 11 claims are based on the allegation that Velti’s

28

DSO figure was misrepresented in the registration statements, the claims are time-barred and must
13

1

be DISMISSED WITH PREJUDICE. As pleaded, there is no indication that plaintiffs can amend

2

the complaint to overcome this defect. To the extent plaintiffs’ Section 11 claims are based on

3

other alleged misrepresentations, defendants’ motions to dismiss for untimeliness are DENIED.

4

B.

5

The parties dispute whether Rule 8(a) or the heightened pleading standard of Rule 9(b)

6

governs plaintiffs’ Section 11 claims.4 Although Section 11 does not contain a fraud element,

7

Section 11 claims may nonetheless be subject to Rule 9(b) if the complaint is “grounded in fraud”

8

or “sounds in fraud.” In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 885-86 (9th Cir. 2012);

9

Rubke v. Capitol Bancorp Ltd, 551 F.3d 1156, 1161 (9th Cir. 2009).

Pleading Standard

To decide whether a complaint sounds in fraud, a court must “determine, after a close

10

United States District Court
Northern District of California

11

examination of the language and structure of the complaint, whether the complaint alleges a

12

unified course of fraudulent conduct and relies entirely on that course of conduct as the basis of a

13

claim.” Rubke, 551 F.3d at 1161. “Where . . . a complaint employs the exact same factual

14

allegations to allege violations of Section 11 as it uses to allege fraudulent conduct under Section

15

10(b) of the Exchange Act, [the court] can assume that it sounds in fraud.” Id. However, a

16

complaint that neither specifically alleges fraud “nor alleges facts that would necessarily constitute

17

fraud” does not sound in fraud and is not governed by Rule 9(b). Vess v. Ciba-Geigy Corp. USA,

18

317 F.3d 1097, 1105-06 (9th Cir. 2003); see also, In re Charles Schwab Corp. Sec. Litig., 257

19

F.R.D. 534, 545-46 (N.D. Cal. 2009).
Plaintiffs have alleged a unified course of fraudulent conduct against both Baker Tilly and

20
21

the Underwriters. While plaintiffs attempt to distinguish their Section 11 claims by including a

22

separate section of factual allegations in the ACC entitled, “Securities Act Claims,” that section

23

incorporates a number of paragraphs which plaintiffs also use as a basis for their Section 10(b)

24

claims. See ACC ¶¶ 150, 154 (incorporating ACC ¶¶ 156-69, 193-204). The incorporated

25

paragraphs include the allegation that the “true facts” underlying the “false and misleading”

26

statements in the IPO and SPO registration statements “were known to and/or disregarded with

27
28

4

Defendants assert that plaintiffs’ Section 11 claims must be dismissed under either pleading
standard but contend that the claims are especially defective under Rule 9(b).
14

1

deliberate recklessness by defendants but concealed from the investing public.” ACC ¶¶ 166, 199.

2

The incorporated paragraphs also assert that Baker Tilly “knew [or] was deliberately reckless in

3

not knowing and not disclosing [in the IPO and SPO registration statements] that Velti’s financial

4

statements had not been prepared in accordance with GAAP.” ACC ¶¶ 169, 204. Elsewhere in

5

the complaint, plaintiffs allege that defendants “engaged in a fraudulent scheme to manipulate

6

[Velti’s] financial results,” and that, “as a result of this fraudulent scheme, defendants violated the

7

federal securities laws in several ways,” including by issuing or causing the issuance of “false and

8

misleading statements . . . in violation of Section 11 . . . of the Securities Act.” ACC ¶¶ 62, 64.
These allegations – which intermix plaintiffs’ Section 11 and Section 10(b) pleading and

10

squarely accuse both Baker Tilly and the Underwriters of fraudulent conduct in connection with

11
United States District Court
Northern District of California

9

Velti’s registration statements – distinguish this case from those cited by plaintiffs. See, e.g., In re

12

Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 273 (3d Cir. 2006) (declining to apply Rule

13

9(b) to Securities Act claims where plaintiff “carefully segregated its allegations of negligence

14

against [certain defendants] from its allegations of fraud against those defendants,” thereby

15

creating “a clear conceptual separation in the complaint between claims sounding in negligence

16

and those sounding in fraud”); In Re Violin Memory Sec. Litig., No. 13-cv-05486-YGR, 2014 WL

17

5525946, at *8 (N.D. Cal. Oct. 31, 2014) (applying Rule 8(a) to Section 11 claims where

18

complaint contained “no allegation that defendants ‘knowingly’ or ‘intentionally’ concealed

19

information or made misrepresentations”); Charles Schwab, 257 F.R.D. at 545 (applying Rule 8(a)

20

to Section 11 claims where complaint “does not specifically allege fraud,” “assiduously avoids use

21

of the word [fraud],” and generally avoids allegations “inherently suggestive of fraud such as that

22

defendants ‘knowingly’ or ‘intentionally’ made the misrepresentations alleged”).

23

Plaintiffs contend that despite these allegations, the Section 11 claims in the ACC should

24

not be subject to Rule 9(b). Opp. 18-21. Plaintiffs assert that the allegations regarding the

25

“fraudulent scheme to manipulate [Velti’s] financial results” are aimed exclusively at Velti and the

26

individual defendants; thus, “to the extent that the Securities Act claims incorporate allegations of

27

fraud to support claims that Velti’s financial statements were false,” such allegations do not

28

concern either Baker Tilly or the Underwriters. Opp. 20. This would be a significant point if it
15

1

were supported by the ACC. However, it is not. See Charles Schwab, 257 F.R.D. at 545 (“In

2

their opposition brief, plaintiffs disclaim any allegation of fraud . . . The substance of the

3

allegations themselves, however, must be examined.”). The allegations in the ACC accuse all

4

defendants of “engag[ing] in a fraudulent scheme to manipulate [Velti’s] financial results” by

5

issuing or causing the issuance of “false and misleading statements . . . in violation of Section 11.”

6

ACC ¶¶ 62, 64. The ACC likewise alleges (in paragraphs incorporated into the “Securities Act

7

Claims” section) that all defendants “kn[ew] and/or disregarded with deliberate recklessness” the

8

false and misleading statements in the registration statements. ACC ¶¶ 166, 199. If plaintiffs

9

mean to limit these and similar allegations to Velti and the individual defendants, plaintiffs must

10

include language to that effect in the ACC.
Plaintiffs also note that while the Section 11 cause of action incorporates “each and every

United States District Court
Northern District of California

11
12

allegation above,” it excludes “those alleging fraud.” ACC ¶ 428. In light of the rest of the

13

language and structure of the ACC, this and other boilerplate disclaimers included in plaintiffs’

14

allegations do not justify analysis under Rule 8(a). A plaintiff “cannot escape the requirements of

15

Rule 9(b) by virtue of a general disclaimer that a [Section 11] claim is based on negligence rather

16

than fraud.” In re Metro. Sec. Litig., 532 F. Supp. 2d 1260, 1278 (E.D. Wash. 2007); see also, In

17

re Stratosphere Corp. Sec. Litig., 1 F. Supp. 2d 1096, 1104 (D. Nev. 1998) (where “overwhelming

18

majority of allegations in the [complaint] concern the fraudulent concealment or misrepresentation

19

of material information,” plaintiffs “cannot avoid the more stringent requirements of Rule 9(b) by

20

merely inserting boilerplate language into their complaint stating that [their Securities Act] claims

21

are based in negligence, not fraud”); Rigel, 697 F.3d at 885-86. As currently alleged, plaintiffs’

22

Section 11 claims sound in fraud and are subject to Rule 9(b).5

23
24
25
26
27
28

5

This is not to say that it is impossible for plaintiffs to bring their Section 11 claims in conjunction
with their Section 10(b) claims without subjecting the Section 11 claims to Rule 9(b). Courts
regularly apply Rule 8(a) to Section 11 claims brought in the same action as Section 10(b) claims,
in particular where the Section 11 defendants are not accused of violating Section 10(b). See, e.g.,
Brown v. China Integrated Energy, Inc., No. 11-cv-02559, 2012 WL 1129909, at *3-4 (C.D. Cal.
Apr. 2, 2012); In re Countrywide Fin. Corp. Sec. Litig., 588 F. Supp. 2d 1132, 1162-63 (C.D. Cal.
2008); In re Exodus Commc'ns, Inc. Sec. Litig., No. 01-cv-02661-MMC, 2005 WL 1869289, at
*12 (N.D. Cal. Aug. 5, 2005) (“As a result of the amendments to the complaint, plaintiffs have
made sufficiently clear their intent to assert two alternative theories of liability against
[defendants]: (1) a Section 11 claim based on negligent or innocent misrepresentations or
16

1

C.

2
3
4
5
6
7
8
9
10

United States District Court
Northern District of California

11
12

Plaintiffs claim that the Underwriters are liable under Section 11 on the basis of four
categories of misrepresentations in the IPO and SPO registration statements: (i) misrepresentations
regarding Velti’s methodology for calculating reserves and the amount of its reported reserves; (ii)
misrepresentations regarding Velti’s methodology for ascertaining the collectability of its
receivables for the purpose of calculating revenues and the amount of its reported revenues; (iii)
misrepresentations that Velti’s financial statements conformed with GAAP; and (iv)
misrepresentations regarding Velti’s DSO figures. See Opp. 22. As stated above, plaintiffs’
allegation that Velti’s DSO figures were misrepresented fails because it is time-barred. Plaintiffs’
three other theories of Section 11 liability are deficient because the ACC does not adequately
plead the falsity of any of the alleged misrepresentations.

13
14
15
16
17

Failure to Adequately Plead Falsity of Alleged Misrepresentations by
the Underwriters

1.

Methodology for Calculating Reserves and the Amount of Reported
Reserves

Plaintiffs identify the following representations in the IPO registration statement regarding
Velti’s reserves:
Allowance for Doubtful Accounts

22

We evaluate the collectability of accounts receivable based on a combination of
factors; an allowance for doubtful accounts is provided based on estimates
developed using standard quantitative measures, which include historical write
offs and current economic conditions. We also make a specific allowance if there
is strong evidence indicating that the amounts due are unlikely to be collectible.
As of September 30, 2010 and December 31, 2009 and 2008, the allowance for
doubtful accounts was $135,000 (unaudited), $135,000, and $131,000,
respectively.

23

[...]

24

We have not historically incurred bad debt expense, none of our significant
customers have historically failed to pay amounts due to us, and we do not believe
that any of the customers contributing to our increased accounts receivable aging
will fail to pay us in full. Accordingly, we have not determined that any slow-

18
19
20
21

25
26
27
28

omissions, . . . and (2) a Section 10(b) claim based on fraud.”). To avoid the heightened pleading
standard, however, plaintiffs must ensure that their complaint does not sound in fraud.
17

1

paying customers will require an allowance for bad debt against accounts
receivable.

2

ACC ¶¶ 159-60. The SPO registration statement included similar representations regarding

3

Velti’s reserves:

4
5
6
7
8
9
10

United States District Court
Northern District of California

11
12
13
14
15
16
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19
20
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23
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25
26
27
28

Allowance for Doubtful Accounts
We evaluate the collectability of accounts receivable based on a combination of
factors; an allowance for doubtful accounts is provided based on estimates
developed using standard quantitative measures, which include historical write
offs and current economic conditions. We also make a specific allowance if there
is strong evidence indicating that the amounts due are unlikely to be collectible.
The allowance for doubtful accounts was $554,000, $135,000, and $135,000, as
of March 31, 2011, and December 31, 2010 and 2009, respectively.
[...]
We have historically collected all amounts due from our customers, even from
those customers with balances with longer aging, as evidenced by our
insignificant bad debt expense for 2010, 2009 and 2008. We do evaluate
receivables on a customer specific basis and record a reserve based on relevant
facts and circumstances as deemed necessary. Accordingly, during the three
months ended March 31, 2011 we recorded an increase in the provision for
doubtful accounts by $419,000 primarily related to one customer subject to
currency control restrictions.
ACC ¶¶ 196-97.
Plaintiffs offer two theories that these statements were false or misleading when made.
They first contend that Velti did not actually calculate its reserves “based on estimates developed
using standard quantitative measures, which include historical write offs and current economic
conditions,” as stated in both registration statements. Opp. 23. According to plaintiffs, Velti in
fact “never had any methodology for calculating its reserves.” Id. Plaintiffs base this claim on an
alleged statement by defendant Jeffrey Ross that, before his arrival at Velti in January 2013,
“[Velti] had no methodology for calculating or allocating reserves against uncollectible
receivables. Because [Velti’s] clients had always eventually paid, the presumption was that they
always would.” ACC ¶ 74.
Plaintiffs provide no context for this statement or any supporting factual allegations. They
do not even provide the exact language of the statement, instead paraphrasing it as quoted above.
18

1

Moreover, the other allegation that plaintiffs offer in support of their claim that Velti “never had

2

any methodology for calculating its reserves” conflicts with that claim. Plaintiffs point to another

3

statement by Ross – this one made during Velti’s Q4 2012 conference call on March 12, 2013 – in

4

which he explains that Velti had decided to increase its reserves because

5
6
7
8
9
10

United States District Court
Northern District of California

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

[Velti] has had very, very limited experience with bad debts . . . So if you sort of
come up with a reserve based on your past experience, it’s a rather – it’s pretty
dang close to nothing . . . I just pressure tested some of the assumptions, took
mathematical percentages of balances over certain ages and came up with an
amount that I felt more comfortable with, that provided us some cushion, when
and if something happens. There wasn’t much in the specific area that led me to
say, oh my gosh, we have a huge problem. I want a big additional reserve . . . I
just thought it was more prudent to have a little bit more cushion with respect to
those numbers.
ACC ¶ 367. But this quote does not indicate that Velti had “no methodology” whatsoever for
calculating its reserves. Rather, it shows that Velti had a methodology based on certain
“assumptions” based on past experience that Ross found insufficient. Ross’s statement is
additionally deficient because, according to the ACC, Ross did not begin working for Velti until
January 2013. This was approximately two years after issuance of the IPO registration statement
and approximately one-and-a-half years after issuance of the SPO registration statement. Absent
additional details about the content and/or context of Ross’s statement, it is not enough to satisfy
the pleading requirements of Rule 9(b).
Plaintiffs’ second theory that the statements regarding Velti’s reserves were false or
misleading when made is that, even at the time of the IPO and SPO, Velti’s reserves were
materially understated. Opp. 23. In support of this theory, plaintiffs point to several allegations in
the ACC, including that: (i) the Greek economic crisis began in April 2010, ACC ¶ 8; (ii) Velti
admitted on August 20, 2013 that some of the $111 million in receivables being written off were
“substantially old” and had been due since before 2012, and that approximately 66 percent of its
receivables were from Greece and the Balkans, ACC ¶ 15; (iii) in fall 2012, Velti divested itself of
certain receivables for which the DSOs topped 450 days, ACC ¶ 338; (iv) also in fall 2012, Velti
reclaimed from third parties $5.1 million in factored receivables that remained unpaid, ACC ¶ 323;
and (v) Deloitte was able to swiftly determine in summer 2013 that many of Velti’s receivables
19

1
2

needed to be written off. Opp. 23-24.
“[U]nderstatement of bad debt reserves can be a form of securities fraud.” Kane v. Madge

3

Networks N.V., No. 96-cv-20652-RMW, 2000 WL 33208116, at *5 (N.D. Cal. May 26, 2000).

4

This is because understatement of bad debt reserves “lead[s] to overstatement of income, and

5

ultimately inflation of stock price.” Id. However, the Ninth Circuit has recognized that the

6

calculation of such reserves is “based on flexible accounting concepts, which, when applied, do not

7

always (or perhaps ever) yield a single correct figure.” GlenFed, 42 F.3d at 1549. Accordingly, it

8

is not enough to merely plead that bad debt reserves turned out to be inadequate. See, e.g., NECA-

9

IBEW Pension Trust Fund v. Bank of Am. Corp., No. 10-cv-00440, 2012 WL 3191860, at *10
(S.D.N.Y. Feb. 9, 2012) (“[T]he mere fact that [defendant’s] predicted loan loss reserves turned

11
United States District Court
Northern District of California

10

out to be insufficient some time after they were made does not render those figures false at the

12

time that they were publicly filed with the SEC.”); In re Loewen Grp. Inc., No. 98-cv-06740, 2004

13

WL 1853137, at *12 (E.D. Pa. Aug. 18, 2004) (“Neither the increase in allowance toward the end

14

of the class period nor the eventual financial ruin of [the corporate defendant] are proof that

15

defendants committed any acts worse than mismanagement.”) (internal modifications omitted).

16

Instead, a plaintiff must set forth facts demonstrating that the reserves figure was “a falsehood.”

17

GlenFed, 42 F.3d at 1549. A plaintiff “may need to draw on contemporaneous statements or

18

conditions to make this demonstration.” Id.

19

Whether pleading under Rule 8(a) or under Rule 9(b), a plaintiff alleging a Section 11

20

violation on the basis of misstated bad debt reserves must also plead subjective falsity. Where an

21

alleged misrepresentation is an opinion, as opposed to a statement of fact, it is only actionable

22

under Section 11 where “the complaint alleges . . . that [it was] both objectively and subjectively

23

false or misleading.” Rubke, 551 F.3d at 1162; see also, City of Dearborn Heights Act 345 Police

24

& Fire Ret. Sys. v. Align Tech., Inc., No. 12-cv-06039-WHO, 2013 WL 6441843, at *13 (N.D. Cal.

25

Dec. 9, 2013).

26

Subjective falsity means the person who gave the opinion believed it was false or

27

misleading at the time it was given. See Rubke, 551 F.3d at 1162. The Ninth Circuit has not

28

considered whether a statement of bad debt reserves qualifies as an opinion for the purposes of
20

1

Section 11. However, in Fait v. Regions Fin. Corp., 655 F.3d 105, 113 (2d Cir. 2011), the Second

2

Circuit concluded that a determination of loan loss reserves is an opinion, reasoning that loan loss

3

reserves “reflect management’s opinion or judgment about what, if any, portion of amounts due on

4

the loans ultimately might not be collectible.” Id. at 113. The court accordingly held that for an

5

alleged misrepresentation “regarding the adequacy of loan loss reserves to give rise to liability

6

under [Section 11], [a] plaintiff must allege that [the] defendant’s opinions were both false and not

7

honestly believed when they were made.” Id.; accord, Oklahoma Firefighters Pension & Ret. Sys.

8

v. Student Loan Corp., 951 F. Supp. 2d 479, 495 (S.D.N.Y. 2013); NECA-IBEW, 2012 WL

9

3191860, at *12.
Plaintiffs here have adequately alleged subjective falsity, see, e.g., ACC ¶¶ 166, 199, but

10

United States District Court
Northern District of California

11

the facts stated in the ACC are not sufficient under Rule 9(b) to show that Velti’s reserves were

12

objectively false or misleading in either of the registration statements. Courts have held that

13

claims based on misstated bad debt reserves are insufficiently alleged where they: (i) do not

14

identify any specific accounts that were in jeopardy when the alleged misrepresentations were

15

made, Siegel v. Lyons, No. 95-cv-03588-DLJ, 1996 WL 438793, at *5 (N.D. Cal. Apr. 26, 1996);

16

see also, Stack v. Lobo, 903 F. Supp. 1361, 1369 (N.D. Cal. 1995); (ii) do not identify any specific

17

accounts in existence at the time the alleged misrepresentations were made that were ultimately

18

rendered uncollectible, Kane, 2000 WL 33208116, at *6; and (iii) fail to provide “details about . . .

19

when and to what level the allowance should have been changed,” Alaska Elec. Pension Fund v.

20

Adecco S.A., 434 F. Supp. 2d 815, 823 (S.D. Cal. 2006); see also, Loewen, 2004 WL 1853137, at

21

*11.
The ACC pleads none of these things. Plaintiffs do not identify a single receivable that was

22
23

in jeopardy of becoming uncollectible when the IPO and SPO registration statements were issued,

24

nor any receivable that existed then and was ultimately written off, either following Deloitte’s

25

audit or at any other time.6

26
27
28

6

Plaintiffs assert that they do identify specific uncollectible receivables, in that they allege that
Deloitte determined that the ten customers who accounted for 65 percent of the receivables in
Greece and Cyprus were primarily comprised of two entities, the VTRIP Group and the Globo
21

Nor do plaintiffs state when and to what extent Velti’s reserves should have been increased.

1

With the exception of the Greek economic crisis beginning in April 2010, each of the allegations

3

highlighted by plaintiffs concerns an event that occurred months, if not years, after the registration

4

statements were issued. There are no allegations of “contemporaneous statements or conditions”

5

specific to defendants or anyone else associated with Velti that show that Velti’s reserves were

6

understated at the time the registration statements were issued.7 See GlenFed, 42 F.3d at 1549.

7

The allegations that in fall 2012 Velti (i) divested itself of certain receivables with DSOs topping

8

450 days and (ii) reclaimed from third parties $5.1 million in factored receivables do indicate that

9

there were receivables which Velti acquired in 2011 and 2012 which had not yet been paid by fall

10

2012. But it does not necessarily follow that these receivables were so evidently uncollectible in

11
United States District Court
Northern District of California

2

January and June 2011 that Velti’s reported reserves constituted “a falsehood” at that time.
Similarly, because the $111 million write down occurred more than two years after the IPO

12
13

and SPO, that the write down occurred is not a sufficient indicator of how or why the reserve

14

figures in the registration statements were misleading when made. Although plaintiffs vaguely

15

allege that some of the written off receivables were “substantially old” and had been due since

16
17
18
19
20
21
22
23
24
25
26
27
28

Group. Opp. 27; ACC ¶¶ 132, 132 n.13. However, plaintiffs do not state that any of these
accounts receivable existed – much less that they appeared uncollectible – at the time the
registration statements were issued.
Plaintiffs’ contention that defendants improperly rely on cases analyzed under both Rule 9(b) and
the PSLRA is also unconvincing. See Opp. 24 n.18. Under the PSLRA, “to properly allege falsity,
a securities fraud complaint must . . . specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if an allegation regarding the statement . . .
is made on information and belief, . . . state with particularity all facts on which that belief is
formed.” Zucco Partners, 552 F.3d at 990-91 (internal quotation marks omitted). Whatever
differences exist between pleading falsity under Rule 9(b) and doing so under the PSLRA,
plaintiffs offer no explanation as to why such differences are material here.
7

This failure to plead contemporaneous facts distinguishes this case from the two cited by
plaintiffs. In In re Complete Mgmt. Inc. Sec. Litig., 153 F. Supp. 2d 314 (S.D.N.Y. 2001),
plaintiffs alleged that the corporate defendant had a history of uncollectible receivables at the time
the misrepresentations were made. Id. at 318-20. Similarly, in Aldridge v. A.T. Cross Corp., 284
F.3d 72 (1st Cir. 2002), defendants were accused of failing to set adequate reserves for “contingent
sales” for which defendants knew, “from the get go,” that they would not recover the full sale
price. Id. at 75-77.
22

1

“before 2012,” plaintiffs do not allege that any of the receivables had been due since January or

2

June 2011, much less that evidence existed at that time that the receivables were uncollectible.
Meanwhile, plaintiffs’ own allegations indicate that Velti’s accounts receivable woes did

3
4

not develop until Q4 2011, after both registration statements had been issued. The ACC states that

5

between December 31, 2010 (a month before the IPO) and June 30, 2011 (two weeks after the

6

SPO), Velti reduced its receivables from $72.7 million to $66 million. ACC ¶ 128. By September

7

30, 2011, Velti had increased its receivables to $79 million, but it was not until December 31,

8

2011, nearly one year after the IPO and several months after the SPO, that receivables jumped to

9

$170 million. Id. Plaintiffs also fail to specifically allege any collectability problems earlier than
Q1 2012 except to vaguely allude to the onset of the Greek economic crisis in April 2010.

11
United States District Court
Northern District of California

10

Plaintiffs’ confidential witness joined Velti in June 2011 yet stated that it was not until “sometime

12

in Q1 2012” that he or she “began to hear that . . . [Velti] was having trouble collecting

13

receivables.” ACC ¶ 119.
In sum, the allegations in the ACC fall short under Rule 9(b) of adequately pleading the

14
15

falsity of any representations in the registration statements regarding Velti’s methodology for

16

calculating reserves and the amount of its reported reserves.8

17
18
19
20
21
22
23
24
25
26
27
28

8

Defendants also argue compellingly that plaintiffs’ allegations of misstated reserves in the IPO
and SPO registration statements fail to state a claim even under Rule 8(a). See, e.g., Panther
Partners, Inc. v. Ikanos Commc’ns, Inc., 538 F. Supp. 2d 662, 670-73 (S.D.N.Y. 2008) (dismissing
Section 11 claim arising from defendants’ alleged failure to disclose product defect where “the
allegations have been craftily drafted to imply that what only became clear due to subsequent
events was somehow known to [defendants] far earlier in time, well before the confirming event
occurred or other evidence came to light,” but “[n]o plausibly pleaded fact suggests that
[defendants] knew or should have known of the scope or magnitude of the defect problem at the
time of the [offering]”); In re CIT Grp., Inc. Sec. Litig., 349 F. Supp. 2d 685, 690-91 (S.D.N.Y.
2004) (“That defendants . . . decided to revise the amount of loan loss reserves that [they] deemed
adequate [just three weeks after their IPO] provides absolutely no reasonable basis for concluding
that defendants did not think reserves were adequate at the time the registration statement and
prospectus became effective.”). Because I find that plaintiffs’ Section 11 claims as currently
pleaded are governed by Rule 9(b), I do not address that argument here.
23

1

2.

2
3
4
5
6
7
8
9
10

United States District Court
Northern District of California

11

Plaintiffs assert that the IPO and SPO registration statements falsely reported that Velti
only recognized revenue from its receivables when their “collectability [was] reasonably assured.”
Opp. 14; ACC ¶¶ 158, 195. According to plaintiffs, Velti in fact recognized revenue from its
receivables even when their collectability was not reasonably assured. Opp. 14. This claim is
based on the same after-arising alleged facts that plaintiffs offer in support of their claim that the
registration statements misrepresented Velti’s methodology for calculating reserves and the
amount of its reported reserves. See, e.g., Opp. 26-27 (“[T]he same alleged facts about the
reserves support an inference that the revenue was not collectible to begin with.”). Accordingly, it
fails for the same reasons.

12
13
14
15
16
17
18
19

Methodology for Ascertaining the Collectability of Receivables for the
Purpose of Calculating Revenues and the Amount of Reported
Revenues

3.

Conformance with GAAP

Because the alleged misrepresentations in the registration statements regarding whether
Velti’s financial statements complied with GAAP are dependent on the failure to properly report
reserves and revenues, these claims are also deficient. See Fait, 655 F.3d at 113 (“Plaintiff’s
remaining allegations related to SOX, GAAP, and GAAS are essentially derivative of his primary
allegations regarding goodwill and loan loss reserves . . . [C]onsistent with our conclusion that the
complaint does not adequately allege that defendants misstated or omitted material facts regarding
goodwill or loan loss reserves, these allegations also fail to state a claim.”).

20
21
22

D.

Failure to Adequately Plead Falsity of Alleged Misrepresentations by Baker
Tilly

As noted above, Baker Tilly may only be held liable under Section 11 for

23

misrepresentations or omissions contained in “those portions of the [registration] statement[s] that

24

purport to have been prepared or certified by [Baker Tilly].” Monroe, 31 F.3d at 774. Thus, the

25

only portions of the registration statements relevant to Baker Tilly’s liability under Section 11 are

26

its audit reports concerning Velti’s financial statements from 2008-2009 (in the IPO registration

27

statement) and 2008-2010 (in the SPO registration statement). The audit report in the IPO

28

registration statement is dated August 3, 2010; the audit report in the SPO registration statement is
24

1

dated April 11, 2011. Plaintiffs contend that they have adequately alleged that the audit reports

2

contained material misrepresentations because the reports (i) misrepresented that Velti’s financial

3

statements complied with GAAP; (ii) misrepresented that Baker Tilly had complied with GAAS;

4

and (iii) misrepresented Velti’s financial condition “in several non-GAAP ways.” Opp. 30.
Plaintiffs’ first and second theories fail for the reasons stated above regarding Velti’s

5

reported reserves and revenues when the registration statements were issued. See Opp. 30

7

(“Velti’s financial statements did not comply with GAAP [because they] did not provide for

8

adequate reserves, which in turn inflated revenues.”). Plaintiffs have not alleged sufficient facts

9

indicating that Velti’s reported reserves or revenues were false or misleading at that time.

10

Accordingly, plaintiffs’ claim that Velti’s financial statements did not comply with GAAP

11
United States District Court
Northern District of California

6

(because they failed to properly calculate reserves or revenues) or that Baker Tilly failed to

12

comply with GAAS are also deficient. See Fait, 655 F.3d at 113.
Plaintiffs’ “non-GAAP” theories are based on allegations that when the IPO and SPO

13
14

registration statements were issued, Velti was misrepresenting its DSO figures and lacked

15

adequate internal controls. Opp. 30. As I found earlier, plaintiffs’ Section 11 claim that Velti’s

16

DSO figures were misrepresented is time-barred. Further, even if the statute of limitations had not

17

expired, plaintiffs have not alleged that Velti’s DSO figures were included in the financial

18

statements that were the subject of Baker Tilly’s audit reports. Plaintiffs’ reliance on alleged

19

misrepresentations regarding Velti’s lack of internal controls is also without merit, as this claim is

20

duplicative of plaintiffs’ claims that Velti’s reserves, revenues, and DSO were misrepresented in

21

the registration statements. See Fait v. Regions Fin. Corp., 712 F. Supp. 2d 117, 125 (S.D.N.Y.

22

2010) (dismissing Section 11 claim based on representations regarding “the effectiveness of

23

[defendant’s] internal controls” where claim was “duplicative of plaintiff’s claims for

24

misstatements of goodwill and loan loss reserves,” which were also deficient); see also, In re

25

Seracare Life Sciences, Inc., No. 05-cv-02335, 2007 WL 935583, at *13 (S.D. Cal. Mar. 19,

26

2007).

27
28

Because plaintiffs have failed to adequately plead the falsity of any material
misrepresentation or omission in either of Velti’s registration statements, plaintiffs’ Section 11
25

1

claims against both Baker Tilly and the Underwriters are DISMISSED WITH LEAVE TO

2

AMEND.

3

II.

4

SECTION 12(a)(2) CLAIMS AGAINST THE UNDERWRITERS
Plaintiffs bring Section 12(a)(2) claims against the Underwriters. Sections 11 and 12(a)(2)

5

are “Securities Act siblings” with similar elements. In re Morgan Stanley Info. Fund Sec. Litig.,

6

592 F.3d 347, 359 (2d Cir. 2010). “To plead a claim under Section 12(a)(2), the plaintiff must

7

allege that (1) the defendant is a statutory seller; (2) the sale was effected by means of a prospectus

8

or oral communication; and (3) the prospectus or oral communication contained a material

9

misstatement or omission.” Maine State Ret. Sys. v. Countrywide Fin. Corp., No. 10-cv-00302,

10

United States District Court
Northern District of California

11

2011 WL 4389689, at *8 (C.D. Cal. May 5, 2011); see also, 15 U.S.C. § 77l(a)(2).
In addition to the arguments discussed above regarding the statute of limitations and

12

plaintiffs’ failure to plead falsity under Rule 9(b) – which apply equally to plaintiffs’ Section

13

12(a)(2) claims – the Underwriters argue that the Section 12(a)(2) claims must be dismissed

14

because plaintiffs have not established that they have standing to bring a claim under the statute. I

15

disagree with that argument.

16

A plaintiff has standing to bring a Section 12(a)(2) claim only against a “statutory seller”

17

from which the plaintiff purchased the security at issue. In re Lehman Bros. Sec. & Erisa Litig.,

18

799 F. Supp. 2d 258, 310 (S.D.N.Y. 2011); see also, Akerman v. Oryx Commc’ns, Inc., 810 F.2d

19

336, 344 (2d Cir. 1987) (noting that Section 12 “imposes liability on persons who offer or sell

20

securities and only grants standing to the person purchasing such securit[ies] from them”) (internal

21

quotation marks omitted). A “statutory seller” is “one who either transferred title to the purchaser

22

or successfully solicited [the purchase] for financial gain.” Tsereteli v. Residential Asset

23

Securitization Trust 2006-A8, 692 F. Supp. 2d 387, 391 (S.D.N.Y. 2010); see also, Mallen v.

24

Alphatec Holdings, Inc., 861 F. Supp. 2d 1111, 1131 (S.D. Cal. 2012) (noting that Section 12

25

“encompasses both direct sellers who pass title of the subject securities and indirect sellers who

26

‘successfully solicit the purchase, motivated at least in part by a desire to serve their own financial

27

interests or those of the securities owner.’”) (quoting Pinter v. Dahl, 486 U.S. 622, 644 n.21, 647

28

(1988)).
26

1

“Purchasers in private or secondary market offerings do not have standing to bring actions

2

under [Section 12(a)(2)].” In re Ultrafem Inc. Sec. Litig., 91 F. Supp. 2d 678, 693 (S.D.N.Y.

3

2000). Courts have thus distinguished between allegations that a plaintiff purchased a security

4

“pursuant or traceable to” a registration statement or similar document, and allegations that a

5

plaintiff purchased a security “pursuant to” the document. While the latter allegation is sufficient

6

to establish standing under Section 12(a)(2), the former is not. See, e.g., Maine State, 2011 WL

7

4389689, at *11; Lehman, 799 F. Supp. 2d at 311; Tsereteli, 692 F. Supp. 2d at 391 (“Plaintiffs

8

likely would not have standing had they alleged only that they purchased the Certificates ‘pursuant

9

or traceable to’ the Offering Documents . . . The amended complaint, however, alleges that
plaintiffs purchased the Certificates ‘pursuant to the Offering Documents.’”); Ultrafem, 91 F.

11
United States District Court
Northern District of California

10

Supp. 2d at 693-94.

12

Here, plaintiffs allege that plaintiff Frank Borreani “purchased Velti common stock

13

pursuant to and traceable to [Velti’s] January 28, 2011 IPO registration statement” and that

14

plaintiff St. Paul Retirement Teachers’ Retirement Fund Association “purchased Velti common

15

stock pursuant to and traceable both to (i) [Velti’s] January 28, 2011 IPO registration statement,

16

and (ii) [Velti’s] June 14, 2011 SPO registration statement.” ACC ¶¶ 33-34. Plaintiffs

17

additionally allege that “St. Paul, Borreani, and other members of the class purchased or otherwise

18

acquired Velti common stock issued in the IPO and SPO pursuant to materially inaccurate

19

registration statements.” ACC ¶ 445. These allegations are sufficient to show that plaintiffs

20

purchased their Velti securities in a public offering as opposed to on the aftermarket. See Maine,

21

2011 WL 4389689, at *11.

22

The parties also dispute whether plaintiffs have adequately alleged that the Underwriters

23

qualify as statutory sellers. Plaintiffs allege that the Underwriters qualify as statutory sellers

24

because they “(i) transferred title to St. Paul, Borreani, and/or other members of the class who

25

purchased in the IPO and SPO; and (ii) solicited the purchase of the common stock by St. Paul,

26

Borreani, and other members of the class and were financially benefitted thereby, including but

27

not limited to by receiving underwriting fees, commissions, or discounts in connection with the

28

IPO and SPO.” ACC ¶ 442. This allegation is enough at the pleading stage to establish that the
27

1

Underwriters are statutory sellers.
The plaintiffs cite several cases that support this view. See, e.g., In re MF Global Holdings

2
3

Ltd. Sec. Litig., 982 F. Supp. 2d 277, 323 (S.D.N.Y. 2013) (allegations that certain named

4

plaintiffs “purchased or otherwise acquired” relevant securities from underwriter defendants were

5

“sufficient to establish standing against the underwriters . . . for the purpose of withstanding a

6

motion to dismiss”); In re Scottish Re Grp. Sec. Litig., 524 F. Supp. 2d 370, 399 (S.D.N.Y. 2007)

7

(plaintiffs adequately alleged that underwriter defendants solicited sales where complaint stated

8

that they “issued or sold” the securities at issue and that “plaintiffs purchased the securities in the

9

[o]fferings”). These cases are persuasive and I decline to hold that plaintiffs must plead additional
facts regarding the Underwriters’ participation in the sales of Velti securities in the IPO and SPO

11
United States District Court
Northern District of California

10

to survive a motion to dismiss. “Should it become apparent . . . during discovery that plaintiffs

12

cannot prove direct purchases from certain individual underwriters, those underwriters will have

13

the opportunity to seek judgment as a matter of law in a motion for summary judgment.” MF

14

Global Holdings, 982 F. Supp. 2d at 324.

15

That said, because the ACC does not plead the falsity of any material misrepresentation or

16

omission in either of Velti’s registration statements, plaintiffs’ Section 12(a)(2) claims against the

17

Underwriters are DISMISSED WITH LEAVE TO AMEND.

18

III.

SECTION 10(b) CLAIMS AGAINST BAKER TILLY

19

Section 10(b) of the Exchange Act makes it unlawful “for any person . . . [t]o use or

20

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

21

device or contrivance in contravention of such rules and regulations as the Commission may

22

prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15

23

U.S.C. § 78j(b). Rule 10b-5, promulgated under the authority of Section 10(b), makes it unlawful

24
25
26
27
28

(a) To employ any device, scheme, or artifice to defraud,
(b) 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 the light of the
circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person,
28

1

in connection with the purchase or sale of any security.

2

17 C.F.R. § 240.10b-5. The basic elements of a Section 10(b) claim are: (i) a material

3

misrepresentation or omission; (ii) a connection with the purchase or sale of a security; (iii)

4

scienter; (iv) economic loss; and (v) loss causation, i.e., a causal connection between the material

5

misrepresentation or omission and the economic loss. Dura Pharm., Inc. v. Broudo, 544 U.S. 336,

6

341-42 (2005); Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009).

7

Under the PSLRA, a plaintiff alleging a Section 10(b) claim must “plead with particularity both

8

falsity and scienter.” Zucco, 552 F.3d at 990.

9

Plaintiffs allege a Section 10(b) class period that begins on January 27, 2011 and ends on
August 20, 2013. See ACC ¶ 1. There is no dispute that throughout that time period, Velti’s SEC

11
United States District Court
Northern District of California

10

filings included Baker Tilly’s audit opinions on Velti’s 2008 to 2012 financial statements. See

12

Baker Tilly Mot. 21. Plaintiffs accuse Baker Tilly of fraudulently issuing clean audit opinions on

13

these financial statements, thereby “falsely assur[ing] investors that [the] financial statements

14

fairly reflected [Velti’s] financial condition and were prepared in compliance with GAAP.” Opp.

15

43.

16

Baker Tilly argues that the Section 10(b) allegations in the ACC are deficient under Rule

17

9(b) and the PSLRA because they do not adequately plead either falsity or scienter. Baker Tilly

18

Mot. 20-24. I agree.

19

The PSLRA imposes “exacting requirements” for pleading falsity. Metzler Inv. GMBH v.

20

Corinthian Colleges, Inc., 540 F.3d 1049, 1070 (9th Cir. 2008). The complaint must “specify

21

each statement alleged to have been misleading, the reason or reasons why the statement is

22

misleading, and, if an allegation regarding the statement or omission is made on information and

23

belief, the complaint [must] state with particularity all facts on which that belief is formed.” 15

24

U.S.C. § 78u-4(b)(1). A litany of alleged false statements, unaccompanied by the pleading of

25

specific facts indicating why the statements were false, does not satisfy this standard. Metzler,

26

540 F.3d at 1070. As under Rule 9(b), a plaintiff seeking to plead falsity under the PSLRA

27

generally must identify “specific contemporaneous statements or conditions that demonstrate the

28
29

1

intentional or the deliberately reckless false or misleading nature of the statements when made.”

2

Ronconi v. Larkin, 253 F.3d 423, 432 (9th Cir. 2001).

3

To the extent plaintiffs’ Section 10(b) claims are based on Baker Tilly’s audit reports on

4

Velti’s 2008 through 2010 financial statements – which were included in the IPO and SPO

5

registration statements – the claims fail to adequately plead the falsity of any alleged

6

misrepresentation for the reasons stated above regarding plaintiffs’ Section 11 claims. To the

7

extent plaintiffs’ Section 10(b) claims are based on Baker Tilly’s audit reports on Velti’s 2011

8

through 2012 financial statements, the claims are deficient for the same reasons: the facts alleged

9

in the ACC are not sufficient under either Rule 9(b) or the PSLRA to show that any of the

10

United States District Court
Northern District of California

11

misrepresentations alleged in the reports were false or misleading when made.
Although plaintiffs do not provide a clear explanation in either the ACC or their opposition

12

brief, their core theory regarding the reports appears to be the same as regarding the IPO and SPO

13

registration statements – i.e., that the reports were false and misleading because Velti’s reserves

14

were materially understated when the reports were made. See, e.g., Opp. 7-8, 43. Accordingly, to

15

adequately plead falsity, plaintiffs must allege specific facts demonstrating how and why Velti’s

16

reserves were understated at those times.

17

Plaintiffs have not done so. I assume that plaintiffs mean to rely on the same allegations

18

which they highlight in attempting to show the falsity of Velti’s reserves in 2009 and 2010. To

19

reiterate, those allegations include that: (i) the Greek economic crisis began in April 2010, ACC ¶

20

8; (ii) Velti admitted on August 20, 2013 that some of the $111 million in receivables being

21

written off were “substantially old” and had been due since before 2012, and that approximately

22

66 percent of its receivables were from Greece and the Balkans, ACC ¶ 15; (iii) in fall 2012, Velti

23

divested itself of certain receivables for which the DSOs topped 450 days, ACC ¶ 338; (iv) also in

24

fall 2012, Velti reclaimed from third parties $5.1 million in factored receivables that remained

25

unpaid, ACC ¶ 323; and (v) Deloitte was able to swiftly determine in summer 2013 that many of

26

Velti’s receivables needed to be written off. Opp. 23-24.

27
28

Given the greater proximity in time, these allegations carry more force with respect to
Velti’s 2011 and 2012 reserves than with respect to the 2009 and 2010 reserves. But they are still
30

1

not enough to demonstrate falsity with the particularity required under Rule 9(b) and the PSLRA.

2

Plaintiffs do not specifically identify which allegations in the ACC indicate the falsity of Velti’s

3

reserves in 2011 and 2012. See Opp. 42-50. That some of the receivables written off in summer

4

2013 were “substantially old” and had been due since “before 2012” does not translate to an

5

explanation of how and why Velti’s reserves were understated during the relevant time period.

6

Likewise, Velti’s decisions to divest certain aging receivables and to reclaim $5.1 million in

7

factored receivables in fall 2012 indicate that Velti was experiencing collectability problems

8

around that time, but they give little indication as to how and why Velti’s reserves were

9

understated. As discussed above with regard to plaintiffs’ Securities Act claims, missing from the
ACC are any allegations regarding specific accounts that were in jeopardy when the alleged

11
United States District Court
Northern District of California

10

misrepresentations were made, specific accounts in existence at the time the alleged

12

misrepresentations were made that were ultimately rendered uncollectible, and when and to what

13

extent Velti’s reserves should have been changed. See Alaska, 434 F. Supp. 2d at 823; Loewen,

14

2004 WL 1853137, at *11; see also, Daou, 411 F.3d at 1016 (noting that “[w]hen pleading

15

irregularities in revenue recognition, plaintiffs should allege . . . such basic details as the

16

approximate amount by which revenues and earnings were overstated . . .”).
Plaintiffs must plead more than generalized allegations about collectability problems and

17
18

that Velti’s reserves ultimately proved inadequate to show that reserves were misrepresented at the

19

time that Baker Tilly issued its audit reports. This is especially so given that, according to

20

plaintiffs’ own allegations, Velti increased its reserves substantially during the relevant time

21

period. Plaintiffs allege that Velti’s receivables grew from $72.7 million in Q4 2010 to $291

22

million in Q4 2012, while its comprehensive DSO grew from 261 days in Q4 20119 to 311 days in

23

Q4 2012. ACC ¶ 128. During that same time period, however, Velti increased its reserves from

24

$135,000 as of December 31, 2010 to $8 million as of December 31, 2012, an increase of nearly

25

6,000 percent. ACC ¶ 375. Velti increased its reserves again in Q1 2013, this time to $10.1

26

million. ACC ¶ 393. These reserves turned out to be enormously insufficient. But in light of

27
28

9

Q4 2011 appears to be the earliest quarter for which a comprehensive DSO figure is available.
See ACC ¶ 128.
31

1

Velti’s apparent attempts to account for its increasing stock of outstanding receivables and

2

growing collectability problems, its reserves figures in 2011 and 2012 are not “falsehood[s]” on

3

their face. GlenFed, 42 F.3d at 1549. To show that they were, plaintiffs must plead additional

4

specific facts; in particular, plaintiffs must plead “specific contemporaneous statements or

5

conditions that demonstrate the intentional or the deliberately reckless false or misleading nature”

6

of the reserves figures when reported. Ronconi, 253 F.3d at 432.
“[F]alsity and scienter in private securities fraud cases are generally strongly inferred from

7
8

the same set of facts, and the two requirements may be combined into a unitary inquiry under the

9

PSLRA.” Daou, 411 F.3d at 1015; see also, Ronconi, 253 F.3d at 429 (“Because falsity and
scienter in private securities fraud cases are generally strongly inferred from the same set of facts,

11
United States District Court
Northern District of California

10

we have incorporated the dual pleading requirements of 15 U.S.C. §§ 78u–4(b)(1) and (b)(2) into a

12

single inquiry.”). The above analysis is focused on falsity but applies also to scienter. As

13

plaintiffs have not alleged sufficient facts to satisfy either requirement, the Section 10(b) cause of

14

action is DISMISSED WITH LEAVE TO AMEND.

15

IV.

16

ADMINISTRATIVE MOTIONS TO FILE UNDER SEAL
On October 3, 2014, I issued an order denying without prejudice the administrative motion

17

to file under seal portions of the ACC, and giving the Settling Defendants (i.e., Velti, Cheung,

18

Negroponte, Ross, and Tso) until October 24, 2014 to file a revised declaration establishing

19

compelling reasons to justify sealing. Dkt. No. 159. On October 15, 2014, Baker Tilly and the

20

Underwriters filed their respective motions to dismiss and sought to seal those portions of their

21

motions that reference the portions of the ACC that had been filed under seal. Dkt. Nos. 160, 163.

22

Baker Tilly and the Underwriters made clear that the only basis for sealing their motions was that

23

the Settling Defendants still had time to submit a revised declaration justifying sealing of the

24

ACC. See id.

25

The Settling Defendants did not file a revised declaration by October 24, 2014 or at any

26

time since then. Accordingly, Baker Tilly and the Underwriters’ sealing motions, Dkt. Nos. 160,

27

163, are DENIED. Plaintiffs’ sealing motions, Dkt. Nos. 182, 183, are also DENIED. The Clerk

28

shall UNSEAL the ACC, Dkt. No. 144, as well as each of the parties’ sealing motions, Dkt. Nos.
32

1

160, 163, 182, 183.

2

CONCLUSION

3

For the foregoing reasons, defendants’ motions to dismiss are GRANTED WITH LEAVE

4

TO AMEND except that to the extent plaintiffs’ Section 11 claims are based on the allegation that

5

Velti’s DSO figure was misrepresented in the registration statements, those claims are time-barred

6

and are DISMISSED WITH PREJUDICE. All sealing motions filed in conjunction with

7

defendants’ motions to dismiss are DENIED. Plaintiffs shall file an amended complaint within 30

8

days of the date of this order.

9
10

United States District Court
Northern District of California

11
12

IT IS SO ORDERED.
Dated: February 27, 2015
______________________________________
WILLIAM H. ORRICK
United States District Judge

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