Jim McMillan v. InvenSense, Inc. et al

Filing 101

ORDER DISMISSING CASE. Signed by Judge James Donato on 4/12/2017. (jdlc2S, COURT STAFF) (Filed on 4/12/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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IN RE INVENSENSE, INC. SECURITIES
LITIGATION.

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Case No. 15-cv-00084-JD
ORDER DISMISSING CASE

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Re: Dkt. No. 80

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United States District Court
Northern District of California

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In this securities fraud class action, defendants challenge plaintiff’s first amended

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complaint for failing to state actionable claims. Dkt. No. 80. The complaint is dismissed with

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prejudice and the case is ordered closed.
DISCUSSION

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I.

INVENTORY CLAIMS (STATEMENT NOS. 1-3)

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The Court dismissed plaintiff’s first effort to state inventory-related claims for failing to

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plead falsity adequately. See Dkt. No. 78. Specifically, plaintiff did not state with particularity

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the facts on which plaintiff’s information and belief were formed. Id. at 6-7 (citing 15 U.S.C.

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§ 78u-4(b)(1)). The Court expressly advised plaintiff that, while a confidential witness or

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informant is by no means a mandatory factor, it needed “to identify some source for how it knows

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of the key, very detailed factual allegations in its complaint that support its theory of falsity, e.g.,

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that ‘by the end of June 2013, InvenSense had built up an inventory of approximately 20 million

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3-axis MEMS chips that were specifically for the iPhone 5S and 5C’; or that these chips, which

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had an ‘approximate cost of $0.44 per chip’ became unsalable because, among other things, they

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‘suffered from manufacturing yield problems and did not meet any high-volume customer’s

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specifications.’” Id. at 7 (quoting Dkt. No. 62 ¶¶ 8, 58-60).

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The inventory claims in the amended complaint again do not meet this basic pleading

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obligation. The foundational factual allegation upon which these claims hinge is that the “excess

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or obsolete” inventory InvenSense later had to write down in fact consisted of “20 million 3-axis

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MEMS chips that had been manufactured for use in the iPhone 5S and 5C in the summer of 2013,

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but never sold to Apple.” Dkt. No. 79 ¶ 47. There can be no question that without this fact, the

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inventory claims cannot stand. See Dkt. No. 79-1 at 1-2 (explaining that the reason why Statement

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Nos. 1-3 were false and misleading is because the later written-off inventory “was primarily

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comprised of approximately 20 million chips leftover from the Apple design loss with the iPhone

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5S and 5C” which the Company improperly failed to write off earlier).
Despite another chance to explain why or how it knows or believes this foundational fact

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United States District Court
Northern District of California

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to be true, plaintiff’s allegations remain materially unchanged. Plaintiff says paragraphs 48 to 50

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of the amended complaint lay out the bases for its information and belief, see Dkt. No. 86 at 2-3,

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but that is not the case. In Berson v. Applied Signal Technology, Inc., 527 F.3d 982 (9th Cir.

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2008), an analogous foundational fact was the existence of four “stop-work orders.” Plaintiffs

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alleged those orders made Applied Signal’s backlog reports misleading because the reports

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included work Applied Signal was unlikely ever to perform because it “had been halted [by the

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stop-work orders] and was likely to be lost forever.” Id. at 984. The circuit rejected the falsity

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challenge because the complaint had “identifie[d] four confidential witnesses who worked for

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Applied Signal and who allegedly will testify to the existence and effect of the stop-work orders.”

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Id. at 985. These confidential witness employees were of a type where it was “entirely plausible”

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that they “would know, or could reasonably deduce, that the company had suffered such

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setbacks.” Id. The circuit expressly held that plaintiffs had “allege[d] the existence . . . of the

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stop-work orders with particularity,” where for the second stop-work order, the complaint

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contained statements by one of the confidential witnesses that “the order followed a ‘series’ of

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client meetings where ‘management’ tried unsuccessfully to ‘negotiate away’ certain contract

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requirements.” Id. at 987 & 988 n. 5. The circuit also observed that “a different confidential

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witness will allegedly testify that the third stop-work order caused the company to reassign ‘50-75

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employees,’ with the result that one of the company’s facilities became a ‘ghost town.’” Id.
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The scant factual allegations here about the supposed existence of the 20 million 3-axis

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MEMS chips are qualitative worlds apart from the allegations upheld in Berson. It is true that

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plaintiff now makes a passing reference to a confidential witness. See Dkt. No. 79 ¶ 50 (“In

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addition to the above sources, Lead Plaintiff’s allegations regarding InvenSense’s inventory of and

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inability to sell the 20 million 3-axis MEMS chips that had been manufactured for use in the

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iPhone 5S and 5C are based on and corroborated by investigative interviews with a former

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InvenSense officer who has requested to remain anonymous.”). But this allegation is so sparse

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and conclusory that it does not add materially to the soundness of the complaint. Cf. Zucco

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Partners, LLC v. Digimarc Corp., 552 F.3d 981, 995 (9th Cir. 2009) (for complaint relying on

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statements from confidential witnesses to satisfy PSLRA pleading requirements, confidential

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United States District Court
Northern District of California

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witness “must be described with sufficient particularity to establish their reliability and personal

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knowledge”). Not only is the confidential witness barely described, the complaint does not offer

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up any specific statements by the confidential witness at all.

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The other allegations are also insufficient. Plaintiff has added citations to the Company’s

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own SEC filings and a handful of third-party articles and reports. Dkt. No. 79 ¶¶ 48-49. But the

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Company’s SEC filings did not reveal that its obsolete inventory consisted of 20 million 3-axis

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MEMS chips -- if they had, there would be no securities fraud case at all. And the speculations of

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some journalists and analysts along the same lines as plaintiff do not make them useful “sources”

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for plaintiff’s claims. Allegations of this kind fail to meet the PSLRA’s requirement that falsity be

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pled with particularity under 15 U.S.C. § 78u-4(b)(1). See Rubke v. Capitol Bancorp Ltd, 551

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F.3d 1156, 1166 (9th Cir. 2009) (“Rubke has failed to reveal ‘the sources of her information’ with

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regard to the telephone conversations, and has not otherwise described how she knows that Capitol

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‘exhorted’ Pedisich to make the calls. Thus, she has not properly alleged the falsity of these

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statements under the PSLRA.”) (internal citations omitted); Applestein v. Medivation, Inc., 561

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Fed. Appx. 598, 600 (9th Cir. 2014) (“uncredited and speculative conclusions do not ‘provide an

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adequate basis for believing that the defendants’ statements were false’”) (quoting Zucco Partners,

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552 F.3d at 995); see also In re: FVC.com Sec. Litig., 32 Fed. Appx. 338, 340 (9th Cir. 2002)

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(finding plaintiffs’ scienter allegations deficient where complaint contained nothing to suggest that
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plaintiffs’ allegations were “based on anything other than mere speculation. That is precisely the

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kind of allegation that the PSLRA is designed to defeat at the pleading stage.”).

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II.

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PRICING CLAIM (STATEMENT NO. 4)
The Court dismissed with prejudice plaintiff’s gross margin claims, see Dkt. No. 78 at 8-

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12, and plaintiff has now turned to a pricing claim. See Dkt. No. 79-1 at 8, Statement No. 4

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(identifying 7/29/14 statement by Krock on an earnings conference call: “But generally it’s about

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the value of these sensor function [sic] in the market with the Gyro and integrated sensor attached.

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So there’s no one customer with any particular window of pricing that’s relevant.”). Plaintiff says

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that this statement was false and misleading because “[d]efendants lacked a reasonable basis to
assure investors that ASPs would be ‘consistent’ with prior quarters. Apple’s purchase order with

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United States District Court
Northern District of California

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InvenSense for at least 35 million 6-axis MEMS chips a quarter for its iPhone 6 and 6 Plus was at

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heavily discounted prices that [sic] the Company’s margins on those chips would only be

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approximately 40%.” Id.

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But just reading those two columns side by side makes plain why this new statement does

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not support a claim. “At the pleading stage, a complaint alleging claims under Section 10(b) and

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Rule 10b-5 must not only meet the requirements of Rule 8, but must satisfy the heightened

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pleading requirements of both Federal Rule of Civil Procedure 9(b) and the Private Securities

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Litigation Reform Act (‘PSLRA’).” In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 876 (9th

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Cir. 2012). Under Rule 8, a complaint must allege “enough facts to state a claim to relief that is

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plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Rule 9(b) requires

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“particularized allegations of the circumstances constituting fraud, including identifying the

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statements at issue and setting forth what is false or misleading about the statement and why the

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statements were false or misleading at the time they were made.” In re Rigel, 697 F.3d at 876.

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And under the PSLRA, to properly allege falsity, a securities fraud complaint must “specify each

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statement alleged to have been misleading [and] the reason or reasons why the statement is

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misleading.” 15 U.S.C. § 78u-4(b)(1).

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Plaintiff has not met any of these requirements for the new pricing claim because there is a
mismatch between the statement identified as false and misleading on the one hand, and the
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reasons why plaintiff says the statement was false or misleading on the other. On its face, Krock’s

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July 29, 2014 statement said nothing about “ASPs” or the “Company’s margins.” See Dkt.

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No. 79-1 at 8. Moreover, reading the statement in its full context makes it even more clear that

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Krock was discussing periods of time during which pricing could be negotiated, and not whether

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there was or was not any particular customer whose band of pricing might be significant for the

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Company’s overall financial outlook. See Dkt. No. 81-1, Ex. 1 at 21 (transcript of 7/29/2014

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InvenSense earnings call, in which Krock discussed customers’ “unique schedules for negotiation

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of pricing”).
Accordingly, for the new pricing claim, plaintiff has failed to plead falsity whether

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measured under Rule 8, Rule 9(b) or the PSLRA.

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United States District Court
Northern District of California

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III.

SCIENTER AND 20(a) CLAIM
Because plaintiff has failed once again to sufficiently plead falsity as required by the

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PSLRA, the Court need not reach the issue of scienter for plaintiff’s Section 10(b)/Rule 10b-5

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claim. Furthermore, because plaintiff has not adequately pled a violation of Section 10(b),

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plaintiff’s Section 20(a) “control person liability” claim must also be dismissed. See Oregon Pub.

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Emps. Ret. Fund v. Apollo Group Inc., 774 F.3d 598, 610 (9th Cir. 2014).

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IV.

LEAVE TO AMEND
Plaintiff has not requested a further opportunity to amend its complaint, see Dkt. No. 86,

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and the Court sees no good reason to grant it at this stage of the case. As here, “where the plaintiff

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has previously been granted leave to amend and has subsequently failed to add the requisite

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particularity to its claims, the district court’s discretion to deny leave to amend is particularly

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broad.” Zucco Partners, 552 F.3d at 1007 (internal quotations omitted). The fact that plaintiff

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failed to correct the deficiencies the Court previously pointed out “is a strong indication that the

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plaintiffs have no additional facts to plead.” Id. Because it is clear plaintiff has made its best case

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and that best case is still wanting, the Court will not grant plaintiff a further opportunity to amend.

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CONCLUSION

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Plaintiff’s first amended complaint is dismissed with prejudice. The Clerk will enter

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judgment and close the case.
IT IS SO ORDERED.
Dated: April 12, 2017

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JAMES DONATO
United States District Judge

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United States District Court
Northern District of California

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