Hussey v. Ruckus Wireless, Inc. et al

Filing 62

ORDER by Judge Edward M. Chen Granting 42 Defendants' Motion to Dismiss. (emcsec, COURT STAFF) (Filed on 2/21/2017)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 Plaintiffs, 8 Docket No. 42 RUCKUS WIRELESS, INC., et al., Defendants. 11 12 For the Northern District of California United States District Court ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS v. 9 10 Case No. 16-cv-02991-EMC MIGUEL HUSSEY, et al., Currently pending before the Court is Defendants‟ motion to dismiss. A hearing was held 13 14 on Defendants‟ motion on February 16, 2017. This order memorializes the rulings made by the 15 Court at the hearing and provides additional analysis, as necessary. I. 16 17 A. DISCUSSION Section 14(d)(7) Claim Lead Plaintiff failed to make any substantive argument in response to Defendants‟ motion 18 19 to dismiss the § 14(d)(7) claim. Accordingly, the motion to dismiss the § 14(d)(7) claim is 20 dismissed with prejudice. 21 B. 22 Section 14(e) Claim Section 14(e) of the 1934 Act covers an untrue statement of material fact or omission of 23 fact with respect to a tender offer. As an initial matter, the Court rejects Lead Plaintiff‟s argument 24 that scienter is not an element of a § 14(e) claim. Multiple circuit courts (in particular, the Second, 25 Third, Fifth, Sixth, and Eleventh Circuits) have held that scienter is an element, as Lead Plaintiff 26 itself admits. See Opp‟n at 20 (citing cases). So has Judge Orrick in his recent decision in 27 Manger v. Leapfrog Enterprises, Inc., No. 16-cv-01161-WHO, 2017 WL 282739 (N.D. Cal. Jan. 28 23, 2017). The reasoning underlying those decisions is sound. See, e.g., Smallwood v. Pearl 1 Brewing Co., 489 F.2d 579, 605 (5th Cir. 1974) (noting that “Congress adopted in Section 14(e) 2 the substantive language of the second paragraph of Rule 10b-5 and in so doing accepted the 3 precedential baggage those words have carried over the years”). Furthermore, Supreme Court 4 case law weighs in favor of Defendants, as does Ninth Circuit case law. See, e.g., Schreiber v. 5 Burlington Northern, Inc., 472 U.S. 1, 10 (1985) (stating that “[§] 14(e) adds a „broad antifraud 6 prohibition,‟ modeled on the antifraud provisions of § 10(b) of the [1934] Act and Rule 10b-5”) 7 (quoting Piper v. Chris-Craft Indus., 430 U.S. 1, 22 (1977)); Vaughn v. Teledyne, Inc., 628 F.2d 8 1214, 1219 (9th Cir. 1980) (stating that “[§] 14(e) is generally the same as § 10(b) and Rule 10b-5, 9 but is applicable specifically to tender offers rather than other purchases or sales of securities”). 10 Lead Plaintiff‟s primary argument in opposition is that a tender offer situation (§ 14(e)) should be treated the same as a proxy/shareholder vote situation (§ 14(a)). But the wording of the 12 For the Northern District of California United States District Court 11 two sections differ, and they were enacted at different times. Lead Plaintiff‟s argument is based 13 not on statutory language but on policy and is thus better addressed to the legislature rather than 14 the Court. Lead Plaintiff‟s last-minute argument (presented for the first time at the hearing) – i.e., 15 that any scienter requirement should apply only to, e.g., third-party accountants – was made 16 without any supportive authority. Because Lead Plaintiff has not made sufficient allegations of scienter, dismissal of the § 17 18 14(e) claim is warranted. Dismissal is also warranted because Lead Plaintiff has failed to adequately plead falsity, 19 20 particularly under the standard required by Rule 9(b) and the PSLRA. At the hearing, Lead 21 Plaintiff primarily argued that the 14D-9 was misleading because it overstated the value of the 22 offer consideration; in particular, the value of the offer consideration was overstated because it 23 was implicitly based on an overstated value of Brocade stock (stand alone) which valuation was 24 not expressly stated in the 14D-9. But this specific theory was never articulated, at least not 25 clearly, in the operative complaint.1 In its papers, Lead Plaintiff claimed falsity on two other grounds: (1) because there was an 26 27 28 1 The Court does not opine at this point on the sustainability of such a theory. 2 1 inadequate disclosure in the 14D-9 regarding Morgan Stanley‟s conflicts of interest and (2) 2 because certain financial projection information was not included in the 14D-9. The first ground 3 is arguably problematic because, as Lead Plaintiff acknowledges in its complaint, Morgan 4 Stanley‟s 13F disclosed its specific holdings in Brocade – i.e., such information was available to 5 the public. Other concerns have been raised by Defendants‟ argument that the 13F disclosures 6 included “both holdings for [Morgan Stanley‟s] own account and those held for clients for whom 7 they make investment decisions,” Reply at 3, and by Defendants‟ argument that Ruckus‟s actual 8 financial advisor (Morgan Stanley & Co. LLC) was only one of fifteen affiliated entities 9 represented on the Form 13F, and it “itself had investment discretion over only 415,049 Brocade accept Lead Plaintiff‟s numbers, there is no context to determine whether Morgan Stanley‟s 12 For the Northern District of California shares of common stock and no Brocade notes.” Reply at 3 n.3. Finally, even if the Court were to 11 United States District Court 10 holding of 3.67 million shares of Brocade common stock and $9.762 million in Brocade notes was 13 significant to Morgan Stanley. See also Reply at 4 (arguing that, in the Form 13F, “Morgan 14 Stanley and its affiliates collectively disclosed securities valued at over $259 billion, of which the 15 Brocade holdings represented 0.0017% for Morgan Stanley (or 0.019% of the overall portfolio 16 including affiliates‟ holdings”) (emphasis in original). 17 As for the second ground, Lead Plaintiff is basically criticizing Defendants for providing 18 an incomplete picture. But an incomplete picture does not necessarily establish that the 14D-9 is 19 false or misleading. The question is whether and how the disclosed projections in the 14D-9 were 20 rendered false or misleading because of the incomplete information. See Brody v. Transitional 21 Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002) (“Rule 10b-5 and Section 14(e) in terms prohibit 22 only misleading and untrue statements, not statements that are incomplete.”) (emphasis omitted). 23 For the foregoing reasons, the Court grants Defendants‟ motion to dismiss the § 14(e) 24 claim. However, because it is not clear that Lead Plaintiff could not cure the deficiencies in an 25 amended pleading, the Court gives Lead Plaintiff leave to amend. In the amended complaint, 26 Lead Plaintiff must address scienter as to each defendant (i.e., “lumping together” of Defendants 27 will not be accepted); in addition, Lead Plaintiff must explain with specificity what the false or 28 3 1 misleading statement or omission is and why it is false or misleading.2 Lead Plaintiff is advised to 2 address in its amended complaint the issues noted above. 3 C. Section 20(a) Claim 4 Lead Plaintiff‟s § 20(a) claim is derivative of its § 14(e) claim. Thus, the § 20(a) claim 5 falls with the § 14(e) claim. Consistent with the above, Lead Plaintiff has leave to amend the § 6 20(a) claim. 7 D. At this juncture, the Court shall not address Defendants‟ arguments in favor of dismissal of 8 9 State Law Fiduciary Duty Claims the state law fiduciary duty claims. The Court will not entertain any arguments related to the that Lead Plaintiff has adequately pled a federal securities claim (§ 14(e) and/or § 20(a)) in the 12 For the Northern District of California fiduciary duty claims over which it has supplemental jurisdiction unless and until it determines 11 United States District Court 10 first instance. 13 However, because the Court is already giving leave to Lead Plaintiff to amend the § 14(e) 14 and § 20(a) claims, it shall also give Lead Plaintiff leave to amend its allegations in support of the 15 fiduciary duty claims. In this regard, the Court notes that it would be helpful for Lead Plaintiff to 16 identify what specific fiduciary duties have allegedly been violated and then explain how. In 17 addition, similar to above, Lead Plaintiff should not lump Defendants together but have allegations 18 specific as to each defendant. Finally, in light of the Delaware Supreme Court‟s affirmance in In 19 re Volcano Corp. Stockholder Litigation, see Docket No. 56-1, Lead Plaintiff should make clear 20 how the shares tendered by disinterested shareholders constitute less than a majority of the total 21 shares. The “other management” holding 2.2% of the shares seems to include three executive 22 officers who – at least facially – Lead Plaintiff has not claimed to be interested (i.e., Lead Plaintiff 23 has not sued all of those individuals as defendants). II. 24 CONCLUSION For the foregoing reasons, the Court grants Defendants‟ motion to dismiss. The § 14(d)(7) 25 26 27 28 2 The Court does not, at this juncture, make a ruling as to Lead Plaintiff‟s contention that it need not plead loss causation for a § 14(e) claim. Out of an abundance of caution, Lead Plaintiff would be well advised to include specific loss causation allegations in its amended complaint. 4 1 claim is dismissed with prejudice. The § 14(e) and § 20(a) claims are dismissed without 2 prejudice, and Lead Plaintiff has leave to amend. The Court defers ruling on the fiduciary duty 3 claims but Lead Plaintiff may amend the factual allegations in support. 4 5 6 The amended complaint shall be filed by March 20, 2017. Defendants‟ response shall be filed by April 20, 2017. This order disposes of Docket No. 42. 7 8 IT IS SO ORDERED. 9 10 12 For the Northern District of California United States District Court 11 Dated: February 21, 2017 ______________________________________ EDWARD M. CHEN United States District Judge 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5

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