Curry v. Hansen Medical, Inc. et al

Filing 103

ORDER by Judge Claudia Wilken GRANTING, IN PART, DEFENDANTS' 81 , 82 MOTION TO DISMISS THIRD CONSOLIDATED AMENDED COMPLAINT. (ndr, COURT STAFF) (Filed on 8/10/2012)

1

IN THE UNITED STATES DISTRICT COURT

2

FOR THE NORTHERN DISTRICT OF CALIFORNIA

3
4 ROBERT CURRY, Individually and on
Behalf of All Others Similarly
5 Situated,
6
7

Plaintiff,
v.

No. C 09-5094 CW
ORDER GRANTING, IN
PART, DEFENDANTS'
MOTION TO DISMISS
THIRD CONSOLIDATED
AMENDED COMPLAINT

8 HANSEN MEDICAL, INC.; FREDERIC H.
MOLL; STEVEN M. VAN DICK; GARY C.
9 RESTANI; and CHRISTOPHER SELLS,

United States District Court
For the Northern District of California

10

Defendants.

11 ________________________________/
12
13
14

In this consolidated securities fraud class action,
Defendants Hansen Medical, Inc., and former Hansen employees

15 Frederic H. Moll, Steven M. Van Dick, Gary C. Restani and
16 Christopher Sells move to dismiss the Third Consolidated Amended
17 Complaint (3AC).1
18

Lead Plaintiffs Mina and Nader Farr, and

Plaintiffs Robert Curry, Kim M. Prenter, Muthusamy Sivanantham,

19
and Jean and Gary Cawood, (collectively, Plaintiffs), bringing
20
21

this putative class action on behalf of the Hansen shareholders

22 who purchased or acquired stock between February 19, 2008 and
23
24

1

Sells, who is named as a defendant for the first time in
the 3AC, files his motion separately. In a related action, the
25 Securities and Exchange Commission charges Sells and Timothy
26 Murawski, another former Hansen employee, with violations of
federal securities laws. See SEC v. Sells and Murawski, C 11-4941
27 CW. Sells and Murawski's motion to dismiss the SEC's complaint is
addressed in a separate order.
28

1

October 18, 2009 (Class Period), oppose the motion.

Plaintiffs

2

allege that, during the Class Period, Defendants induced them to

3

acquire Hansen stock at artificially inflated prices by making

4

knowing and intentional misstatements regarding Hansen's revenue

5

recognition and sales performance in violation of §§ 10(b) and

6

20(a) of the Securities Exchange Act of 1934 (Exchange Act), 15

7
U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b8
5, promulgated thereunder.

The motion was heard on May 3, 2012.

9

United States District Court
For the Northern District of California

10

Having considered all of the parties’ papers and oral argument on

11

the motion, the Court grants Defendants’ motion in part, with

12

leave to amend.

13
14
15

BACKGROUND
I. Second Amended Complaint
The parties in this action previously stipulated to the

16
filing of a first amended complaint and a second consolidated
17
18

amended complaint (2AC).

On August 25, 2011, another judge of

19

this Court granted Defendants' motion to dismiss the 2AC, with

20

leave to amend.

21

order is summarized as follows.

22
23

Docket No. 59.

The statement of facts in that

Defendants are Hansen, Hansen's former Chief Executive
Officer (CEO), Defendant Moll; Hansen's former Chief Financial

24
Officer (CFO), Defendant Dick; Hansen's former Chief Operating
25
Officer (COO), Defendant Restani; and Hansen's former Senior Vice
26
27
28

President (SVP) of Commercial Operations, Defendant Sells.
Hansen's revenue recognition policy for its main product, the
2

1

Sensei Robotic Catheter System (Sensei unit), is based on American

2

Institute of Certified Accountants, Statement of Position 97-2

3

(SOP 97-2), Software Revenue Recognition, which allows recognition

4

of revenue only after installation of the product and training of

5

the end-users are complete.

6

In August 2009, an investigation

conducted by Hansen's audit team with independent counsel

7
concluded that data on certain sales transactions was withheld
8
from Hansen's accounting department and outside auditors, and that
9

United States District Court
For the Northern District of California

10

documents related to some revenue were falsified so that Hansen's

11

accounting department had incomplete information about temporary

12

installations, unfulfilled training obligations and undisclosed

13

side agreements.

14

Hansen's distributors' ability to install Sensei units and train

15

Also, the investigation raised questions about

end-users independently.

On October 8, 2009, these findings were

16
made public in Hansen's Form 8-K filed with the Securities and
17
18

Exchange Commission (SEC).

On November 16, 2009, Hansen restated

19

its financial statements for the year ending December 31, 2008,

20

and for the quarters ending March 31, June 30 and September 30,

21

2008 and March 31 and June 30, 2009 (the Restatement).

22

result of the Restatement, Hansen's stock price decreased

23

significantly.

As a

24
In the August 25, 2011 Order, the Court found that Plaintiffs
25
had not alleged that Defendants made misstatements with actual
26
27
28

knowledge of their falsity.

Order at 7.

The Court held that the

accounts from twelve confidential witnesses (CWs) were
3

1

insufficient to allege scienter because: (1) only one of the CWs

2

was employed by Hansen throughout the entirety of the class

3

period; (2) none of the CWs worked directly with revenue

4

recognition; (3) many of the allegations were hearsay and, even at

5

face value, failed to demonstrate Defendants had knowledge of the

6

alleged fraudulent activity; and (4) the allegations stated

7
information that could only circumstantially give rise to an
8
inference of scienter.

Order at 8.

The Court found the following

9

United States District Court
For the Northern District of California

10

allegations were insufficient to show scienter: (1) Defendants'

11

presumed knowledge of Hansen's core business activity; (2) the

12

magnitude of the Restatement and accounting violations;

13

(3) Defendants' certifications pursuant to the Sarbanes-Oxley Act

14

of 2002 (SOX), 15 U.S.C. § 7201, et seq.; and (4) Defendants'

15

decision to conduct two public equity offerings during the Class

16
Period.

Order at 9-11.

17
18
19
20

II. Third Amended Complaint
A. Allegations Against Defendant Sells
Sells was one of only six Hansen executives and, as the SVP

21

of Commercial Operations, he was responsible for sales, training,

22

installation and customer service.

23

weekly meetings with the other Defendants regarding the status of

3AC ¶ 23.

He participated in

24
Sensei unit sales and installations, received Sensei unit sales
25
and installations reports, and monitored utilization of Sensei
26
27
28
4

1

units and catheter sales data.2

During installation status

2

meetings, Van Dick, Moll and Sells would reach a consensus on

3

which Sensei units could be recognized as revenue.

4

Sells participated in calls with Hospital A and reprimanded a

5

Hansen employee for documenting an agreement that the Sensei unit

6

3AC ¶ 52.

installed would immediately be taken apart, stored and reinstalled

7
in a later quarter when the construction of Hospital A's
8
9

laboratory was complete.

3AC ¶¶ 125, 127.

Sells directed a

United States District Court
For the Northern District of California

10

Hansen employee to obtain signatures required to recognize revenue

11

from a Sensei unit sold to Hospital B, even though Sells knew it

12

would be impossible for the required training to be completed

13

before the end of the quarter.

14

3AC ¶¶ 134-36.

Sells entered into

a side agreement to make a leasing company whole if Hospital C

15
returned its Sensei unit, by helping the leasing company find
16
another buyer.

3AC ¶¶ 142-48.

Sells helped arrange for the

17
18

installation and immediate dismantling and storage of a Sensei

19

unit sold to Hospital D, which allowed Hansen to record

20

approximately $550,000 in revenue for the quarter.

3AC ¶¶ 149-54.

21

B. Allegations Against Other Individual Defendants

22

In meetings and conversations with financial analysts,

23

Defendants Moll, Van Dick and Restani consistently gave optimistic

24
predictions about the pipeline for future Sensei unit sales and
25
26
27

the utilization of Sensei units by purchaser hospitals.
2

In these

Catheter sales were an indicator of Hansen's hospital
customers' utilization of the Sensei units they had purchased.

28
5

1

conversations, Moll, Van Dick and Restani also provided positive

2

interpretations of questionable data regarding sales of catheters.

3

Based upon the sales data and reports they received on a weekly

4

basis, Defendants Moll, Van Dick and Restani knew or should have

5

known that revenue was recognized for installations that did not

6

meet Hansen's accounting guidelines.

Based upon sales of

7
catheters, Defendants Moll, Van Dick and Restani knew or should
8
have known that utilization of Sensei units at customer hospitals
9

United States District Court
For the Northern District of California

10

was not strong.
Plaintiffs assert the following claims for relief:

11
12

(1) against all Defendants, violation of § 10(b) of the Exchange

13

Act and Rule 10b-5(b); (2) against Sells alone, violation of

14

§ 10(b) of the Exchange Act and Rules 10b-5(a) and (c); and

15

(3) against all Defendants, violation of § 20(a) of the Exchange

16
Act.
17
LEGAL STANDARD

18
19

A complaint must contain a "short and plain statement of the

20

claim showing that the pleader is entitled to relief."

Fed. R.

21

Civ. P. 8(a).

22

12(b)(6) for failure to state a claim, dismissal is appropriate

23

only when the complaint does not give the defendant fair notice of

When considering a motion to dismiss under Rule

24
a legally cognizable claim and the grounds on which it rests.
25
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

In

26
27
28

considering whether the complaint is sufficient to state a claim,
the court will take all material allegations as true and construe
6

them in the light most favorable to the plaintiff.

NL Indus.,

2

Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986).

However, this

3

principle is inapplicable to legal conclusions; "threadbare

4

recitals of the elements of a cause of action, supported by mere

5

conclusory statements," are not taken as true.

1

6

Ashcroft v. Iqbal,

556 U.S. 662, 129 S. Ct. 1937, 1949-50 (2009) (citing Twombly, 550

7
U.S. at 555).
8
REQUESTS FOR JUDICIAL NOTICE
9

United States District Court
For the Northern District of California

10

Federal Rule of Evidence 201 allows a court to take judicial

11

notice of a fact “not subject to reasonable dispute in that it is

12

. . . capable of accurate and ready determination by resort to

13

sources whose accuracy cannot reasonably be questioned.”

14

where judicial notice is not appropriate, courts may also properly

15

Even

consider documents “whose contents are alleged in a complaint and

16
whose authenticity no party questions, but which are not
17
18
19
20

physically attached to the [plaintiff’s] pleadings.”

Branch v.

Tunnell, 14 F.3d 449, 454 (9th Cir. 1994).
Defendants request that the Court take judicial notice of

21

copies of completed SEC filings by Hansen, Stereotaxis and

22

Intuitive Services, Inc.

23

judicial notice of conference call transcripts.

They also request that the Court take
Plaintiffs object

24
to the request for judicial notice of these documents if they are
25
taken for the truth of the matter asserted.

Plaintiffs seek

26
27
28

judicial notice of two SEC filings by Sells documenting that he
sold Hansen securities on August 8, 2008 and March 3, 2009.
7

The Court grants Plaintiffs' request for judicial notice of

1
2

Sells' SEC filings.

3

942, 946 n.2 (9th Cir. 2006) (SEC filings may be judicially

4

noticed).

5

Hansen, Stereotaxis and Intuitive Services and the conference

6

See Dreiling v. American Exp. Co., 458 F.3d

The Court takes judicial notice of the filings by

calls for the fact that they were made on the dates specified, but

7
not for the truth of the matters asserted therein.
8
DISCUSSION
9

United States District Court
For the Northern District of California

10
11

I.

Section 10(b) of the Exchange Act and Rule 10b-5(b)
Section 10(b) of the Exchange Act makes it unlawful for any

12

person to "use or employ, in connection with the purchase or sale

13

of any security . . . any manipulative or deceptive device or

14

contrivance in contravention of such rules and regulations as the

15

[SEC] may prescribe."

15 U.S.C. § 78j(b); see also 17 C.F.R.

16
§ 240.10b-5 (Rule 10b-5).

Rule 10b-5(b) clarifies that it is

17
18

"unlawful for any person, directly or indirectly, . . . to make

19

any untrue statement of material fact or to omit to state a

20

material fact necessary in order to make the statements made, in

21

the light of the circumstances under which they were made, not

22

misleading . . . "

23

under Rule 10b-5(b), a plaintiff must allege: "(1) a

17 C.F.R. § 240.10b-5(b).

To state a claim

24
misrepresentation or omission of material fact, (2) scienter,
25
(3) a connection with the purchase or sale of a security,
26
27

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

28
8

In re

1
2
3

Gilead Sciences Securities Litig., 536 F.3d 1049, 1055 (9th Cir.
2008).
Plaintiffs must plead any allegations of fraud with

4

particularity, pursuant to Rule 9(b) of the Federal Rules of Civil

5

Procedure.

6

In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1543

(9th Cir. 1994) (en banc).

Pursuant to the requirements of the

7
Private Securities Litigation Reform Act of 1995 (PSLRA), the
8
complaint must "specify each statement alleged to have been
9

United States District Court
For the Northern District of California

10

misleading, the reason or reasons why the statement is misleading,

11

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

12

on information and belief, the complaint shall state with

13

particularity all facts on which that belief is formed."

14

U.S.C. § 78u-4(b)(1).

15

A.

15

Misrepresentation or Omission of a Material Fact

16
To state a claim pursuant to Rule 10b-5(b), Plaintiffs must
17
18

allege, among other things, a misrepresentation or omission of a

19

material fact.

“A litany of alleged false statements,

20

unaccompanied by the pleading of specific facts indicating why

21

those statements were false, does not meet this standard.”

22

Metzler Investment v. Corinthian Colleges, 540 F.3d 1049, 1070

23

(9th Cir. 2008); Falkowski v. Imation Corp., 309 F.3d 1123, 1133

24
(9th Cir. 2002).
25
1. Sells' Liability for Rule 10b-5(b) Violation
26
27
28

Sells argues that, because there are no allegations that he
made statements or that he was required to make statements, he
9

1

cannot be liable under Rule 10b-5(b).

Plaintiffs do not allege

2

that Sells made any false or misleading statements or omissions of

3

material facts.

4

list of press releases and investor calls in which Hansen's

5

financial situation was discussed.

6

to Sells.

In the appendix to the 3AC, Plaintiffs present a

No statements are attributed

Nor do Plaintiffs allege that Sells signed any of

7
Hansen's SEC filings.
8
Nevertheless, Plaintiffs argue that, as a result of the
9

United States District Court
For the Northern District of California

10

decisions Sells took to manipulate Hansen's financial results, he

11

made it necessary and inevitable that false and misleading

12

statements regarding Hansen's financial condition would be

13

communicated to investors.

14

the disclosure committee, Sells had responsibility for the

15

They also argue that, as a member of

accurate and fair presentation of Hansen's press releases and SEC

16
quarterly filings.
17
Both sides cite a recent Supreme Court case, Janus Capital

18
19

Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011),

20

in support of their positions.

21

purposes of Rule 10b-5(b), "the maker of a statement is the person

22

or entity with ultimate authority over the statement, including

23

its content and whether and how to communicate it."

In Janus, the Court held that, for

Id. at 2302.

24
The Court explained that, without control, a person can only
25
suggest what to say, not make a statement in his or her own right.
26
27
28

Id.

The Court noted that this was exemplified by the relationship

between a speechwriter and speaker; the speechwriter drafts the
10

1
2
3

speech, but the speaker is responsible for its content and is the
person who takes the credit, or the blame, for what is said.

Id.

Plaintiffs' argument that their allegations regarding Sells

4

are sufficient under Janus is unavailing.

5

the lack of allegations that an individual was the maker of a

6

Janus clarifies that

statement is fatal to a Rule 10b-5(b) claim against that

7
individual.

Therefore, the Rule 10b-5(b) claim against Sells is

dismissed.

Because this claim was alleged for the first time in

8
9

United States District Court
For the Northern District of California

10

Plaintiffs' 3AC, dismissal is with leave to amend, if Plaintiffs

11

can truthfully allege that Sells made a statement as required by

12

Janus.

13

2. Other Defendants' Liability Under Rule 10b-5(b)

14

Plaintiffs allege that, throughout the Class Period, Hansen

15

published false statements about its financial performance, the

16
number of Sensei units installed each quarter and the market
17
18

outlook for Sensei units.

In the Restatement, Hansen admitted

19

making these false statements and Defendants do not dispute this.

20

Because, as discussed below, Plaintiffs sufficiently allege Hansen

21

made these misstatements with scienter, they have stated a Rule

22

10b-5(b) claim against Hansen.

23

Plaintiffs allege that Defendants Moll, Van Dick and Restani

24
made false statements regarding Hansen's past and present sales of
25
Sensei units.

For instance, during a 4Q07 conference call with

26
27
28

industry analysts, Moll stated that "we've been able to move from
four units in the second quarter to five in the third and sixth-11

1

six units in our fourth quarter.

I think we're going to continue,

2

we would continue to expect to see a stair-step approach going

3

into '08, and as a natural consequence of a stair step, you're

4

going to see obviously more units in the back half of the year

5

than the front half."

6

3AC ¶ 204.

Plaintiffs allege that this was

false because Hansen's 4Q07 sales were not reported accurately and

7
sales were flat between 3Q07 and 4Q07.
8
In the 1Q08 conference call, Moll stated, "I'm pleased to
9

United States District Court
For the Northern District of California

10

report that since commercialization we have achieved four

11

consecutive quarters of increases in the number of systems

12

placed."

13

Hansen had experienced "steady quarterly growth, four quarters in

14

a row."

15

3AC ¶ 207.

3AC ¶ 207.

During the same call, Restani stated that

Plaintiffs allege this was false because the

Restatement reflects that Hansen improperly recognized revenue for

16
two Sensei units in 1Q08.

3AC ¶ 208.

Without these two

17
18

"manufactured" sales, Hansen's growth for 1Q08 would be flat.

3AC

19

¶ 208.

Plaintiffs have sufficiently alleged that these

20

statements, of past and present financial and sales results, were

21

false.

22

During a 3Q08 conference call with industry analysts, a

23

question was asked about the stagnant growth in catheter sales and

24
utilization of installed Sensei units that might be "sitting idle"
25
or "sleeping," as an indicator of future sales of Sensei units.
26
27
28

Moll replied, "No, I wouldn't call it sitting idle.

I mean,

certainly there are--there's probably a couple examples where
12

1

Sensei that actually have had the time to percolate through the

2

process aren't being used a lot.

3

of systems in that we are growing placements rapidly per quarter,

4

so there is [sic] a lot of systems that are sort of in the early

5

stages of utilization. . . . And so, there is--there aren't a lot

6

of systems that are sleeping.

But, there's--there are a number

There are systems that are not

7
anywhere near up to full utilization because they haven't sort of
8
gone through the process of getting up to full independence and
9

United States District Court
For the Northern District of California

10

utilization by the institution . . ."

3AC ¶ 163.

Plaintiffs

11

allege that Moll made this statement when reports showed that at

12

least three of the forty-five Sensei units sold were never used

13

and customers for these Sensei units never purchased any

14

catheters.

15

3AC ¶ 164.

Plaintiffs have sufficiently alleged that

this statement of present utilization of Sensei units was false.

16
Plaintiffs also allege that Defendants first stated in a 4Q07
17
18

conference call that Hansen's customers do not buy catheters in

19

bulk and that "there's not a lot of stocking built into our

20

numbers at this point."

21

added that this was because the "current shelf life on a catheter

22

is not that long."

23

catheters sold was a better indicator of utilization than

Id.

3AC ¶ 220 (Restani statement).

Van Dick

Moll explained that the number of

24
reporting the number of procedures performed with each Sensei
25
unit.

3AC ¶ 221.

In 1Q08, Hansen reported sales of 401

26
27
28

catheters.

3AC ¶ 223.

However, Defendants failed to disclose

that this number was inflated by twenty to twenty-five percent
13

1

because three customers placed large orders near the end of the

2

first quarter.

3

catheter sales in 1Q08 created the misleading impression among

4

investors that utilization of Sensei units was increasing faster

5

than it was.

6

3AC ¶ 225a.

The report of such a high number of

3AC ¶¶ 226, 227 (positive analyst reports based on

401 catheter sales as compared to analysts' 230 unit estimate).

7
Plaintiffs have sufficiently alleged that the failure to disclose
8
the fact that a significant number of catheter sales in 1Q08 was
9

United States District Court
For the Northern District of California

10
11

made in bulk to three customers was an omission of material fact.
Defendants argue that the alleged misstatements are

12

protected by the PSLRA safe harbor provision because they are

13

forward-looking and accompanied by meaningful cautionary language.

14
15

In order for the safe harbor provision to apply, a statement
is “identified as a forward-looking statement, and is accompanied

16
by meaningful cautionary statements identifying important factors
17
18

that could cause actual results to differ materially from those in

19

the forward-looking statement.”

20

The "bespeaks caution" doctrine, which was formulated by courts

21

prior to the enactment of the PSLRA, operates in a similar

22

fashion.

23
24
25

15 U.S.C. § 78u-5(c)(1)(A)(i).

This doctrine

provides a mechanism by which a court can rule as a matter of
law . . . that defendants’ forward-looking representations
contained enough cautionary language or risk disclosure to
protect the defendant against claims of securities fraud.

26

Provenz v. Miller, 102 F.3d 1478, 1493 (9th Cir. 1996) (citing In

27

re Worlds of Wonder Securities Litigation, 35 F.3d 1407, 1413-14

28
14

1

(9th Cir. 1994)).

"Cautionary statements must be precise and

2

directly address[] . . . the [defendants’] future projections

3

. . . Blanket warnings that securities involve a high degree of

4

risk [are] insufficient to ward against a federal securities fraud

5

claim."

6

Id.

Defendants correctly argue that Plaintiffs cannot assert

7
claims based solely on Hansen's alleged failure to predict the
8
extent to which the 2008 economic recession would affect Hansen's
9

United States District Court
For the Northern District of California

10

sales, 3AC ¶¶ 249-70, or on vague predictions of "stair-step"

11

growth or puffery of "strong demand" or a "healthy" pipeline, 3AC

12

¶¶ 206-07, 264-65.

13

1103, 1111 (9th Cir. 2010) (optimistic, subjective assessments do

14

not rise to the level of a securities violation; investors devalue

15

See In re Cutera Securities Litig., 610 F.3d

the optimism of corporate executives).

Indeed, the Court's August

16
25, 2011 Order held that statements such as "'we feel very
17
18

confident that given the pipeline . . . we're going to have a very

19

reason[able] 2009'" are protected by the safe harbor provision.

20

Order at 6-7.

21

references to concrete rates of Sensei unit sales and user

22

activity would not be immune.

23

Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 947-48 (9th Cir.

However, in the Order, the Court noted that

Order at 6 (citing Livid Holdings

24
2005) (statements of present or historical fact are not protected
25
under safe harbor provision)).
26
27
28

In addition to puffery and optimistic forward-looking
statements, as discussed above, Plaintiffs cite statements of
15

1

historical or present fact made by Defendants.

Defendants' report

2

of a high number of catheter sales, without clarifying that a

3

significant percentage was due to large orders from three

4

customers, misrepresented present customer utilization activity

5

and Defendants' statement that Hansen had experienced steady

6

growth for four quarters in a row misrepresented historical facts.

7
Therefore, some of Defendants' alleged statements are not
8
protected by the safe harbor provision.
9

United States District Court
For the Northern District of California

10
11

B. Scienter For Rule 10b-5(b) Claim
Pursuant to the requirements of the PSLRA, a complaint must

12

“state with particularity facts giving rise to a strong inference

13

that the defendant acted with the required state of mind."

14

U.S.C. § 78u-4(b)(2).

15

15

The PSLRA thus requires that a plaintiff

plead with particularity “facts giving rise to a strong inference

16
that the defendant acted with,” at a minimum, deliberate
17
18

recklessness.

15 U.S.C. § 78u-4(b)(2); In re Silicon Graphics,

19

Inc. Secs. Litig., 183 F.3d 970, 977 (9th Cir. 1999).

20

establish a motive and opportunity, or circumstantial evidence of

21

“simple recklessness,” are not sufficient to create a strong

22

inference of deliberate recklessness.

23

heightened pleading requirement of the PSLRA for scienter,

Id. at 979.

Facts that

To satisfy the

24
plaintiffs “must state specific facts indicating no less than a
25
degree of recklessness that strongly suggests actual intent.”

Id.

26
27
28

When evaluating the strength of an inference, “the court’s
job is not to scrutinize each allegation in isolation but to
16

1

assess all the allegations holistically.”

Tellabs, Inc. v. Makor

2

Issues & Rights, Ltd., 551 U.S. 308, 325 (2007).

3

of scienter must be more than merely ‘reasonable’ or ‘permissible’

4

–- it must be cogent and compelling, thus strong in light of other

5

explanations.”

6

Id. at 324.

“The inference

However, "the inference that the

defendant acted with scienter need not be irrefutable, i.e., of

7
the ‘smoking-gun’ genre, or even the ‘most plausible of competing
8
inferences.’”

Id.

The Tellabs decision suggests that Silicon

9

United States District Court
For the Northern District of California

10

Graphics and its progeny may have been "too demanding and focused

11

too narrowly in dismissing vague, ambiguous, or general

12

allegations outright."

13

F.3d 776, 784 (9th Cir. 2008).

14

less precise allegations to be read together to meet the PSLRA

15

South Ferry LP, No. 2 v. Killinger, 542
Thus, Tellabs "permits a series of

requirement . . . . Vague or ambiguous allegations are now

16
properly considered as a part of a holistic review when
17
18
19
20

considering whether the complaint raises a strong inference of
scienter."

Id.

Scienter also can be shown by pleading "a highly unreasonable

21

omission, involving an extreme departure from the standards of

22

ordinary care, and which presents a danger of misleading buyers or

23

sellers that is either known to the defendant or is so obvious

24
that the actor must have been aware of it."

Zucco Partners, LLC

25
v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009).
26
27
28

In the August 25, 2011 Order, the Court noted that:
Witness accounts can give rise to a strong inference of
17

1
2
3
4
5
6

scienter if: (1) witnesses are "described in the complaint
with sufficient particularity to support the probability that
a person in the position occupied by the source would possess
the information alleged;" and (2) the statements attributed
to witnesses are indicative of scienter. In re Daou Sys.,
Inc., 411 F.3d 1006, 1015-16 (9th Cir. 2005). The Ninth
Circuit concluded in Zucco that allegations made by witnesses
who were not employed throughout the length of the relevant
time period were unreliable. 552 F.3d at 996-97.
August 25, 2011 Order at 7.

7
The Order noted that the 2AC set forth accounts from twelve
8
confidential witnesses (CWs), but rejected most of the allegations
9

United States District Court
For the Northern District of California

10

from these witnesses for the following reasons: (1) only one of

11

the twelve CWs was employed by Hansen throughout the entirety of

12

the class period; (2) none of the twelve witnesses worked with

13

revenue recognition; (3) none of the witnesses would have been in

14

a position to know whether the individual Defendants knew or

15

should have known of Hansen's improper recognition of revenue; and

16
(4) certain allegations relied on hearsay and, even at face value,
17
18

failed to demonstrate that the individual Defendants had knowledge

19

of the alleged fraudulent activities.

20

The Court found that the most compelling allegations came from

21

CW1, who was the only witness who was employed throughout the

22

Class Period, and who allegedly worked with customer support and

23

managed installations.

Id.

August 25, 2011 Order at 8.

In its previous Order, the Court

24
found that CW1 was described with sufficient particularity.

CW1

25
was Director of Customer Support from April 2006 to November 2009.
26
27
28

Initially, CW1 completed sales in Europe and later managed all of
Hansen's Sensei unit installers.

CW1 attended weekly installation
18

1

meetings with Van Dick and Moll where they discussed, line by

2

line, reports showing installations for each customer, with

3

columns for the order, installation date and training dates.

4

The August 25, 2011 Order indicated that CW1 mentioned that there

5

were several incomplete transactions for which revenue should have

6

Id.

been deferred, but that he did not indicate that this information

7
was made known to Defendants at the weekly meetings.

Id. at 9.

8
The Court also noted that CW1 stated that catheter sales would be
9

United States District Court
For the Northern District of California

10

talked about at the meetings, but did not indicate how this would

11

alert Defendants to the misstatements noted in the Restatement.

12

Id.

13
14
15

In the 3AC, Plaintiffs again include statements from CW1 and
include statements from two new CWs, CW2 and CW3.

CW2 was Sales

Director for Central and Eastern Europe from 2007 through 2011.

16
He participated in conference calls with Defendants, during which
17
18

the participants discussed the status of Sensei unit sales, one at

19

a time.

20

from September 2006 through June 2009.

21

that, on occasion, he received calls from Van Dick wanting to know

22

about the closure of particular deals.

23

3AC ¶ 26.

CW3 was Sales Director of the Southeast Region
3AC ¶ 27.

CW3 stated

3AC ¶ 27.

Unlike the other confidential witnesses mentioned in the 2AC,

24
CW2 and CW3, as well as CW1, worked for Hansen during the Class
25
Period and had direct knowledge of Sensei unit sales and
26
27
28

installations.

Moreover, CW1 and CW2 attended weekly meetings

with Defendants at which they discussed sales and installations to
19

1

specific customers, which are central to the alleged misstatements

2

about premature revenue recognition.

3

the circumstances surrounding Sensei unit sales and installations

4

and of what occurred at the staff meetings are relevant to

5

scienter.

6

Therefore, their accounts of

The statement alleged to be made by CW3, that Van Dick

wanted to know about deals closing, provides some support for

7
Defendants' knowledge or scienter.
8
1. Scienter of Individual Defendants Moll, Van Dick
and Restani For Rule 10b-5(b) Claim

9

United States District Court
For the Northern District of California

10
11

Plaintiffs argue that Hansen's Restatement of its financial
statements for 4Q07 through 2Q09 demonstrates Defendants' direct

12
knowledge of the previous misstatements they made.

The Court

13
14

previously held, in the August 25, 2011 Order, that the accounting

15

mistakes acknowledged in Hansen's Restatement were not so

16

egregious that Defendants must have been aware of them.

17

10-11.

18

core operations, the magnitude of the Restatement, and the

19

Order at

The Court also addressed Plaintiffs' allegations regarding

certifications made pursuant to the Sarbanes-Oxley Act of 2002

20
(SOX), and concluded that "Plaintiffs have laid a foundation for
21
their 10(b) claim, but additional specificity is needed to show
22
23

that Defendants acted with the requisite mental state."

24

12.

25

Order at

As discussed below, Plaintiffs now provide specific

26

allegations that Defendants ignored information that it was

27

impossible for Hansen to meet its training obligations to certain

28
20

1

distributors in the quarter in which Hansen recognized revenue

2

from Sensei unit sales to those distributors.

3

sufficiently state that Defendants willfully ignored information

4

in their possession and exclude the Court's previous hypothesis,

5

based on the allegations in the 2AC, that Defendants could have

6

These allegations

been ignorant of the improper revenue recognition because they

7
were provided with false information.
8
The 3AC alleges that, in its Restatement, Hansen disclosed
9

United States District Court
For the Northern District of California

10

that, for Sensei unit sales to "independent distributors," it had

11

"recognized revenue upon shipment of Systems to those distributors

12

that we believed were independently capable of performing required

13

installation and training," but "the distributors were not

14

independently capable of installing systems and/or clinically

15

training end users at the time we recognized revenue on systems

16
purchased by distributors" and "therefore, revenue on such Systems
17
18
19
20

should have been deferred until installation and training had
occurred at the distributor's end user."

3AC ¶ 57.

Plaintiffs allege that Defendants knew or recklessly

21

disregarded Hansen's post-shipment obligations that made revenue

22

recognition upon shipment to its purportedly independent

23

distributors improper.

For instance, CW1 explained that the two

24
days of training that distributors received was insufficient for
25
them independently to install Sensei units for their customers and
26
27
28

to train them.

3AC ¶ 59.

Defendants would have been aware of

this because Hansen installation personnel received two weeks of
21

1

training at a Hansen facility and then three to six months of

2

training in the field under the supervision of a senior employee.

3

3AC ¶ 59.

4
5
6

In a 4Q07 conference call, Restani admitted that training new
end-users took three to six months, 3AC ¶ 97, and Van Dick
explained, during a 2Q09 conference call, that Hansen had to

7
complete its training obligations to distributors before it could
8
recognize revenue on its sales to them.

3AC ¶ 46.

9

United States District Court
For the Northern District of California

10

CW2 confirmed that distributors' personnel attended only a

11

three or five-day training session for both installations and end-

12

user support.

13

conference calls with the individual Defendants, training was

14

often discussed.

15

3AC ¶ 61.

CW2 indicated that, during weekly

3AC ¶ 68.

CW2 also indicated that two of

Hansen's distributors were incapable of supporting an end-user.

16
3AC ¶¶ 68-69.

To show that Defendants knew that the distributors

17
18

required extensive training from Hansen personnel, Plaintiffs cite

19

the reselling and distribution agreements that Hansen entered into

20

with its distributors.

21

with Italian distributor AB Medica signed by Restani on behalf of

22

Hansen).

23

Services for Reseller," indicated that Hansen would provide

3AC, Ex. 14 (October 31, 2007 Agreement

Exhibit C to the Agreement, titled "Clinical Support

24
appropriate training for the Reseller's clinical support personnel
25
and that the Reseller would be responsible for providing ongoing
26
27
28

clinical support for end-users.

Exhibit D to the Agreement,

titled, "End-User Training Provided by Hansen," provided that
22

1

every end-user was required to attend and satisfactorily complete

2

end-user peer training before making human clinical use of the

3

Sensei units and that Hansen would evaluate each participant who

4

was trained to determine whether certification was appropriate or

5

whether further training was needed.

6

These allegations show that Moll, Van Dick and Restani were

7
aware of the amount of training of distributors that was necessary
8
to ensure that they could install Sensei units and train end9

United States District Court
For the Northern District of California

10
11

users.
Plaintiffs also allege that, in several instances, Hansen

12

recognized revenue at the time it sold a Sensei unit to a

13

distributor rather than after the distributor sold the unit to an

14

end-user.

15

In conjunction with allegations of Defendants'

knowledge of this practice, this raises an inference of scienter.

16
Revenue recognition upon the sale to a distributor was improper
17
18

because Hansen accounting procedures did not allow revenue

19

recognition until the end-user had been sufficiently trained.

For

20

instance, Plaintiffs allege that one Sensei unit was sold to AB

21

Medica on the last day of 1Q08 and revenue was recognized for its

22

sale in that quarter.

23

were not sufficiently trained to install the unit for an end-user;

Plaintiffs allege that AB Medica personnel

24
AB Medica was independently unable to provide clinical support for
25
an end-user; AB Medica, as of March 31, 2008, did not have an end26
27
28

user to purchase the Sensei unit; and, even if AB Medica did have
a purchaser in mind, an end-user could not have completed the
23

1

required training to allow Hansen to recognize revenue in that

2

quarter.

3

to Defendants because by March 31, 2008, it was clear that AB

4

Medica had been unable independently to install and support a

5

system it sold to a hospital end-user.

6

3AC ¶ 94.

Plaintiffs allege that these facts were known

3AC ¶ 94.

Plaintiffs also allege that Hansen recognized revenue in 1Q08

7
from a sale to Palex, another distributor, made on the last day of
8
1Q08.

3AC ¶¶ 96-97.

Plaintiffs allege that Moll, Van Dick and

9

United States District Court
For the Northern District of California

10

Restani knew or should have known that it was improper to

11

recognize revenue from this sale because it was impossible for a

12

Palex employee to have received sufficient training by the end of

13

1Q08 to be able independently to provide clinical support to an

14

end-user.

15

3AC ¶ 97.

Also, according to CW1, Hansen sold a Sensei unit to a

16
Canadian distributor in December 2008 and recognized the revenue
17
18

from that sale, although the unit was never installed and the

19

distributor did not obtain approval from the Canadian government

20

to use the equipment.

21

3AC ¶ 108.

In sum, these allegations give rise to an inference of

22

scienter on the part of Moll, Van Dick and Restani:

23

(1) Defendants met weekly to go over each Sensei unit sale on an

24
individual basis; (2) Defendants knew that Hansen's training
25
obligations to distributors had to be met before it could
26
27
28

recognize revenue from a sale to a distributor; and (3) at least
two of the sales to distributors took place on the last day of the
24

1

quarter, when Defendants knew the distributors' personnel had not

2

been adequately trained to install the Sensei units and to train

3

end-users.

4

were reckless in not knowing that recognizing revenue from these

5

sales to distributors violated Hansen's revenue recognition

6

These allegations show that Defendants either knew or

policy.

7
Defendants cite cases for the proposition that the fact that
8
corporate officers monitor financial or sales data does not
9

United States District Court
For the Northern District of California

10

establish that they are deliberately reckless.

See e.g., In re

11

Daou Systs, Inc., 411 F.3d 1006, 1022 (9th Cir. 2005) ("General

12

allegations of defendants' hands-on management style, their

13

interaction with other officers and employees, their attendance at

14

meetings, and their receipt of unspecified weekly or monthly

15

reports are insufficient" to support an inference of scienter).

16
However, in Zucco Partners, 552 F.3d at 1000-01, the court stated
17
18

that an inference of scienter is permitted where the information

19

misrepresented was readily apparent to the corporation's senior

20

management.

21

with less than 200 employees, focused on selling only one product,

22

with quarterly sales derived from the sale of only three to

23

fourteen units of that product.

This is such a case.

Hansen was a small company,

3AC ¶ 2, 120, 211.

Because

24
Hansen sold so few units and because each unit was vitally
25
important to Hansen's revenue stream, Defendants discussed, and
26
27
28

must have known about, each of them.

Furthermore, even though

hands-on management style alone is insufficient to establish
25

1

scienter, "specific admissions from top executives that they are

2

involved in every detail of the company and that they monitored

3

portions of the company's database are factors in favor of

4

inferring scienter in light of improper accounting reports."

5

Systs., 411 F.3d at 1022.

6

Daou

Here, Van Dick, Restani and Moll made

statements indicating that they were familiar with and closely

7
monitored the revenue recognition of every transaction, see 3AC
8
¶¶ 6, 45, 46, 49, and the utilization data for the units that had
9

United States District Court
For the Northern District of California

10
11

been installed, see 3AC ¶ 163.
Taken collectively, all of the allegations add up to a strong

12

inference of deliberate recklessness on the part of Defendants

13

Moll, Van Dick and Restani.

14

are sufficient to assert that these Defendants acted with the

15

Therefore, Plaintiffs' allegations

required scienter for the Rule 10b-5(b) claim.

16
2. Sells' Scienter for Rule 10b-5(a) and (c) Claim
17
18

Although the Rule 10b-5(b) claim against Sells is dismissed,

19

the Court addresses Sells' scienter under Rule 10b-5(a) and (c)

20

because, as discussed below, Sells' motion to dismiss the Rule

21

10b-5(a) and (c) claims is denied and Plaintiffs rely on Sells'

22

scienter to impute scienter to Hansen.

23

To plead scienter in the context of scheme liability under

24
Rule 10b-5(a) and (c), a complaint must allege that the defendant
25
engaged in deceptive conduct with scienter.

Simpson v. AOL Time

26
27
28

Warner Inc., 452 F.3d 1040, 1047 (9th Cir. 2006), vacated on other
grounds, 552 U.S. 1162 (2008).

To claim a "scheme to defraud,"
26

1

the complaint must allege that the defendant engaged in a

2

manipulative or deceptive act that had the principal purpose and

3

effect of creating a false appearance of fact in furtherance of

4

the scheme to defraud.

5

context, is defined as "engaging in a transaction whose principal

6

Id. at 1048.

A deceptive act, in this

purpose and effect is to create a false appearance of revenues."

7
Id.
8
Sells argues that this claim must be dismissed because
9

United States District Court
For the Northern District of California

10

Plaintiffs have failed to allege facts giving rise to a strong

11

inference of his scienter.

12

as the SEC's complaint in SEC v. Sells, about Sells' actions in

13

regard to four sales of Sensei units to Hospitals A, B, C and D.

14

See Order Denying Defendants' Motion to Dismiss in SEC v. Sells,

15

C 11-4941 CW.

3

The 3AC includes the same allegations

In that Order, the Court describes Sells'

16
deceptive acts involving these transactions, the purpose of which
17
18

was to cause Hansen to recognize revenue improperly, before its

19

accounting principles and procedures would allow, so that its

20

revenue stream would appear to be increasing each quarter.

21

allegations that Sells undertook these actions to manipulate the

22

timing of Hansen's revenue recognition are sufficient to allege

23

that he had the required scienter.

The

24
25
26
27

3

Scienter is not an issue in SEC v. Sells because the PSLRA
does not apply to claims brought by the SEC. See SEC v. Yuen, 221
F.R.D. 631, 636 (C.D. Cal. 2004).

28
27

As discussed above, Plaintiffs also allege that Sells, as SVP

1
2

of Commercial Operations, attended meetings with Moll, Restani and

3

Van Dick during which the installation of each Sensei unit was

4

discussed and Sells, Van Dick and Moll would reach a consensus on

5

which sales of Sensei units could be recognized as revenue.

6

¶ 52.

3AC

Thus, for the same reasons that these allegations raise an

7
inference of scienter on the part of Van Dick, Moll and Restani,
8
they also raise an inference of Sells' scienter.
9
3. Hansen's Scienter For Rule 10b-5(b) Claim

United States District Court
For the Northern District of California

10
11

Plaintiffs argue that they have alleged Hansen's scienter

12

under the doctrine of respondeat superior, based upon Sells'

13

scienter.4

14

Sells did not make a false statement, his scienter of improper

15

According to Plaintiffs, even if the Court finds that

revenue recognition, inferred from actions he took within the

16
scope of his employment, can be imputed to Hansen.

Defendants

17
18

respond that Sells' alleged knowledge of improper revenue

19

recognition cannot be imputed to Hansen because there is no

20

allegation that he shared this knowledge with anyone.

21

In the Ninth Circuit, a corporate entity can be vicariously

22

liable under § 10(b) for the fraudulent acts of its officers, if

23

the officers are alleged to have acted within the scope of their

24
employment and for the benefit of the company.

In re Cylink

25
Securs. Litig., 178 F. Supp. 2d 1077, 1088 (N.D. Cal. 2001)
26
27

4

Plaintiffs do not argue that the scienter of Restani, Van
Dick and Moll can be imputed to Hansen.

28
28

1

(citing Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1576-78

2

(9th Cir. 1990)).

3

previous rule that the vicarious liability provisions in certain

4

sections of the Securities Act supplanted the common law doctrine

5

of respondeat superior.

6

In Hollinger, the Ninth Circuit overturned its

914 F.2d at 1578; In re Network Equipment

Techs., Inc., Litig., 762 F. Supp. 1359, 1363-64 (N.D. Cal. 1991).

7
"So long as scienter is appropriately alleged for the officers and
8
directors of a company, then it is appropriately alleged for the
9

United States District Court
For the Northern District of California

10
11

company itself."

Cylink Securs., 178 F. Supp. 2d at 1088.

Because the 3AC adequately alleges Sells' scienter in regard

12

to the scheme to recognize revenue prematurely and that Sells

13

undertook this scheme in the scope of his employment, to benefit

14

his employer, his scienter is imputed to Hansen through vicarious

15

liability.

16
Defendants' argument that Hollinger should be limited to its
17
18

facts regarding broker-dealers was addressed and rejected in

19

Network Equipment Techs., 762 F. Supp. at 1364, where the court

20

held that Hollinger embraced "the old traditional common law

21

doctrine" which contains no limitation that would confine its

22

application exclusively to broker-dealers.

23

Equipment Techs. addressed Defendants' second argument that Hansen

Furthermore, Network

24
cannot be liable because there is no evidence that it knew of any
25
contradictory information at the time of the alleged
26
27
28

misstatements.

Regarding this argument, the court explained that,

"respondeat superior liability establishes a form of secondary
29

1

liability which does not require actual knowledge or recklessness

2

on the part of the vicariously liable principal."

3

1364.

4

imputed to Hansen because, in Hollinger, the court dismissed the

5

plaintiffs' claim against the corporate defendant where there was

6

762 F. Supp. at

Defendants' last argument is that scienter cannot be

no allegation of the corporation's scienter.

914 F.2d at 1572.

7
Defendants misread the import of Hollinger's vicarious liability
8
analysis.

Although the court found insufficient allegations of

9

United States District Court
For the Northern District of California

10

the defendant's scienter and dismissed the claim on that ground,

11

it found that the defendant was secondarily liable under the

12

theory of respondeat superior.

13

Hollinger, although Hansen may not be primarily liable for

14

securities fraud, it is secondarily liable under the theory of

15

Id. at 1577-78.

Therefore, as in

respondeat superior.

16
II. Rule 10b-5(a) and (c) Claim Against Sells
17
18

Plaintiffs assert the Rule 10b-5(a) and (c) claim against

19

Sells only.

In the related case, SEC v. Sells, C 11-4941 CW, the

20

Court addressed the SEC's claim against Sells pursuant to Rule

21

10b-5(a) and (c).

22

here--that this claim is precluded by the Supreme Court's holding

23

in Janus, and that the claim is a Rule 10b-5(b) claim disguised as

The Court held that Sells' first two arguments

24
a fraudulent scheme claim--were unpersuasive.

The Court adopts

25
that holding here.
26
27
28

Sells also contends that the allegations of fraud are not
stated with the particularity required under Rule 9(b).
30

In SEC v.

1

Sells, the Court found that the allegations of sales transactions

2

with Hospitals A through D were stated with sufficient

3

particularity to allege a fraudulent scheme.

4

motion to dismiss Plaintiffs' Rule 10b-5(a) and (c) claims against

5

him is denied.

6

Therefore, Sells'

III. Loss Causation

7
As indicated above, loss causation is an element of the
8
claims under Rule 10b-5(b).

Although Defendants do not contest

9

United States District Court
For the Northern District of California

10

Plaintiffs' claim that they suffered losses due to the decline in

11

the price of Hansen's stock in October 2009 immediately after

12

Hansen issued its Restatement, they do dispute Plaintiffs' claim

13

that they suffered losses from declines in Hansen's stock price

14

based on pre-October 2009 alleged false statements.

15

Defendants

move to dismiss the claims to the extent they are based on

16
allegations of pre-October 2009 statements and stock declines.
17
18

To plead loss causation adequately, a plaintiff must provide

19

the defendant with fair notice of what the relevant economic loss

20

might be and the causal connection between that loss and the

21

misrepresentation.

22

336, 347 (2005).

23

standard of Rule 9(b) or the PSLRA; Rule 8's requirement of a

Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S.

This is not subject to the heightened pleading

24
short and plain statement of the claim showing that the pleader is
25
entitled to relief is sufficient.

Id. at 346.

Nonetheless, the

26
27
28

complaint must allege that the allegedly fraudulent practices were
revealed to the market and caused the resulting losses.
31

Metzler

1

Inv. v. Corinthian Colleges, Inc., 540 F.3d 1049, 1063 (9th Cir.

2

2008).

3

misrepresentation was the sole reason for the stock's decline in

4

value; as long as the misrepresentation is one substantial cause

5

of the investment's decline, other contributing factors will not

6

A plaintiff is not required to show that a

bar recovery, but will play a role in determining recoverable

7
damages.

In re Daou Systs., 411 F.3d at 1025.

8
9

United States District Court
For the Northern District of California

10
11

A. Loss Causation Based on 1Q08 Statements Regarding Catheter
Sales
As discussed above, Plaintiffs sufficiently allege the
misleading nature of Defendants' statement regarding the sale of

12
401 catheters in 1Q08, which created the false impression that
13
14

utilization of Sensei units was increasing when Defendants knew

15

that this number was inflated by three large orders placed at the

16

end of 1Q08.

17

2Q08 results, they admitted that 1Q08 catheter sales had been

18

inflated.

19

3AC ¶¶ 223-25.

3AC ¶¶ 228-29.

When Defendants reported Hansen's

Plaintiffs allege that analysts

expressed surprise that the 1Q08 number of reported catheter sales

20
had been inflated and, on August 1, 2008, the first day after this
21
revelation by Defendants, Hansen's stock price declined by $2.01
22
23

per share or 13.18% and, on August 4, 2008, the second trading day

24

following the catheter report, Hansen's stock price fell another

25

$1.30 per share, or 9.82%.

26

sufficient to allege loss causation due to Defendants' statements

27

regarding catheter sales.

3AC ¶¶ 316-324.

28
32

These allegations are

1
2

B. Misrepresentations Concerning Demand, Utilization,
Inactive Systems and Guidance about the Future
Plaintiffs allege that Defendants' statements about the

3
actual sales of Sensei units each quarter, the utilization of
4
Sensei units and, thus, their predictions of demand were false and
5
6

that when the market realized the falsity of these statements, the

7

price of Hansen's stock declined.

8

claim are as follows.

9

United States District Court
For the Northern District of California

10
11

The allegations supporting this

At the end of FY07, due to Defendants' positive outlook for
FY08, analysts were impressed with Hansen's strong past
performance and promising future performance.

3AC ¶ 306-11.

On

12
the news about Hansen's 1Q08 earnings, its shares increased 5.52%
13
14

to close on May 2, 2008 at $18.54 per share.

3AC ¶ 311.

The

15

following trading day, Hansen's shares increased another $.62 or

16

3.34%, to close at $19.16 per share.

17

after Hansen filed its quarterly report on Form 10-Q for 1Q08 with

18

the SEC, its stock increased $1.35 per share or 7.41% to close at

19

On May 13, 2008, the day

a Class Period high of $19.57 per share.

Id.

20
On July 28, 2008, JP Morgan reported that Hansen's 2Q08 sales
21
would be flat due to the timing of shipments, but that JP Morgan's
22
23

checks continued to indicate that momentum was strong.

24

On July 29, 2008, the day after this report was published,

25

Hansen's stock price declined $.88 per share, nearly 5%, to close

26

at $17.52 per share.

27

declined again and closed at $15.25 per share for a total decline

3AC ¶ 315.

3AC ¶ 313.

On July 30 and 31, the price

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1

of 17.12%.

3AC ¶ 315.

Plaintiffs tie this decline in price to

2

Defendants' improper revenue recognition for one Sensei unit in

3

4Q07 and for two units in 1Q08, which allowed them to portray a

4

steady increase in revenue over the few quarters it had been

5

selling the Sensei units.

6

3AC ¶ 313.

On December 5, 2008, during an analyst conference call, Moll

7
allegedly falsely assured the market that, although the economy
8
was tougher, the enthusiasm for Hansen's Sensei units remained,
9

United States District Court
For the Northern District of California

10

Hansen was working harder, and it would, therefore, deliver in the

11

face of the declining economic environment.

12

January 8, 2009, Morgan Stanley issued a report lowering its 2009

13

forecast for Sensei unit sales from seventy-four to fifty-six,

14

based on a survey of fifty hospitals, only one of which was

15

considering purchasing a Sensei unit.

3AC ¶ 258.

3AC ¶ 330.

On

The same day,

16
Hansen issued a press release reporting lower than expected sales
17
18

and 2009 guidance of fifty-three to sixty-five units.

3AC ¶ 333.

19

The following day, Hansen's shares declined $.50 per share, or

20

7.99%, closing at $5.76 per share.

21

stock declined another $.60 to close at $5.16 per share.

22

¶ 337.

23

misstatement causing Hansen's stock decline, is a forward-looking

On the next trading day, the
3AC

Moll's December 5, 2008 statement, cited as the alleged

24
statement regarding sales in the midst of a declining economy.
25
This statement is protected by the safe harbor provision and is
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27

not actionable under the Rule 10b-5(b).

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Therefore, Moll's

1
2

December 5, 2008 statement cannot be considered to be a factor in
the loss causation analysis.
On July 6, 2009, Hansen issued a press release announcing

3
4

that its FY09 guidance for sales was unattainable; it faced

5

further issues delaying revenue recognition, and demand for and

6

utilization of Sensei units were not as high as suggested in the

7
past.

3AC ¶ 342.

The press release cited Moll as saying that

8
sales were adversely affected by "general macroeconomic conditions
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United States District Court
For the Northern District of California

10

that continue to significantly impact our potential customers'

11

capital spending."

12

cycles will continue to be influenced by macroeconomic trends, we

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are confident that our current technology and planned product

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development activities present a compelling value proposition to

15

3AC ¶ 342.

hospitals and payors."

Moll reiterated, "While sales

3AC ¶ 342.

On July 7, 2009, the day

16
following Hansen's press release, its stock declined $1.58 per
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18

share, or 33.40%, to close at $3.15 per share.

3AC ¶ 351.

The

19

following day it declined another $.27, or 8.57%, to close at

20

$2.88 per share.

21

On August 4, 2009, Defendants reported 2Q09 financial results

22

which revealed that the sales cycle was longer than had been

23

anticipated, demand for Sensei units was lower than anticipated

24
and utilization rates were declining.

3AC ¶ 352.

On August 5,

25
2009, Hansen's shares fell $.33 per share, more than 8%, to close
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at $3.71 per share.

3AC ¶ 354.

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Plaintiffs allege that these disclosures regarding the true

2

nature of Hansen's financial situation and revised demand

3

predictions revealed previous misstatements and caused Hansen's

4

stock price to decline.

5

allege a causal connection between Defendants' alleged previous

6

These claims of loss causation adequately

fraudulent statements, their 2009 disclosures, and the decline in

7
the price of Hansen's stock.
8
IV. Section 20(a) Claim Against all Defendants
9

United States District Court
For the Northern District of California

10

Plaintiffs assert a § 20(a) claim against all Defendants,

11

alleging that Hansen, Moll, Van Dick, Restani and Sells acted as

12

control persons within the meaning of § 20(a) of the Exchange Act.

13

Section 20(a) provides, in relevant part:

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Every person who, directly or
liable under any provision of
rule or regulation thereunder
and severally with and to the
person . . .

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16

indirectly, controls any person
[the Exchange Act] or of any
shall also be liable jointly
same extent as such controlled

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19

15 U.S.C. § 78t(a).
To plead liability under § 20(a), a plaintiff must allege

20

that: (1) there is a primary violation of federal securities law,

21

and (2) the defendant exercised actual power or control over the

22

primary violator.

23

1065 (9th Cir. 2000).

Howard v. Everex Systs., Inc., 228 F.3d 1057,
Plaintiffs need not show that the control

24
persons had scienter or that they culpably participated in the
25
wrongdoing.

Paracor Finance, Inc. v. General Elec. Capital Corp.,

26
27
28

96 F.3d 1151, 1161 (9th Cir. 1996).

Thus, to allege that an

individual is a control person, the plaintiff does not have to
36

1

allege that the person had scienter distinct from the scienter of

2

the controlled corporation or the controlled individual.

3

228 F.3d at 1065.

4

control person may assert a good faith defense to prove the

5

absence of scienter and a failure directly or indirectly to induce

6

Everex,

However, the individual who is alleged to be a

the violations at issue.

Id.

7
Plaintiffs adequately allege that Moll, Van Dick, Restani and
8
Sells controlled Hansen by virtue of their supervisory involvement
9

United States District Court
For the Northern District of California

10

in the day-to-day operations of Hansen.

3AC ¶ 20-24.

Therefore,

11

this claim sufficiently alleges that these individual Defendants

12

were control persons in regard to Hansen.

13
14
15

Plaintiffs also allege that Hansen controlled the individual
Defendants.

3AC ¶ 388.

However, a fictitious entity cannot

control those who act on its behalf.

Plaintiffs cite no authority

16
for the proposition that a corporation can control its employees
17
18
19
20

or officers.

Therefore, this claim is dismissed.

Dismissal is

without leave to amend as amendment would be futile.
Plaintiffs also allege that Hansen, Moll, Van Dick and

21

Restani exercised control over Sells through their ability to

22

supervise, monitor and direct Sells' conduct and activities and

23

because of their superior positions of power within the

24
corporation.

3AC ¶ 389.

As stated above, Hansen cannot exercise

25
control over its employee.

Therefore, this claim against Hansen

26
27
28

is dismissed without leave to amend.

However, by virtue of their

positions, Moll, Van Dick and Restani exercised control over
37

1
2
3

Sells, who was their subordinate.

Therefore, this claim is

adequately alleged against Moll, Van Dick and Restani.
Finally, Plaintiffs allege that Hansen, Moll, Van Dick,

4

Restani and Sells exercised control over Murawski.

5

For the reasons stated previously, this claim is dismissed without

6

leave to amend against Hansen.

3AC ¶ 388.

This claim against the individual

7
Defendants is dismissed because there is no allegation in the 3AC
8
that Murawski committed a primary securities law violation and
9

United States District Court
For the Northern District of California

10

because the allegation is general, conclusory and lacking in

11

factual support.

12

its previous Order, it is dismissed with leave to amend against

13

the individual Defendants.

14
15

Because the Court did not address this claim in

Therefore, Defendants' motion to dismiss the claim of control
person liability is granted in part.

16
CONCLUSION
17
18

Based on the foregoing, the Court rules as follows: the Rule

19

10b-5(b) claim against Sells is dismissed with leave to amend; the

20

Rule 10b-5(b) claim against the other Defendants is sufficiently

21

alleged; the Rule 10b-5(a) and (c) claim against Sells is

22

sufficiently alleged; the control person claim against all

23

individual Defendants based on their control of Hansen is

24
sufficiently alleged; the control person claim against Moll, Van
25
Dick and Restani based on their control of Sells is sufficiently
26
27
28

alleged; the control person claim against Moll, Van Dick, Restani
and Sells based on their control of Murawski is dismissed with
38

1

leave to amend; the control person claim against Hansen based on

2

its control of Sells and Murawski is dismissed without leave to

3

amend.

4

is sufficiently alleged.

5
6

The element of loss causation for the Rule 10b-5(b) claim

If Plaintiffs wish to file a fourth amended complaint (4AC),
they must do so within fourteen days from the date of this Order,

7
with a red-lined version showing the changes made.

Defendants'

8
answer or motion to dismiss is due fourteen days thereafter.

If

9

United States District Court
For the Northern District of California

10

Defendants file a motion to dismiss, Plaintiffs' opposition is due

11

two weeks thereafter and Defendants reply is due one week later.

12

The motion will be taken under submission and decided on the

13

papers.

14
15

IT IS SO ORDERED.

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Dated:

8/10/2012

CLAUDIA WILKEN
United States District Judge

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