Hampton v. Aqua Metals, Inc. et al

Filing 141

ORDER GRANTING 128 MOTION TO DISMISS. Signed by Judge Haywood S. Gilliam, Jr. on 11/16/2020. Case Management Statement due by 12/1/2020. Telephonic Case Management Conference set for 12/8/2020 02:00 PM. This proceeding will be held by AT&T Conference Line. The court circulates the following conference number to allow the equivalent of a public hearing by telephone.For conference line information, see: https://apps.cand.uscourts.gov/telhrg/ All counsel, members of the pub lic and press please use the following dial-in information below to access the conference line: Dial In: 888-808-6929Access Code: 6064255The Court may be in session with proceedings in progress when you connect to the conference li ne. Therefore, mute your phone if possible and wait for the Court to address you before speaking on the line. For call clarity, parties shall NOT use speaker phone or earpieces for these calls, and where at all possible, parties shall use landlines. The parties are further advised to ensure that the Court can hear and understand them clearly before speaking at length.PLEASE NOTE: Persons granted access to court proceedings held by telephone or videoconference are reminded that photographing, recording, and rebroadcasting of court proceedings, including screenshots or other visual copying of a hearing, is absolutely prohibited. See General Order 58 at Paragraph III. (ndrS, COURT STAFF) (Filed on 11/16/2020)

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 1 of 31

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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ARLIS HAMPTON, et al.,
Plaintiffs,

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v.

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ORDER GRANTING MOTION TO
DISMISS
Re: Dkt. No. 128

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AQUA METALS, INC., et al.,
Defendants.

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United States District Court
Northern District of California

Case No. 17-cv-07142-HSG

This is a consolidated securities class action brought by Plymouth County Retirement

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Association and Denis Taillefer, and 1103371 Ontario Ltd. (collectively, the “Plymouth Group” or

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“Plaintiffs”) against Defendant Aqua Metals, Inc. (“Aqua Metals” or the “Company”) and its co-

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founders Stephen R. Clarke (“Clarke”), Thomas Murphy (“Murphy”), and Selwyn Mould

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(“Mould,” and together with Clarke and Murphy, the “Officer Defendants,” and collectively with

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Aqua Metals, “Defendants”). Plaintiffs allege violations of Sections 10(b) and 20(a) of the

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Securities Exchange Act of 1934 (the “Exchange Act”) and Sections 15 U.S.C. 78j(b) and t(a) of

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the Securities Act of 1933 (the “Securities Act”). Dkt. No. 119 (“SAC”) at 1. Plaintiffs bring this

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securities class action “on behalf of investors who purchased or otherwise acquired common stock
of Aqua Metals” between May 19, 2016 and November 9, 2017 (“Class Period”). SAC at 1.
Pending before the Court is Defendants’ motion to dismiss the SAC, Dkt. No. 128

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(“Mot.”), for which briefing is complete. Dkt. Nos. 129 (“Supp. Br.”); 131 (“Opp.”); 136
(“Reply”). On January 16, 2020, the Court took the Motion under submission. Dkt. No. 138.1
For the reasons below, the Court GRANTS the Motion.

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The Court finds this matter appropriate for disposition without oral argument, and the matter is
deemed submitted. See Civil L.R. 7-1(b).

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 2 of 31

I.

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BACKGROUND
A.

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Summary of Alleged False and Misleading Statements2
Aqua Metals is an early-stage company that was incorporated in 2014 and went public in

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2015. SAC ¶¶ 45, 51. It developed a technology known as “AquaRefining” that recycles leadacid batteries (“LABs”). Id. ¶ 46. By 2015, at its test facility in California, the Company had

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produced high purity lead from recycled LABs on a small-scale prototype of what would become
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the basis of an AquaRefinery module, and had successfully replicated that performance on a
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prototype of a full-scale electrolyzer, to produce 99.99% pure AquaRefined lead. Id. ¶ 123.
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On May 19, 2016, the Company announced a strategic partnership with Interstate Batteries
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(“IB”), pursuant to which IB invested about $10 million in the Company, and agreed to supply the

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Company with more than one million LABs for the AquaRefineries. Id. ¶ 122; Dkt. No. 128-2,

United States District Court
Northern District of California

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Declaration of Michael Hogue in Support (“Hogue Decl.”) Ex. 3 (5/19/2016 Press Release). To

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prepare for commercializing the technology, in August 2016, the Company announced it had
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largely completed construction of its first AquaRefining facility at its Tahoe Reno Industrial
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Complex (“TRIC”), and began commissioning AquaRefining modules to prepare for commercial

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operations. SAC ¶ 139, 145.
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On November 1, 2016, the Company announced production of AquaRefined lead with a
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commercial-scale module at its TRIC facility. SAC ¶¶ 158, 160; Hogue Decl. Ex. 7 (11/1/2016
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Press Release). The production was from a single AquaRefining module. SAC ¶ 163. The press
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release included photographs showing the AquaRefined lead produced on the module’s six

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electrolyzers and a conveyor carrying the lead to an ingot casting area. Id. ¶ 159. The Company
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stated that “there can be no assurance that as we commence large scale operations at our TRIC

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facility that we will not incur unexpected costs or hurdles that might restrict the desired scale of
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our intended operations or negatively impact our projected gross profit margin.” Hogue Decl. Ex.

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8 (11/7/2016 10-Q at 21); Ex. 10 (11/7/2016 Earnings Call). The Company repeated these
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Plaintiffs contend that the Motion must fail because Defendants have not addressed every alleged
misstatement in the SAC. Opp. at 9-10. The SAC contains nearly 550 paragraphs of allegations
spanning over 200 pages. Defendants’ choice to address the statements by category does not
concede the merits of any of Plaintiffs’ allegations.
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Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 3 of 31

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warnings in its prospectus filed in connection with its November 21, 2016 public offering. SAC

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¶¶ 180-186.

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On February 9, 2017, the Company announced a battery-recycling partnership with

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Johnson Controls (“JC”), the world’s largest recycler of used LABs and manufacturer of

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automotive batteries. Id. ¶ 192; Hogue Decl. Ex. 11 (2/9/2017 Press Release). Under the

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agreement, JC agreed to acquire approximately 5% of the Company, and become its first licensee

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of the AquaRefining technology. SAC ¶ 194. IB and JC have not alleged that they were

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defrauded, or joined in this action.

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On February 14, 2017, the Company issued a press release highlighting that it had
“[s]uccessfully commissioned and was in the process of scaling up production of AquaRefined

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United States District Court
Northern District of California

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lead” at its TRIC facility. Id. ¶ 200; Hogue Decl. Ex. 13. In its 2016 Form 10-K filed March 2,

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2017, the Company cautioned that “the limited nature of our operations to date are not sufficient to

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confirm the economic returns on our production of recycled lead [and] [t]here can be no assurance

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that the commencement of commercial scale operations at our TRIC facility will not incur

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unexpected costs or hurdles that might restrict the desired scale of our intended operations or

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negatively impact our projected gross profit margin.” Hogue Decl. Ex. 15 at 11. On May 9, 2017,

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the Company issued a press release reporting its first quarter results, and Clarke was quoted as

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stating that the AquaRefinery was “now in commercial operation and generating revenue . . ..”

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SAC ¶ 227; Hogue Decl. Ex. 16. The Company disclosed that the revenue was only from the sale

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of lead compounds and plastic generated from breaking and separating LABs, and not yet from the

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sale of AquaRefined lead. SAC ¶¶ 288(f).

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The next day, the Company filed its Form 10-Q with “no material changes from the risk

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factors set forth in” its 2017 10-K. Hogue Decl. Ex. 18 (5/10/2017 Form 10-Q). On May 31,

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2017, the Company announced that it hosted its first analyst visitor day at TRIC, where analysts

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observed the critical processes in operation. SAC ¶ 243. The analysts confirmed they saw the

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AquaRefining process “up and operational.” Id. ¶¶ 253, 254. At least one analyst reported that

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the “battery breaking system/equipment . . . is having issues to appropriately separate/filter

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components from the bigger load of feedstock.” Id. ¶ 230.
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Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 4 of 31

In a July 25, 2017 press release, the Company announced the “commencement of

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commercial revenues” in the second quarter with expected revenues of $603,000. Id. ¶ 253;

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Hogue Decl. Ex. 20. On August 9, 2017, the Company announced its second quarter results, SAC

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¶ 272, and stated that because the revenue was generated from the sale of lead compounds “that

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have a less established market and some demand uncertainty, . . . following the commissioning of

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all 16 modules, [the Company] may choose to run TRIC at less than 120 tonnes per day, should

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this provide for a more optimal product mix.” Id. ¶ 265.
In an October 23, 2017 press release, the Company updated the public on the operations at

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the TRIC facility. Id. ¶ 289; Hogue Decl. Ex. 26. The Company explained that it was “in the
process of synchronizing all of these stages, which is critical to maximizing efficiencies,

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United States District Court
Northern District of California

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optimizing working procedures and minimizing waste.” SAC ¶ 279; Hogue Decl. Ex. 26. On

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November 9, 2017, the Company issued a press release and filed its third quarter Form 10-Q.

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Hogue Decl. Exs. 30, 31. The Company discussed various problems it was experiencing in

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scaling the AquaRefining process to produce lead on a commercial scale, including that the lead

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that was being produced was stickier than lead the Company previously produced, and that it also

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tended to stick to the shoot exiting from the modules, requiring manual assistance to remove it.

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SAC ¶ 286; Hogue Decl. Ex. 29 at 4 (11/9/2017 Earnings call).3
On June 11, 2018, the Company announced the first commercial production of

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AquaRefined lead. SAC ¶ 288(i). On August 18, 2018, the Company announced it “took the first

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step to move beyond ‘proof of concept’ and transitioned into commercialization.” Id. ¶ 288(j) (the

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first “proof of concept” referring to commercialization of AquaRefind lead).

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B.

Procedural Background

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In ruling on the Defendants’ first motion to dismiss, the Court upheld both Plaintiffs’

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Count Two claim for scheme liability and its Count Three claim for control person liability against

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all Defendants. Dkt. No. 113 at 15, 17, 18. The Court granted the motion to dismiss the Count

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One misrepresentation cause of action with leave to amend, finding that it was a “puzzle

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The Court assumes that the word “shoot” in the cited transcript was a phonetic representation of
“chute.”
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pleading.” Id. at 11. In response to the Court’s ruling, the SAC contains a new section which

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Plaintiffs contend identifies each false and misleading statement, and provides detailed evidence

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demonstrating the falsity of each statement. SAC § VII.A-E. Defendants’ current Motion does

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not challenge the claims the Court already declined to dismiss. Mot. at 1 n.1, 33. Defendants only

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challenge the Count One misrepresentation claim, and the Count Three control person claim “as it

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relates to Count One.” Id.

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II.

REQUEST FOR JUDICIAL NOTICE
Defendants request that the Court take judicial notice of, or consider incorporated by

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reference, thirty-four documents attached to the Motion. Dkt. No. 128-1. Plaintiffs object to four

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of these documents as irrelevant for the purpose for which they are offered, and contend that these

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United States District Court
Northern District of California

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documents are not cited, referenced, or relied upon in the SAC. Dkt. No. 132.4 Defendants

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counter that these documents may be used to establish undisputed facts, to highlight what

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information was available to the market, or to assess the context in which these allegedly false

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statements were made. Dkt. No. 135.
Under Federal Rule of Evidence 201, a court may take judicial notice of a fact “not subject

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to reasonable dispute because it … can be accurately and readily determined from sources whose

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accuracy cannot reasonably be questioned.” Fed. R. Evid. 201(b)(2). In Khoja v. Orexigen

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Therapeutics, the Ninth Circuit clarified the judicial notice rule and incorporation by reference

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doctrine. See 899 F.3d 988 (9th Cir. 2018). Accordingly, a court may take “judicial notice of

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matters of public record,” but “cannot take judicial notice of disputed facts contained in such

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public records.” Id. at 999 (citation and quotations omitted). The Ninth Circuit has also clarified

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that if a court takes judicial notice of a document, it must specify what facts it judicially noticed

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from the document. Id. Separately, the incorporation by reference doctrine is a judicially-created

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doctrine that allows a court to consider certain documents as though they were part of the

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complaint itself. Id. at 1002. This is to prevent plaintiffs from cherry-picking certain portions of

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These include Hogue Decl. Exs. 31-33. Defendants initially requested judicial notice as to
Hogue Decl. Ex. 30, but after Plaintiffs opposed that request, Defendants withdrew it. Dkt. No.
135 at 2, n.2. The Court therefore declines to take judicial notice of that exhibit.
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Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 6 of 31

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documents that support their claims, while omitting portions that weaken their claims. Id.

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However, it is improper to consider documents “only to resolve factual disputes against the

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plaintiff’s well-pled allegations in the complaint.” Id. at 1014.

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As to the thirty exhibits for which Plaintiffs do not oppose judicial notice of the publication

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or existence of the documents, the Court GRANTS Defendants’ request for judicial notice as to

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Exhibits 1-29, and 34. See Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1064 n.7

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(9th Cir. 2008) (SEC filings subject to judicial notice); Dreiling v. Am. Exp. Co., 458 F.3d 942,

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946 n.2 (9th Cir. 2006) (same); Brodsky v. Yahoo! Inc., 630 F. Supp. 2d 1104, 1111 (N.D. Cal.

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2009) (taking judicial notice of press releases); In re Century Aluminum Co. Sec. Litig., 749 F.

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Supp. 2d 964, 979–80 (N.D. Cal. 2010) (taking judicial notice of slide presentations to analysts).

United States District Court
Northern District of California

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With regard to the disputed exhibits, Defendants seek judicial notice of Exhibit 31, a

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number of Form 4’s filed with the SEC describing Clarke’s stock holdings. Dkt. No. 128-1 at 2-3.

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Plaintiffs contend that the SAC does not allege insider selling by Clarke, or that he was financially

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motivated to commit fraud based on stock sales, and that these documents are thus irrelevant.

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Second, Defendants seek judicial notice of Exhibits 32 and 33 (Form 4’s filed by Defendants

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Mould and Murphy) to show that those defendants retained certain percentages of their stock

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holdings in Aqua Metals. Mot. at 28.

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The Court will take judicial notice of these exhibits. The Form 4’s are properly judicially

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noticed for their truth because they contain relevant information required for an assessment of the

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SAC’s scienter allegations, and their authenticity is not in question. See Fed. R. Evid. 201(b); In

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re Rigel Pharmaceuticals, 697 F.3d 869, 884–85 (9th Cir. 2012) (concluding that “because none

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of the defendants sold stock during the period between the allegedly fraudulent statements and the

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public disclosure of detailed data, which is the period during which they would have benefitted

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from any allegedly fraudulent statements, the value of the stock and the stock options does not

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support an inference of scienter”).

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While the SAC does not reference the Form 4’s specifically, they necessarily form the

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basis for Plaintiffs’ allegations regarding Murphy and Mould’s stock sales because they are the

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only public source for the allegations concerning the sale dates, number of shares sold, and price
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Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 7 of 31

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per share, all of which come directly from those Form 4’s. See SAC ¶¶ 494-498 (Murphy sales); ¶

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494, 499 (Mould sales); Hogue Decl. Exs. 32, 33. The documents thus “form[] the basis of the

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plaintiff’s claim.” Khoja, 899 F.3d at 1002. Because the Form 4’s provide relevant information

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concerning an inference of scienter, their authenticity is not in question, and courts routinely

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consider such documents, the Court GRANTS Defendants’ request to take judicial notice of the

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Form 4’s.

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III.

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LEGAL STANDARD
A.

Rule 12(b)(6) Standard
Federal Rule of Civil Procedure 8(a) requires that a complaint contain “a short and plain

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statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). A

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United States District Court
Northern District of California

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defendant may move to dismiss a complaint for failing to state a claim upon which relief can be

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granted under Federal Rule of Civil Procedure 12(b)(6). “Dismissal under Rule 12(b)(6) is

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appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support

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a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th

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Cir. 2008). To survive a Rule 12(b)(6) motion, a plaintiff must plead “enough facts to state a

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claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).

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A claim is facially plausible when a plaintiff pleads “factual content that allows the court to draw

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the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal,

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556 U.S. 662, 678 (2009). In reviewing the plausibility of a complaint, courts “accept factual

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allegations in the complaint as true and construe the pleadings in the light most favorable to the

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nonmoving party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir.

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2008). Nonetheless, Courts do not “accept as true allegations that are merely conclusory,

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unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Secs. Litig., 536

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F.3d 1049, 1055 (9th Cir. 2008).

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B.

Heightened Pleading Standard
Section 10(b) of the Securities Exchange Act of 1934 provides that it is unlawful “[t]o use

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or employ, in connection with the purchase or sale of any security registered on a national

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securities exchange or any security not so registered . . . any manipulative or deceptive device or
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Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 8 of 31

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contrivance . . . . ” 15 U.S.C. § 78j(b). Under this section, the SEC promulgated Rule 10b–5,

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which makes it unlawful, among other things, “[t]o make any untrue statement of a material fact or

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to omit to state a material fact necessary in order to make the statements made, in the light of the

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circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b–5(b). To

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prevail on a claim for violations of either Section 10(b) or Rule 10b–5, a plaintiff must prove six

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elements: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a

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connection between the misrepresentation or omission and the purchase or sale of a security; (4)

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reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”

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Stoneridge Inv. Partners, LLC v. Scientific–Atlanta, Inc., 552 U.S. 148, 157 (2008).
At the pleading stage, a complaint alleging claims under Section 10(b) and Rule 10b–5

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United States District Court
Northern District of California

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must not only meet the requirements of Federal Rule of Civil Procedure 8, but also satisfy the

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heightened pleading requirements of both Federal Rule of Civil Procedure 9(b) and the Private

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Securities Litigation Reform Act (“PSLRA”). In re Rigel, 697 F.3d at 876. Under Rule 9(b),

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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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Additionally, all private securities fraud complaints are subject to the “more exacting pleading

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requirements” of the PSLRA, which require that the complaint plead with particularity both falsity

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and scienter. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009).

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C.

PSLRA Safe Harbor
To assert a claim under the PSLRA for false and misleading statements, a plaintiff must

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identify “each statement alleged to have been misleading” and “the reason or reasons why the

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statement is misleading.” 15 U.S.C. § 78u–4(b)(1); see Ronconi v. Larkin, 253 F.3d 423, 429 (9th

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Cir. 2001). Allegations of misleading statements based on omissions must meet the materiality

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requirement—that is, a plaintiff must show that there is “a substantial likelihood that the

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disclosure of the omitted fact would have been viewed by the reasonable investor as having

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significantly altered the ‘total mix’ of information available.” Matrixx Initiatives, Inc. v.

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Siracusano, 563 U.S. 27, 38 (2011) (quoting Basic v. Levinson, 485 U.S. 224, 231–32 (1988)).

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Under the PSLRA’s safe harbor “a person shall not be liable with respect to any forward8

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 9 of 31

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looking statement” if it is either: (i) identified as a forward-looking statement, and is accompanied

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by meaningful cautionary statements identifying important factors that could cause actual results

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to differ materially from those in the forward-looking statement; or (ii) is immaterial; or (iii)

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plaintiff fails to demonstrate actual knowledge that it is false. 15 U.S.C. § 78u–5(c)(1). Forward-

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looking statements include, among others: (a) a projection of revenues or other financial items, (b)

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management’s plans and objectives for future operations, including plans or objectives regarding

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the issuer’s products, (c) future economic performance, or (d) the assumptions underlying or

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relating to any statement described above. Id.; 15 U.S.C. § 78u–5(i).
Forward-looking statements are protected by the safe harbor if they are accompanied by

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meaningful cautionary statements identifying important factors that could cause actual results to

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United States District Court
Northern District of California

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differ materially from those in the forward-looking statements. 15 U.S.C. § 78u-5(c). Oral

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statements are deemed to be “accompanied by meaningful cautionary statements” if the oral

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statement identifies a readily available document where the cautionary statements may be found.

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15 U.S.C. § 78u-5(c)(2); Emplrs. Teamsters Local Nos. 175 & 505 Pension Tr. Fund v. Clorox

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Co., 353 F.3d 1125, 1133 (9th Cir. 2004) (oral statement that refers listeners to readily available

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written document sufficiently designates statement as containing forward-looking statements).
Forward-looking statements identified as such and accompanied by meaningful cautionary

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statements are also protected by the safe harbor provision without regard to the speaker’s state of

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mind (i.e., even if they were made with actual knowledge that they were false or misleading). See

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In re Cutera Sec. Litig., 610 F.3d 1103, 1111–13 (9th Cir. 2010) (15 U.S.C. §§ 78u–5(c)(1)(A)

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and (B) are read disjunctively). And even if the forward-looking statement is not accompanied by

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meaningful cautionary language, it still is non-actionable unless Plaintiff alleges sufficient facts

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demonstrating that the statement was made with actual knowledge that it is false or misleading. In

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re Quality Sys., Inc. Sec. Litig., 865 F.3d 1130, 1141 (9th Cir. 2017) (citing Cutera, 610 F.3d at

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1112–13).

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IV.

DISCUSSION

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The basis for Plaintiffs’ complaint is their claim that Defendants made materially false and

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misleading statements and failed to disclose problems that Aqua Metals was having in ramping up
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its LAB recycling process. In their Motion, Defendants raise two arguments: (1) the SAC does

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not adequately establish liability under Section 10(b) of the Exchange Act and Rule 10b-5(b) for

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false and misleading statements; and (2) Count Three alleging liability against individual

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defendants as control persons under Section 20(a) of the Exchange Act must be dismissed.

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A.

Forward-Looking Statements are Protected by the Safe Harbor
i.

The AquaRefining Facility and Commercializing the Process

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Defendants contend that the Company’s statements regarding its plans and projections

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concerning commissioning the AquaRefinery facility and commercializing the AquaRefining

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process fall within the PSLRA’s definition of forward-looking statements. The risk disclosures in
the Company’s periodic SEC filings during the Class Period clearly identified a number of risk

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United States District Court
Northern District of California

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factors that could potentially cause actual results to differ materially from those described in what

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Defendant submits were forward-looking statements, including the following from the Company’s

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Form 10-Q filed on May 19, 2016:

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We have tested our AquaRefining process on a small scale and to a
limited degree, however there can be no assurance that we will be
able to produce lead in commercial quantities at a cost of
production that will provide us with an adequate profit margin.
The uniqueness of our AquaRefining process presents potential
risks associated with the development of a business model that is
untried and unproven.
While the testing of our AquaRefining process has been successful to
date, there can be no assurance that we will be able to replicate
the process, along with all of the expected economic advantages, on
a large commercial scale
While we believe that our development and testing to date has proven
the concept of our AquaRefining process, we have not undertaken
the build-out or operation of a large-scale facility capable of
recycling LABs and producing lead in large commercial
quantities. We have commenced the development of our initial LAB
recycling facility in TRIC which we expect to complete in the second
quarter of 2016 and at which point we expect to install a total of 16
AquaRefining modules to support an initial lead production capacity
of 80 ton per day by the close of the third quarter of 2016. However,
there can be no assurance that as we commence large scale
manufacturing or operations at our TRIC facility that we will not
incur unexpected costs or hurdles that might restrict the desired
scale of our intended operations or negatively impact our
projected gross profit margin.
Hogue Decl. Ex. 2, at 5-6 (emphasis added).
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The Company’s August 10, 2016 Form 10-Q contained many of the same risk factor

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disclosures, id. Ex. 5 at 20, and in its November 7, 2016 Form 10-Q, the Company continued to

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caution that it had “tested [its] AquaRefining process on a small scale and to a limited degree,”

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and said that “[w]hile we believe that our development, testing and limited production to date has

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proven the concept of our AquaRefining process, we have not undertaken the processing of used

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LABs nor have we commenced the production of lead in large commercial quantities.” Id. Ex. 8

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at 21.

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Form 10-Q’s filed on May 10, 2017 and August 9, 2017) cautioned that:

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We commenced the commercial scale production of recycled lead at
our TRIC facility during January 2017. However, there can be no
assurance that we will be able to produce lead in commercial
quantities at a cost of production that will provide us with an
adequate profit margin. The uniqueness of our AquaRefining
process presents potential risks associated with the development of
a business model that is untried and unproven. While we believe that
our development, testing and limited production to date has proven
the concept of our AquaRefining process, the limited nature of our
operations to date are not sufficient to confirm the economic returns
on our production of recycled lead. There can be no assurance that
the commencement of commercial scale operations at our TRIC
facility will not incur unexpected costs or hurdles that might restrict
the desired scale of our intended operations or negatively impact our
projected gross profit margin.

18

Id. Ex. 15 at 11, and incorporated by reference in Ex. 18 at 13 and Ex. 22, at 14 (emphasis added).

19

These disclosures identified a number of factors that might cause the actual results to differ

11

United States District Court
Northern District of California

Similarly, the Company’s March 2, 2017 Form 10-K (incorporated by reference in its

12
13
14
15
16

20

materially from those in the forward-looking statements. In fact, the Company specifically

21

warned that issues were likely to arise as the Company scaled the technology, and acknowledged

22

that it had developed and conducted only “limited testing” of the AquaRefining process. Hogue

23

Decl. Ex. 18 at 15. Notwithstanding this clear distinction between small scale and commercial

24

scale operations, Plaintiffs rely on the broad premise that the technology did not work as the

25

foundation for their allegations that many of Defendants’ Class Period statements were false. That

26

claim fails in light of these disclosures. See Browning v. Amyris, Inc., No. 13-cv-2209-WHO,

27

2014 WL 1285175, at *13-14 (N.D. Cal. Mar. 24, 2014) (granting motion to dismiss where SEC

28

filings warned of the type of risks that underlay the events described in complaint, including fact
11

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1

that defendant’s technology might not perform as expected when applied at a commercial scale).
Accordingly, the Company’s statements regarding commissioning the AquaRefining

2
3

facility and commercializing the AquaRefining Process are protected by the safe harbor.

4

ii.

Statements Regarding Projected Production Levels and Revenues

Plaintiffs also focus on statements regarding production levels and revenues. Plaintiffs

5
6

allege that many of the misrepresentations “are not protected by meaningful cautionary language”

7

because “[n]one of Aqua Metals’ risk disclosures mention production rates nor do they warn

8

against or disclose the known and pervasive issues with the AquaRefining technology that

9

rendered it incapable of the touted production rates.” SAC ¶ 449; see also id. ¶¶ 419, 426, 440,
458, 467. For example, a statement that a company is “on track” falls within the safe harbor if that

11

United States District Court
Northern District of California

10

statement is accompanied by cautionary language. Pompano Beach Police & Firefighters’ Ret.

12

Sys. v. Las Vegas Sands Corp., 732 Fed.Appx. 543, 547 (9th Cir. 2018).5 Similarly, statements

13

about production targets and revenue goals are plainly forward-looking. See, e,g., In re ECOtality,

14

Inc. Sec. Litig., No. 13-03791-SC, 2014 WL 4634280, at *5 (N.D. Cal. Sep. 16, 2014) (statement

15

that company expected to be in a position to generate predictable revenue streams was forward-

16

looking).
In Norfolk Cty. Ret. Sys. v. Solazyme, Inc., No. 15-cv-02938-HSG, 2018 WL 3126393 at

17
18

*3 (N.D. Cal. June 26, 2018), the Court found that a company’s statements that a facility was “in

19

good shape to bring full production online” in the spring and was “on track to reach full nameplate

20

capacity in the back half of 2015” were forward-looking statements that were not contradicted by

21

allegations that the facility was not close to achieving commercial viability in 2015. Id. (noting

22

the company could still have made “strong and steady progress,” and been “deep into the

23

commissioning process,” and infrastructure and upstream could still have been “online” and

24

“functioning as expected” without being “close to achieving commercial viability” at the plant).

25

Similarly, statements made using the word “expect” when referring to future events are also

26

forward-looking and thus protected by the safe harbor when accompanied by adequate cautionary

27
28

5

Pompano and the other unpublished Ninth Circuit decisions cited in this order are not precedent,
but may be considered for their persuasive value. See Fed. R. App. P. 32.1; CTA9 Rule 36-3.
12

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 13 of 31

1

language. See, e.g., Browning, 2014 WL 1285175, at *13 (statement that “we expect [to] produce

2

between 2 million and 3 million liters of Biofene this year” was forward-looking).
The Company’s cautionary statements beginning in May 2016 identified a number of risk

4

factors that could delay production, including: (1) it had only tested the AquaRefining process on

5

a small scale and to a limited degree, such that there could be no assurance that the Company

6

would be able to replicate the process on a large commercial scale or that it would not incur

7

unexpected costs or hurdles that might restrict its intended operations or negatively impact its

8

projected profit margin; (2) the uniqueness of the AquaRefining process presented risks associated

9

with the development of an untried and unproven business model; and (3) no one had successfully

10

produced recycled lead in commercial quantities other than by way of smelting, so that while the

11

United States District Court
Northern District of California

3

Company began commercial-scale production in January 2017, it could not assure that it would be

12

able to produce lead in commercial quantities at a production cost that would provide an adequate

13

profit margin.

14

Plaintiffs contend that Clarke’s affirmative statements that there is “little risk associated

15

with the actual AquaRefinery themselves [sic]” and “we don’t anticipate any issues operating at

16

full scale,” SAC ¶ 344, mean the Company’s statements were about then-existing facts. Plaintiffs

17

also contend that denying that there were any issues in the face of known current and pervasive

18

material problems is a statement of present fact. Opp. at 13 (citing Berson v. Applied Signal

19

Tech., Inc., 527 F.3d 982, 990 (9th Cir. 2008) (“descriptions of the present aren’t forward-

20

looking”)). However, the PSLRA does not require that the cautionary statement at issue include

21

the precise particular factor that ultimately causes (or could cause) the forward-looking statement

22

to be untrue. See, e.g., Employers Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Clorox

23

Co., 353 F.3d 1125, 1133 (9th Cir.2004) (“The safe harbor requires that the cautionary language

24

mention “important factors that could cause actual results to differ materially from those in the

25

forward-looking statement.”); Gammel v. Hewlett-Packard Co., 905 F. Supp. 2d 1052, 1067 (C.D.

26

Cal. 2012) (cautionary language referencing product quality and defects was sufficient to satisfy

27

the safe harbor’s threshold requirements, even though it did not specifically refer to a specific

28

operating system); In re Nuvelo, Inc. Secs. Litig., No. C 07-4056 VRW, 2008 WL 5114325, at *16
13

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 14 of 31

1

(N.D. Cal. Dec. 4, 2008) (“the law does not require specification of the particular factor that

2

ultimately renders the forward-looking statement incorrect”).
Accordingly, taking these allegations in the light most favorable to Plaintiffs, the SAC

3
4

does not sufficiently plead under Ninth Circuit precedent that these disclosures were insufficient to

5

trigger application of the PSLRA’s safe harbor.

6
7
8
9

B.

Non-Forward-looking Statements
i.

The Alleged Confidential Witness Statements Do Not Contradict the
Company’s Statements Regarding Issues the Company was Experiencing
During its Commercial-Scale Transition

The SAC alleges that statements regarding the status, success, and commercialization of
the AquaRefining process were false and misleading because the statements concealed that

11

United States District Court
Northern District of California

10

AquaRefining “was malfunctioning and not commercially viable,” SAC at 16, and “did not work

12

and suffered from significant issues, including the sticky lead, hard lead and other problems.” Id.

13

¶¶ 342(vii). The issue here is whether the Confidential Witnesses’ (“CWs”) statements

14

concerning the scaling issues contradict the statements the SAC alleges to be false and misleading.

15

The CWs all appear to agree, notwithstanding alleged problems relating to scaling, that the

16

AquaRefining technology worked to some extent, and the CWs’ statements appear to support,

17

rather than contradict, the Company’s statements. Id. ¶¶ 339, 344. For example, CW1 stated that

18

the AquaRefining modules would run “a few hours at a time.” Id. ¶ 75. CW2 states that “they

19

couldn’t get the equipment to work,” but also states that “one module worked for about an hour or

20

so at a time.” Id. ¶ 78. CW3, who was only involved in the front-end battery breaking part of the

21

process, stated that he or she “personally ran the machinery during the [investor/analyst] visits,”

22

and ensured that the “machinery kept running” during the visits. Id. ¶¶ 89, 92. CW4 indicated the

23

module would work for about an hour per day and that limited amounts of AquaRefined lead were

24

produced. Id. ¶¶ 95, 97. And CW5 stated that “the process wasn’t working” but acknowledges

25

that lead was produced from the modules. Id. ¶ 115.

26

Defendants contend that the problems the Company ultimately faced could not have been

27

anticipated before trying to scale the technology to produce commercial quantities of lead,

28

including a “sticky lead issue” discussed by CW1, CW4, and CW5, id. ¶¶ 63, 66-68, 72, 97, 115,
14

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 15 of 31

1

and the breaker issue described by CW3. Id. ¶ 88. For example, Clarke discussed the breaker

2

problem with analysts during the February 14, 2017 earnings call, id. ¶ 208, and again during the

3

May 9, 2017 earnings call. Id. ¶ 232. During the May 9, 2017 call, while Clarke told the analysts

4

that “every single one of the processes that we need to operate is operating,” id. ¶ 362, he did not

5

state that the processes were operating to produce lead at a commercial scale. Id. This is key

6

because CW1 acknowledged that “as the process goes to large-scale, even just one change can

7

impact everything and make existing issues worse.” Id. ¶ 70. Consistent with this reality,

8

throughout the Class Period, the Company kept pushing back the date it projected to reach

9

commercial scale from Q4 2016, id. ¶ 163, to early 2017, id. ¶ 168, to the first half of 2017, Form

10

United States District Court
Northern District of California

11

10-K filed March 2, 2017, and then to the end of 2017.
Further, the Company clearly stated that its revenue came from the sale of plastic and lead

12

compounds, not AquaRefined lead. See Hogue Decl. Ex. 24 at 7 (sales consisted of “plastic and

13

lead compounds”); Ex. 18 at 4. Whatever the terminology used to describe its operation—

14

“commercial operations”, “commercial production”, or “commercial scale”—the critical fact is the

15

Company did not represent that it was producing AquaRefined lead in commercial quantities. Id.

16

The existence of a number of issues (sticky lead, for example) does not contradict Defendants’

17

statements that the AquaRefinery was in commercial operation, the Company had product ready to

18

ship, or any of the other statements Plaintiffs allege to be false and misleading.

19

In Norfolk, for example, the Court found statements that defendant “successfully produced

20

its first commercially salable product,” “produced . . . oil,” and “just began commercial

21

production” were contradicted by witness accounts that the defendant “was never able to produce

22

commercially salable oil.” Norfolk, 2018 WL 3126393 at *6, 20-24. However, the Court also

23

held that the allegations failed because they did not demonstrate that the CWs had personal

24

knowledge of the information relayed or demonstrate that the defendants were informed of the

25

purported information. Id. at *6, 20-24. The Court agrees with Defendants’ reading of Norfolk,

26

and finds that the Company’s statements as alleged, taken together, were not false or misleading

27

and were not contradicted by the CWs statements.

28

ii.

The Company Disclosed Risks and Issues Surrounding Commercialization
15

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 16 of 31

1

In its Form 10-Q filed on May 19, 2016, in addition to announcing its strategic partnership

2

with IB, and IB’s $10 million investment in Aqua Metals, the Company explained its progress in

3

moving from prototype to commercialization: (i) it built and operated both a small-scale unit of its

4

AquaRefining process and a full-size production prototype, (ii) it tested the AquaRefining process

5

“on a small scale and to a limited degree,” but stated it was providing no assurance it would be

6

able to economically produce lead in commercial quantities; (iii) through those operations it was

7

able to “successfully produce 99.99% pure lead on a limited scale,” and (iv) it “commenced the

8

development” of its LAB recycling TRIC facility. Hogue Decl. Ex. 2 at 5-6. Similarly, in its

9

August 10, 2016 Form 10-Q, the Company did not report any additional progress in
commercializing the AquaRefining process, and pushed back the date by which it expected to

11

United States District Court
Northern District of California

10

install sixteen AquaRefining modules at its TRIC facility from the close of the third quarter to the

12

close of the fourth quarter. Hogue Decl. Ex. 5 at 17. And in a November 1, 2016 press release,

13

the Company announced production of the “first-ever Aqua-Refined lead at its [TRIC facility]”

14

that was 99.9% pure. SAC ¶¶ 158, 166, 350; Ex. 7; see also Hogue Decl. Ex. 10 (11/7/2016 Q3

15

Earnings Call).

16

In its November 7, 2016 Form 10-Q, the Company again explained that the production was

17

done by “conduct[ing] limited operations through the processing of recycled lead through a single

18

AquaRefining module . . . .” Hogue Decl. Ex. 8 at 16. The Company also reported that it had not

19

yet begun processing batteries at the TRIC facility, and that it obtained the recycled lead from

20

other sources before processing it through the AquaRefinery. Id. The Company once again stated

21

in its 10-Q that it was not operating at a commercial scale, saying that “[o]ver the coming weeks

22

we plan to fully integrate the front-end battery-breaking portion of the facility.” Id. ¶ 350. The

23

Company also updated its progress in commercializing the AquaRefining process consistent with

24

its November 1 press release where it pushed back the expected date of commercial production to

25

“early in 2017.” Id. ¶ 163. In its November 7, 2016 press release, the Company disclosed it had

26

just commissioned the first production module, id. ¶ 166; Hogue Decl. Ex. 9, enabling it to begin

27

transitioning into commercial operations. Id. ¶ 172.

28

The Court finds that the SAC fails to sufficiently plead that the Company’s statements
16

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 17 of 31

1

regarding the successful limited production of 99.9% pure AquaRefined lead announced in

2

November 2016 were false or misleading. Id. ¶¶ 158, 166, 339, 350, 356; Hogue Decl. Ex. 7; Ex.

3

10 (11/7/2016 Q3 Earnings call). The only remaining basis for Plaintiffs’ allegation is the premise

4

that the commercialization of the technology did not work, such that the Company’s

5

representations that an ingot was made of AquaRefined lead were necessarily false.

6
7

iii.

The SAC Fails to Allege Sufficient Facts to Support an Inference that
Statements Regarding the Transition to Commercialization were False or
Misleading

8

That the Company did not ultimately complete the transition to commercialization or

9

successfully commence commercial production of AquaRefined lead until 2018 does not, by itself,
make any of its November 2016 statements that it was transitioning to commercialization false or

11

United States District Court
Northern District of California

10

misleading. For example, in its November 7, 2016 Form 10-Q, the Company explained that

12

“[w]hile we believe that our development, testing and limited production to date has proven the

13

concept of our AquaRefining process, we have not undertaken the processing of used LABs nor

14

have we commenced the production of lead in large commercial quantities.” Hogue Decl. Ex. 8.

15

The Company further disclosed that its operations consisted of “limited testing” of the

16

AquaRefining process. Id. Ex. 18 at 15. A review of the statements in this context makes plain

17

that the Company was not representing that it was currently producing 120 tons of AquaRefined

18

lead, but instead had future plans to do so and was in the process of installing equipment that it

19

believed could support a 120-ton capacity in the future. See id. Ex. 10 at 2, 9 (explaining that “we

20

expect to expand our capacity to 120 tonnes a day in early 2017,” and stating that only 6 of 16

21

modules were currently installed and that producing 120 tons would require 16 operating modules)

22

(emphasis added).

23

Further, months later on February 9, 2017, the Company announced a “Break-through

24

Battery Recycling Partnership” with JC and JC’s agreement to acquire just under a 5 percent

25

ownership stake in Aqua Metals. SAC ¶¶ 192-194; Hogue Decl. Ex. 11. The Court finds that the

26

SAC fails to adequately allege that statements regarding this partnership (as well as the May 2016

27

partnership with IB), id. ¶¶ 390, 397, 404, were in any way misleading. The SAC’s assumption

28

that these sophisticated players in the battery recycling industry were defrauded, then continued to
17

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 18 of 31

1

partner with Aqua Metals after the alleged fraud was revealed, is an “unreasonable inference” that

2

the Court will not draw. Gilead, 536 F.3d at 1055 (“Courts do not ‘accept as true allegations that

3

are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.’”).

4

Similarly, during an earnings call, the SAC alleges that Clarke stated that the Company
experienced “challenges” and “surprises.” SAC ¶ 208. Clarke referenced issues with the front-

6

end of the LAB recycling process, i.e., breaking batteries and transporting lead paste to the

7

modules. Id. Clarke explained that the Company “got that dialed in now and it’s operating,”

8

which “means we can provide feedstock to the AquaRefiners and make AquaRefined lead.” Id.

9

Yet there was no representation in the SAC or by the Company that TRIC was operating to

10

produce lead on a commercial scale, and the Company once again cautioned investors that

11

United States District Court
Northern District of California

5

“[w]hile we believe that our development, testing and limited production to date has proven the

12

concept of our AquaRefining process,” “[t]here can be no assurance that the commencement of

13

commercial scale operations at our TRIC facility will not incur unexpected costs or hurdles that

14

might restrict the desired scale of our intended operations or negatively impact our projected gross

15

profit margin.” Hogue Decl. Ex. 15 (3/2/2017 10-K) at 11. The only new information in the Form

16

10-K was that the Company again pushed back the date on which it expected to achieve a

17

production rate of 120 metric tons per day. Id. at 19.

18

In May 2017, the Company announced that it was finally engaging in commercial

19

operations and potentially generating revenue. SAC ¶ 234. But at the same time, Clarke reported

20

various issues the Company experienced in ramping up production, said there was no revenue for

21

the quarter, and reported that the only product being shipped was metallic lead pre-ingot (not

22

AquaRefined lead) and plastics. Id. ¶¶ 236-37, 241. During the earnings call, Clarke stated that

23

the Company would not provide “forward guidance on ramp-up of revenue, products, or capacity.”

24

Id. ¶ 509(a). These disclosures did not contradict any of the Company’s prior non-forward-

25

looking statements, and to the extent they were inconsistent with the Company’s forward-looking

26

projections, the Company had warned repeatedly throughout the Class Period that it might not be

27

able to meet its projections.

28
18

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1
2

iv.

The SAC Fails to Allege Sufficient Facts to Support an Inference that
Statements and Disclosures Regarding Revenue and Commissioning the
Process were False or Misleading

On July 25, 2017, the Company in a press release reported revenue for the first time.
3
4
5
6
7
8

Clarke explained the Company “worked hard to bring the front-end of the process into consistent
operation.” Id. ¶ 253. This release specifically stated the Company “began revenue producing
operations from the sale of lead alloys and plastics,” not AquaRefined lead. Hogue Decl. Ex. 20.
And the Company’s August 2, 2017 press release described the Company’s hosting of its first
Investor Day during which “[i]nvestors were able to view the full production process at the
AquaRefinery as it happened.” SAC ¶¶ 255, 367; Hogue Decl. Ex. 21.

9
In an August 9, 2017 press release, the Company reported its second quarter results. SAC
10
¶ 260; Hogue Decl. Ex. 23. The Company had previously reported that the product shipped in
11

United States District Court
Northern District of California

April was lead compounds and plastics rather than AquaRefined lead, SAC ¶ 241, so the fact that
12

“much of [the] revenue for the second quarter came from” “selling lead components from the

13
AquaRefining feedstock,” id. ¶ 263, was not new information. Clarke cautioned that the Company
14

was “running a series of trials” in an attempt to “fully map the performance of the modules.”

15
Hogue Decl. Ex. 24 (8/9/2017 Earnings Call) at 10; SAC ¶ 261. In a September 28, 2017 8-K, the
16
Company announced progress in implementing its agreement with JC. SAC ¶ 404; Hogue Decl.
17
Ex. 25 at 1. In its October 23, 2017 press release, the Company noted it produced small quantities
18
of AquaRefined lead and explained various scaling issues including optimizing the appropriate
19

control parameters and operating procedures and the “need to periodically assist lead removal.”

20
SAC ¶ 277-79; Hogue Decl. Ex. 26.
21
22

The SAC alleges that these disclosures regarding the Company’s revenue and the
commissioning of the AquaRefining Process contradicted the Company’s prior statements

23
reflecting optimism about the commissioning the process. Id. For example, the SAC appears to
24
25

allege that the Company’s November 9, 2017 statement that it had “not commenced the
commercial production of AquaRefined lead” contradicted its prior statements. SAC ¶ 282. But

26
again, as noted, throughout the Class Period, the Company cautioned that it would face certain
27
issues as the modules, once commissioned, were put into commercial operation and the operation
28
19

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1

was scaled. The allegation that the Company’s prior statements were misleading because it had

2

not yet commenced commercial production at that time ignores the numerous disclosures that the

3

Company made describing the issues surrounding scaling of production. While the Company

4

announced in November 1, 2016 that it produced AquaRefined lead with a commercial scale

5

Aqua-Refining module, id. ¶¶ 160, 350, that was before it announced it had even commenced

6

commercial operations. Thereafter, the Company clearly disclosed that while it began commercial

7

operations and commercial production in the first quarter of 2017, it had produced and sold only

8

lead compounds and plastics, not AquaRefined lead. Id. ¶ 241.

9

The SAC also alleges that the Company’s description of AquaRefining as an “unproved
technology” contradicts its previous statements. Id. ¶ 282. Plaintiffs contend that after the end of

11

United States District Court
Northern District of California

10

the Class Period, Defendants admitted for the first time that the AquaRefining process was

12

“unproven technology” SAC ¶¶343, 348, which directly contradicts their prior statements. Opp. at

13

23 (citing In re Read-Rite Corp. Sec. Litig., 335 F.3d 843, 846 (9th Cir. 2003) (“later statement[s]”

14

supported falsity as they “directly contradicted or were inconsistent with” Defendants’ earlier

15

statements), abrogated on other grounds as recognized by S. Ferry LP, No. 2 v. Killinger, 542

16

F.3d 776, 783-84 (9th Cir. 2008)). That statement was made in the Company’s November 9, 2017

17

Form 10-Q explaining the risks of Aqua Metals’ business model for scaling the technology to

18

produce commercial quantities of lead:

19
20
21
22
23
24
25

Our business model is new and has not been proven by us or
anyone else. We are engaged in the business of producing recycled
lead through a novel and unproven technology. . . . Our lead recycling
production line at TRIC is the first of-its-kind and neither we nor
anyone else has ever successfully built a production line that
commercially recycles LABs without smelting. While we have
commenced limited lead recycling operations at our TRIC facility, to
date all revenues have been derived from the sale of lead compounds
and plastics and we have not commenced the commercial production
of AquaRefined lead. Further, there can be no assurance that we will
be able to produce AquaRefined lead in commercial quantities at a
cost of production that will provide us with an adequate profit margin.
Hogue Decl. Ex. 27 (11/9/2017 Form 10-Q) at 20 (emphasis in original).

26
However, based on the above disclaimers, the SAC does not plausibly allege that the
27
Company represented that the AquaRefining technology was proven to produce lead in
28
20

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 21 of 31

1

commercial quantities. The Company instead explained that the AquaRefining process proved

2

successful in a small-scale unit, a full-size production prototype, and a single commercial scale

3

AquaRefining module in its TRIC facility. Id. The Company’s prior risk disclosures in its Form

4

10-K’s filed in 2016 and 2017 (incorporated by reference in the Form 10-Qs), stated: “While the

5

testing of our AquaRefining process has been successful to date, there can be no assurance that

6

we will be able to replicate the process, along with all of the expected economic advantages, on

7

a large commercial scale.” Hogue Decl. Ex. 1 at 11; Ex. 15 at 11 (emphasis in original).6

8

v.

Statements As Corporate Optimism

Defendants contend that statements such that AquaRefining is a “breakthrough

10

technology,” SAC ¶ 390, that the Company achieved a “major milestone,” id. ¶ 350, or that the

11

United States District Court
Northern District of California

9

“partnership with [JC] is a tremendous step forward,” id. ¶ 397, are non-actionable statements of

12

corporate optimism or puffery not “capable of objective verification” as required for a statement to

13

be misleading. Defendants also contend that other statements, such as “[w]e believe this [IB

14

partnership] serves as a strong validation of our technology,” id. ¶ 390, or “I don’t have a single

15

thing that we’re worried about,” id. ¶ 344, are nonactionable opinion or optimism statements

16

because there are no allegations that Defendants did not believe the statements to be true when

17

made, and the statements contain no purported objectively verifiable facts, much less ones that the

18

SAC adequately alleges were untrue. See City of Dearborn Heights Act 345 Police & Fire Ret.

19
20
21
22
23
24
25
26
27
28

Plaintiffs also challenge the Company’s statements regarding its licensing plans and plans for
future facilities. For example, Plaintiffs refer to a number of statements by Clarke “touting” the
Company’s “strategic relationships,” including discussions with multiple strategic partners and his
statement that the Company was “absolutely serious about a global rollout.” SAC ¶¶ 284, 389,
496. Defendants contend that these are forward-looking statements relating to future plans,
because in both its 2015 Form 10-K filed on March 28, 2016 and its 2016 10-K filed on March 2,
2017, the Company listed as a risk factor that its “business strategy includes licensing
arrangements and entering into joint ventures and strategic alliances. Failure to successfully
integrate such licensing arrangements, joint ventures, or strategic alliances into our operations
could adversely affect our business.” Hogue Decl. Ex. 15 at 11. Plaintiffs allege, however, that
“this is [sic] no way discloses the actual known risk and issues to licensing – that AquaRefining
was not working.” SAC ¶¶ 419, 426. Notwithstanding the scaling issues—which were covered
by extensive disclosures regarding the risk inherent in commercializing the AquaRefining
process—the technology was working in some capacity as noted in these disclosures, and
licensing was a possibility. Accordingly, the statements regarding licensing activities and future
facilities are also not actionable, as the SAC fails to allege that they were false or misleading,
whether they were statements of present fact or forward looking.
21
6

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 22 of 31

1

Sys. v. Align Tech., Inc., 856 F.3d 605, 615-16 (9th Cir. 2017) (to plead falsity of opinion

2

statement “plaintiff must allege both that the speaker did not hold the belief she professed and that

3

the belief is objectively untrue.”) (internal quotations omitted).
Corporate optimism, or “puffery,” is not actionable under the PSLRA because:

4
5

When valuing corporations, . . . investors do not rely on vague
statements of optimism like ‘good,’ ‘well-regarded,’ or other feel
good monikers. This mildly optimistic, subjective assessment hardly
amounts to a securities violation. Indeed, professional investors, and
most amateur investors as well, know how to devalue the optimism
of corporate executives.

6
7
8

Cutera, 610 F.3d at 1111 (9th Cir. 2010) (citations and internal quotations omitted); see also
9
Oregon Pub. Employees Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 606 (9th Cir. 2014)
10

(statement that revenue and growth were “significant events” was non-actionable because it was

11

United States District Court
Northern District of California

too vague for reasonable investor to rely on) (internal citations omitted)); In re Syntex Corp. Sec.
12
13

Litig., 855 F. Supp. 1086, 1095 (N.D. Cal. 1994) aff’d, 95 F.3d 922 (9th Cir. 1996) (holding that
statements like “we’re doing well and I think we have a great future” were nonactionable

14
corporate optimism). The Court finds that the above statements are nonactionable statements of
15
optimism and corporate puffery.
16
***
17
18

Taking these allegations and representations as a whole, the Court finds that the SAC’s
allegations that the Defendants’ statements may have contradicted prior public statements are

19
insufficient to plead that the non-forward looking statements were false or misleading, and are
20
therefore non-actionable.
21
22
23

C.

The SAC Fails to Adequately Allege Scienter
A complaint sufficiently alleges scienter when it “state[s] with particularity facts giving

rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C.

24
§78u-4(b)(2)(A); Tellabs Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308, 314 (2007). The
25
required state of mind includes deliberate recklessness or an intent to deceive. In re Quality Sys.
26
Inc. Sec. Litig., 865 F.3d at 1144. Deliberate recklessness is an extreme departure from the
27
standards of ordinary care. Scheuneman v. Arena Pharm., Inc., 840 F.3d 698, 705 (9th Cir. 2016).
28
22

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 23 of 31

1

It is well established that the test is whether “all of the facts alleged, taken collectively, give rise to

2

a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets

3

that standard.” Tellabs, 551 U.S. at 323. An inference is “strong” if a reasonable person would

4

deem the inference “cogent and compelling” and “at least as likely as any plausible opposing

5

inference.” Id. at 324, 328-29. An inference of scienter “need not be irrefutable, i.e., of the

6

‘smoking-gun’ genre, or even the ‘most plausible of competing inferences’”—the inference need

7

only be equally plausible to any non-culpable inference. Id. Reckless conduct satisfies the

8

scienter standard “to the extent it reflects some degree of intentional or conscious misconduct.”

9

South Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 782 (9th Cir. 2008) (quoting In Re Silicon

10

Graphics Sec. Litig., 183 F.3d 970, 977 (9th Cir. 1999)).

United States District Court
Northern District of California

11

Plaintiffs allege a series of facts that they contend collectively support a strong inference of

12

scienter, including allegations regarding Defendants’ knowledge of problems inconsistent with the

13

statements regarding milestones achieved, site visits, the meaning of strategic partnerships and

14

licensing and production rates.

15

Defendants concede that their “knowledge of problems is not disputed.” Mot. at 27-28.

16

(“Defendants do not claim to have been unaware of the facts.”). Instead of disputing knowledge,

17

Defendants challenge scienter on the basis that “[t]he issue is not whether they had knowledge but

18

instead whether that knowledge contradicted their public statements.” See id. at 28, 30. Plaintiffs

19

allege that Defendants’ scienter is evidenced by awareness of or reckless disregard for “ongoing

20

and significant problems with the AquaRefining process well before the [TRIC facility] was

21

built.” SAC ¶¶ 469-471.

22

i.

23

Confidential Witness Statements Do Not Show Personal Knowledge or
Knowledge of Falsity

As an initial matter, Plaintiff’s allegations are primarily based on reports from a
24
confidential witness, CW 1. Id. A complaint relying on confidential witness statements must
25
meet the following two requirements: (a) the confidential witness statements introduced to
26
establish scienter must be described with sufficient particularity to establish his or her reliability
27
and personal knowledge, and (b) those statements must themselves be indicative of scienter.
28
23

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 24 of 31

1

Zucco Partners, 552 F.3d at 995. The SAC initially fails with respect to the first prong to describe

2

CW1 with the required particularly, stating only that he or she was an “engineer” who worked at

3

AquaMetals from 2015 to January 2017. SAC ¶ 469. The SAC does not identify CW1’s title,

4

who he or she reported to, and what the relationship was to Clarke, Mould, and Murphy. The

5

allegations regarding CW1 do not provide a basis for the Court to establish his or her reliability

6

and personal knowledge. Accordingly, the SAC “fails to allege with particularity facts supporting

7

its assumptions that the confidential witnesses were in a position to be personally knowledgeable

8

of the information alleged.” Zucco Partners, 552 F.3d at 996.

9

Similarly, CW1’s allegations fall short of demonstrating the second prong—a strong
inference of scienter with regard to Defendants’ purported knowledge of “significant problems”

11

United States District Court
Northern District of California

10

with the AquaRefining process “well before the Reno Plant was built.” Id. ¶ 469. CW1 provides

12

the conclusory allegation that there were issues with the modules that “were known, including by

13

Clarke and Mould, since 2015,” and that Clarke and Mould knew the technology would have

14

scaling issues. Id. ¶¶ 470, 471. But CW1 does not provide any facts concerning Clarke’s or

15

Mould’s belief as to whether these issues, to the extent they existed, would be material or

16

significant. In fact, as noted, the Company repeatedly warned that it might face challenges scaling

17

the process: “While the testing of our AquaRefining process has been successful to date, there can

18

be no assurance that we will be able to replicate the process, along with all of the expected

19

economic advantages, on a large commercial scale.” Hogue Decl. Ex. 2 (5/19/2016 10-Q) at 5-6.

20

Therefore, these “generalized claims about corporate knowledge are not sufficient to create a

21

strong inference of scienter” because they do not establish that the “witness reporting them has

22

reliable personal knowledge of the defendants’ mental state.” Zucco Partners, 552 F.3d at 998.

23

Accordingly, the CWs also fail to provide sufficient facts concerning Clarke’s or Mould’s belief as

24

to whether these issues, to the extent they existed, would prove to be significant.

25
26
27
28

ii.

The CWs’ Allegations Regarding Defendant’s Involvement in Visitor
Presentations and Display of Images are Insufficient to Show Personal
Knowledge or Knowledge of Falsity

Plaintiffs also allege, based on the CW statements, that Defendants were aware of and
recklessly disregarded “serious problems” at the TRIC facility and with the “lack of AquaRefined
24

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 25 of 31

1

lead produced.” SAC ¶ 472. For example, Plaintiffs allege that Defendants’ knowledge of

2

purported problems with the technology is evident from their direct involvement “in the staged

3

investor shows.” Id. ¶ 478. In support, the CWs make a number of statements in the SAC

4

regarding the inauthenticity of “lead ingots” and images of AquaRefining, which were allegedly

5

“staged” by Clarke, Mould, and Murph and were not the product of any AquaRefining materials or

6

processes. Lead ingots are lead compounds mined from LABs and processed through the

7

AquaRefining process and converted into an electrolyte, which then goes through a casting

8

process to make an ingot of lead. Id. ¶¶ 47, 48, 177. Plaintiffs also make allegations regarding a

9

photograph showing a single AquaRefining module with a stream of lead-infused electrolytes
falling from the module to the conveyor belt, where the caption of the photo described the lead as

11

United States District Court
Northern District of California

10

“flowing like a waterfall.” Id. ¶¶ 159, 350.

12

Plaintiffs contend that these statements were false and misleading because of the issues

13

described by the CWs, and because Defendant was “nowhere near expanding operations or

14

licensing as they still did not have a proven technology ….” Opp. at 24. Defendants contend

15

these allegations fail because they are not pled with the particularity required under the PSLRA

16

when relying on confidential witnesses. Zucco Partners, 552 F.3d at 995. Defendants also

17

contend that the CWs offer no actual evidence as to what Defendants said during the presentations

18

or the Defendants’ state of mind when they made these public statements.

19

For example, the only related allegations in the SAC based on personal knowledge are

20

from: (1) CW2, who was responsible for air emissions, not AquaRefining, and who bases the

21

claim that AquaRefining was not working only on the air filtration system because, although the

22

filtration system was turned on, it only pulled air out of the room and there was nothing to vent,

23

SAC ¶ 81-82; (2) CW3, who simply speculates that the Company was not making a sufficient

24

amount of AquaRefined lead to cast it into a bar, based on the amount of lead production, id. ¶ 91;

25

and (3) CW4, who did not work at the Company at the relevant time, id. ¶ 94, and admittedly

26

premises his statements solely on hearsay. Id. ¶¶ 101-103. The SAC also alleges that CW2 was

27

an Environmental Systems Supervisor, but there are no facts alleged to show that he or she had

28

personal knowledge that the lead ingots displayed were not, or could not be, AquaRefined lead.
25

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 26 of 31

1

Id. ¶¶ 77, 82. CW3 does not allege that the photos are inauthentic, but instead only speculates that

2

the Company was not making enough AquaRefined to cast it into bars and that the lead that was

3

cast was lead that did not go through the AquaRefining process, and this CW does not provide

4

any other relevant information relating to the authenticity of photographed ingots. Id. ¶ 91.

5

Lastly, CW4 did not even work at the Company when the ingot and images in question were made

6

and taken. Id. ¶¶ 100-103. Importantly, none of the CWs claim to have observed the module in

7

the photograph, which would be necessary to refute the description, i.e., observe that the lead was

8

not flowing off the module. In re Allied Nev. Gold Corp., No. 3:14-CV00175-LRH-WGC, 2016

9

WL 4191017, at *11 (D. Nev. Aug. 8, 2016) (“statements of a confidential witness are disregarded
if lacking in specificity or based on hearsay, rumor, or speculation”) (citations omitted); In re

11

United States District Court
Northern District of California

10

Metawave Communs. Corp. Sec. Litig., 298 F. Supp. 2d 1056, 1068 (W.D. Wash. 2003) (noting

12

that court must be able to tell whether CW is speaking from personal knowledge or “merely

13

regurgitating gossip and innuendo; “[A] shared opinion among confidential witnesses does not

14

necessarily indicate either falsity or a strong inference of scienter if the allegations themselves are

15

not specific enough.”).

16

iii.

17

Insider Stock Sales

It is well established by both the Supreme Court and the Ninth Circuit that it is

18

unnecessary to allege “motive” in order to establish scienter. See Tellabs, 551 U.S. at 325 (“the

19

absence of a motive allegation is not fatal….[rather] allegations must be considered collectively;

20

the significance that can be ascribed to an allegation of motive, or lack thereof, depends on the

21

complaint’s entirety”); Siracusano, 585 F.3d at 1182 (motive is “a relevant consideration” but “the

22

absence of a motive allegation is not fatal.”); Petrie v. Elec. Game Card, Inc., 761 F.3d 959, 970

23

(9th Cir. 2014) (same). Nevertheless, the SAC alleges stock sales by Mould and Murphy as

24

further evidence of scienter. SAC ¶¶ 493-502.

25

“Suspicious” stock sales “only give rise to an inference of scienter when they are

26

dramatically out of line with prior trading practices at times calculated to maximize the personal

27

benefit from undisclosed inside information . . .. Three factors are relevant to this inquiry: (1) the

28

amount and percentage of the shares sold; (2) the timing of the sales; and (3) whether the sales
26

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 27 of 31

1

were consistent with the insider’s trading history.” Metzler, 540 F.3d at 1066-67 (internal

2

citations and quotation marks omitted). For individual defendants’ stock sales to raise an

3

inference of scienter, Plaintiffs must provide a meaningful trading history for purposes of

4

comparison—the court must consider, among other factors, “the amount and percentage of shares

5

sold by insiders.” No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W.

6

Holding Corp., 320 F.3d 920 (9th Cir. 2003); Zucco Partners, 552 F.3d at 1005.
The SAC does not allege that Clarke, who allegedly made most of the statements at issue,

7
8

sold any Aqua Metals stock. Nor, it appears, could it, because public records confirm he did not

9

sell any such stock during the Class Period, and instead acquired $200,000 of stock in the
November 2016 public offering. Hogue Decl. Ex. 31. While Plaintiffs allege that Mould and

11

United States District Court
Northern District of California

10

Murphy each sold 60,000 shares during the Class Period, SAC ¶¶ 493-499, the SAC fails to

12

include any allegations concerning the percentage of their holdings they sold. In fact, as reported

13

in the Company’s May 2018 proxy statement, Mould and Murphy each retained more than 90

14

percent of their Aqua Metals stock. Hogue Decl. Exs. 32 and 33 (SEC Form 4’s).7
The absence of sales by Clarke, who made many of the statements at issue, and Murphy

15
16

and Mould’s retention of more than 90% of their holdings, contradict any inference of scienter. In

17

re Versant Object Tech. Corp., No. C 98-00299 CW, 2001 WL 34065027, at *6 (N.D. Cal. Dec. 4,

18

2001) (no inference of scienter where plaintiffs failed to allege any stock sales by the speaking

19

defendants); see also Ronconi v. Larkin, 253 F.3d 423, 435 (9th Cir. 2001) (no inference of

20

scienter where two insiders sold small percentages of their shares); Silicon Graphics, 183 F.3d at

21

987-988 (no inference of scienter where most of insider sales made by non-speaking defendant);

22

In re Bare Escentuals, Inc. Sec. Litig., 745 F. Supp. 2d 1052, 1078 (N.D. Cal. 2010) (sales not

23

probative of scienter where no defendant sold more than 20% of their stock at any given time).8

24
25
26
27
28

Further, Murphy and Mould’s stock sales on April 10, 2017 and May 5, 2017 were made
pursuant to 10b-5 trading plans, SAC ¶ 498 (“Murphy’s April 10 and May 5, 2017 stock sales
were pursuant to 10b-5 trading plan …”), which weighs against an inference of scienter. Metzler
Inv. GMBH, 540 F.3d at 1067 n.11 (sales according to predetermined plans may rebut an inference
of scienter).
8
Plaintiffs’ allegation of scienter based on IB’s sale of 228,420 Aqua Metals shares in April and
May 2017 is particularly unavailing. SAC ¶¶ 500-502. IB is not an insider, nor are they a party to
27
7

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 28 of 31

1

D.

Mould and Murphy
The SAC also attempts to hold Mould and Murphy individually liable for certain

2
statements that Defendants contend they did not make personally. As the Supreme Court stated in
3
Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142-43(2011):
4
5
6
7
8
9
10

For purposes of Rule 10b-5, the maker of a statement is the person or
entity with ultimate authority over the statement, including its content
and whether and how to communicate it. Without control, a person or
entity can merely suggest what to say, not “make” a statement in its
own right. One who prepares or publishes a statement on behalf of
another is not its maker. And in the ordinary case, attribution within
a statement or implicit from surrounding circumstances is strong
evidence that a statement was made by--and only by--the party to
whom it is attributed. This rule might best be exemplified by the
relationship between a speechwriter and a speaker. Even when a
speechwriter drafts a speech, the content is entirely within the control
of the person who delivers it. And it is the speaker who takes credit-or blame--for what is ultimately said.

United States District Court
Northern District of California

11

See also City of Royal Oak Retirement Sys. v. Juniper Networks, Inc., 880 F. Supp. 2d 1045, 1070

12

(N.D. Cal. 2012) (“A defendant can be liable under § 10(b) for a false or misleading statement

13

only if the defendant ‘made the statement.’”); Hefler v. Wells Fargo & Co., No. 16-cv-05479-

14

JST, 2018 WL 1070116, at *9 (N.D. Cal. Feb. 27, 2018) (dismissing complaint against officers

15

under Janus based on absence of facts alleging officers had ultimate authority over statements).

16

For example, Plaintiffs contend that Mould and Murphy made false and misleading

17

statements on earnings calls or in various articles. See SAC ¶¶ 390, 397 (discussing statements by

18

Mould); id. ¶¶ 356, 362, 382, 428 (discussing statements by Murphy). Moreover, because Murphy

19

signed the SEC filings, Plaintiffs contend that he is liable for the misrepresentations contained in

20

them. Id. ¶¶ 339, 350, 356-57, 397, 420, 428, 434, 441, 450, 459. Plaintiffs also contend that as a

21

participant on Aqua Metals’ earnings calls and a Company Contact on press releases (id. ¶¶ 344,

22

350, 356-57, 362, 367, 382, 390, 397, 404, 412, 420, 428, 434, 441, 450, 459), Murphy had

23
24
25
26
27
28

this action. In any event, IB retained nearly 94% of its shares. Hogue Decl. Ex. 19 (5/16/2017
Schedule 13D/A) (showing IB held 3,483,452 shares as of May 16, 2017). Plaintiffs also point to
the Company’s November 2016 public offering to raise capital as evidence of scienter. SAC ¶
506. However, motives common to most corporate officers, such as the desire for the corporation
to appear profitable to keep stock prices high or a need for capital infusions, do not create a
sufficient inference of scienter. See, e.g., Seaman v. Cal. Bus. Bank, No. 13-cv-02031-JST, 2013
WL 5890726, at *6 (N.D. Cal. Oct. 30, 2013) (allegations that defendants were motivated to raise
capital to avoid further regulatory action insufficient to support inference of fraudulent intent).
28

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 29 of 31

1

control over these statements and is liable for “failing to correct a falsehood” and “silently

2

listen[ing] as others made statements that [he] knew were false.” Opp. at 29 (citing Barrie v.

3

IntervoiceBrite, Inc., 409 F.3d 653, 655 (5th Cir. 2005) (defendant liable for silently listening

4

while false statements were made during conference calls and roadshows)).

5

An individual’s role as an officer—on its own—is insufficient for the individual to be

6

deemed to have “made” a statement under Janus for purposes of 10(b). See Hefler, 2018 WL

7

1070116, at *9 (individual officers not liable under 10b-5 for statements made in company press

8

releases and SEC filings where individuals did not sign SEC filings and absent specific facts

9

showing individuals had ultimate authority over alleged misstatements). Here, there is no
allegation that Mould signed any of the SEC filings or press releases, nor are there any allegations

11

United States District Court
Northern District of California

10

that he was responsible for or had ultimate authority over their content. Similarly, Plaintiffs’

12

claim that Murphy was liable for statements on earnings calls and in press releases merely because

13

he attended the earnings calls and was a “Company Contact” on certain press releases, SAC ¶ 168,

14

fails because absent factual allegations demonstrating he had ultimate control and authority over

15

these statements, he is not subject to liability for them. Juniper Networks, Inc., 880 F. Supp. 2d at

16

1071 (Chairman of the Board could not be held liable under Janus for statements of other

17

individual defendants including those made during analyst or investor calls).
The SAC also alleges Mould made two misstatements during the Class Period, both of

18
19

which appeared in a February 10, 2017 KOLO News article announcing JC’s partnership with the

20

Company. See SAC ¶ 390, n. 92; Hogue Decl. Ex. 12. The first challenged statement was “I think

21

Johnson Controls backing us is a great statement to the industry and the world that aqua refining is

22

the future.” Id. The Court finds that this statement is nonactionable corporate optimism or

23

puffery. In addition, it is non-actionable opinion because the SAC fails to make factual allegations

24

demonstrating that Mould thought the statement was false when he made it, and the statement

25

contains no objectively verifiable fact that is challenged. See Dearborn Heights, 856 F.3d at 615-

26

16.

27
28

The second challenged statement was “Johnson Controls … is major for this facility. It
allows us to build out the facility to its full capacity.” SAC ¶ 397 n. 100; Hogue Decl. Ex. 12.
29

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 30 of 31

1

That statement follows a sentence written by the author Colin Lygren (and not attributed to

2

Mould) that “[t]his new partnership with Johnson Controls brings a spent battery supply and a

3

buyer of the finished product.” Id. The SAC fails to sufficiently allege any facts showing that

4

Mould’s belief that the partnership with JC provided a source of supply and demand that would

5

assist in building a facility was inconsistent with any true fact existing at the time. Therefore, the

6

SAC fails to allege the omission of facts in these statements that “affirmatively led the plaintiff in

7

a wrong direction (rather than merely omitted to discuss certain matters).” See Irving Firemen’s

8

Relief & Ret. Fund v. Uber Tech., No. 17-cv-05558-HSG, 2018 WL 4181954, at *5 (quoting In re

9

Omnivision Techs., Inc. Sec. Litig., 937 F. Supp. 2d 1090 (N.D. Cal. 2013)).
Murphy is alleged to have made three misleading statements. The first was on the

10

United States District Court
Northern District of California

11

February 14, 2017 earnings call when he stated that “we’re starting to – beginning commercial

12

operations.” SAC ¶ 356. However, Clarke, not Murphy, actually made that statement. Hogue

13

Decl. Ex. 14 at 10. Therefore, under Janus, Murphy cannot be liable for the statement. The

14

second and third statements were on the August 9, 2017 earnings call where Murphy, in answering

15

a question related to potential licensing of the technology, referenced “the level of [potential

16

licensee] interest on multiple site visits and observing processes in operation . . . .” SAC ¶ 382.

17

The SAC fails to allege how that statement was material, particularly given that it was part of

18

Murphy’s broader answer that licensing is “a little bit low priority for us at the moment,” that “we

19

are obligated to JC[] to agree a rollout schedule with them before we start formalizing any

20

additional licensing arrangements,” and the Company’s prior warnings that its licensing plans

21

might not be successful. Id. ¶ 362.
Accordingly, the alleged stock sales by Mould and Murphy and other evidence discussed

22
23
24
25

above also do not provide the required strong evidence of scienter.
E.

Section 20(a) Control Person Liability Claim
Plaintiffs assert a Section 20(a) claims against Clarke, Murphy, and Mould on a “control

26

persons” theory of liability. Id. ¶¶ 545-550. To prove a prima facie case under Section 20(a),

27

plaintiff must prove: “(1) a primary violation of federal securities laws”; and “(2) that the

28

defendant exercised actual power or control over the primary violator.” See Howard v. Everex
30

Case 4:17-cv-07142-HSG Document 141 Filed 11/16/20 Page 31 of 31

1

Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000).

2

Defendants do not contend that the officer Defendants did not have control; rather, they

3

contend that the Section 20(a) claim must be dismissed because Plaintiffs have not, and cannot,

4

make out any primary claims in Count I, and therefore Plaintiffs’ Exchange Act Count 3 must be

5

dismissed as to all of the Officer Defendants as it relates to Count One. See, e,g., Markette v.

6

Xoma Corp., 2017 WL 4310759 (N.D. Cal. Sept. 28, 2017).

7

The Court previously denied Defendant’s motion to dismiss Plaintiffs’ Section 20(a)

8

control liability claim because Plaintiffs have sufficiently pled that the Officer Defendants had the

9

requisite control. Because the Court grants the Motion as to Count One, the Plaintiffs will dismiss

10

United States District Court
Northern District of California

11

the Section 20(a) control liability as it relates to that cause of action.
V.

CONCLUSION
Accordingly, the Court GRANTS Defendants’ motion to dismiss the Section 10(b), Rule

12
13

10b–5(a) and (c) scheme liability claim and Section 20(a) control person liability claim as it

14

relates to Count One without leave to amend because Plaintiffs had a chance to amend and again

15

failed to plead viable causes of action. See Ferdik v. Bonzelet, 963 F.2d 1258, 1261 (9th Cir.

16

1992).
The Court SETS a further telephonic case management conference for December 8, 2020

17
18

at 2:00 P.M. to discuss the plan for promptly resolving the remaining causes of action. The parties

19

shall file a joint case management statement, including a proposed case schedule, no later than

20

December 1, 2020. All counsel shall use the following dial-in information to access the call: Dial-

21

In: 888-808-6929/Passcode: 6064255. For call clarity, parties shall NOT use speaker phone or

22

earpieces for these calls, and where at all possible, parties shall use landlines. The parties are

23

further advised to ensure that the Court can hear and understand them clearly before speaking at

24

length.

25
26
27
28

IT IS SO ORDERED.
Dated: 11/16/2020
______________________________________
HAYWOOD S. GILLIAM, JR.
United States District Judge
31