City of Miami General Employees' & Sanitation Employees' Retirement Trust v. RH, Inc. et al

Filing 68

ORDER by Judge Yvonne Gonzalez Rogers denying 50 Motion to Dismiss. (fs, COURT STAFF) (Filed on 2/26/2018)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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CITY OF MIAMI GENERAL EMPLOYEES’ &
SANITATION EMPLOYEES’ RETIREMENT
TRUST, ET AL.,
Plaintiffs,

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Case No. 17-cv-00554-YGR
ORDER DENYING MOTION TO DISMISS
Dkt. Nos. 50, 51, 57

v.
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RH, INC., ET AL.

United States District Court
Northern District of California

Defendants.
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Plaintiffs City of Miami General Employees’ & Sanitation Employees’ Retirement Trust,

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et al., bring this securities class action litigation alleging fraudulent and misleading statements and

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omissions between March 26, 2015, and June 8, 2016, (the “Class Period”), against RH, Inc.

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(“RH”), and two individual defendants, namely Gary Friedman (CEO) and Karen Boone (CFO).

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Specifically, plaintiffs raise the following causes of action: (i) violation of section 10(b) of the

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Exchange Act and Rule 10b-5 against all defendants; and (ii) control person liability under section

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20(a) of the Exchange Act against Friedman and Boone.

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Defendants challenge plaintiffs’ section 10(b) claim on three grounds. First, plaintiffs fail

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to identify any statements which were false or misleading when made. Second, plaintiffs cannot

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establish a strong inference of scienter. Third, the complaint does not allege loss causation. With

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regard to plaintiffs’ 20(b) claim against Friedman and Boone defendants argue that plaintiffs

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cannot show an underlying predicate violation under section 10(b).

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Having carefully considered the papers submitted and the pleadings in this action, the

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hearing held on October 31, 2017, and for the reasons set forth below, the Court hereby DENIES

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the motion to dismiss and finds that plaintiffs have pled sufficient facts of material falsity,

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scienter, and loss causation.

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I.

BACKGROUND

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The facts at issue in this case, as pleaded in plaintiffs’ 100-page Consolidated Class Action

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Complaint (“CCAC”), (Dkt. No. 45), are well-known to the parties. Relevant allegations from the

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CCAC are set forth below. 1

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United States District Court
Northern District of California

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In connection with defendants’ motion to dismiss, defendants also have also filed an
amended request for judicial notice of 25 documents, and a supplemental request for judicial
notice of five additional documents, namely Securities and Exchange Commission (“SEC”)
filings, earnings call transcripts and press releases, earnings video presentations, market analyst
reports, and documents referenced in plaintiffs’ complaint. (See Dkt. Nos. 51 (“RJN”) and 59
(“SRJN”).) Judicial notice may be taken of any adjudicative fact that “can be accurately and
readily determined from sources whose accuracy cannot reasonably be questioned.” Fed. R. Evid.
201(b)(2). The Court may properly take judicial notice of public SEC filings, earnings call
transcripts, and press releases under Federal Rule of Evidence 201(b)(2). See Metzler Inv. GMBH
v. Corinthian Colleges, Inc., 540 F. 3d 1049, 1064 fn. 7 (9th Cir. 2008); see also Primo v. Pac.
Biosciences of Cal., Inc., 2013 WL 1615847, at *8 fn.1 (N.D. Cal. 2013) (taking judicial notice of
earnings call transcripts because they are “capable of immediate determination by resort to
accurate sources and not subject to reasonable dispute”); In re Bare Escentuals, Inc. Sec. Litig.,
745 F. Supp. 2d 1052, 1067 (N.D. Cal. 2010) (“The court is also permitted to take judicial notice
of the content of relevant public disclosure documents required to be filed with the SEC, as well as
of press releases and conference call transcripts cited in the complaint.”). Plaintiffs concede that
juridical notice of Exhibits 1, 3, 6-7, 9-20, and 22-25 is appropriate, (See Dkt. No. 54), and the
Court so finds. Defendants’ request for judicial notice is therefore GRANTED as to these
documents. To the extent plaintiffs take issue with the statements in these documents and
defendants’ arguments based thereon, such argument belongs in plaintiffs’ opposition to
defendants’ motion to dismiss and thus does not persuade on the question of whether judicial
notice is proper.
Plaintiffs object to judicial notice of Exhibit 2 on the grounds that it is an “amalgamation”
of transcripts from two separate events, namely (i) a pre-recorded video presentation for investors
posted on RH’s website posted on March 26, 2016; and (ii) a live investor conference call held on
the same day. Plaintiffs do not persuade in light of the fact that the Court may take judicial notice
of both presentations for investors and investor conference calls. See Metzler, 540 F. 3d 1049 at
1064 n.7; see also Primo, 2013 WL 1615847, at *8 n.1. The fact that transcripts from these two
related events were combined in a single exhibit does not render judicial notice inappropriate.
Defendants’ request for judicial notice is therefore GRANTED as to Exhibit 2.
Finally, plaintiffs contend that judicial notice of Exhibits 4, 5, 8 and 21 is inappropriate
because these documents are incomplete. Specifically, plaintiffs argue that these documents omit
the Sarbanes-Oxley certifications which contain Boone’s and Friedman’s representations that the
reports “do[] not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading.” (Dkt. No. 54 at 3.) Courts frequently decline to take judicial notice of
filings which are incomplete or truncated. See Cal. Sportfishing Prot. All. v. All Star Auto
Wrecking, Inc., 860 F. Supp. 2d 1144, 1149 (E.D. Cal. 2012); Newman v. San Joaquin Delta
Cmty. Coll. Dist., 814 F. Supp. 2d 967, 972 n.2 (E.D. Cal. 2011); see also Harris v. R.J. Reynolds
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A.

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RH is a Delaware corporation headquartered in Corte Madera, California, with

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approximately 41 million outstanding shares. (Id. at ¶ 21.) Its fiscal year (“FY”) concludes on

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January 31 of each year. RH is a retailer of luxury home furnishings such as couches, chairs,

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tables, lamps, and rugs. (Id. ¶ 25.) It sells products through its website; retail and outlet stores;

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and “Source Books” which are voluminous, glossy product catalogs distributed to potential

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customers. (Id.) As of April 29, 2017, the RH operated 85 retail stores and 28 outlets. (Id.)

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RH’s Business and Procurement Structure

During the Class Period, RH did not manufacture any of the products it sold. (Id. ¶ 28.)
Instead, RH contracted with third-party manufacturers. (Id.) Most of RH’s manufacturers
(frequently referred to as “vendors”) were located overseas: RH sourced approximately 69% of its

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United States District Court
Northern District of California

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inventory from vendors in Asia in FY2013 and 82% in FY2015. Plaintiffs aver that sourcing

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inventory from foreign manufacturers involves “significant lead times,” typically upwards of six

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and as many as nine months. (Id. ¶ 29.)

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B.

Alleged Facts Relevant to this Action

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According to plaintiffs, RH experienced significant revenue growth in the years leading up

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to the Class Period. (Id. ¶ 2.) “By the start of the Class Period, however, revenue growth . . . from

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RH’s existing product lines had slowed substantially.” (Id.) RH sought to restore its sales growth

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by expanding its product offerings through the introduction of new brands, notably “RH Modern.”

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(Id. ¶¶ 2 and 30.) Defendants promoted the launch of RH Modern to investors, describing the

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product line as “the most important and significant new home furnishings business to be launched

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in the last 15 or 20 years.” (Id. ¶ 3.) Plaintiffs further allege that a successful launch required

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adequate in-stock merchandise of RH Modern. (Id. ¶ 4.) “Without adequate inventory, customers

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Vapor Co., 2016 WL 6246415, at *3 (N.D. Cal. Sept. 30, 2016) (declining to judicially notice a
document “missing key disclaimer language”).
Here, defendants do not contest that Friedman and Boone signed the Sarbanes-Oxley
certifications at issue and have provided replacement Exhibits 4, 5, 8, and 21 which contained the
omitted certifications. Therefore, plaintiffs’ objection is moot and defendants’ request for judicial
notice is GRANTED as to the revised Exhibits 4, 5, 8, and 21.
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who placed orders for RH Modern products would face long delays to receive their products,

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leading to cancelled orders and costly accommodations.” (Id. ¶¶ 4, 103, and 173.)

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On the first day of the Class Period, March 26, 2015, Friedman announced the launch of

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RH Modern and reported that RH was “systematically placing orders now,” which “should help us

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with lead times [and] help us with inventory flow.” (Id. ¶¶ 5 and 117; Dkt. No. 52, Declaration of

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Erik J. Olson in Support of Motion to Dismiss (“Olson Decl.”), Ex. 1 at 14.) Plaintiffs aver that

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during the Class Period defendants “repeatedly assured investors” that RH was “prepared for the

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launch.” (CCAC ¶ 3.) Specifically, during an investor call on June 6, 2015, Friedman stated that

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RH was growing its inventory levels, making the “necessary” inventory investments, and would
“compete on speed” of delivery for RH Modern. (Olson Decl., Ex. 7 at 19.) Boone also reassured

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Northern District of California

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investors that RH was making inventory investments to prevent “high back orders” and claimed

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that RH would “grow inventory ahead of sales at the end of Q4.” (Id. at 6.) Plaintiffs contend that

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defendants “emphasized RH’s preparedness for the launch throughout 2015” by indicating that

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RH Modern was “going to compete on speed.” (CCAC at ¶ 5.) According to plaintiffs, however,

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the “preparation and launch of RH Modern were debacles from the outset due to a near-complete

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lack of inventory.” (Id. ¶ 7.) “RH needed to order RH Modern products far in advance of the

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launch date in order to have RH Modern inventory available to fulfill customer orders at the time

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of the RH Modern launch” but failed to do so. (Id. ¶¶ 32-37.)

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On June 11, 2015, defendants allegedly marketed RH Modern “before designs were

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finalized and without placing orders with manufacturers.” (Id. ¶ 7.) On that date, defendants

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published a “video presentation” for investors which appeared to display a range of RH Modern

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items. (Id. ¶ 124.) Plaintiffs allege that “certain of these were not actual products from the line

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but unfinished ‘one-offs’ that had been hastily constructed by hand shortly before the investor

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video.” (Id.) During the video presentation, Boone stated that 1Q15 inventory “was up 24%” and

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that “we expect to end the year with inventory growth that is higher than our sales growth, given

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the inventory investments in RH Modern and other newness that we will introduce this fall.”2

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(Olson Decl., Ex. 6 at 5 (emphasis supplied).) Plaintiffs allege that Boone’s statement referencing

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RH Modern “inventory investments” was (i) false because RH had not actually made such

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inventory investments when the statement was made, and (ii) misleading because it concealed the

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fact that 1Q inventory growth was due to “surplus inventory of existing product” and “60-80% of

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RH’s inventory” was “product that had been returned to RH from customers and/or was

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damaged.” (CCAC at ¶ 57.)

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Plaintiffs assert that when defendants launched the RH Modern website and published the
540-page RH Modern Source Book in September 2015, “there was essentially no RH Modern
furniture in stock.” (Id. ¶¶ 7 and 40.) Plaintiffs claim that Friedman knew that the Source Book

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“featured Photoshopped images of products that did not exist, and the videos through which he

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promoted RH Modern also showcased unavailable, unfinished products.” (Id. ¶ 8.) Customers

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therefore faced lengthy delays and many became upset and cancelled their orders. (Id. ¶¶ 8, 51-

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55, 106.)

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On September 10, 2015, RH issued a press release which indicated that “the launch of RH

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Modern and RH Teen late in the third quarter,” among other factors, “puts us on a clear path to

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accelerate our growth in the fourth quarter and into fiscal 2016.”3 (Olson Decl., Ex. 11 at 2.) On

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December 10, 2015, Friedman expressed a similar sentiment during an investor call when he

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touted as a “headline” that RH Modern was “performing ahead of our expectations.” (Id., Ex. 13 at

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14.) That same day, RH issued a press release which indicated that defendants were “extremely

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encouraged by the early results we are seeing out of . . . RH Modern” and that “RH Modern is

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trending to add significant incremental revenues.” (Id., Ex. 15 at 2.) Plaintiffs allege that these

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Defendants made similar statements with regard to inventory growth during the Class
Period. (See CCAC ¶¶ 128, 134, 135, 142, 148, 183, 184, 192, and 193.)
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Also on September 10, 2015, during an investor conference call, Friedman was asked
“how much of [RH’s 29% inventory growth in 2Q15] is related to Modern?” (Id. ¶ 135.) In
response, Friedman stated that “some of it’s on the water,” (i.e., in transit from overseas vendors),
and that RH expected inventory to outpace revenue growth “because we do need to make those
investments in Modern.” (Id.)
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representations were false and misleading because they concealed (i) pervasive RH Modern

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inventory shortages as well as (ii) customer complaints and (iii) canceled orders arising from such

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inventory shortages dating back to 1Q15. (CCAC at ¶ 193.)
In a statement issued by RH on December 10, 2015, RH disclosed that RH Modern was

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suffering from an “in-stock position [which is] not great today.” (Id. ¶¶ 10 and 144.) The

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following day RH shares declined by more than 10%. (Id.) Nonetheless, Boone continued to

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reassure investors that “we continue to expect to end the year with inventory growth higher than

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our sales growth given the inventory investments in RH Modern and RH Teen.” (Olson Decl., Ex.

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14 at 6.)
The extent of RH Modern’s inventory shortage was reflected in an internal memo sent by

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United States District Court
Northern District of California

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Friedman to all RH employees on January 30, 2016, which stated that RH’s customers were “on

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fire” and that RH had “let customers die.” (CCAC ¶ 106.) Friedman’s email initiated a “delight

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the customer initiative” wherein RH issued millions of dollars in “customer accommodations”

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including $10,000 gift cards, free orders, and complimentary expedited air shipping to pacify

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customers upset by the inventory shortage. (Id. ¶¶ 8 and 108.)

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On February 24, 2016, defendants disclosed RH’s poor financial performance as well as

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“shipping delays,” “poor in-stocks . . . [and] suppressed orders” for RH Modern. (Olson Decl.,

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Ex. 17 at 2.) This disclosure also attributed the poor financial performance to “macro economic

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challenges” including “energy, oil, or currency fluctuations” in certain markets. (Id. ¶ 156.) The

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following day RH shares fell by more than 25%. (CCAC at ¶ 163.)

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Finally, on June 8, 2016, defendants disclosed “RH Modern production delays” and

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revealed that RH had issued $18 million in customer accommodations. (Id. ¶ 173; see also Olson

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Decl., Ex. 22 at 5.) RH also stated that other product lines were suffering from “extra inventory”

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which was “bloating [the] balance sheet” and leading to “clearance events.” (Id. ¶¶ 11 and 156.)

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The next day, RH’s “share price plunged over 21% on the highest trading volume in history since

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its IPO.” (Id.)

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II.

LEGAL STANDARD

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A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in

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the complaint. Ileto v. Glock, Inc., 349 F.3d 1191, 1199–1200 (9th Cir. 2003). “Dismissal can be

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based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a

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cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990).

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All allegations of material fact are taken as true and construed in the light most favorable to the

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plaintiff. Johnson v. Lucent Techs., Inc., 653 F.3d 1000, 1010 (9th Cir. 2011). To survive a

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motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a

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claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007)). That requirement is met “when the

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Northern District of California

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plaintiff pleads factual content that allows the court to draw the reasonable inferences that the

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defendant is liable for the misconduct alleged.” Id.
Furthermore, claims for fraud must meet the particularity requirements of Federal Rule of

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Civil Procedure 9(b), which requires that “[i]n alleging fraud or mistake, a party must state with

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particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). Rule 9(b)

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“requires ... an account of the time, place, and specific content of the false representations as well

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as the identities of the parties to the misrepresentations.” Swartz v. KPMG LLP, 476 F.3d 756,

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764 (9th Cir. 2007) (internal quotation marks omitted). Further, plaintiffs are required to state

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with particularity the facts giving rise to a strong inference of defendants’ scienter. See 15 U.S.C.

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§ 78u–4(b)(2). “[T]he inference of scienter must be more than merely ‘reasonable’ or

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‘permissible’—it must be cogent and compelling, thus strong in light of other explanations” and a

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court “‘must consider plausible nonculpable explanations for the defendant’s conduct.” See

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Tellabs, 551 U.S. at 324.

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III.

COUNT 1: SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B-5

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A.

LEGAL FRAMEWORK

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Section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b), makes it unlawful

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for any person to “use or employ, in connection with the purchase or sale of any security . . . any

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manipulative or deceptive device or contrivance in contravention of such rules and regulations as
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the Commission may prescribe as necessary or appropriate in the public interest or for the

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protection of investors.” 15 U.S.C. § 78j(b). SEC Rule 10b–5 implements this provision by

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making it unlawful to “make any untrue statement of a material fact or to omit to state a material

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fact necessary in order to make the statements made, in the light of the circumstances under which

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they were made, not misleading.” 17 C.F.R. § 240.10b–5(b). Similarly, under the Exchange Act,

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any person who “directly or indirectly, controls any person liable under any provision of [the

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Exchange Act] or of any rule or regulation thereunder shall also be liable jointly and severally

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with and to the same extent as such controlled person to any person to whom such controlled

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person is liable. 15 U.S.C. § 78t(a).

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In 1995, Congress enacted the Private Securities Litigation Reform Act (“PSLRA”), which

United States District Court
Northern District of California

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includes “exacting pleading requirements,” as a check against abusive litigation by private

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parties.4 Tellabs, Inc., 551 U.S. at 313. Heightened pleading is one of the control measures

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Congress included to advance “the PSLRA’s twin goals: to curb frivolous, lawyer-driven

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litigation, while preserving investors’ ability to recover on meritorious claims.” Id. at 322.

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To state a claim under Section 10b, a plaintiff must “show that the defendant made a

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statement which was ‘misleading as to a material fact.’” Matrixx Initiatives, Inc. v. Siracusano,

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563 U.S. 27, 38 (2011) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988)) (emphasis in

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original). Under the PSLRA’s heightened pleading requirement, to state a Section 10(b) claim,

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plaintiffs must allege facts sufficient to establish: (i) that the defendant made a material

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misrepresentation or omission of fact; (ii) that the misrepresentation was made with scienter; (iii) a

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connection between the misrepresentation or omission and the purchase or sale of a security; (iv)

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reliance on the misrepresentation or omission; (v) loss causation; and (vi) economic loss. Metzler

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Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1061 (9th Cir. 2008). Under Rule 9(b),

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Members of the House and Senate “observed that plaintiffs routinely were filing lawsuits
‘against issuers of securities and others whenever there [was] a significant change in an issuer’s
stock price, without regard to any underlying culpability of the issuer, and with only faint hope
that the discovery process might lead eventually to some plausible cause of action[.]’”
In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 978 (9th Cir. 1999) (alterations in original)
(citation omitted).
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claims alleging fraud are subject to a heightened pleading requirement, which requires that a party

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“state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b).

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With respect to the scienter requirement, the Court must view the allegations as a whole and

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determine whether plaintiff have raised an inference of scienter that is “cogent and compelling,

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thus strong in light of other explanations,” to satisfy the PSLRA standard. S. Ferry LP, No. 2 v.

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Killinger, 542 F.3d 776, 784 (9th Cir. 2008) (citing Tellabs, 551 U.S. at 326). When assessing the

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allegations holistically, the Court views circumstances that are probative of scienter with a

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practical and common-sense perspective. Id.
B.

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DISCUSSION

As an overview, defendants assert that the complaint should be dismissed because it fails

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Northern District of California

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to include three categories of allegations to state a claim, namely with respect to the first, second,

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and fifth elements. Thus: plaintiffs first fail to identify any statements which were false or

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misleading when made and, in any event, many of the challenged statements are protected by the

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PSLRA’s safe harbor. 5 Second, plaintiffs fail to plead a strong inference of scienter with

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sufficient particularity. Third, the complaint fails to allege loss causation. With respect to

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plaintiffs’ section 20(a) claim against Friedman and Boone, defendants’ assert that plaintiffs

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cannot show an underlying predicate violation under section 10(b). Defendants do not contest that

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Friedman and Boone are control persons for the purposes of section 20(a). The Court addresses

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each.
1. First Element: Material Misrepresentation or Omission

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a.

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Legal Standard

“Materially misleading statements or omissions by a defendant constitute the primary

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The PLSRA creates a safe harbor for untrue statements of material fact with respect to
any forward looking statement where any of the following conditions are met: (i) the forward
looking statement is identified as such and is accompanied by meaningful cautionary statements;
(ii) the forward looking statement is immaterial; (iii) the plaintiff fails to prove that the declarant
made the statement with actual knowledge that the statement was false or misleading; or (iv) if
made by an entity, the plaintiff fails to show that it was made by an officer with actual knowledge
of falsity. 15 U.S.C. § 78u-5(c)(1).

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element of a section 10(b) and rule 10b-5 cause of action.” In re Immune Response Sec. Litig.,

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375 F.Supp.2d 983, 1017 (S.D. Cal. 2005) (quoting Marksman Partners, L.P. v. Chantal Pharm.

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Corp., 927 F.Supp. 1297, 1305 (C.D. Cal. 1996)). To plead falsity, a complaint must “specify each

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

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misleading.” 15 U.S.C. § 78u–4(b)(1)(B). Plaintiff, “in addition to alleging the ‘time, place[,] and

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nature of the alleged fraudulent activities,’ must ‘plead evidentiary facts’ sufficient to establish

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any allegedly false statement ‘was untrue or misleading when made.’” Wozniak v. Align Tech.,

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Inc., 850 F.Supp.2d 1029, 1034 (N.D. Cal. 2012) (quoting Fecht v. Price Co., 70 F.3d 1078, 1082

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(9th Cir. 1995)).
“Central to a 10b–5 claim is the requirement that a misrepresentation or omission of fact

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Northern District of California

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must be material.” In re Cutera Sec. Litig., 610 F.3d 1103, 1108 (9th Cir. 2010). A statement is

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material when there is “a substantial likelihood that the disclosure of the omitted fact would have

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been viewed by the reasonable investor as having significantly altered the ‘total mix’ of

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information made available.” Basic, 485 U.S. at 231–32 (quoting TSC Indus., Inc. v. Northway,

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Inc., 426 U.S. 438, 449 (1976)). Put another way, a “statement or omission is misleading in the

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securities fraud context ‘if it would give a reasonable investor the impression of a state of affairs

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that differs in a material way from the one that actually exists.’” Reese v. BP Exploration (Alaska)

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Inc., 643 F.3d 681, 691 (9th Cir. 2011) (quoting Berson v. App. Signal Tech., Inc., 527 F.3d 982,

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985 (9th Cir. 2008)). To plead materiality, the allegations must “suffice to raise a reasonable

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expectation that discovery will reveal evidence satisfying the materiality requirement, and to allow

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the court to draw the reasonable inference that the defendant is liable.” Matrixx, 563 U.S. at 43.

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(quoting Twombly, 550 U.S. at 556; Iqbal, 556 U.S. at 678) (internal citations and quotation marks

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omitted). “Although determining materiality in securities fraud cases should ordinarily be left to

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the trier of fact, conclusory allegations of law and unwarranted inferences are insufficient to defeat

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a motion to dismiss for failure to state a claim.” In re Cutera, 610 F.3d at 1108 (internal citations

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and quotation marks omitted).

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b.

Material Misrepresentations or Omissions Requirement Met

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Plaintiffs’ securities fraud claim centers on three categories of statements. First, plaintiffs

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allege that statements regarding RH Modern inventory were false and misleading. Second,

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plaintiffs challenge statements which allegedly misrepresented RH Modern’s market performance.

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Finally, plaintiffs aver that RH’s partial disclosures were themselves misleading because such

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disclosures attributed poor financial performance in part to macroeconomic conditions.
i.

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Inventory

With respect to statements concerning RH inventory, the Court finds the relevant

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allegations to be as follows. During a 2Q15 video presentation for investors held on June 11,

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2015, Boone indicated that RH inventory “at the end of the first quarter was up 24%.” (Olson
Decl., Ex. 6 at 5.) Boone explained that RH expected “to end the year with inventory growth that

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Northern District of California

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is higher than our sales growth, given the inventory investments in RH Modern.” (Id. (Emphasis

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supplied).) Plaintiffs allege that this statement was misleading for two reasons: First, it led the

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market to believe that RH’s inventory growth was driven by the launch of RH Modern and

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inventory investments regarding the same. As noted above, plaintiffs proffer evidence that RH’s

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inventory growth was actually the result of non-Modern product returns stemming from persistent

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quality issues. (CCAC ¶¶ 58 and 59.) Second, plaintiffs assert that this statement led the market

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to believe that RH had made meaningful “inventory investments in RH Modern” despite the fact

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that RH had failed to order necessary inventory for the RH Modern launch in a timely manner.6

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(Id. ¶ 181.)

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Defendants attempt to characterize as forward-looking Boone’s statement that RH
“expect[s] to end the year with inventory growth that is higher than our sales growth, given the
inventory investments in RH Modern.” However, defendants overlook the fact that Boone’s
statement gave the impression that RH had at present made “inventory investments in RH
Modern.” When a statement contains mixed forward-looking and present-tense components the
Ninth Circuit treats the “non-forward-looking portions of mixed statements [as] not eligible for the
safe harbor provisions of the PSLRA.” In re Quality Sys., Inc. Sec. Litig., 865 F.3d 1130, 1150
(9th Cir. 2017). Therefore, the portion of Boone’s statement which refers to present-tense
inventory investments in RH Modern line is not forward-looking and thus not eligible for the safe
harbor provisions of the PSLRA. Id.

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Next, on December 10, 2015, RH touted “increases in inventory of $201.7 million related

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to the increase in 2015 Spring, RH Teen and RH Modern collections” in its SEC filing for the

3

fiscal quarter ending October 31, 2015 (“3Q15”). (Olson Decl., Ex. 16 at 28.) According to

4

plaintiffs, it was misleading for RH to connect the $201.7 million inventory increase to RH

5

Modern when RH Modern inventories were negligible and the company did not order or receive

6

significant RH Modern inventory in 3Q15.

7

In support of plaintiffs’ allegations regarding material falsity, plaintiffs rely on several
confidential witnesses (“CWs”) as attesting that (i) defendants had not made inventory

9

investments in RH Modern prior to the launch in 2Q15, and (ii) RH inventory growth in 3Q15

10

reflected an accumulation of excess non-Modern inventory rather than RH Modern inventory

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8

growth leading up to and immediately following the launch. With regard to RH Modern inventory

12

investments in 2Q15, CW2, a Buyer employed at RH who worked at corporate headquarters from

13

2014 through 2016 and is knowledgeable about product selection, inventory levels, and

14

purchasing of hard goods and furniture for RH Modern, stated that when RH Modern was

15

launched in September 2015 no inventory existed because RH Modern product designs had not

16

even been finalized. (Id. ¶ 77.) CW 19, a former Vice President of Merchandising for

17

Upholstered Furniture, stated that the Modern Source Book depicted samples that RH had not yet

18

attempted to manufacture. (Id. ¶ 73.) RH’s Customer Service Lead Assist until April 2016 (CW4)

19

explained that when RH issued its Modern Source Book in September 2015 not a single piece of

20

RH Modern furniture was in stock. (Id. ¶ 40.) CW4 further explained that prior to the Modern

21

launch employees were informed that RH Modern inventory was not in stock. (Id. ¶ 48.) CW8, a

22

Manager of Financial Planning and Analysis throughout the Class Period, corroborates the

23

testimony of the other CWs in indicating that when the RH Modern Source Book was issued RH

24

Modern product was not available for purchase. (Id. ¶ 41 n.8.) RH’s Product Development

25

Leader for Dining Furniture from 2014 through September 2016 (CW9) similarly stated that no

26

RH Modern product was in stock on the launch date. (Id. ¶ 41; see also ¶ 42 (Associate Store

27

Leader from May 2013 through April 2016 (CW10) (same)).)

28
12

1

Concerning the inventory of non-Modern products in 2Q15 and 3Q15, RH’s Store

2

Operations and Communications Analyst through June 2016 (CW18) noted that surplus inventory

3

for non-Modern product lines increased significantly year-over-year from 2014 to 2015. (Id. ¶

4

57.) CW11, a Manager in Operations throughout the Class Period, similarly indicated that RH

5

was experiencing problems regarding “tons of excess inventory” totaling over $200 million in

6

2015. (Id. ¶ 61.) CW11 further noted that Friedman “would get involved” in conversations about

7

excess inventory and “yell.” (Id. ¶ 63.)

8

Based on the foregoing outline of the allegations, the Court finds that plaintiffs have
sufficiently alleged falsity, particularly with respect to present-tense statements of fact7 regarding

10

(i) the inventory investments RH had made in RH Modern inventory as of 2Q15, and (ii) specific

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attribution of 3Q15 inventory growth to RH Modern on December 10, 2015.8
ii.

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13

Market Performance

The Court further highlights three statements made by Friedman with regard to RH

14

Modern’s performance in the market. First, on September 10, 2015, Friedman stated in a press

15

release that the launch of RH Modern in 3Q15 “puts us on a clear path to accelerate our growth in

16

the fourth quarter and into fiscal 2016.” (Olson Decl., Ex. 11 at 2.) Second, in a December 10,

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7

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25
26
27
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Although plaintiffs allege further statements in support of the instant claim, the
statements the Court finds most central to resolution of the instant motion are those that are
statements of past or existing fact that plaintiffs allege differed materially from the state of affairs
at the time the statements were made. Given that the Court finds these statements sufficient to
state a claim, the Court need not and does not consider plaintiffs’ additional statements, which
defendants argue generally are inactionable as forward-looking statements and/or puffery. (See id.
¶¶ 118, 121, 128, 134, 135, 148, 178, 180, 183, 184, 189, and 194.)
8

Defendants rely on Santa Fe Industries v. Green, 430 U.S. 462, 479-80 (1977), in arguing
that the CCAC recites mere “allegations of mismanagement [which] do not give rise to a Section
10(b) claim.” (Motion at 9, 18.) There, the Supreme Court held that “Congress by [enacting] §
10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j, did not seek to regulate [conduct]
which constitute[s] no more than internal corporate mismanagement.” Santa Fe Indus., 430 U.S.
at 479-80; see also Gaines v. Haughton, 645 F.2d 761, 779 n.33 (9th Cir. 1981) (federal securities
laws do not provide a cause of action for corporate mismanagement).
Defendants do not persuade, as they ignore the allegations in the CCAC which state that
defendants made affirmative statements regarding the inventory growth of RH Modern. Such
allegations support plaintiffs’ theory that defendants made misleading statements and omissions in
reporting strong inventory growth for RH Modern when in reality inventory growth was weak.
(CCAC ¶¶ 178–192.)
13

1

2015, press release, Friedman wrote that RH was “extremely encouraged by the early results we

2

are seeing out of . . . RH Modern” and that “RH Modern is trending to add significant incremental

3

revenues.” (Id., Ex. 15 at 2) Third, during an investor call held that same day, Friedman stated

4

that a “headline” was that RH Modern was “performing ahead of our expectations.” (Id., Ex. 13 at

5

14.)

6

The Court finds that plaintiffs have sufficiently alleged material falsity with regard to the

7

challenged market performance statements because Friedman’s rosy representations concealed

8

that RH Modern was suffering from a severe lack inventory and defendants were receiving

9

customer complaints and canceled orders regarding the same. As noted, less than eight weeks
after Friedman stated that defendants were “extremely encouraged” by the RH Modern results and

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Northern District of California

10

represented that RH Modern was “performing ahead of [] expectations[,]” Friedman wrote a

12

memo to all RH employees which specifically referenced RH Modern and stated that RH’s

13

customers were “on fire” and that RH had “let customers die.” (CCAC ¶ 106.)

14

Three categories of allegations support this conclusion: first, allegations regarding RH

15

Modern inventories as of September 10, 2015; second, allegations concerning the home

16

furnishings industry production cycle and lead times; and third, the content of Friedman’s internal

17

memo sent to all RH employees eight weeks after he made the December 10, 2015, statements.

18

As to the first category, plaintiffs reference several CWs as attesting to the fact that by

19

September 10, 2017, defendants’ “total absence of [RH Modern] inventory” was well known

20

internally and openly “communicated at staff meetings.” (Id. ¶ 49 (CW4).) As discussed above,

21

plaintiffs proffer CWs who indicate that RH Modern product had not been ordered by the time

22

defendants launched the RH Modern product line and issued the Source Book in September 2015.

23

(Id. ¶¶ 41, 161 (CW8); see also ¶¶ 33, 37 (CW1); ¶ 40 (CW4); ¶ 41 (CW9 and CW10); and ¶ 73

24

(CW19).)

25

With regard to the second category, multiple CWs state that product lead times in the home

26

furnishings industry are at least six months. (Id. ¶¶ 33 (CQ1); 34 (CW2 and CW2); 35 (CW4);

27

and ¶ 38 (CW6).) Pursuant to this timeline, Friedman’s September 10, 2015, representation that

28

the launch of RH Modern put RH “on a clear path to accelerate our growth in the fourth quarter
14

1

[of fiscal 2015] and into fiscal 2016” was misleading because RH would not even have received

2

RH Modern inventory until several months after the close of FY2015, much less converted that

3

inventory into incremental revenue.

4

Third, the Court finds significant the temporal proximity between Friedman’s December
10, 2015, statements that RH Modern was experiencing “encouraging” results and “performing

6

ahead of [] expectations,” and his January 30, 2016, memo alerting employees to customer

7

complaints stemming from orders “not being in stock, and having orders pushed out multiple

8

times” which specifically referenced RH Modern. (Id. at ¶ 112.) The Court does not find

9

plausible the possibly that such pervasive customer complaints arose only after December 10,

10

2015, and subsequently escalated with such intensity over the next eight weeks so as to drive

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Friedman to decry that RH had let its customers “die.” Thus, it was misleading for Friedman to

12

represent to that market that RH Modern was experiencing “encouraging” market performance

13

when RH Modern was suffering from inventory shortages and customer dissatisfaction.

14

Accordingly, the Court finds that plaintiffs have alleged facts sufficient to support their

15

contention that at the time Friedman’s statements were made the statements conveyed to investors

16

that RH Modern was performing well in the market despite inventory shortages, customer

17

complaints, and canceled orders which were well documented internally. Such statements

18

therefore created an “impression of a state of affairs that differ[ed] in a material way from the one

19

that actually exist[ed].” Berson v, 527 F.3d at 985 (quoting Brody v. Transitional Hospitals Corp.,

20

280 F.3d 997, 1006 (9th Cir. 2002)).

21

Defendants attempt to characterize Friedman’s market performance statements as referring

22

only to customer demand rather than to RH Modern’s performance as a whole. However, this

23

characterization fails to take into account the import of context, as discussed at length above. For

24

example, the December 10, 2015, press release specifically mentions incremental revenue and

25

does not appear to be limited to customer demand.

26

For these reasons, plaintiffs have adequately alleged falsity.9

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9

28

Because the Court finds that plaintiffs have alleged sufficiently the falsity of present15

1
2
3

2. Second Element: Scienter
a. Legal Standard
Scienter is defined as “a mental state embracing intent to deceive, manipulate, or defraud.”
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976). To plead scienter adequately, the

5

complaint must “state with particularity facts giving rise to a strong inference that the defendant

6

acted with the required state of mind.” 15 U.S.C. § 78u–4(b)(2)(A) (emphasis supplied). “The

7

inference that the defendant acted with scienter need not be irrefutable, i.e., of the ‘smoking gun’

8

genre, or even the ‘most plausible of competing inferences.’” Tellabs, 551 U.S. at 324 (citation

9

omitted). Rather, a complaint survives if, “[w]hen the allegations are accepted as true and taken

10

collectively . . . a reasonable person [would] deem the inference of scienter at least as strong as

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any opposing inference.” Id. at 326. In determining whether this requirement is met, the Court

12

must view the allegations as a whole and determine whether plaintiffs have raised an inference of

13

scienter that is “cogent and compelling, thus strong in light of other explanations,” to satisfy the

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PSLRA standard. S. Ferry LP, 542 F.3d at 784 (citing Tellabs, 551 U.S. at 326). When assessing

15

allegations holistically, the Court views circumstances that are probative of scienter with a

16

practical and common-sense perspective. Id.

17

Nonetheless, the PSLRA demands “particular allegations which strongly imply

18

Defendants’ contemporaneous knowledge that the statement was false when made.” Berson, 527

19

F.3d at 989 (emphasis in original). A strong inference of scienter “must be more than merely

20

plausible or reasonable — it must be cogent and at least as compelling as any opposing inference

21

of non-fraudulent intent.” Tellabs, 551 U.S. at 314. The inference must be that “the defendant[ ]

22

made false or misleading statements either intentionally or with deliberate recklessness.” Zucco,

23

552 F.3d at 991 (emphasis supplied) (internal quotation marks omitted). Deliberate recklessness

24

means that the reckless conduct “reflects some degree of intentional or conscious misconduct.”

25
26
27
28

tense statements for purposes of the instant motion, the Court need not and does not consider
independently the sufficiency of plaintiffs’ claims concerning later part of the class period
regarding statements made by Friedman in February and March of 2016 which attribute some of
RH’s poor financial performance to macroeconomic trends. (See id. ¶¶ 169, 197, 199, and 201.)
16

1

S. Ferry, 542 F.3d at 782. “[A]n actor is [deliberately] reckless if he had reasonable grounds to

2

believe material facts existed that were misstated or omitted, but nonetheless failed to obtain and

3

disclose such facts although he could have done so without extraordinary effort.” In re Oracle

4

Corp. Sec. Litig., 627 F.3d 376, 390 (9th Cir. 2010) (quoting Howard v. Everex Sys., Inc., 228

5

F.3d 1057, 1064 (9th Cir. 2000)).

6

“[F]acts showing mere recklessness or a motive to commit fraud and opportunity to do so

7

[may] provide some reasonable inference of intent,” but are not independently sufficient. In re

8

Silicon Graphics Inc. Sec. Litig., 183 F.3d at 974, abrogated on other grounds by S. Ferry LP, 542

9

F.3d at 784. It may also be reasonable to conclude that high-ranking corporate officers have

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United States District Court
Northern District of California

11
12

knowledge of the critical core operation of their companies. S. Ferry LP, 542 F.3d at 785–86.
b. Scienter Requirement Met
The Court finds that plaintiffs have adequately alleged scienter for three reasons: First,

13

Friedman was highly involved in the RH Modern launch. Second, plaintiffs proffer testimony of

14

CWs who indicate that Friedman and Boone had access to and reviewed reports which described

15

the RH Modern inventory shortage and customer complaints. Third, the record reflects CW

16

testimony alleging that RH was struggling with an accumulation of non-Modern “excess

17

inventory” totaling over $200 million and that Friedman took an active role in conversations

18

regarding this issue. (Id. ¶¶ 61 and 63.) Finally, the Court highlights the importance of the RH

19

Modern launch to defendants’ business and growth strategy. In so finding, the Court views the

20

CCAC as a whole and takes note of the context in which the statements above were made.

21

In support of their contention that defendants possessed scienter when the above-

22

referenced statements were made, plaintiffs refer to multiple CWs. Plaintiffs’ reliance on the CW

23

statements must pass two hurdles. First, a CW must be described with sufficient particularity to

24

establish his or her reliability and personal knowledge. Zucco Partners LLC v. Digimarc Corp.,

25

552 F.3d 981, 995 (9th Cir. 2009). Second, the statements supplied by CWs “with sufficient

26

reliability and personal knowledge must themselves be indicative of scienter.” Id. Here, the Court

27

finds the standard met. The CWs are described with sufficient specificity to establish reliability

28

— their dates of employment and professional roles are provided, and that information provides a
17

1

sufficiently reliable basis for the Court to determine that statements attributed to them are

2

indicative of scienter.

3

First, Friedman was highly involved in the Modern launch, and made last-minute changes

4

to RH Modern designs which caused delays. (Id. ¶ 67.) According to CW2, these changes slowed

5

down production and caused inventory shortages. (Id. ¶¶ 68 and 69.) Further, CW2 indicated that

6

both Boone and Friedman received “weekly inventory reports” which showed that RH Modern

7

inventory was out of stock. (Id. ¶ 82.) Similarly, CW1, RH’s Director of Product development

8

employed from April 2009 through May 2015, explained that Friedman “had the final word on

9

how much of the RH Modern would be ordered.” (Id. ¶ 67; see also ¶ 49 (Customer Service Lead

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United States District Court
Northern District of California

11

Assist (CW4) statement that Friedman’s management style was “hands on everything”).)
Second, CW11, RH’s Manager in Operations throughout the class period who worked with

12

vendors to source RH inventory, indicated that she observed Friedman “regularly” inspect RH’s

13

Merchandise Drill Down (“MDD”) system which pulled information on inventory levels for all

14

products including for RH Modern. CW11 further stated that “in mid to late 2015, there were

15

meetings where Friedman checked MDD . . . asking questions about inventory.” (Id. ¶ 80.)

16

According to CW11, Friedman and Boone received weekly inventory reports which showed that

17

RH Modern was out of stock. (Id. ¶ 82.) CW8, a Manager of Financial Planning and Analysis

18

throughout the class period, worked closely with Boone and provided Boone with a weekly “CFO

19

Package” which contained information on sales, demand, and how the RH was converting demand

20

to net sales for products including RH Modern. (Id. ¶ 41 n.8.)

21

Third, CW20, a studio manager in charge of catalogue photo operations from 2012 to

22

2016, stated that Friedman staged RH Modern video and photoshoots for investors by using

23

samples and prototypes instead of actual product because RH had not “decided what it was going

24

to make.” (Id. ¶ 75.) Employees would “have to rig the products to make them work, and [] this

25

process was happening the night before the video was released” to investors.” (Id.) CW2

26

similarly stated that “items were photographed and digitally manipulated, and catalogs launched

27

long before finishes were approved on the product.” (Id. ¶ 77.) Further, “some products shown in

28

the RH Modern Source Book were Photoshopped and did not actually exist.” (Id.)
18

1

Fourth, CW11 stated that RH was struggling with an accumulation of non-Modern

2

“excess inventory” totaling over $200 million in 2015. (Id. ¶ 61.) Accordingly to CW11,

3

Friedman “would get involved” in conversations about excess inventory and “yell.” (Id. ¶ 63.)

4

Finally, in addition to these CW statements, the CCAC notes that Friedman touted RH

5

Modern as “the most innovative and new concept in the world of home design” that “represented

6

our finest work to date.” (Id. ¶ 3.) He also described RH Modern as “the most important and

7

significant new home furnishings business to be launched in the last 15 or 20 years.” (Id.)

8

Although circumstantial and certainly not dispositive, such statements, paired with the CW

9

statements regarding Friedman’s “hands on” management style, support a compelling inference

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United States District Court
Northern District of California

11

that Friedman knew about the inventory shortages and customer complaints which followed.
The confluence of these specific allegations supports this Court’s finding that the PSLRA’s

12

high standard for alleging scienter has been met here. That RH Modern was allegedly such a

13

critical product for RH’s financial success, that defendants had been highly involved when the RH

14

Modern launch was delayed, that they had received or reviewed the substance of MDD, CFO, and

15

weekly sales reports wherein the inventory shortage continued to be quantified and analyzed, and

16

the production timeline for the Modern furniture, together support a strong inference that they

17

knew of the (i) shortage in RH Modern inventory, (ii) effects of this shortage on RH Modern’s

18

market performance and customer satisfaction, and (iii) fact that inventory growth in 3Q2015 was

19

attributable to excess non-Modern inventory and not the RH Modern launch.

20

The Court does not reach this conclusion lightly. In so holding, the Court has considered

21

possible non-culpable explanations for why defendants might have stated that they had sufficient

22

RH Modern inventory to support the launch and that Modern was exceeding market expectations

23

when it was later exposed as not having been. For example, perhaps Friedman and Boone simply

24

assumed that customers would not mind waiting several months for their RH Modern orders to

25

arrive, or maybe the delays were not foreseeable to defendants when the challenge statements

26

were made. However, allegations in the CCAC render such possibilities relatively less persuasive

27

than the inference that defendants met the scienter requirement of the PSLRA. The CCAC, read

28

as a whole, and in particular those allegations concerning Friedman’s and Boone’s own roles in
19

1

monitoring inventory and the confidential witnesses’ statements, 10 undermines the notion that

2

defendants were not privy to the sort of information that would have informed them about the

3

problems surrounding RH Modern inventory and customer dissatisfaction.

4

3. Fifth Element: Loss Causation

5

a. Legal Standard

6

To establish loss causation, plaintiffs must show that the statements at issue “caused the

7

loss for which the plaintiff seeks to recover damages.” 15 U.S.C. § 78u-4(b)(4). Plaintiffs must

8

establish “some causal connection between the fraud and the securities transaction in question.” In

9

re Daou Sys., Inc., 411 F.3d 1006, 1025 (9th Cir. 2005); In re Gilead Scis. Sec. Litig., 536 F.3d
1049, 1055–56 (9th Cir. 2008). However, plaintiffs are not “required to show ‘that a

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United States District Court
Northern District of California

10

misrepresentation was the sole reason for the investment’s decline in value’ in order to establish

12

loss causation.” Id. at 1025. Put another way, “plaintiff can satisfy loss causation by showing that

13

‘the defendant misrepresented or omitted the very facts that were a substantial factor in causing the

14

plaintiff's economic loss.’” Nuveen Mun. High Income Opportunity Fund v. City of Alameda, 730

15

F.3d 1111, 1120 (9th Cir. 2008) (emphasis in original). Further, a “corrective disclosure need not

16

be a ‘mirror image’ disclosure—a direct admission that a previous statement is untrue; it must

17

simply ‘relate to the same subject matter as the alleged misrepresentation.’” In re Harman Int'l

18

Indus., Inc. Sec. Litig., 791 F.3d 90, 109 (D.C. Cir. 2015), (quoting Mass. Ret. Sys. v. CVS

19

Caremark Corp., 716 F.3d 229, 240 (1st Cir. 2013)).
b.

20

Loss Causation Requirement Met

21

On December 10, 2015, RH disclosed to investors that “the in-stock position is not great

22

today” for RH Modern. This disclosure corrected defendants’ earlier statements that RH (i) had

23

made investments in RH Modern inventory, and (ii) RH Modern inventories were growing. The

24

following day, RH’s stock price declined by $3.78 per share, erasing over $153 million in market

25

value. (CCAC ¶¶ 144 and 215.)

26
10

27
28

Defendants’ generic characterization of the CW statements as “hearsay allegations” does
not persuade. First, many of the CWs had firsthand knowledge of the events and company
procedures which form the basis for their statements.
20

1

On February 24, 2016, RH disclosed the existence of “shipping delays” for RH Modern.

2

Friedman further revealed that RH Modern was experiencing “suppressed orders” and that RH did

3

not “plan to introduce any incremental new businesses in fiscal 2016.” (Id. ¶ 156.) This

4

disclosure corrected defendants’ earlier statements that RH Modern was displaying encouraging

5

early results and exceeding expectations. On February 25, 2016, RH stock fell $13.43, erasing

6

over $543 million in market capitalization. (Id. ¶ 217.)

7

Finally, RH disclosed on June 8, 2016, that it had experienced poor financial results partly

8

“due to RH Modern production delays during the first half” of the fiscal year. (Id. ¶ 173.) This

9

disclosure corrected defendants’ earlier statements that RH Modern was displaying encouraging

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United States District Court
Northern District of California

11

early results and exceeding expectations. The next day, RH shares dropped over 21%. (Id. ¶ 176.)
The Court finds plaintiffs’ allegations regarding loss causation sufficient to establish a

12

“causal connection between the fraud and the securities transaction in question.” Daou, 411 F.3d

13

at 1025; Gilead, 536 F.3d at 1055–56. Specifically, these disclosures “relate[] to the same subject

14

matter as the alleged misrepresentations[s],” namely that (i) defendants had made inventory

15

investments in RH Modern in 2Q15 sufficient to support a successful launch, (ii) RH Modern was

16

performing well in the market as of 3Q2015, and (iii) inventory growth in 3Q2015 was driven by

17

RH Modern rather than the accumulation of non-Modern inventory which customers had returned

18

due to quality issues. See Harman, 791 F.3d at 109. Further, the three disclosures and

19

corresponding declines in stock price discussed above indicate that the misrepresented or omitted

20

facts “were a substantial factor in causing the plaintiff's economic loss.” Nuveen, 730 F.3d at 1120.

21

Defendants’ argument that the respective stock declines were due to other macroeconomic

22

factors does not persuade. “Whether the stock drop was due to other factors is a factual inquiry

23

better suited for determination on summary judgment or trial, rather than at the pleading stage.”

24

Robb v. Fitbit, Inc., 216 F.Supp. 3d 1017 at 1033 (N.D Cal. 2016) (citing McCabe v. Ernst &

25

Young, LLP, 494 F.3d 418, 427 n.4 (3d Cir. 2007); Emergent Capital Inv. Mgmt., LLC v.

26

Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003)). Thus, defendants’ final argument on the

27

sufficiency of the claims fails and the motion on that ground is DENIED.

28

In light of the Court’s holding with regard to plaintiffs’ section 10(b) claim, defendants’
21

1

motion to dismiss plaintiffs’ section 20(a) claims against Friedman and Boone is DENIED because

2

defendants’ challenge to plaintiffs’ section 20(a) claims is based solely on the argument that

3

plaintiffs failed to plead a predicate violation of section 10(b).

4

IV.

5

CONCLUSION
For the reasons stated above, the Court finds that plaintiffs have alleged sufficiently a

6

violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder.

7

Accordingly, the motion to dismiss is DENIED. By this Order, the Court takes no position

8

regarding the appropriate length of the class period, given the lack of briefing on the issue of

9

whether the class period should be of plaintiffs’ desired length.
This terminates Docket Nos. 50, 51, 57.

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10

IT IS SO ORDERED.

12
13
14

Dated: February 26, 2018
______________________________________
YVONNE GONZALEZ ROGERS
UNITED STATES DISTRICT COURT JUDGE

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