Primo v. Pacific Biosciences of California Inc et al

Filing 72

ORDER by Judge Claudia Wilken GRANTING ( #56 , #61 ) MOTIONS TO DISMISS. (ndr, COURT STAFF) (Filed on 4/15/2013)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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THOMAS J. PRIMO; and EVAN POWELL,
individually and on behalf of all
others similarly situated,

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United States District Court
For the Northern District of California

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Plaintiffs,

No. C 11-6599 CW
ORDER GRANTING
MOTIONS TO DISMISS
(Docket Nos. 56
and 61)

v.
PACIFIC BIOSCIENCES OF
CALIFORNIA, INC.; HUGH C. MARTIN;
SUSAN K. BARNES; BRIAN B. DOW;
WILLIAM ERICSON; BROOK BYERS;
MICHAEL HUNKAPILLER; RANDALL
LIVINGSTON; SUSAN SIEGEL; DAVID
SINGER; J.P. MORGAN SECURITIES
LLC; MORGAN STANLEY & CO., INC.;
DEUTSCHE BANK SECURITIES, INC.;
and PIPER JAFFRAY & CO.,
Defendants.
________________________________/
Lead Plaintiff Thomas J. Primo and Plaintiff Evan Powell

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(collectively, Plaintiffs) assert claims on behalf of a putative
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class and subclass, for various violations of the Securities Act
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of 1933, the Securities Exchange Act of 1934 and the Rules
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promulgated thereunder, against Defendants Pacific Biosciences of
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California, Inc. (PacBio); Hugh C. Martin, Susan K. Barnes and
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Brian B. Dow (collectively, the Officer Defendants); William
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Ericson, Brook Byers, Michael Hunkapiller, Randall Livingston,
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Susan Siegel and David Singer (collectively, with Martin, the
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Director Defendants); and J.P. Morgan Securities LLC, Morgan
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Stanley & Co., Deutsche Bank Securities Inc., Piper Jaffray & Co.
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(collectively, the Underwriter Defendants).

Together, PacBio, the

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Officer Defendants and the Director Defendants are referred to as
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the PacBio Defendants.

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Defendants move to dismiss Plaintiffs’ First Amended Complaint

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(1AC) in its entirety.

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considered the papers filed by the parties and their arguments at

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the hearing, the Court GRANTS both motions to dismiss, with leave

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to amend.

The PacBio Defendants and the Underwriter

Plaintiffs oppose the motions.

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Having

BACKGROUND

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The following facts are alleged in Plaintiffs’ 1AC.

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Plaintiffs bring this putative class action suit against

United States District Court
For the Northern District of California

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PacBio, nine of its officers and directors and four underwriting

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firms, on behalf of themselves and all persons or entities that

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purchased PacBio common stock between October 27, 2010, the day of

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PacBio’s initial public offering (IPO), and September 20, 2011.

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1AC ¶ 1.

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persons or entities that purchased PacBio common stock pursuant or

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traceable to PacBio’s IPO.

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Powell also brings claims on behalf of a subclass of all

PacBio, a biotechnology company formed in 2000, develops,

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manufactures and markets technology for genetic analysis.

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¶¶ 14, 39.

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including the Prospectus and Registration Statements, PacBio

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explained that its initial focus was on the DNA sequencing market

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and that it had developed a “third generation” sequencing system

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called the PacBio RS, which addressed various limitations of

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earlier DNA sequencing methods.

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advances in nanofabrication, biochemistry, molecular biology,

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surface chemistry and optics, [PacBio] created a technology

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platform called single molecule, real-time, or SMRT, technology.”

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Id.

1AC

In the offering materials prepared for its IPO,

Id. at ¶ 39.

“Combining recent

PacBio represented that its “SMRT technology has the
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1

potential to advance scientific understanding by providing a

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window into biological processes that has not previously been

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open.”

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Id.

Plaintiffs allege that the RS system “was supposed to be able

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to produce a complete, high quality human genome in a very short

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period of time,” which could be utilized for, among other things,

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cancer research and diagnostics.

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its offering materials, “In order to understand the limitations of

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current DNA sequencing technologies, it is important to understand

Id. at ¶ 2.

PacBio explained in

United States District Court
For the Northern District of California

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the sequencing process,” which “consists of three phrases”:

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“sample preparation, physical sequencing and re-assembly.”

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¶ 41.

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is broken into multiple small fragments, which may be amplified

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into multiple copies.

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sequencing, “the individual bases in each fragment are identified

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in order, creating individual reads.”

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individual bases identified continuously” in a read is referred to

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as “readlength.”

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overlapping reads are aligned and the original genome is assembled

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into a continuous sequence.

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easier it is to reassemble the genome.”

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the assembled information is also dependent on “the accuracy of

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the assembled sequence.”

Id. at

In the first phase, sample preparation, the target genome

Id.

Id.

In the second phase, physical

Id.

“The number of

In the final, re-assembly phase, the

Id.

“The longer the readlength the
Id.

The ability to use

Id.

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The offering materials explain that first generation

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sequencing technology had “relatively long readlengths” but was

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“limited by the small amounts of data that can be processed per

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unit of time, referred to as throughput.”

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methods achieved higher throughput but used processes that
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Id.

Second generation

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introduced errors and resulted in short readlength.

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offering materials proclaimed that the PacBio RS system “addresses

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many of the limitations of the first and second generation

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technologies, including short read lengths, limited flexibility,

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long time to result, lower throughput” and other issues.

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¶ 42.

Id.

The

Id. at

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On October 27, 2010, the company conducted its IPO, raising

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$230 million by selling shares at a price of sixteen dollars per

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share.

Id. at ¶ 38.

Prior to its IPO, PacBio had obtained

United States District Court
For the Northern District of California

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funding primarily through investments from venture capital firms

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and small government grants.

Id. at ¶ 37.

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Plaintiffs allege that, in the offering materials and after

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the IPO, Defendants made various misleading statements or failed

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to disclose material information regarding the performance of the

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PacBio RS system, which caused the PacBio common stock to be

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artificially inflated throughout the class period.

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Id. at ¶¶ 4-5.

On August 4, 2011, after the close of trading, Defendants

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issued a press release and held an earnings call, in which

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Plaintiffs contend Defendants disclosed some of the limitations of

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the RS system.

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5, 2011, JP Morgan downgraded PacBio’s rating because the company

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had lowered its projection of sales.

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Id. at ¶¶ 120-125.

The following day, on August

Id. at ¶ 126.

Plaintiffs allege that the press release, earnings call and

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JP Morgan report “shocked the market.”

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PacBio had closed at $9.90 per share on August 4, 2011, and fell

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to $6.50 per share by the close of trading on Friday, August 5,

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2011 and to $5.60 per share by the close of trading on Monday,

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August 8, 2011.

Id.
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Id. at ¶ 127.

Shares of

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On September 20, 2011, PacBio announced that it would reduce

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its workforce by twenty-eight percent, with the reductions

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affecting most its operations and research and development

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functions.

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share on September 20, 2011 and fell to $4.25 per share by the

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close of trading the following day.

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Id. at ¶ 130.

PacBio’s stock had closed at $5.56 per

Id. at ¶ 133.

Plaintiffs have attached to their 1AC a certification from

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Primo attesting that he purchased 1,500 shares of PacBio stock on

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July 7, 2011.

Plaintiffs separately filed a certification from

United States District Court
For the Northern District of California

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Powell attesting that he purchased fifty shares of PacBio stock on

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November 17, 2010, one hundred shares on May 2, 2011 and two

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hundred shares on August 5, 2011.

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Docket No. 26.

Plaintiff Powell asserts the following claims on behalf of

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himself and the putative subclass: (1) against all Defendants for

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violation of § 11 of the Securities Act, 1AC ¶¶ 58-65; (2) against

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PacBio, the Officer Defendants and the Underwriter Defendants for

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violation of § 12(a)(2) of the Securities Act, id. at ¶¶ 66-72;

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and (3) against the Officer Defendants and the Director Defendants

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for violation of § 15 of the Securities Act, id. at ¶¶ 73-75.

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Both Plaintiffs assert the following claims on behalf of

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themselves and the putative class: (1) against PacBio and the

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Officer Defendants, for violation of § 10(b) of the Exchange Act

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and Rule 10b-5, id. at ¶¶ 154-64; and (2) against the Officer

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Defendants, violation of § 20(a) the Exchange Act, id. at

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¶¶ 165-68.

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LEGAL STANDARD
A complaint must contain a “short and plain statement of the
claim showing that the pleader is entitled to relief.”
5

Fed. R.

1

Civ. P. 8(a).

2

state a claim, dismissal is appropriate only when the complaint

3

does not give the defendant fair notice of a legally cognizable

4

claim and the grounds on which it rests.

5

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

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enough to raise a right to relief above the speculative level on

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the assumption that all the allegations in the complaint are

8

true.”

9

LEXIS 18743, at *13 (9th Cir.) (citing Twombly, 550 U.S. at 555).

On a motion under Rule 12(b)(6) for failure to

Bell Atl. Corp. v.

“Factual allegations must be

In re Rigel Pharms., Inc. Sec. Litig., 2012 U.S. App.

United States District Court
For the Northern District of California

10

In considering whether the complaint is sufficient to state a

11

claim, the court will take all material allegations as true and

12

construe them in the light most favorable to the plaintiff.

13

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

14

However, this principle is inapplicable to legal conclusions;

15

“threadbare recitals of the elements of a cause of action,

16

supported by mere conclusory statements,” are not taken as true.

17

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550

18

U.S. at 555).

19

NL

“In addition to the pleading requirements of Rule 8, there

20

are more demanding pleading requirements for certain causes of

21

action, especially securities fraud.”

22

18743, at *13-14.

23

of fraud or mistake, the circumstances constituting fraud or

24

mistake shall be stated with particularity.”

25

9(b).

26

notice of the particular misconduct which is alleged to constitute

27

the fraud charged so that they can defend against the charge and

28

not just deny that they have done anything wrong.”

Rigel, 2012 U.S. App. LEXIS

Further, Rule 9(b) provides, “In all averments

Fed. R. Civ. P.

The allegations must be “specific enough to give defendants

6

Semegen v.

1

Weidner, 780 F.2d 727, 731 (9th Cir. 1985).

2

time, place and nature of the alleged fraudulent activities are

3

sufficient, Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439

4

(9th Cir. 1987), provided the plaintiff sets forth “what is false

5

or misleading about a statement, and why it is false.”

6

GlenFed, Inc., Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994).

7

Scienter may be averred generally, simply by saying that it

8

existed.

9

knowledge, and other condition of mind of a person may be averred

Statements of the

In re

See id. at 1547; Fed. R. Civ. P. 9(b) (“Malice, intent,

United States District Court
For the Northern District of California

10

generally”).

11

knowledge, pleadings based on information and belief may satisfy

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Rule 9(b) if they also state the facts on which the belief is

13

founded.

As to matters peculiarly within the opposing party’s

Wool, 818 F.2d at 1439.

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When granting a motion to dismiss, the court is generally

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required to grant the plaintiff leave to amend, even if no request

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to amend the pleading was made, unless amendment would be futile.

17

Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911

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F.2d 242, 246-47 (9th Cir. 1990).

19

amendment would be futile, the court examines whether the

20

complaint could be amended to cure the defect requiring dismissal

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“without contradicting any of the allegations of [the] original

22

complaint.”

23

Cir. 1990).

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25

In determining whether

Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th

DISCUSSION
Defendants contend that the 1AC constitutes an impermissible

26

“puzzle pleading” and should be dismissed in its entirety for that

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reason.

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adequately to plead a § 11 claim because they have not plead facts

Defendants also argue that Plaintiffs have failed

7

that show that the registration statement contained any material

2

omissions or misrepresentations.

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dismiss Plaintiffs’ § 12(a)(2) claim because they have not alleged

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any false or misleading statement in the prospectus.

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argue that Plaintiffs lack standing to bring a § 12(a)(2) claim.

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PacBio Defendants also maintain that the § 12(a)(2) claim should

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be dismissed against PacBio and the Officer Defendants because

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they were not “sellers” of the securities.

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dismissal of the claim under § 10(b) and Rule 10b-5, arguing that

10
United States District Court
For the Northern District of California

1

none of the challenged statements or omissions are actionable and

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that Plaintiffs fail to plead scienter sufficiently.

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PacBio Defendants move to dismiss the § 15(a) and § 20(a) claims

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because Plaintiffs have not adequately alleged the primary

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violations under the Exchange Act or Securities Act and have not

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alleged properly that the Officer and Director Defendants were

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“controlling persons.”

17

I.

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Similarly, Defendants seek to

They further

PacBio Defendants seek

Finally,

Puzzle pleading
In a “puzzle pleading,” the “plaintiffs have left it up to

19

defendants and the court to try to figure out exactly what the

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misleading statements are, and to match the statements up with the

21

reasons they are false or misleading.”

22

Litig., 132 F. Supp. 2d 833, 841 (N.D. Cal. 2000).

23

In re Autodesk, Inc. Sec.

“In the context of securities class action complaints, courts

24

have repeatedly lamented plaintiffs’ counsels’ tendency to place

25

‘the burden [] on the reader to sort out the statements and match

26

them with the corresponding adverse facts to solve the “puzzle” of

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interpreting Plaintiffs’ claims.’”

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Supp. 2d 1231, 1244 (N.D. Cal. 1998) (quoting In re Oak Tech. Sec.
8

Wenger v. Lumisys, Inc., 2 F.

Litig., 1997 U.S. Dist. LEXIS 18503, at *5 (N.D. Cal.) (formatting

2

in original)).

3

complaints are an ‘unwelcome and wholly unnecessary strain on

4

defendants and the court system.’”

5

at 1544); see also Shuster v. Symmetricon, Inc., 1997 U.S. Dist.

6

LEXIS 14007, at *9 (N.D. Cal.) (“The Complaint as it now stands is

7

a rambling set of allegations which is almost impossible to

8

effectively review . . . Plaintiff sets forth lengthy quotes from

9

various releases by defendants’ officers and a securities analyst

10
United States District Court
For the Northern District of California

1

but does not make clear what portion of each quote constitutes a

11

false presentation”);

12

193811, at *1 (N.D. Cal.) (“The complaint as written requires the

13

court to excavate for actionable claims . . . Judicial resources

14

are too scarce and worthy cases too pressing for a court to spend

15

its time rooting around in bloated complaints by experienced

16

lawyers for a handful of actionable allegations.”).

17

Courts recognize that such “‘puzzle-style’

Id. (quoting GlenFed, 42 F.3d

In re Conner Peripherals, Inc., 1996 WL

Courts in this district have held that puzzle pleadings fail

18

“to set forth a ‘short and plain’ statement of their claims in

19

violation of Rule 8(a),” to “make each allegation ‘simple, concise

20

and direct’” in violation of Rule 8 and to fulfill the more

21

exacting pleading requirements of the Private Securities

22

Litigation Reform Act of 1995 (PSLRA) for violations of the

23

Exchange Act.

24

F. Supp. 2d 1059, 1075 (N.D. Cal. 2001); Wenger, 2 F. Supp. 2d at

25

1244.

26

In re Splash Tech. Holdings, Inc. Sec. Litig., 160

Like the pleadings found to be lacking in many of the above

27

cases, Plaintiffs’ 1AC contains lengthy quotes and recitations of

28

the contents of the offering materials and public comments made by
9

1

Defendants.

2

Plaintiffs present a list of alleged omissions or misstatements

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but fail to connect these to any particular statements made in the

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offering materials.

5

their Exchange Act claims, Plaintiffs make some attempt to connect

6

the alleged omissions to particular statements but continue to do

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so in a general manner that requires the reader to guess what

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particular statements they mean or how those statements were

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rendered false and misleading.

In the allegations common to all of their claims,

See 1AC ¶ 51.

In the allegations specific to

See, e.g., 1AC ¶ 85 (“The failure

United States District Court
For the Northern District of California

10

to state in the Prospectus that the Company expected to ‘have lots

11

of bugs’ with the PacBio RS, that the ‘performance envelope’

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needed to be validated, and that systems were unstable and needed

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to be incrementally increased demonstrated that the statements

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describing the PacBio RS in the prospectus [were] materially false

15

and misleading.”).

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Plaintiffs argue that their 1AC is sufficient because

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Defendants are able to “discern which omissions or

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misrepresentations form the basis of their claims” well enough to

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draft a motion to dismiss.

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were able to argue that the pleading was inadequate does not

21

establish that it provided them with sufficient notice of the

22

claims against them.

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basis of Plaintiffs’ claims.

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to present at least a “short and plain statement” of their claims.

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Moreover, in their papers, Defendants did not evidence a clear

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understanding of the statements that Plaintiffs challenge.

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28

Opp. at 9.

However, that Defendants

Defendants are not required to guess at the
Instead, Plaintiffs have the burden

Because Plaintiffs have failed to set forth a “short and
plain statement” of their claims in violation of Rule 8(a), to
10

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make their allegations “simple, concise and direct” in violation

2

of Rule 8(d) or to fulfill the requirements of the PSLRA for their

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Exchange Act claims, the Court GRANTS Defendants’ motion to

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dismiss the 1AC in its entirety.

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II.

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7

Claim against all Defendants for violation of § 11 of the
Securities Act
A. Legal standard
“Section 11 creates a private remedy for any purchaser of a

8
security if any part of the registration statement, ‘when such
9
part became effective, contained an untrue statement of a material
10
United States District Court
For the Northern District of California

fact or omitted to state a material fact required to be stated
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therein or necessary to make the statements therein not
12
misleading.’”

In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1403

13
(9th Cir. 1996) (quoting 15 U.S.C. § 77k(a)).

“‘The plaintiff in

14
a § 11 claim must demonstrate (1) that the registration statement
15
contained an omission or misrepresentation, and (2) that the
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omission or misrepresentation was material, that is, it would have
17
misled a reasonable investor about the nature of his or her
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investment.’”

Id. at 1403-04 (quoting Kaplan v. Rose, 49 F.3d

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1363, 1371 (9th Cir. 1994)).

“‘No scienter is required for

20
liability under § 11; defendants will be liable for innocent or
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negligent material misstatements or omissions.’”

Id. at 1404

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(quoting Kaplan, 49 F.3d at 1371).

For an omission to be material

23
and actionable, “there must be a substantial likelihood that the
24
disclosure of the omitted fact would have been viewed by the
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reasonable investor as having significantly altered the ‘total
26
mix’ of information made available.”

Id. at 1408 (internal

27
quotation marks and citations omitted); see also Basic Inc. v.
28
11

1

Levinson, 485 U.S. 224, 231 (1988) (an “omitted fact is material

2

if there is a substantial likelihood that a reasonable shareholder

3

would consider it important” in making a decision); No. 84

4

Employer-Teamster Joint Council Pension Trust Fund v. Am. W.

5

Holding Corp., 320 F.3d 920, 934 (9th Cir. 2003) (same).

6

Defendants contend that Plaintiffs’ § 11 claim and other
claims under the Securities Act sound in fraud and therefore are

8

subject to Rule 9(b)’s heightened pleading standards.

9

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

10
United States District Court
For the Northern District of California

7

re Daou Sys., Inc., 411 F.3d 1006, 1027 (9th Cir. 2005); Vess v.

11

Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-1104 (9th Cir. 2003).

12

Plaintiffs respond that they have “carefully distinguished their

13

Securities Act claims from those under the Exchange Act and Rule

14

10b-5, which requires allegations of fraud and scienter,” that

15

they have “expressly disclaim[ed] any allegation of fraud for

16

those claims” and that their “Section 11 claim was not dependent

17

on the fraud allegations relevant to their Section 10(b) claims.”

18

Opp. at 11-12.

19

See Rubke

“To ascertain whether a complaint ‘sounds in fraud,’” a court

20

“must normally determine, after a close examination of the

21

language and structure of the complaint, whether the complaint

22

‘allege[s] a unified course of fraudulent conduct’ and ‘rel[ies]

23

entirely on that course of conduct as the basis of a claim.’”

24

Rubke, 551 F.3d at 1161 (quoting Vess, 317 F.3d at 1103-04)

25

(formatting in original).

26

unified course of fraudulent conduct in support of a claim, but

27

rather to allege some fraudulent and some non-fraudulent conduct.”

28

Vess, 317 F.3d at 1104.

A plaintiff “may choose not to allege a

“In such cases, only the allegations of
12

1

fraud are subject to Rule 9(b)’s heightened pleading

2

requirements.”

3

Id.

Here, Plaintiffs have made conscious efforts to separate

4

their Securities Act claims from the fraud allegations in their

5

Exchange Act claims; the facts that are related to the Securities

6

Act claims are incorporated into the Exchange Act claims, but the

7

reverse is not true.

8

12(a)(2) and 15 of the Securities Act expressly disclaim any

9

allegations that “allege fraud, scienter or the intent of the

The 1AC’s causes of action under §§ 11,

United States District Court
For the Northern District of California

10

defendants to defraud Plaintiff Powell or members of the

11

subclass.”

12

the 1AC that some of Defendants’ conduct in violation of the

13

Exchange Act was fraudulent, Plaintiffs are permitted to plead

14

their claims in the alternative in this manner.

15

8(d)(2),(3).

16

1AC ¶¶ 58, 66, 73.

Although there are allegations in

Fed. R. Civ. P.

Accordingly, because Plaintiffs’ claims under the Securities

17

Act do not sound in fraud, they are not required to meet the

18

particularity pleading standards in Rule 9(b).

19

B. Misrepresentation or omission of a material fact

20

Defendants contend that Plaintiffs have not plead facts

21

sufficient to show that the registration statement contained any

22

false statements of material fact or omitted material facts

23

necessary to make the statements in the statement not misleading.

24

In the 1AC, Plaintiffs allege that the offering materials,

25

including the registration statement and prospectus, contained the

26

following “untrue statements of material fact and/or omitted

27

material facts”:

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3
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5
6
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8
9

United States District Court
For the Northern District of California

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(1) omitted that PacBio’s human gene sequencing
technology in fact did not have a 99.99% accuracy rate
or misstated that it did have a 99.99% accuracy rate;
(2) misstated that the PacBio RS system would not
require upgrades and/or replacement of instrument
hardware;
(3) misstated that there were plans to further develop
applications for the PacBio RS system, as these
applications could not be introduced commercially;
(4) omitted that the initial “limited production release
program” was in fact a “beta test program;”
(5) omitted that the PacBio RS system had a significant
number of “bugs” that would affect the system’s
performance;
(6) omitted that the PacBio RS system’s performance
envelope needed to be validated;
(7) omitted that the PacBio RS’s systems were unstable
and needed to be incrementally increased;
(8) omitted that the Company would experience
“variability;”
(9) omitted that the accuracy rate was critical to the
Company’s customers;
(10) omitted that there were in fact “trade offs”
involving the Company’s products, such as running the
equipment in either “read length” or “accuracy” mode;
and
(11) omitted that the $50 million pre-IPO investment by
Gen-Probe was in actuality a down payment for a system
that would allow Gen-Probe to obtain a 50% discount.
1AC ¶ 51.

In their opposition, Plaintiffs have not defended the

21
sufficiency of their allegations as to the ninth and eleventh
22
items on the above list.

The remaining alleged misrepresentations

23
or omissions are discussed below.
24
1. Accuracy rate
25
In the 1AC, Plaintiffs allege that the offering materials
26
omitted or misrepresented a material fact because they did not
27
disclose that the “PacBio’s human gene sequencing technology in
28
14

1

fact did not have a 99.99% accuracy rate.”

2

opposition, although not in the 1AC, they tie this allegation to

3

the following statements in the registration statement:

1AC ¶ 51(1).

In their

4

Using the PacBio RS

5

The PacBio RS delivers a complete product solution from
sample preparation to biological results. The instrument
has the capability for multiple sequencing protocols,
enabling a high degree of flexibility in experimental
design.

6
7
8
9

United States District Court
For the Northern District of California

10
11
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15
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18
19

Standard sequencing. The standard SMRT sequencing
protocol is designed to generate single pass long reads.
The protocol uses long insert lengths so that the
polymerase can continuously synthesize along a single
strand. As with all protocols, this process runs in
parallel across thousands of ZMWs in a single SMRT Cell
at the same time. This protocol has utility for a range
of both resequencing and de novo applications. Our
system achieves consensus accuracy of 99.99% which is
commensurate with leading second generation sequencing
systems.
Circular consensus sequencing. The PacBio RS has
the capability for circular consensus sequencing. The
circular consensus sequencing protocol uses a circular
DNA template which enables multiple reads across the
same sequence to achieve 99.99% accuracy at single
molecule resolution from a single DNA strand.
Furthermore, this approach provides reads on both the
forward and reverse strands of a double stranded
template. This method offers potential advantages for
the discovery and confirmation of rare variants.

20
21
22
23
24
25
26
27
28
15

1

Opp. at 13-14 (citing 1AC ¶ 45) (emphasis in original); see also

2

Moreno Decl., Ex. 2, 62.1

3

this allegation by arguing that the two references to 99.99%

4

accuracy in these paragraphs were false or misleading because,

5

after the registration statement was filed, certain Defendants

6

stated on a number of occasions that “raw read accuracy was

7

nowhere near 99.99% and never would be.”

8
9

In their opposition, Plaintiffs defend

Opp. at 14.

In their motion, Defendants argue that Plaintiffs are
conflating two concepts, raw read accuracy and consensus accuracy,

United States District Court
For the Northern District of California

10

and that the registration statement never claimed that raw read

11

accuracy was 99.99%.

12

difference between these terms is incomprehensible to a reasonable

13

investor, that the registration statement did not explain the

14

difference, that Defendants had a duty to disclose material facts

15

which are not easily understood, and that the omission, in

16

conjunction with the claims about 99.99% accuracy, could mislead a

17

reasonable investor.

18

registration statement makes clear that the 99.99% accuracy rate

19

referred to consensus accuracy, that they were not required to

20

disclose the raw read accuracy rate because they did not have to

Mot. at 15-16.

Opp. at 14-15.

Plaintiffs respond that the

Defendants reply that the

21
22
23
24
25
26
27
28

1

Defendants request that the Court take judicial notice of
various documents referenced in, or attached to, the 1AC. They
also request that the Court take judicial notice of documents
filed with the United States Securities and Exchange Commission
(SEC), market analyst reports, earnings call transcripts and
PacBio’s historical stock prices, which they contend are capable
of immediate determination by resort to accurate sources and not
subject to reasonable dispute. The 1AC also refers to some of
these documents. Further, they ask that the Court take judicial
notice of Plaintiffs’ certifications reflecting stock purchases,
which were attached to or filed in connection with the 1AC.
Plaintiffs do not oppose Defendants’ requests. Accordingly, the
Court GRANTS Defendants’ request for judicial notice.
16

1

reveal every detail about the RS system and that Plaintiffs cannot

2

point to any statement in the registration statement which was

3

rendered misleading or untrue by their omission to disclaim this

4

statistic.

5

the subject matter was incomprehensible.

6

Defendants also challenge Plaintiffs’ assertion that

Plaintiffs do not argue that the statements in the

7

registration statement regarding accuracy were literally untrue.

8

Instead, they contend that the statements, while true, were

9

nonetheless misleading, apparently because they conveyed a general

United States District Court
For the Northern District of California

10

sense that the system was 99.99% accurate, even though the raw

11

read accuracy rate was lower.

12

that statements literally true on their face may nonetheless be

13

misleading when considered in context.”

14

Inc. (Miller I), 519 F.3d 879, 886 (9th Cir. 2008) (quoting In re

15

Convergent Tech. Sec. Litig., 948 F.2d 507, 512 (9th Cir. 1991))

16

(“‘Some statements, although literally accurate, can become,

17

through their context and manner of presentation, devices which

18

mislead investors.

19

the securities laws is measured not by literal truth, but by the

20

ability of the material to accurately inform rather than mislead

21

prospective buyers.’”).

22

The Ninth Circuit has “recognized

Miller v. Thane Int’l,

For that reason, the disclosure required by

Plaintiffs, however, have likewise not plead sufficiently

23

that these statements were misleading in their context.

24

to Plaintiffs’ characterization, in describing the DNA sequencing

25

process, the registration statement clearly disclosed that there

26

are two distinct types of accuracy.

27

use sequence-based information is contingent not only on assembly,

28

but the accuracy of the assembled sequence,” and stated, “There
17

Contrary

It noted that the “ability to

1

are two principal forms of accuracy that are commonly cited,

2

referred to as raw read accuracy and finished or consensus

3

accuracy.”

4

statement did not explain the two terms in great detail, it did

5

disclose that there was a difference between the two and they were

6

distinct terms and concepts: in discussing the reassembly step of

7

DNA sequencing, it stated that raw read accuracy “can be a

8

platform specific performance metric while consensus accuracy is

9

critical to successful reassembly.”

Moreno Decl., Ex. 2, 57.

Although the registration

Id.

The statement also made

United States District Court
For the Northern District of California

10

clear that circular consensus accuracy reflected the results of

11

“multiple reads across the same sequence.”

12

passages cited by Plaintiffs and quoted above made clear that the

13

99.99% accuracy rate identified in the registration statement

14

referred to consensus accuracy.

15

statement made no representation regarding the raw read accuracy

16

rate of the RS system.

17

Id. at 62.

The

In contrast, the registration

Plaintiffs assert, “A reasonable investor easily could have

18

been misled by the assertions in the Offering Materials about the

19

RS’s 99.99% accuracy.”

20

the registration statement about an overall accuracy rate.

21

Instead, one was made about consensus accuracy and the accuracy

22

achieved through circular consensus sequencing.

23

Plaintiffs have not sufficiently plead that Defendants made a

24

material misrepresentation about the accuracy rate of the RS

25

system.

26
27
28

Opp. at 14.

However, no claim was made in

Accordingly,

2. Trade offs
Plaintiffs also allege that the offering materials were
misleading or untruthful because they failed to disclose “that
18

there were in fact ‘trade offs’ involving the Company’s products,

2

such as running the equipment in either ‘read length’ or

3

‘accuracy’ mode.”

4

admitted there was a trade off between readlengths and accuracy

5

rates during a post-IPO earnings calls on February 15, 2011 and

6

August 4, 2011, and stated that the company might offer a

7

readlength mode and an accuracy mode.

8

hearing, Plaintiffs clarified: they claim the registration

9

statement promised that the RS system had a 99.99% accuracy rate

10
United States District Court
For the Northern District of California

1

and long readlengths but did not disclose that this accuracy rate

11

can be attained only for shorter readlengths than those described

12

in the statement and that, when readlengths are increased,

13

accuracy rates go down.

14

1AC ¶ 51(10).

Plaintiffs state that Martin

Id. at ¶¶ 102, 125.

At the

Although Plaintiffs state that the RS system could not “have

15

performed as promised when the Offering Materials said nothing

16

about trade-offs,” Opp. at 16, Plaintiffs do not identify any

17

particular parts of the registration statement that they rely on

18

for the purported promises.

19

portions of the registration statement contained promises about

20

long readlengths that were rendered misleading or false by the

21

failure to disclose a trade off between accuracy and readlength.

22

The Court finds that their failure to do so renders this

23

allegation deficient.

24

Specifically, they do not state what

In their motion, Defendants also argue that the trade off to

25

which Martin referred in the August 4, 2011 call explicitly

26

pertained to circular consensus sequencing and “that the notion of

27

a ‘trade off’ between read length and consensus accuracy is

28

inherent in the very concept” of this type of sequencing.
19

PacBio

1

Ds.’ Mot., 19.

2

sequencing protocol uses multiple reads across the same DNA

3

sequence to achieve the 99.99% accuracy rate, the length of the

4

reads was necessarily reduced because the same sections had to be

5

read multiple times.

6

Mot., 19.

7

materials stated the RS system “demonstrated readlengths greater

8

than 1,000 base pairs on average,” in order to get a 99.99%

9

circular consensus accuracy rate, one would have to sequence a

They explain that, because the circular consensus

PacBio Ds.’ Reply, 8 n.7; PacBio Defs.’

Thus, they explain that, although the offering

United States District Court
For the Northern District of California

10

smaller DNA strand repeatedly and thus would be limited to a

11

shorter readlength, of 500 pairs.

12

PacBio Defs.’ Mot., 19.

13

obvious from the technology itself, they were not obliged to

14

disclose it.

15

PacBio Ds.’ Reply, 8 n.7;

They contend that, because this was

However, at this stage, Defendants have not demonstrated that

16

this understanding of the technology would have been obvious to

17

the reasonable investor such that it did not need to be disclosed

18

in the registration statement.

19

inherent in the technology, Defendants rely primarily on a

20

detailed understanding of the technology that cannot be assumed of

21

reasonable investors.

22

readlengths and stated that the PacBio RS had “demonstrated

23

readlengths greater than 1,000 base pairs on average with

24

instances of over 10,000 base pairs” and attained a 99.99%

25

consensus accuracy rate.

26

readlengths could only be achieved using a single pass or that it

27

would decrease when using the circular consensus sequencing mode

In contending that this was

The statement repeatedly referred to long

However, it did not indicate that these

28
20

1

or other techniques necessary to achieve a high consensus accuracy

2

rate.

3

Further, Defendants’ cited authority does not support this
argument.

5

that, in the context of a fraud on the market theory for a

6

securities fraud claim, a presumption of reliance can be rebutted

7

if the omitted information was already credibly available to the

8

market from other sources.

9

v. Adage, Inc., 42 F.3d 204, 212 (4th Cir. 1994) (citing, among

10
United States District Court
For the Northern District of California

4

others, In re Apple Computer Sec. Litig., 886 F.2d 1109, 1114-15

11

(9th Cir. 1989)).

That legal proposition is inapplicable to the

12

instant analysis.

Further, none of the allegations here supports

13

that this information about the RS system was readily available to

14

the reasonable investor.

15

Teledyne, Inc., 628 F.2d 1214 (9th Cir. 1980), the Ninth Circuit

16

reviewed the district court’s summary judgment order on a claim

17

for securities fraud under § 10(b) of the Exchange Act to assess

18

whether there was a material dispute of fact that a scheme to

19

defraud existed.

20

acquisition by a company of its own stock obviously would reduce

21

the number of outstanding shares and increase the proportionate

22

control and earnings of all shareholders who retained their

23

stock,” but stated, “It is not a violation of any securities law

24

to fail to disclose a result that is obvious even to a person with

25

only an elementary understanding of the stock market.”

26

1220 (citing Ala. Farm Bureau Mutual Casualty Co., Inc. v. Amer.

27

Fidelity Life Ins. Co., 606 F.2d 602, 611 (5th Cir. 1979)).

28

the purportedly obvious fact is not a basic function of the stock

One case that they cite stands for the proposition

See Hillson Partners Ltd. Partnership

In Defendants’ other case, Vaughn v.

The court observed, “Any tender offer or

21

Id. at

Here,

1

market of which investors would be aware; it is instead a concept

2

that is part of the technology.

3

In addition, contrary to Defendants’ conclusory statement,

4

the fact that the offering materials stated that there were

5

“multiple sequencing protocols, enabling a high degree of

6

flexibility in experimental designs,” did not disclose that there

7

were trade offs between long readlengths and accuracy.

8

descriptions of these protocols did not explain, for example, that

9

one protocol could be used for longer readlengths and another for

The

United States District Court
For the Northern District of California

10

a high level of accuracy.

11

referred both to “long reads” and to a 99.99% consensus accuracy.

12

Moreno Decl., Ex. 2.

13
14

In fact, the first protocol discussed

3. Upgrades or replacement of the hardware
Another omission or misrepresentation of material fact in the

15

offering materials alleged by Plaintiffs was that the documents

16

failed to disclose “that the PacBio RS system would require

17

upgrades and/or replacement of instrument hardware.”

18

Defendants contend that Plaintiffs have not plead facts supporting

19

their claim that improvements to the RS system would in fact

20

require any upgrade or replacement of instrument hardware.

21

In their opposition, Plaintiffs tie this claim to the

22

following passage in the offering materials, which was repeated

23

several times:

24

significant performance improvements without an upgrade or

25

replacement of the instrument hardware.

26

enhancements will be delivered through software upgrades and new

27

consumables.”

28

contend that this was omitted from “otherwise identical language”

1AC ¶ 51.

“The design of the PacBio RS will allow for

These performance

Opp. at 16 (quoting 1AC ¶¶ 39, 44, 47).

22

Plaintiffs

1

in PacBio’s 2010 Form 10-K.

2

omission, in combination with a statement in the Form 10-K that

3

“our engineering teams will continue their focus on increasing

4

instrument component, system reliability, reducing costs,

5

increasing sample thoroughput, and implementing additional system

6

flexibility and versatility,” id. (quoting 1AC ¶¶ 110-11), shows

7

that the PacBio RS would require an upgrade or replacement of the

8

instrument hardware in order to achieve performance improvements.

9

Thus, they conclude that the statements to the contrary in the

United States District Court
For the Northern District of California

10
11

Opp. at 17.

offering materials were false.

They claim that this

Id.

However, as Defendants point out, the Form 10-K does not

12

support a finding that the statements in the offering materials

13

were false or misleading or created a false and misleading

14

impression.

15

in the offering materials, the Form 10-K stated that the RS is

16

“designed for expandable capability to permit performance

17

improvements and new applications to be delivered through

18

chemistry and software enhancements without necessitating changes

19

to the hardware.”

20

essentially replaced the offering materials’ phrase “software

21

upgrades and new consumables” with “chemistry and software

22

enhancements.”

23

“proprietary consumables” to include their “SMRT Cells and . . .

24

chemical reagent kits.”

25

phrases are essentially equivalent.

26

in which they materially differ or that any difference was

27

misleading or false.

Instead of using a sentence identical to the sentence

Moreno Decl., Ex. 6, 6.

The Form 10-K

The offering materials defined PacBio’s

Moreno Decl., Ex. 2, 1, 3.

28
23

Thus, these

Plaintiffs have plead no way

1

Plaintiffs respond that this additional sentence in the Form
10-K only shows that the Form 10-K also “contained a materially

3

false and misleading statement.”

4

the 1AC, Plaintiffs did not allege that the statement in the

5

offering materials was false and misleading because performance

6

enhancements to the RS in fact required changes to the hardware

7

itself.

8

false and misleading because the “omission of the sentence” that

9

appeared in the offering materials “from the 2010 Form 10-K could

10
United States District Court
For the Northern District of California

2

only mean that such enhancements could not be accomplished through

11

‘software upgrades and new consumables’” and thus that “they would

12

have to be accomplished through changes to the hardware itself.”

13

1AC ¶¶ 111-12.

14

Form 10-K was consistent with the offering materials undermines

15

Plaintiffs’ allegation that the differences between the documents

16

showed that the offering materials were false and misleading.

17

Opp. at 17 n.18.

However, in

Instead, they alleged that the offering materials were

Thus, that the additional sentence in the 2010

Accordingly, Plaintiffs have failed to allege sufficiently

18

any material omission or misleading statement in the offering

19

materials regarding required upgrades or replacement of the

20

hardware.

21

4. No future plans to further develop applications

22

Plaintiffs allege that the offering materials were misleading

23

or false based on the failure to disclose “that there were no

24

plans to further develop applications for the PacBio RS system, as

25

these applications could not be introduced commercially.”

26

¶ 51.

27
28

1AC

In their opposition, but not their pleading, Plaintiffs tie
this claim to the following passage in the offering materials:
24

1
2
3
4
5
6
7
8

We believe that the power of SMRT detection extends
beyond DNA sequencing to the detection and
characterization of other fundamental biological
functions. The ability of the SMRT technology to
observe kinetic information of individual molecules
provides the ability to detect nucleic acid variations,
including detection of base modifications and the
detection of binding of biomolecules to DNA. SMRT
detection has been applied by researchers to directly
observe, on a single molecule basis, transcription,
reverse transcription, translation and ligand binding.
Although these applications will not be available at the
commercial launch of the PacBio RS, we plan to further
develop them and, if successful, we may commercially
introduce them in the future.
Opp. at 17 (quoting 1AC ¶ 48).

9
Plaintiffs argue that the final sentence in this passage was
10
United States District Court
For the Northern District of California

false or misleading because there were in fact “no plans to
11
‘further develop’” the applications.

Opp. at 18.

They contend

12
that Martin’s later comments revealed that “the Company’s efforts
13
were devoted to making the PacBio RS commercially viable, not to
14
developing new applications.”

Id.

Plaintiffs further argue that

15
any “[p]lans to develop future applications, which had never
16
existed, were . . . dead,” after PacBio announced on September 20,
17
2011 that it was reducing its workforce by 28%, affecting most the
18
operations and research and development functions.”

Id.

19
However, none of Plaintiffs’ arguments or allegations
20
supports the conclusion that the statement in the offering
21
materials was misleading or created a false impression.

Even if

22
PacBio devoted its time initially to making the RS system
23
commercially viable, this did not mean that it did not intend to
24
develop other applications later.

Further, the layoffs more than

25
a year after the IPO does not show anything about the company’s
26
intentions at the time of the IPO.

As Defendants point out, that

27
it had a large research department to cut suggests that PacBio was
28
25

1

investing in such development.

2

the offering materials that development of future applications

3

could be hindered by problems with cash and resources.

4

Decl., Ex. 2, 11 (“We may be unable to develop our future

5

commercial applications. . . . These future commercial

6

applications will require significant investments of cash and

7

resources and we may experience unexpected delays or difficulties

8

that could postpone our ability to commercially launch these

9

future applications . . .”).

United States District Court
For the Northern District of California

10

Finally, PacBio did disclose in

See Moreno

Accordingly, Plaintiffs have failed to allege any material

11

omission or misleading statement in the offering materials related

12

to plans to develop future applications.

13
14

5. Issues related to beta testing and bugs
Plaintiffs also allege that the offering materials failed to

15

disclose “that the initial ‘limited production release program’

16

was in fact a ‘beta test program,’” 1AC ¶ 51(4), “that the PacBio

17

RS system had a significant number of ‘bugs’ that would affect the

18

system’s performance,” id. at ¶ 51(5), “that the PacBio RS

19

system’s performance envelope needed to be validated,” id. at

20

¶ 51(6), “that the RS’s systems were unstable and needed to be

21

incrementally increased,”

22

would experience ‘variability,’” id. at ¶ 51(8).

23

id. at ¶ 51(7), and “that the Company

Plaintiffs contend that they adequately alleged that the

24

description of the limited production release (LPR) program for

25

the RS system did not use the word “beta” or the phrase “beta

26

test,” that the description portrayed the RS system as having

27

moved past beta testing to “initial production,” and thus that the

28

offering materials concealed from the investors the true status of
26

1

the LPR program as a beta test for the RS system.

2

Plaintiffs further argue that, “[b]ecause the Offering Materials

3

did not describe the LPR as a beta test, or something truly

4

equivalent, reasonable investors had no reason to know” that “the

5

Company’s ‘expectation [was] in the beginning we would have lots

6

of bugs, . . . and be able to validate the initial beta

7

performance envelope,’” that “[o]ver time, the systems would

8

become more stable and we would then start to incrementally

9

increase the performance with consumables and software upgrades,”

Opp. at 18-19.

United States District Court
For the Northern District of California

10

and that there would be issues with “performance variability.”

11

Opp. at 19-20 (quoting 1AC ¶ 84).

12

other issues were concealed by the failure to disclose fully the

13

status of the LPR program as a beta program.

14

Thus, they argue that these

Plaintiffs have alleged no unique meaning for the terms

15

“beta” or “beta test.”

16

the terms “are common in the computer hardware and software

17

industry.”

18

does not concern the computer hardware and software industry and

19

they have not alleged in the 1AC that the terms are commonly used

20

in other industries.

21

as “a nearly complete prototype of a product (as software).”

22

“beta,” Merriam-Webster Dictionary, http://www.merriam-

23

webster.com/dictionary/beta (last visited October 2, 2012).

24

defines beta test as “a field test of the beta version of a

25

product (as software) especially by testers outside the company

26

developing it that is conducted prior to commercial release.”

27

“beta test,” Merriam-Webster Dictionary, http://www.merriam-

28

webster.com/dictionary/ beta%20test (last visited October 2,

Opp. at 18.

Plaintiffs state in their opposition that

However, the technology at issue here

The Merriam-Webster Dictionary defines beta

27

See

It

See

1

2012).

2

http://www.oed.com/view/Entry/18257 (last visited October 2, 2012)

3

(defining “beta test” as “a test of machinery, software, etc. in

4

course of final development, carried out by a party or parties

5

unconnected with the developer”).

6

See also “beta test,” Oxford English Dictionary,

Defendants do not contest that the LPR program was a beta

7

program, within the dictionary definition of that term.

8

they argue that the offering materials sufficiently disclosed that

9

the program was a platform for testing and improving pre-

Instead,

United States District Court
For the Northern District of California

10

commercial versions of the RS system, the equivalent of a beta

11

test, and that the RS system would contain defects or errors, even

12

after commercial release.

13

The offering materials included at least two descriptions of

14

the LPR program.

15

Prospectus Summary, Moreno Decl., Ex. 2, 3, and a longer

16

description appeared in the body of the prospectus in the

17

“Business” section, id. at 68.

18
19
20
21
22
23
24
25
26
27
28

The shorter description appeared in the

The longer description stated,

We instituted a limited production release program
pursuant to which we received orders for eleven limited
production release instruments from entities such as
genome centers, clinical, government and academic
institutions and agricultural companies. This program
was designed to help us garner quality feedback on the
product prior to our full commercial launch scheduled
for early 2011. We received orders for our limited
production release instrument from [eleven
institutions.] As of September 15, 2010, we have
shipped a total of seven PacBio RS limited production
release instruments, and we intend to ship the remaining
four later this year. Limited production release
instruments are designed to provide early access to the
technology, while we complete the research, development
and testing required for full commercial release.
Therefore, performance during the limited production
release phase will not be equal to that of the system at
commercial release. There will be a continuous
evolution of these performance variables, including
readlength and throughput, during the limited production
28

release phase as we develop new versions of our software
and consumables. During a testing period, which we
expect to last at least through the end of 2010, we will
be working with these customers to obtain feedback and
plan to incorporate relevant improvements into the
commercial release version of the PacBio RS. Generally,
each customer is obligated to pay us a deposit after
accepting a limited production release instrument, and
is entitled to receive an upgrade to a commercial
release version of the PacBio RS, at which time each
customer will be obligated to pay the balance of their
order and we will then recognize revenue. While we
expect to deliver upgrades to all of these customers, we
cannot provide assurance that we will succeed and
recognize revenue from our limited production release
customers.

1
2
3
4
5
6
7
8
9

Id.

This description of the LPR program comports with the

United States District Court
For the Northern District of California

10

dictionary definition of a beta program and does not give an

11

impression that the LPR program was anything other than such a

12

program.

13

convey what the LPR program was.

14

Defendants did not need to use the word “beta” itself to

Plaintiffs contend that the description nevertheless

15

concealed the beta status for several reasons.

16

the “recipients of the machines were called ‘customers,’

17

as opposed to ‘users’ or ‘evaluators,’” who placed “orders” for

18

the instrument rather than volunteered to serve as testers and

19

were “obligated to pay a deposit” and to “pay . . . the balance of

20

the order” upon getting the commercial release product.

21

19.

22

customers frequently perform beta testing, which is used to test a

23

product in a non-laboratory setting to see how it will perform

24

when used in actual, real world applications.

25

v. Oracle Corp., 383 F.3d 462, 466-467 (6th Cir. 2004) (“In the

26

software industry, ‘Beta release’ refers to a stage of software

27

development in which the software is released to a limited number

28

of customers for testing and further development before being

However, this is not persuasive.

29

They argue that
. . .

Opp. at

Customers and potential

See Am. Trim, LLC

1

released to the general public.”); Dowty Communs. v. Novatel

2

Computer Sys. Corp., 817 F. Supp. 581, 590 (D. Md. 1992) (“Beta

3

testing refers to product testing at a customer location,

4

attempting tasks the product was designed to perform.

5

testing, by contrast, is done by a manufacturer, in its

6

laboratory, using test equipment.”); see also Oxford English

7

Dictionary, http://www.oed.com/view/Entry/18257 (last visited

8

October 2, 2012) (defining “beta customer” as “a person or company

9

(usually a potential purchaser) involved in beta-testing a

Alpha

United States District Court
For the Northern District of California

10

product”).

11

customers involved had to give a “deposit” when they received the

12

LPR instrument is not surprising, given that it was an expensive

13

instrument, which the customers would use at their own sites.

14

Plaintiffs also do not make clear how requiring payment for the

15

balance of the cost of the commercial release model would imply

16

that the LPR device was not a beta device.

17

Plaintiffs suggest that customers were required to upgrade to a

18

commercial release version, the offering materials did not make

19

such a representation and stated instead that the customers were

20

“entitled to receive an upgrade,” as quoted above.

21

materials also specifically noted that the company might not be

22

able to “succeed” and “deliver upgrades to all of these

23

customers.”

24

Plaintiffs do not explain how this suggested that the LPR program

25

was not a beta test.

26

any material omission or material misstatement regarding the

27

status of the LPR program as a “beta” program.

That the offering materials made clear that the

To the extent that

In fact, the

Even if customers were required to upgrade,

Thus, Plaintiffs have not alleged adequately

28
30

1

Further, Plaintiffs have not adequately alleged that the

2

description of the LPR program concealed or omitted that it would

3

have “bugs” that would affect the system’s performance, that the

4

performance would increase incrementally or that there would be

5

performance variability.

6

program specifically stated that “performance during the limited

7

production release phase will not be equal to that of the system

8

at commercial release.”

9

involve “a continuous evolution of these performance variables,

First, the description of the LPR

It further stated that the program would

United States District Court
For the Northern District of California

10

including readlength and throughput, during the limited production

11

release phase as we develop new versions of our software and

12

consumables.”

13

“Any product using our SMRT technology will be complex and may

14

develop or contain undetected defects or errors,” and “We cannot

15

assure you that a material performance problem will not arise.”

16

Moreno Decl., Ex. 2, 16.

17

http://www.oed.com/view/Entry/24352 (last visited October 2, 2012)

18

(defining “bug” as, among other things, “A defect or fault in a

19

machine, plan, or the like”).

Finally, the offering materials also disclosed,

See Oxford English Dictionary,

20

C. Summary

21

Accordingly, the Court GRANTS Defendants’ motion to dismiss

22

the § 11 claim in its entirety.

23

have not sufficiently plead any misrepresentation or omission in

24

the offering materials.

25

this claim to remedy the deficiencies identified above, provided

26

that they are able to do so truthfully and meet the pleading

27

requirements of Rule 8.

The Court finds that Plaintiffs

Plaintiffs are granted leave to amend

28
31

1
2

III. Claim against PacBio, the Officer Defendants and the
Underwriter Defendants for violation of § 12(a)(2) of the
Securities Act
A. Legal standard

3
Section 12(a)(2) of the Securities Act imposes civil
4
liability on “any person who . . . offers or sells a security
5
. . . by the use of any means or instruments . . . in interstate
6
commerce . . . by means of a prospectus or oral communication,
7
which includes an untrue statement of a material fact or omits to
8
state a material fact necessary in order to make the statements,
9
in light of the circumstances under which they were made, not
10
United States District Court
For the Northern District of California

misleading . . .”

15 U.S.C. § 77l(a)(2).

“Accordingly, to

11
prevail under Section 12(a)(2), a plaintiff must demonstrate
12
(1) an offer or sale of a security, (2) by the use of a means or
13
instrumentality of interstate commerce, (3) by means of a
14
prospectus or oral communication, (4) that includes an untrue
15
statement of material fact or omits to state a material fact that
16
is necessary to make the statements not misleading by any person.”
17
Miller v. Thane Int’l (Miller II), 615 F.3d 1095, 1099 (9th Cir.
18
2010) (citations and internal quotation marks omitted).

“The Act

19
defines ‘person’ to include individuals and corporations.”

Id.

20
(citing 15 U.S.C. § 77b(a)(2)).

“Additionally, ‘[e]very person

21
who, by or through stock ownership, agency, or otherwise . . .
22
controls any person liable under [Section 12(a)(2)] shall also be
23
liable jointly and severally with and to the same extent as such
24
controlled person.’”

Id. (quoting 15 U.S.C. § 77o) (formatting in

25
original).
26
27
28
32

1
2
3

B. Discussion
1. Misrepresentation or omission of material fact
Defendants argue that Plaintiffs have failed to allege a
misrepresentation or omission of material fact in the prospectus

5

for the same reasons addressed above regarding the § 11 claim.

6

Plaintiffs do not respond to this argument or provide any reason

7

to differentiate the two claims for this purpose.

8

because the Court has found that Plaintiffs failed to allege a

9

misrepresentation or omission of material fact in the offering

10
United States District Court
For the Northern District of California

4

materials in general, the Court reaches the same conclusion for

11

the prospectus for the purposes of this claim.

12
13

Accordingly,

2. Standing
The parties disagree as to whether either named Plaintiff has

14

standing to bring the § 12(a)(2) claim and on the role of the

15

Supreme Court’s decision in Gustafson v. Alloyd Co., Inc., 513

16

U.S. 561, 574 (1995), in this determination.

17

that Plaintiffs’ certifications, submitted with the 1AC, reveal

18

that neither Plaintiff purchased his shares in the public offering

19

on October 27, 2010 and instead they purchased their shares in

20

aftermarket transactions.

21

lacks standing to bring this claim.

22

Powell has standing because aftermarket purchases made less than

23

ninety days after the IPO are actionable and he purchased at least

24

some of his shares on November 17, 2010, less than ninety days

25

after the IPO.

26

Powell “purchased PacBio securities pursuant and/or traceable to

27

the IPO at artificially inflated prices”).

Defendants argue

Plaintiffs do not dispute that Primo
Instead, they contend that

Opp. at 27-28; see also 1AC ¶ 13 (alleging that

28
33

“Section 12(a)(2) provides that any person who ‘offers or

2

sells’ a security by means of a prospectus containing a materially

3

false statement or material omission shall be liable to any

4

‘person purchasing such security from him.’”

5

Mortg. Backed Certificates Litig., 712 F. Supp. 2d 958, 966 (N.D.

6

Cal. 2010) (quoting 15 U.S.C. § 77l(a)(2)).

7

Supreme Court addressed the meaning of the word “prospectus” under

8

the Securities Act.

9

since recognized that “[d]icta in Gustafson indicate that a suit

10
United States District Court
For the Northern District of California

1

under Section 12 may only be maintained by a person who purchased

11

the stock in the offering under the prospectus.”

12

Dignity Partners, 191 F.3d 1076, 1081 (9th Cir. 1999); see also

13

Gustafson, 513 U.S. at 571-72, 578 (“The intent of Congress and

14

the design of the statute require that § 12(2) liability be

15

limited to public offerings.”).

16

distinguished between §§ 11 and 12 on the basis that “Section 11

17

permits suit without restriction by ‘any person acquiring such

18

security,’” while, in contrast, § 12 “permits suit against a

19

seller of a security by prospectus only by ‘the person purchasing

20

such security from him,’ thus specifying that a plaintiff must

21

have purchased the security directly from the issuer of the

22

prospectus.”

23

§ 12’s “express privity requirement.”

24

513 U.S. at 566-84.

191 F.3d at 1081.

In re Wells Fargo

In Gustafson, the

The Ninth Circuit has

Hertzberg v.

In Hertzberg, the Ninth Circuit

The court referred to this as
Id.

“There is no clear appellate authority as to whether

25

aftermarket purchasers may have § 12(a)(2) standing.”

26

Mut., Inc. Sec., 694 F. Supp. 2d 1192, 1225 (W.D. Wash. 2009).

27

Some district courts have held that aftermarket purchasers have

28

standing “so long as that aftermarket trading occurs ‘by means of
34

In re Wash.

1

a prospectus or oral communication.’”

2

Inc., 47 F. Supp. 2d 250, 253 (D. Conn. 1999) (quoting 15 U.S.C.

3

§ 771).

4

liability can extend for as long as a prospectus is required under

5

the statutory and regulatory framework to have been delivered and

6

rejected the defendants’ attempts to limit liability to shares

7

purchased in the initial distribution.

8
9

Feiner v. SS&C Techs.,

In Feiner, the district court held that § 12(a)(2)

Id.

Other courts, including those in the Northern District of
California that have considered this issue, have found that

United States District Court
For the Northern District of California

10

§ 12(a)(2) liability does not extend to aftermarket transactions.

11

In In re Levi Strauss & Co. Sec. Litig., 527 F. Supp. 2d 965 (N.D.

12

Cal. 2007), the court considered Feiner and other district court

13

decisions and concluded that Feiner was inconsistent with the

14

dicta in Gustafson.

15

purchased pursuant to a public offering and, therefore, does not

16

extend to any aftermarket transactions.

17

Similarly, in In re Wells Fargo Mortg. Backed Certificates Litig.,

18

the court held, “Unlike Section 11, which permits an action by a

19

plaintiff who has purchased a security that is merely ‘traceable

20

to’ the challenged misstatement or omission, Section 12(a)(2)

21

requires a plaintiff to plead and prove that it purchased a

22

security directly from the issuer as part of the initial offering,

23

rather than in the secondary market.”

24

also In re WorldCom, Inc. Sec. Litig., 2004 U.S. Dist. LEXIS

25

11696, at *17 (S.D.N.Y.) (“The Feiner analysis is not

26

persuasive.”); In re Alcatel Sec. Litig., 382 F. Supp. 2d 513, 530

27

n.8 (S.D.N.Y. 2005) (“Only those plaintiffs who purchased Class O

28

shares pursuant to (i.e., in) the IPO have standing to bring [a]

The court held that § 12 is limited to shares

35

Id. at 982-83.

712 F. Supp. 2d at 966; see

1

section 12(a)(2) claim.”).

2

reasoning better comports with Gustafson and Hertzberg.

3

This Court concludes that this

Plaintiffs cite one decision, Washington Mutual, 694 F. Supp.

4

2d at 1225, to support their assertion that “courts within the

5

Ninth Circuit recognize that aftermarket purchases are

6

actionable.”

7

However, that case does not so hold.

8

Mutual, the district court recognized that there was no clear

9

appellate authority on the issue and that there was a division

Opp. at 27 (internal quotation marks omitted).
Instead, in Washington

United States District Court
For the Northern District of California

10

between district courts.

11

some courts had held that standing “does not exist for those who

12

purchase securities in private and secondary markets outside of

13

the initial offering” and that other courts, such as that in

14

Feiner, had found that “liability is coextensive with the

15

prospectus’s effective date.”

16

the Washington Mutual court did not determine which approach was

17

correct and instead found that “[e]ven under” the “more expansive

18

reading of § 12(a)(2)” that would recognize aftermarket trading,

19

the plaintiffs in that case had failed to state a claim because

20

their purchases were made after the effective period of the

21

prospectus.

22

694 F. Supp. 2d at 1225.

It noted that

Id. (collecting cases).

However,

Id. at 1225-26.

Accordingly, the Court finds that neither named Plaintiff has

23

standing to assert the § 12(a)(2) claim and thus it must be

24

dismissed.

25

named Plaintiff who has standing to assert this claim.

26

3. Offerors or sellers of the securities

27
28

Plaintiffs are granted leave to amend, with a new

As previously noted, § 12(a)(2) imposes liability on any
person who “offers or sells” a security.
36

The PacBio Defendants

1

also argue that Plaintiffs’ § 12(a)(2) claim should be dismissed

2

against PacBio and the Officer Defendants because they did not

3

offer or sell the securities purchased by Plaintiffs.

4

In Pinter v. Dahl, 486 U.S. 622 (1988), the Supreme Court

5

stated that § 12 “imposes liability on only the buyer’s immediate

6

seller; remote purchasers are precluded from bringing actions

7

against remote sellers.”

8

recover against his seller’s seller.”

9

Pinter, the Fifth Circuit noted that, “in a firm commitment

Id. at 643 n.21.
Id.

“Thus, a buyer cannot
In interpreting

United States District Court
For the Northern District of California

10

underwriting,” such as that here, “the public cannot ordinarily

11

hold the issuers liable under section 12, because the public does

12

not purchase from the issuers.”

13

F.3d 363, 370 (2001).

14

underwriters, and suing the issuers is an attempt to recover

15

against the seller’s seller.”

16

Lone Star Ladies Inv. Club, 238

“Rather, the public purchases from the

Id.

However, liability under §12 is not limited only to those who

17

pass title to a purchaser.

18

successfully solicits the purchase, motivated at least in part by

19

a desire to serve his own financial interests or those of the

20

securities owner.”

21

statute, a “‘seller’ is someone: (1) who passes title to the

22

securities; or (2) who solicits the sale of securities to serve

23

his own financial interest or the financial interest of the

24

securities’ owner.”

25

at *7 (W.D. Wash.) (citing Pinter, 486 U.S. at 647–50).

It also encompasses a “person who

Pinter, 486 U.S. at 647.

Thus, under the

Fouad v. Isilon Sys., Inc., 2008 WL 5412397,

26

Because the securities at issue were sold through a firm

27

commitment underwriting, in which title passed to the Underwriter

28

Defendants before passing to the ultimate purchasers, PacBio and
37

1

the Officer Defendants were not immediate sellers.

2

Lone Star Ladies Inv. Club, 238 F.3d at 370.

3

whether Plaintiffs have alleged adequately active solicitation on

4

the part of PacBio and the Officer Defendants.

5

See, e.g.,

Thus, the focus is

Plaintiffs have argued that PacBio and the Officer Defendants

6

engaged in solicitation by “signing a registration statement,”

7

“causing the inclusion of misleading statements in offering

8

materials” and “controlling the defendant corporation.”

9

29-30 (citing 1AC ¶¶ 15-24, 38, 66-68); see also 1AC ¶¶ 67-68

Opp. at

United States District Court
For the Northern District of California

10

(alleging that these Defendants took actions that “included

11

soliciting Plaintiff Powell and the Subclass by means of these

12

defendants’ participation in the preparation of the false and

13

misleading Offering Materials”).

14

The Ninth Circuit has not addressed whether allegations that

15

a defendant signed a registration statement or prospectus, alone

16

or combined with other possible solicitation activity, is

17

sufficient to state a claim under § 12, and other courts that have

18

addressed the issue have reached differing results.

19

re Charles Schwab Corp. Sec. Litig., 257 F.R.D. 534, 549 & n.3

20

(N.D. Cal. 2009) (collecting cases).

21

recognized that § 12 did not encompass liability “for mere

22

participation in unlawful sales transactions,” even if the person

23

was a “‘substantial factor’ in causing the sale.”

24

650, 654.

25

statements in Pinter “a requirement that the defendant be alleged

26

to have had some ‘direct’ role in the solicitation of the

27

plaintiff, although the Ninth Circuit has not explained precisely

28

what that direct role may entail.”

See, e.g., In

In Pinter, the Court

486 U.S. at

“Courts have extrapolated” from the Supreme Court’s

38

In re Charles Schwab Corp.

1

Sec. Litig., 257 F.R.D. at 549 (citing, among others, In re Daou

2

Systems, 411 F.3d at 1029; In re Westinghouse Sec. Litig., 90 F.3d

3

696, n.19 (3d Cir. 1996)).

4

Plaintiffs have adequately alleged more than mere

5

participation, including by alleging that these Defendants

6

participated in the preparation of, and signed, the purportedly

7

misleading solicitation documents.

8

other courts that have held that “‘whether an individual is a

9

seller under section 12 is a question of fact, not properly

The Court also agrees with

United States District Court
For the Northern District of California

10

decided on a motion to dismiss.’”

11

Sec. Litig., 2006 U.S. Dist. LEXIS 61589, at *11-12 (N.D. Cal.);

12

see also In re Charles Schwab Corp. Sec. Litig., 257 F.R.D. at

13

550.

14

IV.

15

In re Portal Software, Inc.

Claim against PacBio and the Officer Defendants for violation
of § 10(b) of the Exchange Act and Rule 10b-5
Section 10(b) of the Exchange Act makes it unlawful for any

16
person to “use or employ, in connection with the purchase or sale
17
of any security . . . any manipulative or deceptive device or
18
contrivance in contravention of such rules and regulations as the
19
[SEC] may prescribe.”

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

20
§ 240.10b-5 (Rule 10b-5).

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

21
“unlawful for any person, directly or indirectly, . . . to make
22
any untrue statement of material fact or to omit to state a
23
material fact necessary in order to make the statements made, in
24
the light of the circumstances under which they were made, not
25
misleading . . . ”

17 C.F.R. § 240.10b-5(b).

To state a claim

26
under Rule 10b-5(b), a plaintiff must allege: “(1) a
27
misrepresentation or omission of material fact, (2) scienter,
28
39

1

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

2

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

3

Gilead Sciences Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).

4

In re

Plaintiffs must plead any allegations of fraud with
particularity, pursuant to Rule 9(b) of the Federal Rules of Civil

6

Procedure.

7

requirements of the PSLRA, the complaint must “specify each

8

statement alleged to have been misleading, the reason or reasons

9

why the statement is misleading, and, if an allegation regarding

10
United States District Court
For the Northern District of California

5

the statement or omission is made on information and belief, the

11

complaint shall state with particularity all facts on which that

12

belief is formed.”

13

GlenFed, 42 F.3d at 1543.

Pursuant to the

15 U.S.C. § 78u-4(b)(1).

In support of this claim, Plaintiffs repeat the same

14

allegations that were made in support of the § 11 claim about the

15

offering materials.

16

insufficiently plead for the same reasons as for the § 11 claim.

17

The Court finds that these allegations were

In addition, Plaintiffs base this claim on misrepresentations

18

or omissions in a number of post-IPO filings and oral statements,

19

many of which overlap with those purportedly made in the offering

20

materials.

21

actionable and that Plaintiffs have not properly alleged scienter.

22

In their opposition, Plaintiffs address only three purported

23

misrepresentations and omissions other than those in the offering

24

materials and argue that they allege scienter properly for each of

25

these.

26

Plaintiffs have not defended the sufficiency of their allegations

27

related to any other misrepresentation or omission, they will not

28

be considered to support the § 10(b) claim.

Defendants argue in their motion that none of these is

These will be discussed individually below.

40

Because

1

Further, Plaintiffs have not defended the sufficiency of

2

their allegations of scienter as to any Officer Defendant other

3

than Martin.

4

knowledge or intent from one defendant to another.”

5

Capital Assur., Ltd. Sec. Litig., 729 F. Supp. 2d 569, 595

6

(S.D.N.Y. 2010); see also In re Accuray Sec. Litig., 757 F. Supp.

7

2d 936, 949 (N.D. Cal. 2010) (finding complaint insufficiently

8

plead due to its failure “to plead facts identifying what each

9

Defendant purportedly knew”).

“[T]he PSLRA and Rule 9(b) preclude attribution of
In re Sec.

Accordingly, the Court GRANTS the

United States District Court
For the Northern District of California

10

motion to dismiss the § 10(b) claim against the Officer

11

Defendants, other than Martin.

12
13

A. Form 10-Q dated November 30, 2010, for the quarter ending
September 30, 2010
In the 1AC, Plaintiffs point to one passage of the 2010 Third

14
Quarter Form 10-Q that they allege is materially false and
15
misleading.

This passage is similar to the statements in the

16
offering materials about the LPR program and states in full:
17
18
19
20
21
22
23
24
25
26
27
28

We instituted a limited production release program
pursuant to which we received orders for eleven limited
production release instruments from entities such as
genome centers, clinical, government and academic
institutions and agricultural companies. This program
was designed to help us garner quality feedback on the
product prior to our full commercial launch scheduled
for the first half 2011. We received orders for our
limited production release instrument from [eleven
institutions]. As of November 15, 2010, we had shipped
a total of eleven PacBio RS limited production release
instruments. Limited production release instruments are
designed to provide early access to the technology,
while we complete the research, development and testing
required for full commercial release. Therefore,
performance during the limited production release phase
will not be equal to that of the system at commercial
release. There will be a continuous evolution of these
performance variables, including readlength and
throughput, during the limited production release phase
as we develop new versions of our software and
consumables. During a testing period, which we expect
41

1
2
3
4
5
6
7

to last at least through the end of 2010, we will be
working with these customers to obtain feedback and plan
to incorporate relevant improvements into the commercial
release version of the PacBio RS. Generally, each
customer is obligated to pay us a deposit after
accepting a limited production release instrument, and
is entitled to receive an upgrade to a commercial
release version of the PacBio RS, at which time each
customer will be obligated to pay the balance of their
order and we will then recognize revenue. While we
expect to deliver upgrades to all of these customers, we
cannot provide assurance that we will succeed and
recognize revenue from our limited production release
customers.

8

1AC ¶ 78 (emphasis added in 1AC).

9

that the Form 10-Q “made no mention of the discrepancy in the

Plaintiffs state in their 1AC

United States District Court
For the Northern District of California

10

single molecule raw read accuracy figures.”

11

Plaintiffs allege that the omission of this information “made the

12

statements in the Form 10-Q about the status of the limited

13

production release program, which was critical to the Company’s

14

future success, materially false and misleading.”

15

Id. at ¶ 79.

Id.

In their opposition brief, however, Plaintiffs do not explain

16

what this “discrepancy” was or how the omission of the raw read

17

accuracy rate rendered the above passage about the LPR program to

18

be misleading or false.

19

they have plead this adequately.

20

argue that the passage in the Form 10-Q was also misleading

21

because there were material omissions of a variety of other

22

information, including that the LPR program was a beta program,

23

that there were “bugs,” that there was “variability” on

24

performance metrics and that there was a trade off between

25

accuracy and readlength.

26

that these were the reasons that the statements in the Form 10-Q

27

were misleading or explain how the Form 10-Q was rendered

They make only conclusory statements that
Instead, in their brief, they

However, they did not specify in the 1AC

28
42

1

misleading by those omissions.2

2

the pleading requirements of the PSLRA as to these purported

3

reasons.

Accordingly, they have not met

4

Even if the omissions argued in the opposition had been

5

alleged in the 1AC, Plaintiffs have not adequately explained how

6

they would render the Form 10-Q misleading.

7

the passage properly discloses that the LPR program is a beta

8

program, as discussed above.

9

the performance of the RS system during the LPR program would not

Among other things,

Further, it clearly discloses that

United States District Court
For the Northern District of California

10

equal to that of the commercial release version and that the

11

performance variables would evolve during this testing phase.

12

In addition, Plaintiffs have not plead sufficiently that

13

Martin made omissions with the requisite scienter.

14

pleading requirement, the complaint must contain allegations of

15

specific contemporaneous statements or conditions that demonstrate

16

the intentional or the deliberately reckless false or misleading

17

nature of the statements when made.’”

18

Corinthian Colleges, Inc., 540 F.3d 1049, 1066 (9th Cir. 2008)

19

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

20

“plaintiff must ‘state with particularity facts giving rise to a

21

strong inference that the defendant acted with the required state

22

of mind.’”

Id. (quoting 15 U.S.C. § 78u-4(b)(2)) (emphasis in

23

original).

This is assessed by considering “the complaint in its

24

entirety” and determining “whether all of the facts alleged, taken

25

collectively, give rise to a strong inference of scienter.”

“‘To meet this

Metzler Inv. GMBH v.

26
2

27
28

Many of the paragraphs of the 1AC that Plaintiffs cite in
their opposition brief relate to the prospectus and not to the
Form 10-Q.
43

A

1

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 323

2

(2007) (emphasis in original).

3

Plaintiffs allege that Martin made comments on November 30,

4

2010 which reveal that he knew there were material omissions

5

regarding the status of the LPR program as a beta test and

6

regarding bugs, accuracy and a trade off between accuracy and

7

readlength.

8

addressing the average readlength, consensus accuracy and raw read

9

accuracy of the “initial beta” and stating, among other things,

Specifically, Plaintiffs cite Martin’s statements

United States District Court
For the Northern District of California

10

that “he was ‘very pleased with the progress we’ve made from July

11

through now’” and that “some of the beta sites had received

12

‘upgrades including ‘new software features’ and were experiencing

13

‘nice progress with increased readlength and accuracy.’”

14

23 (quoting 1AC ¶¶ 86-88) (emphasis added in brief).

15

explain that, by using the word “progress,” Martin implicitly

16

admitted “that the RS system was not consistently meetings its

17

specifications.”

18

Opp. at

Plaintiffs

Id.

However, the comments made by Martin are consistent with the

19

portion of the Form 10-Q that Plaintiffs have identified as

20

misleading.

21

“continuous evolution of these performance variables, including

22

readlength and throughput, during the limited production release

23

phase as we develop new versions of our software and consumables.”

24

Martin’s comments merely amount to a statement that the

25

“continuous evolution” that was disclosed was in fact taking place

26

and do not support a finding of scienter.

The passage made clear that there would be

27
28
44

1
2

B. Martin’s February 15, 2011 oral statement that “we can do
pretty much any re-sequencing application with the raw
read accuracy at around 85%”
Plaintiffs allege that, during a February 15, 2011 earnings

3
call, Martin stated, “Our customers right now, today, we can do
4
pretty much any re-sequencing application with the raw read
5
accuracy at around 85% that we have.”

1AC ¶ 102.

In their

6
opposition brief, Plaintiffs argue that this statement was
7
“materially false when made.”

Opp. at 25.

They argue that the

8
falsity of this statement is shown by analyst reports, released
9
before and after February 15, 2011, that expressed concern over
10
United States District Court
For the Northern District of California

the low raw-read accuracy and because PacBio’s Chief Technology
11
Officer noted that the PacBio RS’s accuracy was “81 to 84%.”

Id.

12
at 23-25.

The reports indicated that “some researchers were

13
concerned that longer reads might result in higher error rates
14
which could reduce the overall utility of the system.”

1AC ¶ 107.

15
Plaintiffs appear to argue that Martin’s comment was false or
16
misleading because the low raw read accuracy rate in fact reduced
17
customers’ ability to use the RS system for some applications.
18
Plaintiffs also contend that Martin’s later statement that “our
19
initial raw read accuracy of 85% limited some of our users to
20
certain applications” establishes that his earlier statement was
21
false and that he had admitted its falsity.

Opp. at 25-26 (citing

22
1AC ¶ 122).
23
However, in their opposition brief, Plaintiffs remove
24
Martin’s February 15, 2011 comment from its context and ignore
25
that this statement refers to “any re-sequencing application,” not
26
any application whatsoever.

Martin stated,

27
28

Our customers right now, today, we can do pretty much
any re-sequencing application with the raw read accuracy
45

1
2
3

at around 85% that we have. And our customers are
telling us they’d really like to see us for de novo
sequencing, especially de novo mammalian, they’d like to
see if it’s 90% or greater. And I am confident that
with time we’re absolutely going to be able to get
there.

4

1AC ¶ 102.

5

regarding only one type of application of the RS device--re-

6

sequencing applications--and not about other types of sequencing--

7

de novo sequencing.

8

improvements to the raw read accuracy in order to perform de novo

9

sequencing.

United States District Court
For the Northern District of California

10
11

Thus, Martin made clear that his claim was made

He also made clear that users were asking for

This is consistent with the analysts’ reports and

Martin’s other statements.
Accordingly, Plaintiffs have not sufficiently plead that

12

Martin made materially false or misleading statements.

13

addition, given that Martin disclosed that the raw read accuracy

14

rate was “around” eighty-five percent and that customers were

15

asking for a higher level for de novo sequencing, Plaintiffs have

16

not alleged sufficient facts that would establish a strong

17

inference that Martin acted intentionally or deliberately

18

recklessly in making false or misleading statements.

19
20

In

C. Martin’s February 15, 2011 oral statement regarding
delivery time
Plaintiffs also argue that a second comment that Martin made

21
during the February 15, 2011 earnings call was false or
22
misleading.

They allege that, during the call, Martin was asked

23
by an analyst,
24
25
26
27

as you talk to your potential customers, what are some
of the key factors holding them back, maybe, from
placing an order at this point? And you know,
specifically in terms of your current throughput, is
that an issue that comes up in your conversations for
the type of customers that you are currently targeting?

28
46

1

1AC ¶ 104.

2

think they--the biggest issue that comes up at our conversation is

3

when they can actually get the system.

4

delivery time is the conversation.”

5

They allege that he responded, “No, it doesn’t.

I

That by far and away,

Id.

Plaintiffs contend that this statement was materially false

6

because this was not “the biggest topic of conversation” and

7

“[p]otential customers were not, and never had been clambering for

8

PacBio’s product because of . . . stability and variability

9

issues” and “the limitations imposed by the 85% raw read

United States District Court
For the Northern District of California

10

accuracy.”

11

shown to be materially false when, on a later earnings call on

12

August 4, 2011, after the commercial release of the RS system on

13

April 27, 2011, Martin pointed to “two factors that have impacted

14

our new order uptake,” which he identified as the “stability and

15

variability issues” that had existed in the beta systems and the

16

“initial raw read accuracy of 85%,” which had “limited some of our

17

users to certain applications.”

18

Plaintiffs also cite paragraph ninety-five of their 1AC, which

19

quotes a December 14, 2010 Nature article that discussed a

20

competitor’s product, which was priced to be affordable to

21

individual labs, unlike the PacBio RS system, and which had a

22

higher stated accuracy rate, although a lower readlength.

23

¶ 95.

24

Opp. at 26.

Plaintiffs contend that the statement was

Opp. at 26 (citing 1AC ¶ 122).

1AC

The Court finds that Plaintiffs have not plead sufficiently

25

that the February 15, 2011 statement was misleading or false or

26

that it was made with the requisite scienter.

27

issues later became a prominent topic of discussion with customers

28

does not mean that, at the time of Martin’s February 15, 2011
47

The fact that other

1

statement, delivery time was not the biggest topic of conversation

2

with potential customers.

3

statement was false at the time it was made.

4

comments were in different contexts.

5

to the commercial release, during a time period when the final

6

specifications of the commercial system were still developing.

7

is reasonable that one major focus of conversations with customers

8

would be about when the company expected to be able to deliver the

9

commercial systems.

Plaintiffs must allege that the
In addition, the two

The first one was made prior

It

The second was made after the commercial

United States District Court
For the Northern District of California

10

release and addressed the factors that had impacted the rate at

11

which new orders were placed.

12

not demonstrate that the “current throughput” was an issue that

13

was coming up for customers that PacBio was targeting during the

14

LPR program or that “delivery time” was not the biggest issue that

15

was arising.

The Nature article similarly does

16

C. Summary

17

Accordingly, the Court GRANTS the PacBio Defendants’ motion

18

to dismiss the § 10(b) claim against the Officer Defendants and

19

PacBio.

20

remedy the deficiencies identified above, provided that they are

21

able to do so truthfully and meet the pleading requirements of

22

Rule 8, Rule 9 and the PSLRA.

23

V.

24
25

Plaintiffs are granted leave to amend this claim to

Claims against the Officer Defendants and the Director
Defendants for violation of § 15 of the Securities Act and
against the Officer Defendants for violation of § 20(a) the
Exchange Act
Both the Exchange Act and the Securities Act provide for

26
joint and several liability for every person who, directly or
27
28
48

1

indirectly, controls any person found liable under other

2

provisions of the Acts.

3

Defendants contend that Plaintiffs have not plead

4

sufficiently that each of the Officer and Director Defendants were

5

controlling persons of PacBio.

6

things, that these individuals signed the offering materials, were

7

in “high-level positions” and had “direct and supervisory

8

involvement in the day-to-day operations of the Company.”

9

e.g., 1AC ¶¶ 15-24, 74, 166-67.

Plaintiffs alleged, among other

See,

Other courts in this district

United States District Court
For the Northern District of California

10

have found similar allegations regarding control sufficient to

11

survive a motion to dismiss.

12

Funds, 2011 U.S. Dist. LEXIS 707, at *32-33 (N.D. Cal.) (finding

13

sufficient allegations that “Defendants are high level officers

14

and signed registration statements”); In re Charles Schwab Corp.

15

Sec. Litig., 257 F.R.D. at 555 (holding, “Where a board member is

16

alleged to have signed the registration statements at issue,

17

however, courts have presumed that the director exercised actual

18

authority and control, at least over the contents of and/or

19

release of those statements.”)

20

allegations sufficient at this stage to support that the Officer

21

and Director Defendants were controlling persons.

See, e.g., Rafton v. Rydex Series

Accordingly, the Court finds these

22

However, under the relevant provisions, there must be an

23

underlying primary violation of the Acts before so-called “control

24

person” liability can be found.

25

primary violation of § 11 or 12 of the Securities Act), 78t(a)

26

(requiring a primary violation of the Exchange Act or any rule or

27

regulation thereunder).

28

adequately a primary violation under either Act, the Court grants

See 15 U.S.C. §§ 77o (requiring a

Because Plaintiffs have failed to plead

49

1

the PacBio Defendants’ motion to dismiss their claims under § 15

2

of the Securities Act and § 20(a) of the Exchange Act.

3

are granted leave to re-assert these claims, provided they are

4

able to plead the primary violations.

5
6
7
8
9

Plaintiffs

CONCLUSION
For the reasons set forth above, the Court GRANTS Defendants’
motions to dismiss (Docket Nos. 56 and 61).
Plaintiffs are granted leave to amend their claims as stated
above, within sixty days of the date of this Order.

Defendants

United States District Court
For the Northern District of California

10

shall respond to any amended pleading within four weeks

11

thereafter.

12

shall file their response two weeks thereafter, Defendants may

13

file a reply one week thereafter and the Court will resolve the

14

motion on the papers.

15

If Defendants file a motion to dismiss, Plaintiffs

If Defendants file an answer, within two weeks thereafter,

16

the parties shall file a stipulation to set a case management

17

conference, setting forth the dates on which they are available to

18

appear.

19

IT IS SO ORDERED.

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22

Dated: 4/15/2013

CLAUDIA WILKEN
United States District Judge

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