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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1 IN THE UNITED STATES DISTRICT COURT 2 FOR THE NORTHERN DISTRICT OF CALIFORNIA 3 4 5 THOMAS J. PRIMO; and EVAN POWELL, individually and on behalf of all others similarly situated, 6 7 8 9 United States District Court For the Northern District of California 10 11 12 13 14 15 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 16 (collectively, Plaintiffs) assert claims on behalf of a putative 17 class and subclass, for various violations of the Securities Act 18 of 1933, the Securities Exchange Act of 1934 and the Rules 19 promulgated thereunder, against Defendants Pacific Biosciences of 20 California, Inc. (PacBio); Hugh C. Martin, Susan K. Barnes and 21 Brian B. Dow (collectively, the Officer Defendants); William 22 Ericson, Brook Byers, Michael Hunkapiller, Randall Livingston, 23 Susan Siegel and David Singer (collectively, with Martin, the 24 Director Defendants); and J.P. Morgan Securities LLC, Morgan 25 Stanley & Co., Deutsche Bank Securities Inc., Piper Jaffray & Co. 26 (collectively, the Underwriter Defendants). Together, PacBio, the 27 Officer Defendants and the Director Defendants are referred to as 28 1 the PacBio Defendants. 2 Defendants move to dismiss Plaintiffs’ First Amended Complaint 3 (1AC) in its entirety. 4 considered the papers filed by the parties and their arguments at 5 the hearing, the Court GRANTS both motions to dismiss, with leave 6 to amend. The PacBio Defendants and the Underwriter Plaintiffs oppose the motions. 7 Having BACKGROUND 8 The following facts are alleged in Plaintiffs’ 1AC. 9 Plaintiffs bring this putative class action suit against United States District Court For the Northern District of California 10 PacBio, nine of its officers and directors and four underwriting 11 firms, on behalf of themselves and all persons or entities that 12 purchased PacBio common stock between October 27, 2010, the day of 13 PacBio’s initial public offering (IPO), and September 20, 2011. 14 1AC ¶ 1. 15 persons or entities that purchased PacBio common stock pursuant or 16 traceable to PacBio’s IPO. 17 Powell also brings claims on behalf of a subclass of all PacBio, a biotechnology company formed in 2000, develops, 18 manufactures and markets technology for genetic analysis. 19 ¶¶ 14, 39. 20 including the Prospectus and Registration Statements, PacBio 21 explained that its initial focus was on the DNA sequencing market 22 and that it had developed a “third generation” sequencing system 23 called the PacBio RS, which addressed various limitations of 24 earlier DNA sequencing methods. 25 advances in nanofabrication, biochemistry, molecular biology, 26 surface chemistry and optics, [PacBio] created a technology 27 platform called single molecule, real-time, or SMRT, technology.” 28 Id. 1AC In the offering materials prepared for its IPO, Id. at ¶ 39. “Combining recent PacBio represented that its “SMRT technology has the 2 1 potential to advance scientific understanding by providing a 2 window into biological processes that has not previously been 3 open.” 4 Id. Plaintiffs allege that the RS system “was supposed to be able 5 to produce a complete, high quality human genome in a very short 6 period of time,” which could be utilized for, among other things, 7 cancer research and diagnostics. 8 its offering materials, “In order to understand the limitations of 9 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 10 the sequencing process,” which “consists of three phrases”: 11 “sample preparation, physical sequencing and re-assembly.” 12 ¶ 41. 13 is broken into multiple small fragments, which may be amplified 14 into multiple copies. 15 sequencing, “the individual bases in each fragment are identified 16 in order, creating individual reads.” 17 individual bases identified continuously” in a read is referred to 18 as “readlength.” 19 overlapping reads are aligned and the original genome is assembled 20 into a continuous sequence. 21 easier it is to reassemble the genome.” 22 the assembled information is also dependent on “the accuracy of 23 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. 24 The offering materials explain that first generation 25 sequencing technology had “relatively long readlengths” but was 26 “limited by the small amounts of data that can be processed per 27 unit of time, referred to as throughput.” 28 methods achieved higher throughput but used processes that 3 Id. Second generation 1 introduced errors and resulted in short readlength. 2 offering materials proclaimed that the PacBio RS system “addresses 3 many of the limitations of the first and second generation 4 technologies, including short read lengths, limited flexibility, 5 long time to result, lower throughput” and other issues. 6 ¶ 42. Id. The Id. at 7 On October 27, 2010, the company conducted its IPO, raising 8 $230 million by selling shares at a price of sixteen dollars per 9 share. Id. at ¶ 38. Prior to its IPO, PacBio had obtained United States District Court For the Northern District of California 10 funding primarily through investments from venture capital firms 11 and small government grants. Id. at ¶ 37. 12 Plaintiffs allege that, in the offering materials and after 13 the IPO, Defendants made various misleading statements or failed 14 to disclose material information regarding the performance of the 15 PacBio RS system, which caused the PacBio common stock to be 16 artificially inflated throughout the class period. 17 Id. at ¶¶ 4-5. On August 4, 2011, after the close of trading, Defendants 18 issued a press release and held an earnings call, in which 19 Plaintiffs contend Defendants disclosed some of the limitations of 20 the RS system. 21 5, 2011, JP Morgan downgraded PacBio’s rating because the company 22 had lowered its projection of sales. 23 Id. at ¶¶ 120-125. The following day, on August Id. at ¶ 126. Plaintiffs allege that the press release, earnings call and 24 JP Morgan report “shocked the market.” 25 PacBio had closed at $9.90 per share on August 4, 2011, and fell 26 to $6.50 per share by the close of trading on Friday, August 5, 27 2011 and to $5.60 per share by the close of trading on Monday, 28 August 8, 2011. Id. 4 Id. at ¶ 127. Shares of 1 On September 20, 2011, PacBio announced that it would reduce 2 its workforce by twenty-eight percent, with the reductions 3 affecting most its operations and research and development 4 functions. 5 share on September 20, 2011 and fell to $4.25 per share by the 6 close of trading the following day. 7 Id. at ¶ 130. PacBio’s stock had closed at $5.56 per Id. at ¶ 133. Plaintiffs have attached to their 1AC a certification from 8 Primo attesting that he purchased 1,500 shares of PacBio stock on 9 July 7, 2011. Plaintiffs separately filed a certification from United States District Court For the Northern District of California 10 Powell attesting that he purchased fifty shares of PacBio stock on 11 November 17, 2010, one hundred shares on May 2, 2011 and two 12 hundred shares on August 5, 2011. 13 Docket No. 26. Plaintiff Powell asserts the following claims on behalf of 14 himself and the putative subclass: (1) against all Defendants for 15 violation of § 11 of the Securities Act, 1AC ¶¶ 58-65; (2) against 16 PacBio, the Officer Defendants and the Underwriter Defendants for 17 violation of § 12(a)(2) of the Securities Act, id. at ¶¶ 66-72; 18 and (3) against the Officer Defendants and the Director Defendants 19 for violation of § 15 of the Securities Act, id. at ¶¶ 73-75. 20 Both Plaintiffs assert the following claims on behalf of 21 themselves and the putative class: (1) against PacBio and the 22 Officer Defendants, for violation of § 10(b) of the Exchange Act 23 and Rule 10b-5, id. at ¶¶ 154-64; and (2) against the Officer 24 Defendants, violation of § 20(a) the Exchange Act, id. at 25 ¶¶ 165-68. 26 27 28 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). 6 enough to raise a right to relief above the speculative level on 7 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 12 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. 14 When granting a motion to dismiss, the court is generally 15 required to grant the plaintiff leave to amend, even if no request 16 to amend the pleading was made, unless amendment would be futile. 17 Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911 18 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 21 “without contradicting any of the allegations of [the] original 22 complaint.” 23 Cir. 1990). 24 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 27 reason. 28 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. 3 dismiss Plaintiffs’ § 12(a)(2) claim because they have not alleged 4 any false or misleading statement in the prospectus. 5 argue that Plaintiffs lack standing to bring a § 12(a)(2) claim. 6 PacBio Defendants also maintain that the § 12(a)(2) claim should 7 be dismissed against PacBio and the Officer Defendants because 8 they were not “sellers” of the securities. 9 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 11 that Plaintiffs fail to plead scienter sufficiently. 12 PacBio Defendants move to dismiss the § 15(a) and § 20(a) claims 13 because Plaintiffs have not adequately alleged the primary 14 violations under the Exchange Act or Securities Act and have not 15 alleged properly that the Officer and Director Defendants were 16 “controlling persons.” 17 I. 18 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 20 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 27 interpreting Plaintiffs’ claims.’” 28 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 3 but fail to connect these to any particular statements made in the 4 offering materials. 5 their Exchange Act claims, Plaintiffs make some attempt to connect 6 the alleged omissions to particular statements but continue to do 7 so in a general manner that requires the reader to guess what 8 particular statements they mean or how those statements were 9 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’ 12 needed to be validated, and that systems were unstable and needed 13 to be incrementally increased demonstrated that the statements 14 describing the PacBio RS in the prospectus [were] materially false 15 and misleading.”). 16 Plaintiffs argue that their 1AC is sufficient because 17 Defendants are able to “discern which omissions or 18 misrepresentations form the basis of their claims” well enough to 19 draft a motion to dismiss. 20 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. 23 basis of Plaintiffs’ claims. 24 to present at least a “short and plain statement” of their claims. 25 Moreover, in their papers, Defendants did not evidence a clear 26 understanding of the statements that Plaintiffs challenge. 27 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 1 make their allegations “simple, concise and direct” in violation 2 of Rule 8(d) or to fulfill the requirements of the PSLRA for their 3 Exchange Act claims, the Court GRANTS Defendants’ motion to 4 dismiss the 1AC in its entirety. 5 II. 6 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 11 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 16 omission or misrepresentation was material, that is, it would have 17 misled a reasonable investor about the nature of his or her 18 investment.’” Id. at 1403-04 (quoting Kaplan v. Rose, 49 F.3d 19 1363, 1371 (9th Cir. 1994)). “‘No scienter is required for 20 liability under § 11; defendants will be liable for innocent or 21 negligent material misstatements or omissions.’” Id. at 1404 22 (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 25 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”: 28 13 1 2 3 4 5 6 7 8 9 United States District Court For the Northern District of California 10 11 12 13 14 15 16 17 18 19 20 (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 12 13 14 15 16 17 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. 20 21 22 Dated: 4/15/2013 CLAUDIA WILKEN United States District Judge 23 24 25 26 27 28 50

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