Welgus v. Trinet Group, Inc. et al

Filing 145

ORDER GRANTING 116 120 121 DEFENDANTS' MOTIONS TO DISMISS THE SECOND AMENDED COMPLAINT WITHOUT LEAVE TO AMEND. Signed by Judge Beth Labson Freeman on 12/18/2017. (blflc2S, COURT STAFF) (Filed on 12/18/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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HOWARD WELGUS,

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Plaintiff,

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v.
TRINET GROUP, INC., et al.,
Defendants.

Case No. 15-cv-03625-BLF
ORDER GRANTING DEFENDANTS’
MOTIONS TO DISMISS THE SECOND
AMENDED COMPLAINT WITHOUT
LEAVE TO AMEND
[Re: ECF 116, 120, 121]

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United States District Court
Northern District of California

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This is the Court’s second look at the pleadings in this securities fraud class action brought

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by lead plaintiff Howard Welgus (“Plaintiff”) against Defendant TriNet Group, Inc. (“TriNet” or

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the “Company”) and its officers and directors for violations of federal securities laws. Plaintiff

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alleges that TriNet made material misrepresentations regarding, among other things, its risk

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management capabilities, data analytics capabilities, and the Company’s limited exposure to

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excessive insurance claims. After TriNet’s Initial Public Offering (“IPO”) and Secondary Public

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Offering (“SPO”), its stock price dropped on three separate occassions in response to the

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Company’s announcements of higher-than-expected claims resulting in higher insurance costs and

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lower revenues. Plaintiff brought this lawsuit, and Defendants moved to dismiss the First

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Amended Complaint (“FAC”). The Court dismissed the FAC with leave to amend through a

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reasoned order specifically outlining the deficiencies in Plaintiff’s allegations. See Order Granting

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in Part and Denying in Part Motions to Dismiss FAC With Leave to Amend in Part and Without

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Leave to Amend in Part (“Prior Order”), ECF 112. The Court primarily pointed out the

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deficiencies in Plaintiff’s pleadings with respect to falsity and scienter regarding five categories of

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TriNet’s allegedly false statements. See generally Prior Order.

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In an attempt to address the identified deficiencies, Plaintiff filed a Second Amended

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Complaint (“SAC”). See ECF 115. Defendants filed three motions to dismiss the SAC with

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prejudice: First, Defendants TriNet, TriNet’s President and Chief Executive Officer Burton M.

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Goldfield, TriNet’s Chief Financial Officer William Porter (collectively, “Officer Defendants”)

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and Martin Babinec, H. Raymond Bingham, David C. Hodgson, Katherine August-deWilde,

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Kenneth Goldman, John H. Kispert, and Wayne B. Lowell (collectively, “Outside Directors” or

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“Director Defendants”) move to dismiss the SAC for failure to plead falsity and scienter sufficient

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to meet the demanding requirements of the Private Securities Litigation Reform Act (“PSLRA”).

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See TriNet Mot., ECF 116; TriNet Mem., ECF 117. Second, private equity firm General Atlantic

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LLC (“General Atlantic”) joins TriNet’s motion to dismiss and separately moves to dismiss the

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SAC on grounds specific to General Atlantic’s role in the events. See General Atlantic Mot., ECF

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120. Third, J.P. Morgan Securities LLC, Morgan Stanley & Co., LLC, Deutsche Bank Securities
Inc., Jefferies LLC, Stifel, Nicolaus & Company, Incorporated, and William Blair & Company,

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Northern District of California

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LLC (collectively, “Underwriter Defendants”), join TriNet’s motion to dismiss and separately

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raise arguments unique to the underwriters as independent grounds for dismissal. See Underwriter

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Defs.’ Mot., ECF 121.
The Court heard oral argument on all three motions to dismiss on September 20, 2017. For

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the reasons that follow, the Court finds that the SAC fails to meet the PSLRA’s demanding

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pleading standards for claims alleging violations of federal securities law. Moreover, because

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Plaintiff has already been afforded leave to amend as well as the opportunity to provide argument

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at two extensive hearings on his pleadings, and because Defendants would be prejudiced by

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permitting further amendment, Defendants’ motions to dismiss the SAC are GRANTED

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WITHOUT LEAVE TO AMEND.

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I.

BACKGROUND

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A.

Procedural History

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On August 7, 2015, Plaintiff filed this suit against only TriNet and the Officer Defendants.

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See Compl., ECF 1. In his original complaint, Plaintiff asserted claims under section 10(b) of the

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Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b); Rule 10b-5 of the

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Securities and Exchange Commission (“SEC”), 17 C.F.R. § 240.10b-5; and § 20(a) of the

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Exchange Act, 15 U.S.C. § 78t(a). Compl. ¶¶ 57–62. On December 3, 2015, this Court granted

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Plaintiff’s motion for appointment as lead plaintiff. See ECF 24. Thereafter, on February 1, 2016,
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Plaintiff filed a consolidated complaint asserting the same claims as in the original complaint and

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adding General Atlantic and three of the Outside Directors—Babinec, Bingham, and Hodgson—as

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defendants. See Consolidated Complaint, ECF 26. In April 2016, Plaintiff sought and was

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granted leave of Court to file the First Amended Complaint which added claims for violations of

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§§ 11, 12, and 15 of the Securities Act of 1933 (the “Securities Act”), and added additional

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Outside Director Defendants as well as the Underwriter Defendants. See First Amended

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Complaint (“FAC”), ECF 53. Defendants filed four separate motions to dismiss the FAC, which

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the Court granted in part with leave to amend on January 17, 2017. See ECF 112 (“Prior Order”).1

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Plaintiff filed the SAC on March 3, 2017, asserting claims for (1) securities fraud under § 10(b) of
the Exchange Act and Rule 10b-5 of the SEC against TriNet and the Officer Defendants; (2)

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Northern District of California

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controlling person liability under § 20(a) of the Exchange Act against the Officer Defendants,

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Director Defendants, and General Atlantic; (3) violations of § 11 of the Securities Act of 1933, 15

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U.S.C. § 77k, against TriNet, the Officer Defendants, Director Defendants, and Underwriter

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Defendants; (4) violations of § 12(a)(2) of the Securities Act, 15 U.S.C. § 77l, against all

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Defendants; (5) and controlling person liability under §15 of the Securities Act, 15 U.S.C. § 77o,

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against the Officer Defendants, Outside Directors, and General Atlantic. See SAC ¶¶ 234-307.

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Defendants have now filed three motions to dismiss the SAC, this time with prejudice.

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B.

Factual Allegations in the SAC

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The facts of this case are familiar to the Parties and the Court, and the primary focus is

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therefore on Plaintiff’s amendments to his pleadings in the Second Amended Complaint. See

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SAC, ECF 115. TriNet is a professional employer organization (“PEO”) that was founded in 1988

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and provides outsourced human resources (“HR”) to its client companies, which includes

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functions such as payroll processing, employment law compliance, health insurance and workers’

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compensation insurance.2 Id. ¶ 16. TriNet uses a co-employment model, whereby employees of

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The Prior Order dismissed without leave to amend Plaintiff’s claims for violations of §§11 and
12 against Defendant Kispert in relation to the IPO, as well as § 11 claim against General Atlantic
in relation to the IPO. See Prior Order at 30-32. The Court granted Plaintiff leave to amend all
other claims. Id. at 40.
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A more detailed factual background on TriNet’s business model, public offerings and allegedly
false statements is set forth in the Court’s prior order dismissing the FAC. See ECF 112 at 2-5.
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TriNet’s clients are considered co-employed as worksite employees (“WSEs”) by TriNet. Id.
In relevant part to Plaintiff’s claims, TriNet derives revenues from its Insurance Services

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segment by entering into contracts with insurance carriers in order to provide TriNet-sponsored

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plans to clients, primarily employee health benefit plans and workers’ compensation insurance.

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Id. ¶ 17(b). Generally, TriNet collects insurance premiums from WSEs, which it then passes on to

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the insurance companies. For a portion of the Insurance Services plans, TriNet takes on a

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deductible layer of risk, which means that the insurance company has the first layer of exposure,

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but TriNet is responsible for any excess if the claim exceeds the negotiated policy limit. Id.

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Taking on the deductible layer of risk has an upside for TriNet, allowing it to capture an
“insurance spread” or as TriNet calls it, a “performance fee,” which Plaintiff alleges is essential to

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Northern District of California

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Tri-Net’s business model. Id. ¶¶ 17(b), 19. In the simplest terms, for the TriNet-sponsored plans

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where TriNet takes on a deductible layer of risk, its net insurance service revenues would be

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higher if claims were smaller or fewer than expected.3 However, if claims under the plans were

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larger or higher in volume than expected, then TriNet risked having lower net insurance revenues.

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TriNet conducted its IPO on March 27, 2014, selling 15 million shares of common stock to

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the public at $16 per share, raising $240 million. Id. ¶ 20. An SPO of TriNet common stock

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followed on September 17, 2014, whereby private equity firm General Atlantic, an early investor

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in TriNet, was the sole selling stockholder. General Atlantic and Hodgson, Managing Director of

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General Atlantic who is also a TriNet Director, sold 13.8 million shares of TriNet stock to the

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public at prices as high as $24.42 per share, “cashing in” more than $336 million. Id. ¶¶ 26-27.

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For three successive quarters after these offerings, TriNet experienced the downside:

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unexpected volatility resulting in claims activity that was higher-than-expected and TriNet’s

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financial results fell short of its projections. TriNet made three public announcements on March 3,

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2015, May 5, 2015, and August 3, 2015, respectively, disclosing the unexpected spikes in medical

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claims. See, e.g., id. ¶¶ 29-35, 114, 118, 125, 142. After each disclosure, TriNet’s stock price

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Defendants explain that insurance plans where TriNet has no deductible risk are sometimes
referred to as “guaranteed cost” plans, as opposed to non-guaranteed cost plans where TriNet takes
on a deductible layer of risk. See TriNet Mem. at 4.
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dropped. Id. ¶¶ 30, 32, 37.
Plaintiff Howard Welgus then brought this putative securities class action on behalf of all

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persons who purchased or otherwise acquired the common stock of TriNet between March 27,

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2014—the date of TriNet’s IPO—and February 29, 2016—when TriNet announced its FY15

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financial results (the “Class Period”).4 Id. ¶ 14. Plaintiff’s theory is that Defendants violated

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federal securities laws by disseminating hundreds of materially false and misleading statements

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about TriNet’s business and concealing material adverse facts regarding its financial condition and

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growth prospects. Id. ¶ 15.
Plaintiff focuses his allegations on five categories of allegedly false statements made

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repeatedly during the class period, including those that appear in the Registration Statements for

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TriNet’s IPO and the SPO. The Court’s prior order dismissing the FAC reviewed Plaintiff’s

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allegations with respect to all five categories, and the Parties continue to use the five-category

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framework in arguing the motions to dismiss.
The five categories of statements that Plaintiff alleges were false or misleading include:

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(1) statements regarding TriNet’s risk management capabilities, including that “risk management

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is a core competency”; (2) statements regarding TriNet’s unprecedented access to claims data;

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(3) statements that TriNet assesses all risks on an “individual basis” and analyzes claims data for

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each client on an “ongoing basis”; (4) assurances to investors that TriNet had predictability and

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visibility into its future financial performance and insurance business; and (5) statements

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indicating that TriNet was not exposed to the same risk as other failed PEOs because its insurance

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plans were “fully insured” and had aggregate stop loss limits.
In its prior order, the Court found that the FAC’s allegations regarding the statements in all

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five categories were deficient with respect to falsity and scienter. The Court concluded that the

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FAC was “missing facts indicating that these allegedly false statements were false at the time they

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were made,” and thus only plausibly alleged falsity with the benefit of hindsight. See Prior Order

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at 11. The Court further concluded that Plaintiff offered no facts to support an inference of

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Plaintiff originally filed this action on August 7, 2015. Defendants were added and the Class
Period was extended via Plaintiff’s amendments to the Complaint.
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scienter. Id. at 15. With respect to Plaintiff’s Section 11 claim, the Court concluded that Plaintiff

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failed to sufficiently allege statutory standing. Id. at 27. Moreover, without a primary violation,

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Plaintiff’s claims for violations of Section 15 and Section 20(a) for control person liability also

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failed, and the Court indicated that Plaintiff’s allegations that General Atlantic controlled TriNet

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were deficient as well. Id. at 21-23, 34.

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Plaintiff argues that the allegations in the SAC remedy the previously identified

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deficiencies. In particular, Plaintiff focuses on Category 3 statements (statements that TriNet

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assesses all claims on an individual basis), which the Court indicated might be adequately pled

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with respect to falsity. Id. at 13; see also SAC ¶ 3. The SAC also adds to Plaintiff’s allegations
with respect to Category 5 statements (statements that TriNet’s insurance plans were “fully

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insured”), because such statements implied that the plans were fully insured for TriNet, when in

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reality the plans were fully insured for the client and actually increased TriNet’s risk exposure.

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SAC ¶¶ 4, 98(e)-(g). The SAC also includes a chart contrasting Defendants’ representations with

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their later admissions, in an attempt to demonstrate that all of the categories of statements were

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materially false or misleading when made. Id. ¶¶ 3, 198. Moreover, Plaintiff argues that the

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additional allegations that TriNet removed the alleged false statements from its SEC filings for

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FY15, and the fact that it dismissed its auditor in 2016, support an inference that the challenged

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statements were false. Id. ¶¶ 11, 166, 167.

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As discussed further below, Plaintiff also supplements his allegations with respect to

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standing under Section 11 of the Securities Act. Id. ¶¶ 5, 281. Specifically, the SAC now includes

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an allegation that due to lock-up agreements in place during the period between the IPO and SPO,

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the IPO shares were the only TriNet shares available on the market and thus are traceable. Id.

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With respect to General Atlantic’s liability, the SAC also adds specific allegations regarding

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General Atlantic’s ability to control five out of seven seats on TriNet’s Board of Directors via its

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ability to appoint four Board Members and TriNet’s CEO. Id. ¶¶ 7, 72-73.

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Defendants move to dismiss the SAC, arguing that it is “largely unchanged” from the

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FAC, and for the most part Plaintiff simply “repackages the same factual allegations” that were

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previously deemed insufficient by the Court. See TriNet Mem. at 9. With respect to any new
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allegations in the SAC, Defendants argue that the addition of public information from post-Class

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Period events and filings do nothing to move the needle closer to satisfying the PSLRA’s

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requirements with respect to falsity and scienter. Id. at 9-10.
The Court has considered the SAC, the briefing on Defendants’ motions to dismiss, oral

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argument from both sides at the September 20, 2017 hearing, as well as relevant case law. For the

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reasons that follow, Defendants’ motions to dismiss are GRANTED WITHOUT LEAVE TO

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AMEND.

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II.

LEGAL STANDARD
A.

Rule 12(b)(6)

“A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a

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Northern District of California

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claim upon which relief can be granted ‘tests the legal sufficiency of a claim.’” Conservation

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Force v. Salazar, 646 F.3d 1240, 1241–42 (9th Cir. 2011) (quoting Navarro v. Block, 250 F.3d

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729, 732 (9th Cir. 2001)). When determining whether a claim has been stated, the Court accepts

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as true all well-pled factual allegations and construes them in the light most favorable to the

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plaintiff. Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). However, the

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Court need not “accept as true allegations that contradict matters properly subject to judicial

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notice” or “allegations that are merely conclusory, unwarranted deductions of fact, or

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unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008)

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(internal quotation marks and citations omitted). While a complaint need not contain detailed

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factual allegations, it “must contain sufficient factual matter, accepted as true, to ‘state a claim to

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relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl.

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Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible when it “allows the

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court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id

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B.

Rule 9(b) and the PSLRA

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In addition to the pleading standards discussed above, a plaintiff asserting a private

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securities fraud action must meet the heightened pleading requirements imposed by Federal Rule

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of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (“PSLRA”). In

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re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir. 2012). Rule 9(b) requires a
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plaintiff to “state with particularity the circumstances constituting fraud . . . .” Fed. R. Civ. P.

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9(b); see also In re VeriFone Holdings, 704 F.3d at 701. Similarly, the PSLRA requires that “the

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complaint shall specify each statement alleged to have been misleading, [and] the reason or

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reasons why the statement is misleading . . . .” 15 U.S.C. § 78u-4(b)(1)(B). The PSLRA further

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

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defendant acted with the required state of mind.” Id. § 78u-4(b)(2)(A). “To satisfy the requisite

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state of mind element, a complaint must allege that the defendant [ ] made false or misleading

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statements either intentionally or with deliberate recklessness.” In re VeriFone Holdings, 704

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F.3d at 701 (internal quotation marks and citation omitted) (alteration in original). The scienter
allegations must give rise not only to a plausible inference of scienter, but to an inference of

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Northern District of California

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scienter that is “cogent and at least as compelling as any opposing inference of nonfraudulent

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intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007).

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III.

JUDICIAL NOTICE
Defendants have also filed two requests for judicial notice, which the Court GRANTS.

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ECF 118, 130. While the scope of review on a motion to dismiss is generally limited to the

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contents of the complaint, under Fed. R. Evid. 201(b), courts may take judicial notice of facts that

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are “not subject to reasonable dispute.” Courts have previously taken judicial notice of documents

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on which complaints necessarily rely, Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir.

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2001), publicly available financial documents such as SEC filings, Metzler Inv. GMBH v.

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Corinthian Colls., Inc., 540 F.3d 1049, 1064 n.7 (9th Cir. 2008), and publicly available articles or

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other news releases of which the market was aware, Heliotrope Gen., Inc. v. Ford Motor Co., 189

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F.3d 971, 981 n.18 (9th Cir. 1999).

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Defendants request judicial notice of 18 exhibits in support of their motion to dismiss the

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SAC. These documents consist of financial reports, press releases, and filings with the SEC, many

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of which were referenced by Plaintiff in the SAC. See ECF 118, 119, 119-1–119-18. The Court

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previously took judicial notice of the majority of these documents in its prior order. See Prior

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Order at 8-9. With respect to the documents for which the Court has not yet taken judicial notice,

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the Court agrees with Defendants that the Form 4s filed with the SEC by various Defendants
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during the Class Period are also appropriate subjects of judicial notice. See City of Royal Oak Ret.

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Sys. v. Juniper Networks, Inc., 880 F. Supp. 2d 1045, 1059 (N.D. Cal. 2012). Defendants also

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request judicial notice of TriNet’s Form 10-K filed with the SEC for fiscal year ending December

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31, 2016. See ECF 130, 131, 131-1. This document is incorporated by reference into the SAC as it

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is quoted at SAC ¶ 197.
As before, Plaintiff does not object to the Court taking judicial notice of these documents

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generally, but he requests that judicial notice be taken only of the fact of their existence, and not of

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the truth of the matters asserted therein. Opp’n to TriNet MTD at 4 n.5, ECF 124. Defendants’

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requests for judicial notice are accordingly GRANTED.

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Northern District of California

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IV.

THE COMPANY, OFFICER DEFENDANTS, AND DIRECTOR DEFENDANTS’
MOTION TO DISMISS
A.

Section 10(b) and Rule 10b-5

Plaintiff brings a claim for a violation of Section 10(b) of the Exchange Act and SEC Rule
10b-5 against TriNet and the Officer Defendants only. See SAC ¶¶ 234-237 (Count I). Section
10(b) prohibits any act or omission that results in fraud or deceit in connection with the purchase
or sale of any security. To state a securities fraud claim, Plaintiff must plead the following with
particularity: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a
connection between the misrepresentation or omission and the purchase or sale of a security; (4)
reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” City
of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 613 (9th
Cir. 2017)
In its Prior Order, the Court dismissed Plaintiff’s § 10(b) claim for failure to adequately
plead two of the required elements: (1) falsity and (2) scienter. See Prior Order at 9-20.
Defendants move to dismiss this claim in the SAC on the same grounds. The arguments on falsity
and scienter are set forth in the TriNet Defendants’ motion to dismiss. See TriNet Mem. at 10-22.
However because the claims against General Atlantic and the Underwriter Defendants depend on
whether Plaintiff has adequately alleged a primary violation of securities laws, all Defendants join
in TriNet’s motion to dismiss.
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Falsity

In order to plead falsity, the PSLRA requires Plaintiff to “specify each statement alleged to

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have been misleading, the reason or reasons why the statement is misleading, and, if an allegation
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regarding the statement or omission is made on information and belief, the complaint shall state
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with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). As explained
previously, the Court examines Plaintiff’s pleading for “specific facts indicating why” the

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challenged statements were false. Metzler Inv. GMBH, 540 F.3d at 1070; Ronconi v. Larkin, 253
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F.3d 423, 430 (9th Cir. 2001) (to be actionable, a statement must be false “at [the] time by the
people who made them”); In re Stratosphere Corp. Sec. Litig., No. CV-S-96-708, 1997 WL
581032, at *13 (D. Nev. May 20, 1997) (to plead falsity, plaintiff must provide “evidentiary facts

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contemporary to the alleged false or misleading statements from which this court can make

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inferences permissible under Rule 9(b)”). “A litany of alleged false statements, unaccompanied

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by the pleading of specific facts indicating why those statements were false, does not meet this
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standard.” Metzler Inv. GMBH, 540 F.3d at 1070.
As explained above, Defendants’ allegedly false and misleading statements can be grouped
into five categories: (1) statements regarding TriNet’s risk management capabilities;

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(2) statements regarding access to claims data; (3) statements that TriNet assesses all claims on an
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individual basis; (4) assurances that TriNet had predictability and visibility into future financial
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performance; and (5) statements regarding the use of fully insured plans and aggregate stop loss
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provisions.
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At the outset, the Court corrects any indication in its Prior Order that Plaintiff must
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succeed on all five categories of statements in order for this case to survive a motion to dismiss
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and proceed to discovery. That is not so. As explained at the hearing, if one category of claims is
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sufficiently pled under the PSLRA with respect to falsity and scienter, then the Section 10(b)
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claim moves forward with respect to those statements. See September 20, 2017 Hearing
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Transcript at 6:12-20, ECF 142. With this in mind, the Court turns to Plaintiff’s allegations

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regarding each category of statements to determine whether the SAC supports a plausible
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inference that the statements were false when made.
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a.

Category 1: Statements Concerning Risk Management

First, Plaintiff alleges that Defendants made false statements regarding TriNet’s risk

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management capabilities during the Class Period that analysts and investors relied upon to
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differentiate TriNet from its competitors. Plaintiff’s theory of falsity is essentially that TriNet
boasted risk management as a “core competency” when in reality risk management was actually a
material weakness. Specifically, the SAC points to statements in TriNet’s IPO and SPO
Registration Statements, and repeated in TriNet’s FY14 Form 10-K filed with the SEC,
emphasizing the Company’s proficiency in risk management. These statements include TriNet’s
assertions that: (1) “Risk management is a core competency of our company,” SAC ¶¶ 79, 96, 122;
and (2) “We leverage… our robust risk management capabilities to mitigate the risks associated
with providing workers compensation and employee benefit plans to our clients,” SAC ¶¶ 79, 96,

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122. This category also includes statements made by the Officer Defendants at an Annual Growth
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Stock Conference on June 10, 2015 where they reassured investors that TriNet had “an
experienced risk management team.” SAC ¶ 139.

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Plaintiff argues that at the time the statements were made, rather than having strong risk
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management capabilities, TriNet did not have appropriate risk management personnel to perform
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adequate risk management functions. See Opp’n to TriNet MTD at 8. To demonstrate falsity,
Plaintiff points to “admissions” by the Company beginning in May 2015 after the Company’s

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revenues and stock price declined in response to higher-than-anticipated insurance claims. Id.
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(citing SAC ¶¶ 136, 143, 150, 152, 165). None of the allegations cited by Plaintiff regarding the
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falsity of the first category of statements is new, despite their different paragraph numbers in the
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SAC. Rather, Plaintiff tries to reargue the same theory rejected in the Court’s Prior Order, and

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urges the Court to reconsider its findings with respect to these statements and credit the same
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“well-pled allegations” that the Court previously rejected. See Opp’n to TriNet MTD at 8.
Plaintiff’s theory is the same as before: that Defendants admitted TriNet’s poor financial

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performance was partly attributable to the fact that TriNet did not have an adequately experienced
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risk management team despite its prior public statements to the contrary. For example, Plaintiff
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highlights revelations on August 14, 2015, and November 2, 2015 that TriNet did not previously
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employ in-house actuaries for its insurance business. SAC ¶¶ 150, 152. The Court declined to

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infer falsity from these exact same contentions, finding that these allegations were insufficient to

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support the assertion that TriNet did not have sufficient policies, procedures, and personnel in

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place to support Defendants’ claims of risk management proficiency or core competency. See

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Prior Order at 12.

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As Defendants point out, the SAC remains devoid of allegations regarding who TriNet’s

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risk management personnel were or how those individuals were inexperienced or ineffective at the

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time that the allegedly false statements were made. See TriNet Mem. at 11. At the hearing on the

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motion to dismiss, counsel for TriNet emphasized the unusualness of this absence, noting that in
the SAC, “there are literally no people that are alleged to even exist within TriNet’s building.” See

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Hearing Transcript at 8:12-14. Plaintiff responds that his inability to allege actual individuals in

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TriNet’s risk management department is due to the fact that “there was no one to fire and no one

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to scapegoat” since TriNet lacked any personnel in this area. See Opp’n to TriNet MTD at 8 n.11.

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Yet the SAC concedes that TriNet relied on “outside actuaries and consultants.” SAC

15

¶ 144. Thus, Plaintiff’s unchanged allegations that TriNet originally outsourced its risk

16

management capabilities and later added an in-house risk management team of actuaries does not

17

suggest that TriNet’s statements touting its robust risk management capabilities were false when

18

made. Plaintiff has no internal documents or other source of contemporaneous information

19

regarding what was actually going on at TriNet in order to contradict TriNet’s representations and

20

adequately allege falsity with respect to this category of statements. Plaintiff alleges no facts to

21

suggest that the business decision to outsource risk management functions is, itself, indicative of a

22

lack of risk management capabilities.

23

Rather than point to new allegations in the SAC, Plaintiff argues that his previous

24

allegation regarding TriNet’s disclosure in its FY15 Form 10-K of several material weaknesses in

25

its internal controls is evidence of falsity at the time the Category 1 statements were made. See

26

Opp’n to TriNet MTD at 9; see also SAC ¶ 164-65 (previously FAC ¶¶ 149-150). The Court

27

rejects this argument, again, and finds that the case cited by Plaintiff is distinguishable on its facts.

28

In re LendingClub Sec. Litig. involved SEC filings in which LendingClub made representations
12

1

about its internal control procedures which would have “prevented self-dealing, processing of

2

improper loan applications, misleading investors, and irresponsible lending practices,” which

3

controls the company concluded were “effective at a reasonable assurance level. 254 F. Supp. 3d

4

1107, 1111 (N.D. Cal. 2017).
In holding that the plaintiff had adequately alleged falsity of such representations, Judge

5
6

Alsup relied on LendingClub’s later disclosures of internal control deficiencies including “two

7

snafus” that (1) the CEO took out thirty-two loans for himself and his family members and (2) the

8

company reported exaggerated loan values which resulted in underpayment to limited partners.

9

Id. at 1116. These allegations indicated that LendingClub’s internal control failures existed at the
time of LendingClub’s allegedly false statements in the SEC filings. Id. Here, Plaintiff does not

11
United States District Court
Northern District of California

10

challenge any statements made by TriNet with respect to its internal controls, but argues that the

12

later disclosed internal control deficiencies somehow demonstrate the falsity of TriNet’s

13

statements of a “robust risk management” capability that is a “core competency.” As was required

14

in LendingClub, the SAC must contain information about when the purported internal controls

15

deficiencies arose, and how the alleged deficiencies contradicted TriNet’s assertions regarding its

16

risk management capabilities. Id. at 1120. Without more—and the SAC has added nothing since

17

the Court’s prior guidance in this respect—Plaintiff cannot connect TriNet’s disclosure of material

18

internal controls weaknesses to its risk management statements.5
The Court briefly addresses Plaintiff’s new allegation in the SAC that TriNet has since

19
20

removed a number of representations, including statements regarding “risk management as a core

21

competency,” from its SEC filings beginning with TriNet’s FY15 Form 10-K. SAC ¶ 166.

22

Without citing to a single case in support of his position, Plaintiff argues that the removal of these

23

statements from TriNet’s filings is “admissible evidence of prior falsity” rather than a subsequent

24

remedial measure that Courts have rejected. See e.g., Opp’n to TriNet MTD at 6 n.7. The Court is

25
5

26
27
28

The Court previously withheld ruling on Defendants’ argument that the Category 1 statements
are classic examples of puffery upon which no reasonable investor relies. See Prior Order at 10
n.3. This argument is addressed more fully below in connection with Category 4 statements,
where the Court concludes that certain Category 1 and Category 4 statements are textbook
examples of puffery that render them inactionable under federal securities law.
13

1

not persuaded, and finds that this allegation fails to support an inference of falsity with respect to

2

any of the five categories of allegedly false statements. Rather, as Defendants point out, if the law

3

viewed a company’s editing or removal of language from an SEC filing as a tacit admission that

4

the language was false when made, “no public company would ever remove disclosures from its

5

filings.” TriNet Reply at 2-3, ECF 129.

6

With respect to Category 1 statements, the SAC fails for the same reasons previously

7

identified by the Court, permitting falsity to be inferred only by hindsight rather than with

8

allegations that the statements were false when made. Plaintiff alleges nothing to indicate what

9

TriNet’s risk management capabilities actually were at the time the allegedly false statements were

10

United States District Court
Northern District of California

11
12
13

made, leaving the Court unable to infer that such statements were false.
b.

Categories 2 and 3: Statements Concerning TriNet’s Access to
Claims Data and Whether TriNet Assesses All Claims on an
Individual Basis.

Because they are closely related, the Court considers the allegations in the SAC regarding

14

the second and third categories of statements together. These statements include TriNet’s

15

assertions that it has “the right data” on insurance claims that it gets “every month” which is “key

16

to the risk portion of the business,” allowing the Company to succeed where other risk-based

17

PEOs have failed. See, e.g., SAC ¶¶ 108, 111. TriNet asserted that these state-of-the-art analytics

18

allowed it to assess the risk associated with insurance claims “on an ongoing basis” in order to

19

price every client to the risk it posed. Id. ¶¶ 79, 96, 122. TriNet further made the representation:

20

“We assess all workers compensation and medical benefits risks on an individual client basis.” Id.

21

Plaintiff alleges that these statements were false because TriNet later admitted that all data it

22

received was six months delayed, inaccurate, and incomplete. See Opp’n to TriNet MTD at 10. In

23

particular, the SAC alleges that on March 5, 2015, Defendants admitted that they only received

24

data for claims over $300,000. See SAC ¶ 120.

25

As with the statements in Category 1, these allegations in the SAC are not new. Rather,

26

Plaintiff argues that neither the Court’s Prior Order nor Defendants’ motion analyzes these

27

statements with respect to whether they support falsity. See Opp’n to TriNet MTD at 9-10.

28

Plaintiff also points out that the Court’s Prior Order indicated that the Category 3 statements
14

1

specifically—that TriNet assessed “all claims” on an individual basis—might actually be

2

sufficient with respect to falsity. Id. at 5-6. As explained at the hearing and above, the Court

3

agrees that the standard for assessing falsity does not require the Court to conduct a holistic

4

analysis. Rather, “a single properly alleged false statement is actionable.” Id. at 6 (citing In re

5

Finisar Corp. Sec. Litig., No. 5:11-CV-01252-EJD, 2017 WL 1549485, at *4 (N.D. Cal. May 1,

6

2017)). However, the Court now finds that Plaintiff’s falsity allegations remain deficient with

7

respect to Category 3 statements.

8

Plaintiff points to Defendant Porter’s statement on December 17, 2014 that “we get state-

9

of-the-art analytics on all of our claims. So every month we are able to get claims data so we can
see how our clients are performing.” SAC ¶¶ 108, 198. Plaintiff then argues that his allegation

11
United States District Court
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10

that the data TriNet received was actually limited to “catastrophic” claims—historically claims

12

over $300,000—supports an inference that TriNet was not actually receiving data on claims under

13

that threshold. SAC ¶ 120. Specifically, Plaintiff alleges that on March 5, 2015, Defendant Porter

14

disclosed that TriNet had historically asked insurance carriers for information on catastrophic

15

claims (claims over $300,000) that could potentially be in their pipeline, but TriNet would now

16

ask for “any claim that [the carriers] expect to be greater than $50,000, give that to us on a

17

monthly basis so that we can track these through their pipeline.” Id. Plaintiff asks the Court to

18

interpret this allegation as raising the inference that TriNet was not previously receiving monthly

19

data on claims below $300,000, and that its statements to the contrary were false at the time they

20

were made.

21

Defendants argue that Plaintiff has distorted the statements concerning TriNet’s analysis of

22

claims data and that Plaintiff’s alleged proof of falsity mischaracterizes the record. See TriNet

23

Mem. at 12-13. Defendants explain that Porter’s statement “we get state-of-the-art analytics on all

24

of our claims” does not necessarily convey that TriNet was tracking each and every claim for its

25

hundreds of thousands of WSEs employed by its tens of thousands of clients. Id.; see also

26

Hearing Transcript 9:15-25. The Court agreed at the hearing that receiving “analytics on all

27

claims” could mean that TriNet gets a “synthesized, terse statement” from an analytics company

28

that has been evaluating the characteristics of all claims. See Hearing Transcript 35:16-19. As for
15

1

the statement that TriNet is “able to get claims data so we can see how our clients are performing,”

2

Plaintiff has not adequately alleged facts raising an inference that TriNet does not evaluate claims

3

on a client-by-client basis.

4

In fact, Plaintiff does not allege any facts that tell the Court what claims data TriNet
actually received during the Class Period in order for the Court to determine that TriNet’s

6

representations were false when made. Rather, Plaintiff relies on Porter’s March 5, 2015

7

statement at an investor conference that indicates TriNet only received data on “catastrophic”

8

claims, i.e., those over $300,000. SAC ¶ 120. Defendants urge the Court to consider Porter’s

9

entire statement in context, which was made in response to an analyst’s question regarding how

10

TriNet was addressing the large, one-time claims that had resulted in losses reported in Q4 2014.

11
United States District Court
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5

See Gallagher Decl. ISO Defendants’ Request for Judicial Notice (“RJN”), Ex. 9 at 4, ECF 119-9.

12

The context of the statement makes clear that TriNet would be tracking its data differently:

13

explaining that run rate claims (70% of claims) would now be “split out” or “separated out” in the

14

forecast to improve tracking, and that TriNet would be asking for more granular information from

15

its insurance carriers on the large claims (30% of claims). Id.

16

Without allegations of the type of reports and claims data that TriNet actually reviewed

17

during the Class Period, the Court is unable to infer the falsity of the portion of Porter’s December

18

17, 2014 statement that “every month we are able to get claims data so we can see how our clients

19

are performing.” SAC ¶ 108. Plaintiff argues that later “admissions” permit the Court to infer that

20

TriNet never received data “every month” for “all” of its claims. See Opp’n to TriNet Mot. at 7.

21

For example, Plaintiff alleges that statements by Goldfield and Porter in conference calls with

22

analysts and investors on March 3, 2015, May 18, 2015, and August 3, 2015 somehow reveal that

23

TriNet had not previously obtained any data on claims below $300,000. SAC ¶¶ 115, 120. On

24

these calls, the Officer Defendants further disclosed that the data TriNet received had inherent

25

lags, taking up to six months for a claim to be incurred before it was paid, and prompting a request

26

for “clean data” from TriNet’s carriers. See SAC ¶¶ 135, 144. These allegations in the SAC,

27

which remain unchanged from the FAC, only support an inference of falsity by hindsight, and do

28
16

1

not actually contradict TriNet’s representations regarding its access to claims data.6 Plaintiff

2

repeats his same arguments that TriNet’s disclosure of “inherent lags” up to sixth months on

3

claims data, as well as a need for “clean data,” renders false TriNet’s prior statements that it was

4

receiving the “right data” from insurance companies “every month” which was a “true

5

breakthrough” and a key aspect of its business. See SAC ¶¶ 108, 111 (allegedly false statements);

6

¶¶ 115, 120, 135, 144 (TriNet’s “admissions” regarding access to claims data).
The Court recognizes the theory underlying Plaintiff’s argument: that TriNet made

7
8

allegedly false statements in order to contrast TriNet’s business model and superior access to

9

claims data from that of prior risk-based PEOs that had failed. See Opp’n to TriNet Mot. at 9. But
to meet the PSLRA’s heightened pleading requirement, Plaintiff still must allege a false or

11
United States District Court
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10

misleading statement with particularity, specifying the reason why each statement was

12

misleading. See 15 U.S.C. § 78u-4(b)(1). Rather than plead specific facts that render Defendants’

13

representations false or misleading, Plaintiff takes pieces of Defendants’ “admissions” out of

14

context, and urges the Court to adopt an implausible inference of falsity. With respect to

15

statements in Categories 2 and 3 regarding TriNet’s access to claims data, Goldfield and Porter’s

16

later statements do not indicate that TriNet never received monthly data of any kind on its claims.

17

Rather, TriNet disclosed to investors at these conferences that it would implement forecasting

18

improvements and request different kinds of data from its carriers going forward, such as “a report

19

that tells us for claims that are not yet paid, that are above $50,000, how many of them are there

20

and what’s their estimated type of diagnostic there is.” SAC ¶ 135.
TriNet’s later request for more granular data on a monthly basis, and its disclosure of

21
22

delays and issues with the data it did receive, do not plausibly allege that Porter’s December 17,

23

2014 statement that “every month we are able to get claims data so we can see how our clients are

24

performing,” was false when made. The only plausible inference from these later statements is

25
6

26
27
28

As with the statements regarding risk management, Plaintiff’s citation to In re LendingClub is
also misplaced with respect to the Category 2 statements. See Opp’n to TriNet Mot. at 10-11. The
Court does not find that any of the allegations in the SAC with respect to Category 2 statements
(which are the same as those in the previously dismissed FAC) support a plausible inference that
later disclosed material weaknesses in TriNet’s internal controls must have existed and could have
been discovered at the time of the IPO, rendering TriNet’s Category 2 statements false.
17

1

that TriNet requested additional reporting from its insurance carriers on large claims when it

2

became evident that TriNet did not have enough information on those claims as they were

3

developing. The SAC does not allege falsity with particularity, and none of its allegations raises

4

an inference that TriNet did not receive any data on a monthly basis on claims below $300,000.

5

The Court also cannot draw the inference of falsity that Plaintiff suggests in light of the

6

disclosure in TriNet’s Registration Statements that TriNet had reserved for all of its claims, and

7

never misstated its reserves. Thus, it is not plausible that TriNet did not evaluate any data on

8

claims below $300,000, which represented 70% of its claims. When pressed at the hearing,

9

Plaintiff argued only that TriNet had not “adequately reserved” because it had not updated its
analysis on a claim-by-claim or client-by-client basis. See Hearing Transcript 37:2-20. Plaintiff’s

11
United States District Court
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10

entire theory of falsity would require the Court to draw an implausible inference from Porter’s

12

statement about what claims data TriNet actually received in order for the Court to draw yet

13

another inference that the data was not consistent with TriNet’s representations. The Court need

14

not make this leap. See In re Gilead Scis. Sec. Litig., 536 F.3d at 1055 (holding that the Court

15

need not “accept as true allegations that contradict matters properly subject to judicial notice” or

16

“allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable

17

inferences.”). Plaintiff has alleged no facts regarding the type of claims data that TriNet actually

18

received in order for the Court to infer that TriNet did not actually receive data “every month” and

19

for “all” of its claims. Any inference of falsity would therefore be improperly drawn from another

20

inference, when the PSLRA requires inferences of falsity and scienter to be supported by facts. 7

21

The Court recognizes that its previous order indicated that the falsity of the Category 3

22

statements might be adequately alleged. See Prior Order at 13 (“Standing alone, this might be

23

sufficient to allege that the statement that TriNet received analytics on ‘all’ of its claims was

24

false.”) However, for the foregoing reasons, the Court now finds that Porter’s statement that

25

TriNet would ask for data on a more granular basis –i.e. $50,000 claims as opposed to $300,000

26

claims—going forward does not sufficiently allege falsity without allegations of what TriNet’s

27
7

28

As explained above, the Court also rejects Plaintiff’s argument that TriNet’s removal of
representations from its SEC filings raises an inference of falsity.
18

1

data actually looked like. In the absence of specific facts about the frequency and content of the

2

claims data or reports that TriNet received from its carriers, the falsity of these statements is not

3

alleged with particularity.

4

The only new allegations in the SAC that Plaintiff points to are post-class period reports by

5

analysts that Plaintiff argues “confirm” the falsity of TriNet’s statements such as its access to

6

“breakthrough data.” See Opp’n to TriNet MTD at 11 (citing SAC ¶¶ 191-197). The fact that

7

TriNet’s business model “had failed” because TriNet was forced to “repric[e] its entire medical

8

insurance book” is not sufficient to allege falsity. As the Court explained at the hearing, this

9

theory of falsity suggests that “every General who has lost a battle was making false statements
saying that they were going to win the battle.” Hearing Transcript at 27:2-6. These post-class

11
United States District Court
Northern District of California

10

period allegations regarding changes to TriNet’s business model do not indicate that TriNet’s

12

statements regarding the strength of its business in comparison to its competitors and access to

13

“breakthrough” claims data were false when they were made.

14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

c.

Category 4: Statements that TriNet had “Predictability” and
“Visibility” into Future Financial Performance

Plaintiff repeats his arguments that the fourth category of statements, that TriNet had
predictability and visibility into future financial performance and its insurance business, are false.
See Opp’n to TriNet MTD at 12 (citing SAC ¶¶ 90, 105, 108-110). Plaintiff also points to the
same “concessions” by TriNet in an attempt to demonstrate falsity. Id. (citing SAC ¶¶ 117, 120,
135-136, 144, 151-152, 155, 158). None of the allegations that Plaintiff refers to are substantively
new, barring one slight variation in wording. Compare FAC ¶ 95 with SAC ¶ 110.
The Court is not persuaded that it should reconsider its prior ruling with respect to this
category of statements. At the hearing, Plaintiff explained that this was a “unique” situation
because Goldfield, TriNet’s CEO, was given the opportunity to answer the question from an
analyst: “If you are the investors out there now…why now with TriNet?” Hearing Transcript
34:18-24; SAC ¶ 110. In response, Goldfield praised TriNet’s “predictable revenue [and]
visibility into the future.” SAC ¶ 110. Plaintiff urges the Court to read this statement as a
“guarantee” that TriNet could “predict exactly how [the Company is] going to do in the future.”
19

1
2

Hearing Transcript 34:22-24.
“[V]ague, generalized assertions of corporate optimism or statements of ‘mere puffing’ are

3

not actionable material misrepresentations under federal securities laws” because no reasonable

4

investor would rely on such statements. In re Impac Mortg. Holdings, Inc., 554 F.Supp.2d 1083,

5

1096 (C.D. Cal. 2008) (citing Glen Holly Entm't, Inc. v. Tektronix, Inc., 352 F.3d 367, 379 (9th

6

Cir. 2003)); see In re Cutera Sec. Litig., 610 F.3d 1103, 1111 (9th Cir. 2010) (“[P]rofessional

7

investors, and most amateur investors as well, know how to devalue the optimism of corporate

8

executives.”).

9

Reasonable investors would not believe that Goldfield was reassuring them that TriNet had
a crystal ball. The December 17, 2014 statement by Porter that TriNet is “able to predict pretty

11
United States District Court
Northern District of California

10

accurately on an annual basis exactly how we are going to do” explicitly contains the caveat that

12

“predictability” is at most: “pretty accurate.” See SAC ¶ 109. The statements in Category 4 are

13

textbook examples of non-actionable puffery and corporate optimism that are not capable of

14

objective verification or inducing the reliance of a reasonable investor. See In re Finisar Corp.

15

Sec. Litig., 646 F. App’x 506, 507 (9th Cir. 2016); see also Rombach v. Chang, 355 F.3d 164, 174

16

(2d Cir. 2004) (holding that “expressions of puffery and corporate optimism do not give rise to

17

securities violations.”) Even if the Court were to follow Plaintiff’s argument that this situation is

18

particularly unique in light of the context of TriNet’s statements, Plaintiff has failed to

19

demonstrate with specificity why and how statements that TriNet had some measure of

20

“predictability” and “visibility” into its financial performance were false. The SAC, like the FAC,

21

alleges nothing about TriNet’s actual practices for forecasting claims or what kind of visibility it

22

had to track claims at the time the Officer Defendants’ challenged statements were made. Thus,

23

even if the Category 4 statements were actionable, the factual allegations are insufficient to raise

24

an inference that these statements were false.

25
26
27
28

d.

Category 5: Statements Regarding TriNet’s use of Fully Insured
Plans and Aggregate Stop Loss Provisions

The fifth and final category of allegedly false statements involves TriNet’s use of the term
“fully insured” plans, and its representations that its insurance contracts included stop loss
20

1

provisions. The Court addresses each in turn.

2

i.

3

Fully Insured

The SAC alleges that TriNet’s IPO Registration Statement and SPO Registration Statement

4

contained the following representation: “Our programs are fully insured by top-rated insurance

5

carriers, which limits our ultimate exposure or potential losses.” SAC ¶¶ 20, 79, 96, 122. Plaintiff

6

argues this statement is false and misleading because in reality, less than 40% of TriNet’s plans

7

were “fully insured” with respect to TriNet, and for the other 60% of TriNet’s plans, TriNet shared

8

liability with the carrier. See Opp’n to TriNet Mot. at 13. This disclosure is hardly a revelation—

9

it appears on the very same page of the IPO and SPO Registration statements as the allegedly false
statement itself. See RJN Ex. 1 at 96, ECF 119-1; Ex. 2 at 84, ECF 119-2 (“Approximately 39%

11
United States District Court
Northern District of California

10

of our 2013 health insurance premiums were for policies with respect to which our carriers set the

12

premiums and for which we were not responsible for any deductible. The remainder of our health

13

insurance premiums are for policies with respect to which we agree to reimburse our carriers for

14

any claims that they pay within our deductible layer.”).

15

Plaintiff does not dispute that all of TriNet’s plans are “fully insured” for the WSEs. See

16

Opp’n to TriNet MTD at 14. However, he argues that TriNet’s statements that its plans were

17

“fully insured,” were false or misleading when made because the use of the term insinuated that

18

“all” of its plans were fully insured with respect to TriNet. Id. This is implausible in light of the

19

simultaneous disclosure a few sentences later in the Registration Statements that TriNet was only

20

risk-free on 39% of its insurance premiums. Meanwhile, TriNet expressly disclosed that it

21

remained exposed on over 60% of the premiums by agreeing to reimburse carriers for any claims

22

that the carriers paid within TriNet’s deductible layer. See RJN Ex. 1 at 96, ECF 119-1 at 102.

23

Indeed, Plaintiff alleges that taking on this deductible layer allowed TriNet to capture the

24

“insurance spread” which was the “key differentiator that TriNet used to sell itself to investors”

25

and allowed it to achieve greater margins compared to a purely pass-through PEO. See SAC ¶¶ 9,

26

17(b), 98(l).

27
28

Unlike other categories of statements, the SAC does include new allegations on this
category of statements, which the Court now analyzes. Plaintiff alleges that “the market
21

understood ‘fully insured’ to mean fully insured for TriNet…and defendants understood that the

2

market understood the term in that way.” SAC ¶ 98(f). However, Plaintiff ignores TriNet’s

3

disclosures in its Registration Statements, which were also available to investors and the market as

4

of March 2014. Ultimately, a plaintiff alleging a violation of Section 10(b) or Rule 10b-5 must

5

“demonstrate that a particular statement, when read in light of all the information then available to

6

the market, or a failure to disclose particular information, conveyed a false or misleading

7

impression.” In re Oracle Corp. Securities Litigation, 627 F.3d 376, 390 (9th Cir. 2010) (citing In

8

re Convergent Techs. Sec. Litig., 948 F.2d 507, 512 (9th Cir. 1991)).8 The Court is cognizant that

9

Oracle and Convergent articulated the standard for proving falsity on summary judgment, and this

10

case has not yet proceeded beyond the pleading stage to discovery. Nevertheless, it is detrimental

11
United States District Court
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1

to Plaintiff’s claim that he challenges a statement as false or misleading but ignores a clear

12

explanation of the term “fully insured” appearing on the same page of the same public filing.

13

Plaintiff points to other allegations in the SAC, such as Goldfield and Porter’s statements

14

at conferences on May 19, 2014 and November 12, 2014, that he argues were false or misleading

15

in context. See Opp’n to TriNet Mot. at 14 (citing SAC ¶¶ 89, 105). Of course, TriNet’s March

16

2014 Registration Statement with the disclosure that it was only risk-free on 39% of its plans but

17

bore risk on over 60%, predated these allegedly false statements as well. Plaintiff attempts to

18

argue that TriNet’s later substitution of the term “guaranteed cost” for “fully insured” also raises

19

an inference that TriNet’s previous use of fully insured to describe its plans was deceptive. See

20

SAC ¶ 155.
Plaintiff provides the following chart to highlight the allegedly misleading nature of

21
22

TriNet’s description of its plans as “fully insured”:

23

Defendants in 2014
“Our programs are fully insured by top-rated
insurance carriers, which limits our ultimate
exposure or potential losses.” SAC ¶¶ 79, 96,
122

24
25
26

Defendants in 2015
“[T]oday 40% of our plans are fully insured,
60% of our plans are high deductible . . . [The
question is] whether we should move more
towards the fully insured side of the plans.”
SAC ¶ 152.

27
8

28

The Court notes that Plaintiff himself relies on Convergent for the relevant legal standard on
evaluating false or misleading statements. See Opp’n to TriNet Mot. at 14.
22

“We use fully insured plans. We’re using large
group plans for our medical, so we are not
buffeted by the same factors that buffet small
business.” SAC ¶ 89

7

“So if we start at what guaranteed costs looks
like and guaranteed costs or some people would
call it fully insured. So that’s effectively a pass
through [i.e., liability is passed through to
carriers].” SAC ¶ 155.
“[W]e have a very stable, fully insured workers’ “[O]n a fully-insured plan . . . you would take
comp program…I think the example that you’re the volatility out of it.” SAC ¶ 155.
referencing was a self-insured model...for us
it’s been a very stable program on all of our
“38% of our plans are fully insured . . . if we
products.” SAC ¶ 105
went with the fully insured plans [for the other
62% of plans] it reduces the quarter-to-quarter
volatility.” SAC ¶ 158.

8

See SAC ¶ 98(g).

1
2
3
4
5
6

9

This new chart of old allegations does not change the Court’s determination in its prior
order that Plaintiff has not adequately alleged falsity. See Prior Order at 11 n.4. In fact, Plaintiff’s

11
United States District Court
Northern District of California

10

chart mischaracterizes TriNet’s statements as “later admissions” in 2015, when, as discussed

12

above, TriNet disclosed this information to investors beginning with its IPO Registration

13

Statement in March 2014. See RJN Ex. 1 at 96. TriNet made this clear disclosure—that TriNet

14

bore risk on certain plans where it agreed to reimburse carriers for claims they paid within a

15

deductible layer—repeatedly throughout the Class Period. See RJN Ex. 2 at 84; Ex. 11 at 5, ECF

16

119-11 at 6. TriNet’s statement that “top-rated insurance carriers” fully insure such plans is also

17

not misleading in light of the statement two paragraphs later that TriNet’s national network of

18

carriers includes Aetna, Blue Shield of California, Blue Cross and Blue Shield of Florida, Kaiser

19

Permanente, MetLife and United Healthcare, “all of which provide fully insured policies for our

20

WSEs.” RJN Ex. 1 at 96; RJN Ex. 2 at 84.

21

In light of these conspicuous disclosures, Plaintiff’s contention that investors were misled

22

into believing that TriNet had “zero risk” on any of its plans is not plausible. Rather, when TriNet

23

referred to its plans as “fully insured,” it either meant that the plans were fully insured with respect

24

to WSEs, or TriNet was referring to the 39% of its plans where TriNet took on no deductible risk.

25

TriNet’s later statements, in response to unexpected volatility, that it should strategically move

26

toward its category of fully insured plans does not support a plausible inference that TriNet’s

27

references to fully insured plans were false or misleading at the time they were made.

28

Similar to the Category 3 statements, falsity is not adequately alleged with respect to the
23

1

“fully insured” statements because the existence and disclosure of TriNet’s tens of millions of

2

dollars in liability reserves prevents the Court from drawing the inference that Plaintiff suggests:

3

that TriNet’s statements somehow meant that all of its plans were fully insured for TriNet in the

4

sense that TriNet bore zero risk. See RJN Ex. 1 at F-10, ECF 119-1 at 162 (disclosing liability

5

reserves of $23.0 million and $46.6 million as of December 31, 2012 and 2013, respectively, “to

6

provide for the estimated costs of reimbursing the carriers for paying claims within the deductible

7

layer in accordance with health insurance policies.”) Plaintiff’s argument that Defendants

8

somehow “created ambiguity” in their public statements, despite clear disclosures throughout the

9

Class Period that TriNet took on a deductible layer of risk and specifically reserved in order to
reimburse carriers if such risk materialized, is not sufficient to satisfy Rule 9(b) or the PSLRA’s

11
United States District Court
Northern District of California

10

requirement that a plaintiff plead contemporaneous and specific facts indicating why the

12

challenged statements were false. Metzler Inv. GMBH, 540 F.3d at 1070; Ronconi, 253 F.3d at

13

430.

14
15

ii.

Stop Loss

TriNet’s statements regarding stop loss provisions in its insurance agreements present a

16

closer call. The IPO and SPO Registration Statements included the following representation: “Our

17

agreements with our health insurance carriers with respect to these policies typically include limits

18

to our exposure for individual claims, which we refer to as pooling limits, and limits to our

19

maximum aggregate exposure for claims in a given policy year, which we refer to as stop losses.”

20

SAC ¶¶ 79, 96. Again, these are not new allegations, but Plaintiff reiterates his arguments that this

21

statement was false when it was made because TriNet later admitted that it did not use aggregate

22

stop losses to limit risk. See Opp’n to TriNet MTD at 11.

23

Plaintiff obscures the fact that there are at least two different types of stop loss. As

24

Defendants explained on the record at the hearing, the Court understands that stop loss provisions

25

can exist to cap losses within a specific policy in a given year, and stop loss can also be used to

26

cap losses with respect to specific carriers or regions. See Hearing Transcript 14:24-15:15.

27

Conceptually, a stop loss provision in an individual’s policy might place an upper limit on

28

TriNet’s obligation to pay that individual’s aggregate claims in a certain year, in order to protect
24

1

TriNet if that individual had an unexpectedly large number of catastrophic claims. Similarly, a

2

PEO such as TriNet may also want to cap losses in the aggregate, and utilize stop losses with

3

respect to a group of policies in a specific company or a region, in case the entire group of

4

individuals had an unexpectedly high number of claims. In theory, these stop loss provisions

5

could be complementary, and serve to limit TriNet’s maximum exposure with respect to aggregate

6

claims under a policy, as well as aggregate claims in a larger group of policies.

7
8
9
10

United States District Court
Northern District of California

11
12
13
14
15
16
17
18

Under a heading titled “Employee Benefit Plans,” TriNet made the following
representation to investors in its Registration Statements:
We sponsor a number of fully-insured employee benefit plans, including
group health, dental, vision and group and individual life insurance, legal
services, commuter benefits, home insurance, critical illness insurance, pet
insurance and auto insurance, as an employer plan sponsor under Section
3(5) of ERISA, 29 U.S.C. §1002(5). Approximately 39% of our 2013
health insurance premiums were for policies with respect to which our
carriers set the premiums and for which we were not responsible for any
deductible. The remainder of our health insurance premiums are for
policies with respect to which we agree to reimburse our carriers for any
claims that they pay within our deductible layer. Our agreements with our
health insurance carriers with respect to these policies typically include
limits to our exposure for individual claims, which we refer to as pooling
limits, and limits to our maximum aggregate exposure for claims in a
given policy year, which we refer to as stop losses. We manage the risk
that we assume in connection with these policies by utilizing group risk
assessments and HIPAA-compliant analytics and pricing these policies
accordingly. Following our initial pricing of these policies, we analyze
claims data for each client on an ongoing basis and seek to adjust our
prices as appropriate.

19
20
21
22
23
24
25
26
27
28

See RJN Ex. 1 at 96; Ex. 2 at 84 (emphasis added). This statement clearly refers to (1) pooling
limits which cap TriNet’s exposure on an individual claim under a policy; and (2) stop loss
provisions that limit TriNet’s aggregate exposure for claims in a given year under that policy. As
Defendants point out, Plaintiff does not actually allege what any of TriNet’s agreements looked
like during the Class Period, so the Court cannot directly infer that TriNet’s agreements did not
typically include these provisions.
Plaintiff argues that the above statement is false because TriNet never utilized stop losses
to mitigate risk. See Opp’n to TriNet Mot. at 11. Plaintiff primarily relies on a statement by
Porter to investors at a March 5, 2015 Conference to allege falsity with respect to TriNet’s
25

1

statement that its agreements “typically include…stop losses.” Id. (citing SAC ¶ 120). Porter’s

2

statement is hard to decipher and appears to contain a transcription error, and the parties dispute

3

whether Plaintiff’s parenthetical in the SAC clarifies or misrepresents Porter’s statement. In

4

considering this allegation, the Court looks directly at the transcript from the Conference, which

5

provides as follows:

6
7
8
9
10

United States District Court
Northern District of California

11
12
13
14
15
16
17
18
19
20

[ANALYST]: And just on the topic in workings with the carriers, you have an
agreement with the carriers that limit your claim costs for large
claims, but a high quantity of large claims can still cause you to
miss guidance, like this past quarter. Are there other ways to cap
your losses to specific carriers or regions other than the per-claim
limits?
PORTER:

The most practical way to do it is what’s called a pooling limit,
which is a per-claim limit. And again, on our larger carriers, it’s up
to $1 million. On others, it’s below that.
But it’s really an economic decision. We look at the pricing that
we get from our carriers for these pooling limits and we can choose
to bring those down. But effectively what you do is you are just
going to be paying that higher premium to the carriers.
And for the – I think the modest amount of deductible risk we take,
I think it makes sense for us to have a limited or reasonable return
on that. Just to quantify, in our insurance revenue, only about 20%
historically has been in this deductible. We call it performance
fees. So it’s not a large amount, but it is a number.
We’ve also can do aggregate stop-loss, but again, when you
look at that, the cost really isn’t outweighing the benefit of
doing it.

RNJ Ex. 9 at 5, 119-9 at 6 (emphasis added).
The Court agrees that the statement is garbled because it appears to contain a typo, uses

21

two tenses, and, logically, if the benefit outweighs the cost of doing something then the reasonable

22

inference is that it should continue to be done going forward. Plaintiff argues that this statement,

23

along with Morgan Stanley’s report from the conference and a statement by Goldfield that TriNet

24

was considering “putting an aggregate pooling limit in place,” demonstrate that TriNet did not

25

utilize stop losses at all in any of its agreements. SAC ¶¶ 120, 121, 152.

26

Even if the Court interprets Porter’s statement as Plaintiff suggests, that TriNet could but

27

did not utilize aggregate stop-loss in its agreements with carriers, it does not support an inference

28

that the stop loss representation in the Registration Statements is false. The analyst specifically
26

1

asked Porter about ways to cap losses to specific carriers or regions other than “per-claim” limits,

2

and made no mention of TriNet’s aggregate exposure for claims in a given policy year, which was

3

the only representation made in the Registration Statements. Porter responded that “aggregate

4

stop-loss” covering a region or with a specific carrier was possible, but given the economics it

5

may be too expensive to justify the cost.
The Court finds that Plaintiff’s allegations in the SAC regarding stop loss, which remain

7

entirely unchanged from the FAC, do not sufficiently allege that TriNet had no stop loss of any

8

kind in its agreements with its carriers, which would render its representations in the IPO and SPO

9

Registration Statements false. Other than Porter’s confusing statement and Morgan Stanley’s

10

summary that TriNet could “in theory…establish an ‘aggregate stop loss,’” there are no factual

11
United States District Court
Northern District of California

6

allegations in the SAC regarding the content of TriNet’s insurance carrier contracts during the

12

Class Period that would permit the Court to infer that TriNet never used stop losses to limit its

13

exposure with respect to any of its policies or clients. Without contemporaneous allegations of the

14

content of TriNet’s policies during the Class Period, the plausible inference from the Officer

15

Defendants’ statements regarding aggregate stop loss is that TriNet may have used stop loss to cap

16

claim costs in a specific policy in a given year, but perhaps did not utilize stop loss to cap losses to

17

specific carriers or regions—which TriNet concluded was too expensive to justify the cost.

18

For the foregoing reasons, and without any new allegations in the SAC to consider, the

19

Court does not disturb its prior conclusion that falsity has not been pled with respect to TriNet’s

20

stop loss representation in its Registration Statements. With the benefit of the intense scrutiny that

21

has been brought to bear on this statement, the Court can imagine a better way to write the

22

challenged provision. However, Plaintiff has not alleged that it was misleading. Plaintiff’s theory

23

of falsity hinges solely on Porter’s March 5, 2015 response to an analyst’s question, which does

24

not address the specific type of stop loss identified in the Registration Statements. Further,

25

Plaintiff offers no contemporaneous facts of the contents of TriNet’s agreements or terms of its

26

policies for the Court to infer that stop loss provisions were entirely absent from them. As

27

discussed further below, the SAC also contains no factual allegations that Defendants intended to

28

deceive or acted with deliberate recklessness when making the statements in Category 5 regarding
27

1

aggregate stop loss or fully insured plans. See In re VeriFone Holdings, 704 F.3d at 701.

2

2.

3

The second element of a securities fraud claim requires the plaintiff to plead scienter with

Scienter

4

particularity. In its prior order, the Court dismissed the FAC for failure to allege a

5

misrepresentation, and further found the allegations of scienter to be insufficient under the

6

PSLRA. See Prior Order at 14 (finding that “even assuming that Plaintiff’s allegations regarding

7

falsity were sufficient, Plaintiff has not pled facts sufficient to show that the Officer Defendants

8

knew of or deliberately disregarded the alleged falsity at the time the statements were made.”). In

9

the SAC, Plaintiff proceeds under largely the same theories as before, attempting to establish
scienter through: (1) inferences from the Officer Defendants’ own statements; (2) inferences from

11
United States District Court
Northern District of California

10

the temporal proximity of the alleged misrepresentations and “corrective disclosures”; (3) the core

12

operations inference; (4) inconsistent statements regarding fully insured plans; and (5) alleged

13

insider trading and false Sarbanes-Oxley (“SOX”) certifications. Opp’n to TriNet MTD 15-21.

14

Plaintiff attempts to bolster these theories of scienter by adding further core operations and insider

15

trading allegations to the SAC. See, e.g., SAC ¶¶ 52-54, 56, 58, 60.

16

Defendants contend that even with additional allegations in the SAC, Plaintiff has failed to

17

allege a strong inference of scienter to survive a motion to dismiss, which serves as an

18

independent basis for the dismissal of the Section 10(b) and Rule 10b-5 claim. See TriNet Mem.

19

at 9. Notably absent from the SAC are any allegations from confidential witnesses, internal emails

20

or memoranda, or any contemporaneous facts that shed light on what was actually going on within

21

TriNet’s walls during the Class Period. Rather, Plaintiff doubles down on later developments to

22

attempt to raise an inference that at the time the Officer Defendants made their public statements

23

described above, they knew of or deliberately disregarded information that made those statements

24

false.

25

Under the PSLRA’s heightened standard to allege scienter, a plaintiff must “state with

26

particularity facts giving rise to a strong inference that the defendant acted with the required state

27

of mind.” 15 U.S.C. § 78u-4(b)(2)(A). Scienter is a “mental state that not only covers intent to

28

deceive, manipulate, or defraud, but also deliberate recklessness.” City of Dearborn Heights, 856
28

1

F.3d at 619 (quoting Schueneman v. Arena Pharm., Inc., 840 F.3d 698, 705 (9th Cir. 2016)).

2

“[D]eliberate recklessness is ‘an extreme departure from the standards of ordinary care…which

3

presents a danger of misleading buyers or sellers that is either known to the defendant or is so

4

obvious that the actor must have been aware of it.’” Schueneman, 840 F.3d at 705. (quoting Zucco

5

Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009), as amended (Feb. 10, 2009)).

6

“Facts showing mere recklessness or a motive to commit fraud and opportunity to do so provide

7

some reasonable inference of intent, but are not sufficient to establish a strong inference of

8

deliberate recklessness.” In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir.

9

2012).

10

“The inference that the defendant acted with scienter need not be irrefutable, i.e., of the

United States District Court
Northern District of California

11

‘smoking-gun’ genre, or even the ‘most plausible of competing inferences.’” Tellabs, Inc. v.

12

Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007). However, “the inference of scienter must

13

be more than merely ‘reasonable’ or ‘permissible’—it must be cogent and compelling, thus strong

14

in light of other explanations.” Id. In light of this standard, a securities fraud complaint will

15

survive “only if a reasonable person would deem the inference of scienter cogent and at least as

16

compelling as any opposing inference one could draw from the facts alleged.” Id.

17

The Court’s inquiry is twofold: first, the Court determines whether “any of the allegations,

18

standing alone, are sufficient to create a strong inference of scienter.” N.M. State Inv. Council v.

19

Ernst & Young LLP, 641 F.3d 1089, 1095 (9th Cir. 2011); accord Curry v. Yelp Inc., No. 16-

20

15104, 2017 WL 5583889, at *4 (9th Cir. Nov. 21, 2017). “[I]f no individual allegation is

21

sufficient, we conduct a ‘holistic’ review of the same allegations to determine whether the

22

insufficient allegations combine to create a strong inference of intentional conduct or deliberate

23

recklessness.” N.M. State Inv. Council, 641 F.3d at 1095. Viewing the totality of the

24

circumstances pled, “[e]ven if a set of allegations may create an inference of scienter greater than

25

the sum of its parts, it must still be at least as compelling as an alternative innocent explanation.”

26

Zucco Partners, 552 F.3d at 1006.

27
28

The Court considers Plaintiff’s allegations of scienter below, but observes that Plaintiff has
merely repackaged its falsity allegations, previously dismissed in the FAC and found to be
29

1

inadequate above, in an attempt to invoke a cogent inference of scienter. Thus, the Court focuses

2

on the areas where Plaintiff has tried to bolster his allegations, but finds that the new facts cannot

3

save the SAC on scienter grounds and do not adequately address the Court’s prior guidance. The

4

Court then considers the SAC holistically and determines that it is deficient with respect to

5

scienter, which provides an independent basis to GRANT Defendants’ motion to dismiss Count I

6

for a violation of § 10 and Rule 10b-5 against TriNet and the Officer Defendants.
a.

7
8
9

Insider Trading and SOX Certifications

The Court first addresses the most significant addition to the SAC that has a potential
bearing on scienter: allegations of insider trading by the Officer Defendants. Plaintiff previously
dropped his insider trading allegations from the FAC, but has revived them in the SAC. These

11
United States District Court
Northern District of California

10

allegations provide that “insiders,” (including Director Defendants who are not named in the § 10

12

claim) sold $474 million in shares in eight months following the IPO. See, e.g., SAC ¶¶ 27 n.5, 52-

13

54, 56, 58, 60. In support of this theory, Plaintiff argues only that selling stock in “suspicious

14

amounts” is probative of scienter, even if the allegations are not sufficient on their own. See Opp’n

15

to TriNet MTD at 20.

16

Insider trading may suffice as circumstantial evidence that a statement was false when

17

made. See Ronconi v. Larkin, 253 F.3d 423, 435 (9th Cir. 2001). However, in order for stock

18

sales to be suspicious, Plaintiff “must allege sufficient context of insider trading” for the Court to

19

determine whether the trading is “dramatically out of line with prior trading practices at times

20

calculated to maximize the personal benefit from undisclosed inside information.” Id. at 436-37

21

(quoting In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999)). Three factors

22

are relevant to this inquiry: (1) the amount and percentage of the shares sold; (2) the timing of the

23

sales; and (3) whether the sales were consistent with the insider’s trading history. Metzler Inv.

24

GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1067 (9th Cir. 2008).

25

Plaintiff’s bare allegations that TriNet Officers and Directors sold stock at “inflated prices

26

during the Class Period,” without any allegations of trading history, fail to plead that sales of stock

27

were dramatically out of line with their prior trading practices and thus cannot support a strong

28

inference of scienter under the PSLRA. In addition, Plaintiff does not explain how any allegations
30

1

of trades by individuals other than the two Officer Defendants, the only individuals charged with a

2

§ 10 violation and thus the only individuals whose mental states matter, supports an inference of

3

scienter. With respect to the Officer Defendants, there is simply nothing in the SAC that enables

4

the Court to compare their stock sales with their trading histories to evaluate whether the trades

5

were consistent or “dramatically out of line” with past practices. Plaintiff also gives the Court

6

nothing by way of an explanation of what information the Officer Defendants knew or deliberately

7

disregarded when they made the alleged trades. Moreover, as exhibited by the various Form 4s

8

that are subject to judicial notice, the Officer Defendants’ trades during the Class Period were

9

executed pursuant to predetermined 10b5-1 plans without concern for the market, which rebuts an
inference of scienter. See RJN Ex. 3-4, 10, 12, 15-16. Plaintiff does not address any of these

11
United States District Court
Northern District of California

10

arguments in his opposition.

12

The insider trading allegations do not raise a “strong inference of scienter,” especially

13

when considering the more likely opposing inference that the Officer Defendants executed trades

14

pursuant to predetermined plans and even acquired rather than sold shares during the Class Period,

15

evidencing their confidence in TriNet. Stock sales alone are not suspicious when the allegations

16

“can equally or more likely support the inference that [defendant] was engaging in modest

17

diversification.” Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1037 (9th Cir. 2002). Here, there is

18

simply no suspicious inference from the factual allegations of the trades for the Court to draw.

19

Because these allegations were not included in the FAC, the Court has not previously granted

20

Plaintiff leave to amend the insider trading allegations to provide evidence of the Officer

21

Defendants’ prior trading history or additional allegations of suspicious timing of the sales.

22

However, the Court finds that amendment in this respect would be futile because the SAC also

23

adds an allegation that the Officer Defendants were subject to lock-up agreements that prevented

24

them from trading for 180 days following the IPO, so there is no pattern to compare the trades to.

25

See SAC ¶ 248. That the trades were also executed pursuant to predetermined 10b5-1 plans is

26

further dispositive of this theory of scienter.

27
28

Plaintiff has also failed to cure the deficiencies identified in the Prior Order regarding
allegedly false Sarbanes-Oxley (“SOX”) certifications by the Officer Defendants. See SAC ¶¶
31

1

134, 149, 154; Opp’n to TriNet MTD at 20-21. The Court previously explained that although

2

certifications made pursuant to SOX can raise an inference of scienter, “[b]oilerplate language in a

3

corporation’s 10-K form, or required certifications under Sarbanes-Oxley section 302(a) . . . add

4

nothing substantial to the scienter calculus.” Zucco, 552 F.3d at 1003–04; Prior Order at 15:8-

5

16:2. There remains no allegation that the Officer Defendants who signed the certification were

6

severely reckless in certifying the accuracy of the financial statements, or support an inference that

7

the Officer Defendants were even aware of any errors contained therein. With no new allegations

8

and the same conclusory arguments, the allegedly false SOX certifications do not raise an

9

inference of scienter.
b.

10

United States District Court
Northern District of California

11

Core Operations Inference

Next, the Court turns to Plaintiff’s second attempt to invoke the core operations inference

12

in support of scienter. The core operations theory of scienter is based on the principle that

13

“corporate officers have knowledge of the critical core operation of their companies.” Police Ret.

14

Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1062 (9th Cir. 2014). Core operations

15

may support a strong inference of scienter under three circumstances: (1) “the allegations may be

16

used in any form along with other allegations that, when read together, raise an inference of

17

scienter that is cogent and compelling, thus strong in light of other explanations,” (2) “such

18

allegations may independently satisfy the PSLRA where they are particular and suggest that

19

defendants had actual access to the disputed information,” and (3) “such allegations may

20

conceivably satisfy the PSLRA standard in a more bare form, without accompanying

21

particularized allegations, in rare circumstances where the nature of the relevant fact is of such

22

prominence that it would be absurd to suggest that management was without knowledge of the

23

matter.” S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 785-86 (9th Cir. 2008). As the Ninth

24

Circuit explained, “[p]roof under this theory is not easy.” Police Ret. Sys. of St. Louis, 759 F.3d at

25

1062. “A plaintiff must produce either specific admissions by one or more corporate executives of

26

detailed involvement in the minutia of a company’s operations, such as data monitoring; or

27

witness accounts demonstrating that executives had actual involvement in creating false reports.”

28

Id. (citations omitted).
32

Plaintiff argues that the SAC now explicitly and particularly pleads the necessary facts to

1
2

invoke the core operations inference, but the SAC has missed the mark yet again. Plaintiff’s only

3

new substantive allegation is that TriNet derived 83% or more of its revenue from its insurance

4

plans and could only maintain its target profit margins by “capturing the insurance spread” on

5

risk-based plans. SAC ¶ 98(l). Plaintiff now concedes that the SAC “does not rely on defendants’

6

personal involvement in the minutia of the business to plead the core operations doctrine.” Opp’n

7

to TriNet MTD at 19. Thus, Plaintiff argues only that this is one of those rare circumstances

8

where it would be “absurd” to suggest that Defendants were unaware of the truth that TriNet had

9

no internal actuaries, could not get “clean data,” and was only assessing the largest claims on a
timely basis. Id.9 This is the same argument previously rejected by the Court. See Prior Order at

11
United States District Court
Northern District of California

10

19-20.
An inference of scienter under this aspect of the core operations doctrine is only permitted

12
13

where allegedly false information is “readily apparent” to senior management to the point where

14

management “must have known” that the statements to the public were false because it was so

15

“obvious from the operations of the company” and management’s awareness of the falsity can be

16

assumed. Zucco Partners, 552 F.3d at 1001 (quoting Berson v. Applied Signal Tech., Inc., 527

17

F.3d 982, 987–89 (9th Cir.2008)). “Nevertheless, reporting false information will only be

18

indicative of scienter where the falsity is patently obvious—where the facts prominent enough that

19

it would be absurd to suggest that top management was unaware of them.” Zucco Partners, 552

20

F.3d at 1001 (internal citations and quotations omitted).
Plaintiff argued at the hearing that when a high-level executive is tasked with investigating

21
22

a problem and reporting to investors, there is an inference that they “know the truth” or should

23

have known the true state of affairs at that point. Hearing Transcript 38:1-22. But Plaintiff’s

24

reassurance that that the SAC now “explicitly invokes” this inference ignores the Court’s Prior

25
26
27
28

9

As discussed above with respect to the allegedly false statements regarding risk management
capabilities, TriNet’s decision to employ outside firms to perform its actuarial function is well
within its business judgment. That TriNet later developed a team of internal actuaries does not
support an inference of falsity or scienter regarding earlier risk management statements.
33

1

Order rejecting Plaintiff’s invitation for the Court to infer, “based upon statements made after

2

three quarters of unanticipated, high insurance claims that the Officer Defendants must have

3

known all of these alleged falsities. That inference, by itself, is insufficiently cogent to satisfy the

4

PSLRA’s exacting pleading requirements.” Prior Order at 20 (citing Zucco, 552 F.3d at 990,

5

1000–01). Even in light of the new allegations in the SAC, this is not the “exceedingly rare” case

6

in which a securities fraud plaintiff may rely solely on the core operations inference without

7

particularized allegations about each defendant’s access to the relevant information. See S. Ferry,

8

542 F.3d at 785 n.3. The Court therefore finds once again that the core operations theory, standing

9

alone, does not satisfy the PSLRA under these circumstances.

10

c.

TriNet’s Dismissal of Ernst & Young in 2016

United States District Court
Northern District of California

11

Another new allegation in the SAC is that TriNet dismissed its auditor, Ernst & Young,

12

after the Class Period ended but “less than one month after the Company asked shareholders to

13

ratify the selection of Ernst & Young to serve as the Company’s 2016 auditor.” See SAC ¶¶ 12,

14

167. Defendants argue that this allegation is a “red herring at best” and is not accompanied by any

15

particular facts regarding Ernst & Young’s dismissal, or any connection between TriNet’s decision

16

to dismiss its auditor months after the allegedly operative events and the other allegations in the

17

SAC. See TriNet Mem. at 20. Plaintiff only discusses this allegation in passing, claiming that the

18

SAC “directly addresses the pleading deficiencies identified by the Court” by demonstrating that

19

TriNet dismissed its auditor. See Opp’n to TriNet MTD at 3. Defendants also cite persuasive law

20

to support their proposition that departures of auditors and internal management at or around times

21

of large stock drops are not sufficient evidence of scienter and courts should not penalize directors

22

for these decisions. TriNet Mem. at 20 (citing Proter v. Medifast, Inc., No. 11-720, 2013 WL

23

1316034, at *17–18 (D. Md. Mar. 28, 2013); In re Cornerstone Propane Partners, L.P. Sec. Lit.

24

355 F. Supp. 2d 1069, 1093 (N.D. Cal. 2005); Gammel v. HewlettPackard Co., 905 F. Supp. 2d

25

1052, 1078 (N.D. Cal. 2012)). Without further explanation from Plaintiff regarding the relevancy

26

of TriNet’s dismissal of its auditor in 2016, the Court finds that this addition to the SAC is

27

insufficient to allege an inference of scienter.

28
34

1
2

d.

Plaintiff’s Additional Theories of Scienter

Plaintiff’s remaining theories of scienter have either already been considered and rejected

3

by the Court and are not enhanced by additional allegations in the SAC, or they are easily

4

disposed of for failure to support a strong inference of scienter.

5

First, Plaintiff argues that Defendants’ “specific admissions” permit the Court to directly

6

infer that Defendants acted with the requisite state-of-mind at the time of their allegedly

7

misleading statements. See Opp’n to TriNet MTD at 16. This is a repeat of Plaintiff’s argument

8

that the Officer Defendants’ own statements demonstrate that they had access to information that

9

contradicted their representations. Plaintiff cites to statements in the SAC, as well as its new chart
collecting the supposed “admissions,” to argue that Defendants were at least “deliberately

11
United States District Court
Northern District of California

10

reckless” in claiming that they reviewed all claims on a monthly basis. Id. (citing SAC ¶¶ 108,

12

115, 117, 120, 135, 137, 198). These allegations remain insufficient, and do not include facts or

13

evidence that Defendants knew of or deliberately disregarded information that TriNet did not

14

receive some sort of analytics that covered all of its claims on a monthly basis. There is no

15

specific allegation about what the Officer Defendants knew at all concerning the claims data

16

TriNet received. Thus, the inference of scienter does not defeat the competing inference of non-

17

actionable mistake. See Prior Order at 17.

18

Without pointing to a single allegation in the SAC, new or old, Plaintiff argues a novel

19

theory that Defendants’ allegedly false statements that were “intended to and did induce investor

20

reliance” address the Court’s concern that the FAC contains no allegations that the Officer

21

Defendants had actual access to information contradicting these alleged falsities at the time the

22

statements were made. See Opp’n to TriNet MTD at 17 (citing Prior Order at 19-20). The Court’s

23

“concern” that Plaintiff references was specifically addressing Plaintiff’s failure to invoke a core

24

operations inference, discussed above. As such, the Court is at a loss for how Plaintiff’s

25

conclusory allegations that Defendants “intended to induce reliance,” combined with cherry-

26

picked quotations from inapposite cases, somehow supports a strong inference of scienter.

27
28

The Court further rejects Plaintiff’s theory that scienter is strongly inferred from the
temporal proximity of the alleged misrepresentations and Defendants’ later “corrective
35

1

disclosures.” See Opp’n to TriNet MTD at 17. Although temporal proximity can sometimes

2

constitute circumstantial evidence of scienter, the timing of a disclosure alone cannot establish a

3

strong inference of scienter or even contribute strongly to such an inference. See City of Dearborn

4

Heights, 856 F.3d at 622 (citing Yourish v. Cal. Amplifier, 191 F.3d 983, 997 (9th Cir. 1999)

5

(explaining that “temporal proximity of an allegedly fraudulent statement or omission and a later

6

disclosure” is insufficient on its own to establish scienter and can only “bolster” an inference

7

based on other allegations)).

8

Finally, Plaintiff argues that Defendants’ inconsistent statements concerning fully insured
plans support a strong inference of scienter. See Opp’n to TriNet MTD at 19. This argument

10

relies on the same arguments in support of Plaintiff’s theory of falsity that the Court rejected

11
United States District Court
Northern District of California

9

above with respect to the Category 5 statements. Specifically, Plaintiff argues that allegations in

12

the SAC that Defendants referred inconsistently to “fully insured” plans, and later changed their

13

use of the term to “guaranteed cost plans,” suggest that scienter has been pled. Id. (citing SAC

14

¶¶ 98(e)-(g), 166). Plaintiff argues that TriNet knew that the market understood “fully insured” to

15

mean limits to TriNet’s liability, and its use of different terminology was merely a “substitute”

16

once TriNet’s fraud had been exposed. See Opp’n to TriNet Mot. at 20.

17

The authority on which Plaintiff relies is distinguishable from these circumstances, where

18

Plaintiff urges the Court to infer scienter—i.e. that the Officer Defendants knew of or deliberately

19

disregarded information that would render their statements false—based solely on the Officer

20

Defendants’ use of different terminology to describe TriNet’s plans. Rather, Plaintiff relies on

21

cases where the defendants use an entirely inconsistent term to describe events at a later point. See

22

Plotkin v. IP Axess Inc., 407 F.3d 690, 700 (5th Cir. 2005) (referring to “beta” or “testing”

23

agreements that were first announced as normal commercial sales); but see In re DaimlerChrysler

24

AG Sec. Litig., 197 F. Supp. 2d 42, 59, 63 (D. Del. 2002) (dismissing complaint for failure to

25

allege scienter under the PSLRA despite inconsistencies in use of the same term to describe four

26

different concepts). Just as the Court rejects Plaintiff’s theory of scienter based on allegations in

27

the SAC that TriNet removed certain statements from its securities filings, TriNet’s later use of the

28

term “guaranteed cost” does not, standing alone or when considered holistically, support a strong
36

1

inference that the Officer Defendants knew or were severely reckless in not knowing that their

2

statements regarding TriNet’s “fully insured” plans were false.
e.

3
4

Holistic Review of Plaintiff’s Allegations

Plaintiff’s failure to plead scienter is even more stark under the required holistic analysis.

5

As Tellabs explains, the strength of an inference cannot be considered “in a vacuum.” 551 U.S. at

6

323. “The inquiry is inherently comparative: How likely is it that one conclusion, as compared to

7

others, follows from the underlying facts? To determine whether the plaintiff has alleged facts that

8

give rise to the requisite ‘strong inference’ of scienter, a court must consider plausible,

9

nonculpable explanations for the defendant’s conduct, as well as inferences favoring the plaintiff.”
Id. at 323-24. The Court’s job is therefore “not to scrutinize each allegation in isolation, but to

11
United States District Court
Northern District of California

10

assess all the allegations holistically.” Id. at 326. “In sum, the reviewing court must ask: When the

12

allegations are accepted as true and taken collectively, would a reasonable person deem the

13

inference of scienter at least as strong as any opposing inference?”

14

The Court has determined above that none of Plaintiff’s allegations in the SAC, standing

15

alone, is sufficient to create a strong inference of scienter. City of Dearborn Heights, 856 F.3d at

16

620. A holistic review of the SAC’s allegations similarly fails to create a strong inference of

17

intentional conduct or deliberate recklessness by TriNet and the Officer Defendants. Id.; see also

18

Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 48, (2011) (holding that courts “must review

19

all the allegations holistically” to determine whether the plaintiff has met the relevant pleading

20

standards).

21

The SAC gives rise to competing inferences of non-fraudulent intent that are more

22

compelling than any inference that the Officer Defendants knew or deliberately disregarded

23

information that rendered their public statements false. Zucco Partners, 552 F.3d at 991 (“A court

24

must compare the malicious and innocent inferences cognizable from the facts pled in the

25

complaint, and only allow the complaint to survive a motion to dismiss if the malicious inference

26

is at least as compelling as any opposing innocent inference.”). For example, in the very

27

Registration Statement that launched TriNet’s IPO, TriNet made disclosures of its “Risk Factors”

28

including specific warnings to investors of the possibility of unexpected changes in claims activity
37

1

by WSEs. See RJN Ex. 1 at 15-17. Moreover, TriNet disclosed: “If there is an unexpected

2

increase in the severity or frequency of claims, such as due to our WSEs generating additional

3

claims activity, or if we subsequently receive updated information indicating insurance claims

4

were higher than previously estimated and reported, our insurance costs could be higher in that

5

period or subsequent periods as we adjust our reserves accordingly.” Id.

6

The allegations in the SAC with respect to the five categories of statements taken as a

7

whole do not diminish the plausibility of the counter-inference of non-fraudulent intent. For

8

example, there are no allegations regarding Defendants’ state of mind with respect to the

9

representation in the Registration Statements that TriNet’s agreements with its health insurance
carriers “typically include…limits to our maximum aggregate exposure for claims in a given

11
United States District Court
Northern District of California

10

policy year, which we refer to as stop losses.” SAC ¶¶ 79, 96, 120. Thus, even if Defendants

12

made a technical mistake that rendered this statement misleading, the SAC provides no evidence

13

of any intent to deceive investors into thinking that TriNet had an aggregate stop loss in place that

14

would cap its total losses with respect to specific carriers and regions.10 A securities fraud action

15

does not arise from the use of imprecise language.
Similarly, TriNet’s clear and repeated disclosures in its SEC filings that TriNet bore risk

16
17

on over 60% of its plans where it agreed to reimburse carriers within the deductible layer, do away

18

with any inference that TriNet and the Officer Defendants used the term “fully insured” with a

19

culpable state of mind under the PSLRA. The SAC does not allege a single fact that counteracts

20

the inference of non-fraudulent intent and demonstrates that TriNet or the Officer Defendants

21

knew that their use of the term “fully insured” would mislead the market into thinking TriNet bore

22

zero risk on any of its insurance plans. The Court cannot infer, even under a core operations

23

inference, that the Officer Defendants intended to deceive or defraud investors at the time they

24

made the challenged statements.
When viewed holistically, scienter is not adequately pled with respect to any of the five

25
26
27
28

10

The Court recognizes that Sections 11 and 12(a)(2) of the Securities Act do not have a scienter
requirement. However, the Court concludes that the stop loss and fully insured statements in
Category 5 are not material misstatements for the reasons discussed above.
38

1

categories of statements, which provides an independent basis for dismissal of the Section 10(b)

2

and Rule 10b-5 claim. Rather than raising an equally cogent inference that the Officer Defendants

3

intended to defraud investors during the Class Period, the much more plausible inference remains

4

that when TriNet experienced the exact unanticipated volatility in its insurance business that it

5

warned investors about in the IPO and SPO Registration Statements, the Officer Defendants

6

identified material weaknesses and reconsidered some of their unsuccessful business decisions.

7

By strengthening TriNet’s risk management capabilities, requesting data on a more granular basis,

8

moving more plans toward those that are “fully insured” as opposed to those where TriNet took on

9

more risk, and discovering internal controls weaknesses, it is much more compelling to conclude
that the Officer Defendants were correcting previously unidentified mistakes rather than

11
United States District Court
Northern District of California

10

evidencing an awareness of, or deliberate disregard of, information that rendered their public

12

statements false or misleading.

13

Therefore, as the Court held previously with regard to the FAC: “Taken together, the facts

14

suggest, at most, corporate mismanagement and negligence, but they do not evince such fraudulent

15

intent or deliberate recklessness as to make the inference of scienter cogent.” Prior Order at 17.

16

Despite the additional allegations analyzed above, the SAC merely bolsters its arsenal of later

17

developments in an attempt to raise an inference about what was happening on the ground at

18

TriNet and what the Officer Defendants knew or ignored. There are absolutely no

19

contemporaneous facts that indicate the Officer Defendants knew of or deliberately disregarded

20

information that was contrary to the statements they were making. Unadorned allegations that the

21

Officer Defendants made trades during the Class Period, and irrelevant later developments such as

22

TriNet’s dismissal of its auditor and removal of certain statements from its SEC filings, do not

23

raise an inference that the Officer Defendants “knew the truth” and deliberately made false

24

statements, or even that they had an improper financial motive. Poor business judgment does not

25

amount to a “strong inference” of scienter, and Plaintiff fails to establish an inference of scienter

26

that is at least as compelling as the inference drawn from the SAC of non-fraudulent mistakes or

27

imprecise terminology that were later corrected by management. City of Dearborn Heights, 856

28

F.3d at 623.
39

Even if any category of statements could survive this motion to dismiss on falsity grounds,

2

the SAC remains fatally deficient in that its allegations do not, individually or holistically, support

3

the PSLRA’s requisite strong inference of scienter. Accordingly, the Court GRANTS Defendants’

4

motion to dismiss Plaintiff’s claim for a violation of section 10(b) and Rule 10b-5 against TriNet

5

and the Officer Defendants on scienter grounds as well as failure to plead a material

6

misrepresentation. The Court previously afforded Plaintiff leave to amend his allegations to

7

support an inference of scienter after the Court dismissed the FAC, and Plaintiff does not indicate

8

how he would be able to further amend to cure deficiencies related to falsity and scienter. At the

9

hearing on Defendants’ motion to dismiss the FAC, the Court offered Plaintiff additional time to

10

investigate his claims. Plaintiff did not accept the offer for more time and filed the SAC, which

11
United States District Court
Northern District of California

1

has added no material allegations and does not alter the previous deficiencies laid out in the

12

Court’s Order dismissing the FAC. As discussed further below under the Foman factors, the

13

Court’s dismissal of Count I is now DISMISSED WITHOUT LEAVE TO AMEND.

14

B.

15

The SAC does not salvage Plaintiff’s claim for a violation of Section 11 against TriNet, the

Section 11 of the Securities Act

16

Officer Defendants, the Director Defendants, and the Underwriter Defendants. See SAC ¶¶ 279-

17

296 (Count III). The Court discusses the Section 11 arguments specific to the Underwriter

18

Defendants below in connection with their motion to dismiss. In addition, because the SAC no

19

longer alleges a claim for a violation of Section 11 against General Atlantic, General Atlantic’s

20

motion to dismiss the Section 11 claim against it is GRANTED WITHOUT LEAVE TO AMEND.

21

“Section 11 creates a private right of action for any purchaser of a security where ‘any

22

part of the registration statement, when such part became effective, contained an untrue statement

23

of a material fact or omitted to state a material fact required to be stated therein or necessary to

24

make the statements therein not misleading.’” Rieckborn v. Jefferies LLC, 81 F. Supp. 3d 902,

25

914 (N.D. Cal. 2015) (quoting 15 U.S.C. § 77k(a)). “To prevail on a Section 11 claim, a plaintiff

26

must demonstrate (1) that the registration statement contained a misrepresentation or omission;

27

and (2) that the misrepresentation or omission was material.” Id. (citing In re Daou Sys., 411 F.3d

28

at 1027).
40

1

Defendants argue that Plaintiff has not alleged that TriNet’s Registration Statements for its

2

IPO or SPO contained a material misrepresentation or omission, and further that Plaintiff lacks

3

standing with respect to the SPO because he cannot trace his stock purchases to TriNet’s SPO.

4

See TriNet Mem. at 22. The Parties also dispute whether allegations of damages are required to

5

plead a violation of § 11. Id. at 23.

6

The SAC’s allegations remain entirely unchanged from the FAC regarding the challenged

7

statements in TriNet’s offering documents. Compare SAC ¶¶ 246, 252 with FAC ¶¶ 220, 225.

8

Plaintiff again points to the following alleged misrepresentations and omissions in the IPO and

9

SPO Registration Statements: “[1] Risk management is a core competency of our company;
[2] We leverage . . . our robust risk management capabilities to mitigate the risks associated with

11
United States District Court
Northern District of California

10

providing workers compensation and employee benefit plans to our clients; [3] Our programs are

12

fully insured by top-rated insurance carriers, which limits our ultimate exposure or potential

13

losses; [4] We assess all workers compensation and medical benefits risks on an individual client

14

basis and annually adjust pricing to reflect their current risk based on HIPAA compliant

15

analytics; [5] Our agreements with our health insurance carriers with respect to these policies

16

typically include limits to our exposure for individual claims, which we refer to as pooling limits,

17

and limits to our maximum aggregate exposure for claims in a given policy year, which we refer

18

to as stop losses; [6] Following our initial pricing of these policies, we analyze claims data for

19

each client on an ongoing basis and seek to adjust our prices as appropriate.” Id. (emphasis in

20

original).

21

The Court already found these categories of statements to be insufficiently pled in the

22

FAC, and determines above in the context of Plaintiff’s section 10(b) claim in the SAC that the

23

false and misleading nature of these allegations remains deficient. Plaintiff would have the Court

24

take these allegations out of context and turn a blind eye to TriNet’s disclosures in the same

25

Registration Statements that TriNet bore serious risk from unexpected changes in claims activity.

26

See RJN Ex. 1 at 16-17, 96; Ex. 2 at 13-14, 84 (disclosing under “Risk Factors” that “[u]nexpected

27

changes in workers compensation and health insurance claims by worksite employees could harm

28

our business.”) Indeed, TriNet reserved millions of dollars to reimburse its carriers in accordance
41

1

with the roughly 60% of its policies where TriNet agreed to do so. Id.

2

As before, the SAC hones in on Defendants’ alleged violations of Item 303 of Regulation

3

S-K which requires that a company disclose “known trends or uncertainties that have had or that

4

the registrant reasonably expects will have a material favorable or unfavorable impact on net sales

5

or revenues or income from continuing operations.” 17 C.F.R. § 229.303(a)(3)(ii). “Allegations

6

which state a claim under Item 303(a) of Regulation S-K also sufficiently state a claim under

7

Sections 11 and 12(a)(2).” Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1296 (9th Cir. 1998).

8
9

Plaintiff alleges that Defendants failed to make key disclosures including: “negative trends
in TriNet’s workers’ compensation plans, uncertainty and exposure to loss on its insurance plans,
loss reserve amounts and reserve-setting processes, and adverse claims trends in its insurance

11
United States District Court
Northern District of California

10

plans.” SAC ¶¶ 168-190. He argues that Defendants were aware of the material impact of these

12

adverse trends, some of which went back to 2012, because, for example, TriNet’s competitor had

13

failed to reserve for workers’ compensation claims and “similarly failed.” See Opp’n at 22 (citing

14

SAC ¶¶ 170, 173, 185). This one-off allegation does not support an inference that the “adverse

15

trends” were either known to Defendants or could have reasonably been expected to have a

16

material impact on TriNet’s net sales, revenues or income. In fact, the SAC does not contain

17

sufficient facts to allow the Court to draw the inference that any of these “negative trends” were

18

“adverse” as Plaintiff suggests.

19

For these reasons, as well as those discussed above, Plaintiff has not plausibly alleged a

20

material misrepresentation in the Registration Statements under Section 11. Defendants’ motion

21

to dismiss the Section 11 claim is GRANTED WITHOUT LEAVE TO AMEND. However, the

22

Court briefly addresses the issue of standing because it previously found standing to be a basis for

23

dismissal of the Section 11 claim, but finds that standing is adequately pled in the SAC.

24

In its Prior Order, the Court held that Plaintiff did not plead traceability to allege standing

25

to bring a Section 11 claim with respect to either the IPO or the SPO Registration Statements. See

26

Prior Order at 24-27. “To have standing to bring a Section 11 claim, plaintiffs must be able to

27

trace their shares back to an allegedly misleading registration statement.” In re Ubiquiti Networks,

28

Inc. Sec. Litig., 33 F. Supp. 3d 1107, 1117 (N.D. Cal. 2014) (citing In re Century Alum. Co. Sec.
42

1

Litig., 729 F.3d 1104, 1106 (9th Cir. 2013)), rev’d in part on other grounds, No. 14-15962, 2016

2

WL 6156043 (9th Cir. Oct. 24, 2016). The Ninth Circuit has explained that the “level of factual

3

specificity” needed to trace shares back to a particular statement “will vary depending on the

4

context.” In re Century Alum. Co., 729 F.3d at 1107. For example, “[w]hen all of a company’s

5

shares have been issued in a single offering under the same registration statement, this ‘tracing’

6

requirement generally poses no obstacle.” Id. at 1106 (citation omitted). “But when a company

7

has issued shares under more than one registration statement, the plaintiff must prove that her

8

shares were issued under the allegedly false or misleading registration statement, rather than some

9

other registration statement.” Id. (citation omitted).

10

The SAC now specifically alleges that the TriNet shares Plaintiff purchased after the IPO

United States District Court
Northern District of California

11

were the only shares in the market. See SAC ¶¶ 248, 281 (alleging that lock-up agreements in

12

place during the period between the IPO and the SPO meant the only shares available to be

13

purchased when Plaintiff bought shares were shares issued in, and thus traceable to, the IPO).

14

Thus, the SAC sufficiently pleads traceability, and thus standing, to assert Section 11 claims as to

15

the IPO. Defendants do not contest that Plaintiff has now alleged standing to assert Section 11

16

claims in connection with the IPO, but argues that Plaintiff lacks Article III standing for the SPO.

17

See TriNet MTD at 23-24.

18

The Court previously rejected Plaintiff’s argument that because he has standing to pursue

19

his own claims, he may assert claims on behalf of the class for which he cannot allege standing

20

because the claims implicate a similar set of concerns against the same defendants. See Prior Order

21

at 26-27. Although it is not dispositive of Plaintiff’s Section 11 claims in the SAC, which fail on

22

other grounds, the Court revisits its prior ruling and now agrees with Plaintiff that the Section 11

23

claim for the SPO should not be dismissed for failure to plead standing. Plaintiff’s legal argument

24

has persuaded the Court that with respect to the SPO, Plaintiff has alleged his own Article III

25

standing and he has the ability to bring a class action. See Opp’n to TriNet MTD at 23-24.

26

In Melendres v. Arpaio, which was a class action but not a securities case, the Ninth

27

Circuit adopted a “class certification approach” as opposed to a “standing approach” to determine

28

whether a lead plaintiff may pursue claims on behalf of unnamed class members. 784 F.3d 1254,
43

1

1262 (9th Cir. 2015). The “class certification approach” requires the Court first to determine

2

whether at least one named class representative has Article III standing, and then defers until the

3

class certification stage the question of whether that individual has the representative capacity to

4

assert the rights of others who have similar, but not identical, interests. Id. Plaintiff analogizes his

5

Section 11 claims to Melendres, arguing that his IPO Section 11 claims implicate the exact same

6

set of concerns—indeed the IPO and SPO are alleged to contain the same false statements—as the

7

SPO Section 11 claims of the absent class members. See Opp’n to TriNet MTD at 23.
This approach has been used expansively in a wide range of class actions, and has even led

8
9

to a court in the context of a bond offering to conclude that Melendres “clearly forecloses” any
argument that a class representative lacks standing to represent other putative class members who

11
United States District Court
Northern District of California

10

purchased bonds in different tranches or offerings. See In re Volkswagen “Clean Diesel” Mktg.,

12

Sales Practices, & Prod. Liab. Litig., No. MDL 2672 CRB (JSC), 2017 WL 3058563, at *4 (N.D.

13

Cal. July 19, 2017). The Court therefore finds it necessary to reconsider its prior order to the

14

extent it held that Plaintiff failed to allege statutory standing with respect to the SPO. Because the

15

SAC now adequately alleges that Plaintiff has standing for the IPO Section 11 claim, the issue of

16

whether he can bring claims on behalf of absent class members who bought TriNet shares

17

traceable to the SPO would be deferred to class certification in the event this claim had survived.

18

The Court provides this analysis only to clarify that it does not dismiss Plaintiff’s SPO Section 11

19

claims for failure to allege standing.11

20

C.

Section 12(a)(2) of the Securities Act

21

The SAC alleges a violation of Section 12(a)(2) against all Defendants. See SAC ¶¶ 297-

22

304 (Count IV). In order to allege a violation of this provision, Plaintiff must allege that: “(1) the

23

defendant is a statutory seller; (2) the sale was effected by means of a prospectus or oral

24

communication; and (3) the prospectus or oral communication contained a material misstatement

25

or omission.” 15 U.S.C. § 77l(a)(2). Defendants argue that this claim must be dismissed for lack

26
11

27
28

However, because Defendants’ motion to dismiss the Section 11 claims is granted for failure to
allege materially false or misleading statements in the Registration Statements, the Court declines
to consider Defendants’ argument that Plaintiff’s IPO Section 11 claim fails because he has not
alleged damages and cannot show that he has been harmed. See TriNet Mem. at 23.
44

1

of standing and failure to allege falsity.

2

Plaintiff does not oppose this argument directly in his opposition to the TriNet Defendants’

3

motion to dismiss, but rather he groups his Section 12(a)(2) claims with his Section 11 claims and

4

then only addresses the TriNet Defendants’ arguments with respect to Section 11. Plaintiff only

5

expands on these standing arguments in his opposition to General Atlantic’s motion to dismiss,

6

arguing that “[a]ftermarket purchasers, like plaintiff, have standing to assert §12(a)(2) claims” and

7

that “Section 12(a)(2) makes no distinction between aftermarket and in-offering purchasers, and

8

the better-reasoned case law recognizes that Gustafson v. Alloyd Co., 513 U.S. 561 (1995) did not

9

foreclose aftermarket purchasers from pursuing §12(a)(2) claims.” See Opp’n to General Atlantic
MTD at 126. Plaintiff’s arguments do not persuade the Court to reconsider its prior reasoning,

11
United States District Court
Northern District of California

10

and the Court finds that Plaintiff lacks standing to bring the Section 12(a)(2) claim because he

12

does not allege that he bought TriNet shares “pursuant to” a public offering. On a separate and

13

independent ground, Plaintiff fails to allege a material misstatement or omission. Accordingly,

14

Defendants’ motion to dismiss the Section 12(a)(2) claim in the SAC is GRANTED WITHOUT

15

LEAVE TO AMEND.12
With respect to standing under Section 12(a)(2), the Court previously held that Plaintiff

16
17

must show that he purchased his shares “in a public offering, as opposed to the secondary market.”

18

See Prior Order at 31-32 (quoting In re Ubiquiti Networks, Inc. Sec. Litig., 33 F. Supp. 3d 1107,

19

1126 (N.D. Cal. 2014)). There is a distinction between allegations that a plaintiff purchased a

20

security “pursuant to or traceable to” a registration statement as required by Section 11, and

21

allegations that a plaintiff purchased a security “pursuant to” the document which is required to

22

establish standing under Section 12(a)(2). See, e.g., Rieckborn, 81 F. Supp. 3d at 925–26; Maine

23

State, 2011 WL 4389689, at*11. Thus, the additional allegation in the SAC that lock-up

24

agreements were in place during the period in which Plaintiff bought shares do not sufficiently

25

allege that Plaintiff bought his shares “pursuant to” the IPO. SAC ¶¶ 248, 281.

26
12

27
28

General Atlantic and the Underwriter Defendants join the TriNet Defendants’ motion to dismiss
on these grounds, but further assert an independent basis for dismissal of the Section 12(a)(2)
claim on the grounds that they are not statutory sellers. See General Atlantic Mot. at 6-8, ECF
120; Underwriter Defs’ MTD at 11. This independent ground for relief is addressed below.
45

1

Without any material changes to his allegations, the SAC remains deficient with respect to

2

standing under Section 12(a)(2). See Maine State Ret. Sys. v. Countrywide Fin. Corp., No. 10-cv-

3

0302, 2011 WL 4389689, at *11 (C.D. Cal. May 5, 2011); Thomas v. Magnachip Semiconductor

4

Corp., 167 F. Supp. 3d 1029, 1055 (N.D. Cal. 2016). Plaintiff does not even contest this point in

5

his opposition, and, despite this Court’s prior guidance on this issue, the SAC does not plausibly

6

allege that Plaintiff purchased his shares “pursuant to” TriNet’s IPO or SPO. Accordingly, the

7

Court GRANTS Defendants’ motion to dismiss the Section 12(a)(2) claim for lack of standing and

8

failure to allege falsity in line with the above analysis WITHOUT LEAVE TO AMEND.

9
10

D.

Section 20(a) of the Exchange Act

Defendants move to dismiss with prejudice Plaintiff’s claim for a violation of Section

United States District Court
Northern District of California

11

20(a) of the Exchange Act, which is brought against all Defendants except the Underwriter

12

Defendants for control person liability. See SAC ¶¶ 238-278 (Count II). Section 20(a) of the

13

Exchange Act makes certain “controlling” individuals liable for violations of § 10(b). Zucco

14

Partners, 552 F.3d at 990. In order to prove a prima facie case under Section 20(a), a plaintiff

15

must prove: (1) a primary violation of federal securities laws and (2) that the defendant exercised

16

“actual power or control” over the primary violator.” Howard v. Everex Sys., Inc., 228 F.3d 1057,

17

1065 (9th Cir. 2000).

18

Because the Court grants Defendants’ motion to dismiss Count I for a violation of § 10(b),

19

the § 20(a) claim must also be dismissed for failure to allege a primary violation. Where there is

20

no underlying violation alleged against the “controlled” person, Plaintiff has likewise failed to

21

state a § 20(a) control person liability claim. See Zucco Partners, 552 F.3d at 990 (“Section 20(a)

22

claims may be dismissed summarily…if a plaintiff fails to adequately plead a primary violation of

23

section 10(b).”); accord In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 711 (9th Cir.

24

2012). The Court therefore GRANTS Defendants’ motion to dismiss the Section 20(a) claims

25

WITHOUT LEAVE TO AMEND.

26

E.

27

Plaintiff’s claim for a violation of Section 15 of the Securities Act is also brought against

28

all Defendants except the Underwriter Defendants. See SAC ¶¶ 305-307 (Count V). Section 15,

Section 15 of the Securities Act

46

1

much like Section 20(a) for Exchange Act claims, allows plaintiffs to bring claims against parties

2

who are “control persons” for a primary violation of the Securities Act. Hollinger v. Titan Capital

3

Corp., 914 F.2d 1564, 1578 (9th Cir. 1990) (stating that the “controlling person analysis” for

4

Section 15 is the same as Section 20(a)).

5

As explained above, Plaintiff has failed to allege a primary violation under Section 11 or

6

12(a)(2) of the Securities Act. Because Plaintiff fails to allege a primary violation, and because

7

the allegations regarding control are lacking as to the Director Defendants, the Court GRANTS

8

Defendants’ motion to dismiss the Section 15 claims WITHOUT LEAVE TO AMEND.

9

V.

GENERAL ATLANTIC’S MOTION TO DISMISS
The Court next addresses General Atlantic’s motion to dismiss, although the above

11
United States District Court
Northern District of California

10

analysis granting the TriNet Defendants’ motion with respect to all claims eliminates any basis for

12

General Atlantic’s liability as well. See General Atlantic Mot., ECF 120. General Atlantic is a

13

private equity firm that was TriNet’s majority owner at the beginning of the Class Period. See

14

SAC ¶ 55. The SAC brings claims against General Atlantic for a primary violation of securities

15

law under Section 12(a)(2) of the Securities Act, and for control person liability under Section 15

16

of the Securities Act and Section 20(a) of the Exchange Act. General Atlantic joins in the TriNet

17

Defendants’ motion to dismiss, but also raises arguments specific to its role in the alleged events

18

that it argues provide an independent basis for dismissal of the claims against General Atlantic.

19

With respect to primary liability, the SAC notably does not reassert a claim under Section

20

11 against General Atlantic. On these grounds, General Atlantic’s motion to dismiss the Section

21

11 claim against it is GRANTED WITHOUT LEAVE TO AMEND.

22

The SAC does, however, reassert a claim for a violation of Section 12(a)(2) against

23

General Atlantic. As explained above, Plaintiff’s claim against General Atlantic for a primary

24

violation of Section 12(a)(2) is dismissed for lack of standing and failure to plead falsity. The

25

Court notes however, that in its Prior Order the Court dismissed the Section 12(a)(2) claim in the

26

FAC against General Atlantic due to Plaintiff’s failure to allege that General Atlantic was a

27

statutory seller. See Prior Order at 34. General Atlantic again moves to dismiss the Section

28

12(a)(2) claim on these grounds, and the Court agrees that the SAC does not cure the previously
47

1

identified deficiencies in this respect.
Section 12(a)(2) claims may be asserted only against a defendant who “offers or sells a

2
3

security.” 15 U.S.C. § 77l(a)(2). The phrase “offers or sells” includes not only traditional

4

sellers—individuals who pass title to another—but also certain individuals who engage in the

5

solicitation of sales:

6

The person who gratuitously urges another to make a particular
investment decision is not, in any meaningful sense, requesting
value in exchange for his suggestion or seeking the value the
titleholder will obtain in exchange for the ultimate sale . . . .
[L]iability extends only to the person who successfully solicits the
purchase, motivated at least in part by a desire to serve his own
financial interests or those of the securities owner.

7
8
9

Pinter, 486 U.S. at 647 (1988). As the Ninth Circuit has explained, to state a claim based on

11
United States District Court
Northern District of California

10

solicitation, “plaintiff must allege that the defendants did more than simply urge another to

12

purchase a security; rather, the plaintiff must show that the defendants solicited purchases of the

13

securities for their own financial gain.” In re Daou Sys., 411 F.3d at 1029; In re Charles Schwab

14

Corp. Sec. Litig., 257 F.R.D. 534, 549 (N.D. Cal. 2009) (finding that mere participation in a

15

solicitation or sale does not suffice). Additionally, “the defendant [must] be alleged to have had

16

some ‘direct’ role in the solicitation of the plaintiff[.]” In re Charles Schwab Corp., 257 F.R.D. at

17

549.

18

The SAC does not allege any facts to support an inference that General Atlantic was an

19

immediate seller of the TriNet securities that Plaintiff bought. Plaintiff argues, without pointing to

20

any new allegations in the SAC, that General Atlantic’s role as seller is “undeniable” because, for

21

example, General Atlantic sold 2,250,000 shares in the IPO and sold all 13,800,000 shares in the

22

Secondary Offering. See Opp’n to General Atlantic Mot. at 8 (citing SAC ¶¶ 27, 55-56, 63). But

23

these allegations, recycled from the FAC, do not constitute facts that Plaintiff purchased his shares

24

directly from General Atlantic as opposed to another seller or intermediary. Moreover, there are

25

no allegations that General Atlantic solicited his purchase of TriNet shares, despite Plaintiff’s

26

assertion that General Atlantic’s role as a “selling shareholder” means that it “clearly solicited” the

27

sale of TriNet shares. See Opp’n to General Atlantic MTD at 8.

28

Finally, the Court notes that it previously picked up on an allegation in the FAC that
48

1

General Atlantic “executed the Prospectus Supplement in connection with the Securities

2

Offerings.” FAC ¶ 49; see Prior Order at 3 n.1, 30-31, 33. This allegation has been revised, now

3

stating only that “General Atlantic caused the issuance of the Prospectus Supplement.” SAC

4

¶ 63.13 In light of this weakened allegation, and the absence of additional facts regarding General

5

Atlantic’s solicitation or sale of securities to Plaintiff, the Section 12(a)(2) claims against General

6

Atlantic independently fail. Accordingly, General Atlantic’s motion to dismiss Plaintiff’s Section

7

12(a)(2) claim against it is GRANTED WITHOUT LEAVE TO AMEND.
Turning to Plaintiff’s control person allegations against General Atlantic for violations of

8
9

Section 20(a) of the Exchange Act and Section 15 of the Securities Act, the Court explained above
that these claims are dismissed against all Defendants because the SAC fails to plead a primary

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United States District Court
Northern District of California

10

violation of the securities laws pursuant to Section 10(b) (required for Section 20(a) control person

12

liability) and for Sections 11 and 12(a)(2) (required for Section 15 control person liability under

13

the Securities Act).
General Atlantic moves to dismiss these claims on the independent ground that the SAC

14
15

does not adequately allege that General Atlantic is a control person over TriNet. See General

16

Atlantic Mot. at 8. Because these claims are dismissed for failure to plead a primary violation, the

17

Court need not reach the issue of whether Plaintiff has adequately alleged control person liability

18

against General Atlantic. However, the Court takes this opportunity to reconsider its Prior Order

19

regarding control person liability to the extent that it may have been too strict when it required

20

Plaintiff to allege “day to day” operations in order to adequately allege control persons liability

21

against General Atlantic. See Prior Order at 21-22 (finding that the FAC failed to allege control

22

person liability against General Atlantic because the FAC did not contain “factual allegations

23

regarding General Atlantic’s authority to exercise decision-making power, nor allegations of its

24

day-to-day involvement in the operation of the Company.”) In his brief and at oral argument,

25

Plaintiff persuasively argued that his allegations might be sufficient to meet the pleading

26

standards.

27
13

28

According to General Atlantic, ¶ 49 of the FAC was revised because “it was simply inaccurate.”
General Atlantic Mot. at 5.
49

For example, the SAC alleges that General Atlantic owned 72% of TriNet’s common stock

1
2

at the time of the Company’s IPO, which was only reduced to 56% after the offering. SAC ¶ 63.

3

Plaintiff points out that TriNet’s 2014 IPO Registration Statement and Form 10-K disclosed that

4

the Company was controlled by General Atlantic, the majority shareholder, who was “able to

5

determine substantially all matters requiring stockholder approval, including the election of

6

directors and approval of significant corporate transactions, such as [the] sale of . . . company . . .

7

assets.” SAC ¶ 74. The SAC also adds a significant new allegation that General Atlantic “had the

8

ability to select and did select four of the seven directors on TriNet’s Board of Directors and the

9

Company’s CEO.” SAC ¶ 63. Due to General Atlantic’s control of a majority of the board seats
and its majority share ownership, General Atlantic had the power to hire and fire TriNet’s

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United States District Court
Northern District of California

10

executive officers. SAC ¶ 73.

12

Again, the Court need not resolve this issue because it has dismissed Plaintiff’s Section

13

20(a) and Section 15 claims without leave to amend for failure to allege a primary violation of

14

federal securities laws. However, TriNet’s allegations regarding General Atlantic’s control over

15

TriNet –now bolstered by the additional allegation that General Atlantic actually exercised its

16

control by selecting a majority of Board Members as well as TriNet’s CEO—the Court now finds

17

it likely that had the primary violations of securities laws been adequately pled, General Atlantic

18

would face liability as a control person. However, the Court need not rule on General Atlantic’s

19

motion to dismiss Plaintiff’s Section 20(a) or Section 15 claims for failure to plead control person

20

liability, as they are deficient for failure to plead a primary violation.

21
22

VI.

THE UNDERWRITER DEFENDANTS’ MOTION TO DISMISS
The Court has also considered the Underwriter Defendants’ motion to dismiss, which

23

primarily urges the Court to dismiss the Section 11 and Section 12(a)(2) claims against the

24

Underwriter Defendants on the independent grounds that these claims remain time barred, and

25

further argue that Plaintiff does not allege that the Underwriter Defendants were statutory sellers

26

for purposes of Section 12(a)(2). See Underwriter Defs.’ Mot., ECF 121. The Court finds that

27

despite specific guidance to Plaintiff in its Prior Order on these issues, the SAC remains deficient

28

with respect to the claims against the Underwriter Defendants. Accordingly, the Court now
50

1

GRANTS the Underwriter Defendants motion to dismiss these claims WITHOUT LEAVE TO

2

AMEND on the grounds set forth in their motion to dismiss.
The statute of limitations for claims brought under the Securities Act provides that claims

3
4

must be brought “within one year after the discovery of the untrue statement or the omission, or

5

after such discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C. §

6

77m. The one-year period “begins to run once the plaintiff did discover or a reasonably diligent

7

plaintiff would have discovered the facts constituting the violation—whichever comes first.”

8

Merck & Co. v. Reynolds, 559 U.S. 633, 653 (2010); see also Booth v. Strategic Realty Trust, Inc.,

9

No. 13-cv-4921, 2014 WL 3749759, at *5 (N.D. Cal. July 29, 2014).
Plaintiff did not allege claims against the Underwriter Defendants until the First Amended

10

United States District Court
Northern District of California

11

Complaint filed on April 1, 2016. See FAC. “Plaintiffs are considered to have discovered a fact

12

when a ‘reasonably diligent plaintiff would have sufficient information about that fact to

13

adequately plead it in a complaint . . . with sufficient detail and particularity to survive a 12(b)(6)

14

motion to dismiss.’” F.D.I.C. v. Countrywide Fin. Corp., No. 12-4353, 2012 WL 5900973, at *2–

15

3 (C.D. Cal. Nov. 21, 2012) (quoting City of Pontiac Gen. Emps.’ Ret. Sys. v. MBIA, Inc., 637

16

F.3d 169, 175 (2d Cir. 2011)).
The hurdle that Plaintiff faces is that the SAC alleges on its face that TriNet made a

17
18

disclosure on March 3, 2015 that “stunned” investors by announcing an unexpected $10 million

19

spike in large medical claims, which the Company disclosed was due in part to untimely and

20

insufficiently detailed data, as well as inadequate risk management processes. SAC ¶¶ 25(i), 29-

21

30, 114, 255.

22

alleged claims against the Underwriter Defendants. Thus, the question is whether TriNet’s March

23

3, 2015 disclosure gave reasonably diligent plaintiffs sufficient information to discover the

24

Underwriter Defendants’ involvement in TriNet’s alleged misrepresentations.14 In its Prior Order,

25

the Court concluded that the disclosure would have put a reasonably diligent investor on notice of

March 3, 2015 is of course over one year before April 1, 2016 when the FAC first

26
14

27
28

In contrast, Plaintiff applies an incorrect standard, arguing unconvincingly that the Underwriter
Defendants must “identify which of the multiple alleged misrepresentations could have been
adequately alleged to be false based solely on the March 3, 2015 disclosure.” See Opp’n to
Underwriter Defs’ Mot. at 4.
51

1

potential Securities Act claims against the Underwriter Defendants, and granted the motion to

2

dismiss with leave to amend to allow Plaintiff “to allege that he was not on notice based on the

3

March 3, 2015 disclosure.” Prior Order at 37.

4

The Underwriter Defendants point out that not only has Plaintiff failed to add allegations

5

that he was not on notice based on the disclosure, but the SAC actually strengthens the allegations

6

with respect to the March 3, 2015 against the other Defendants. See Underwriter Defs’ Mot. at 9 &

7

n.7 (citing SAC ¶ 9). The Court’s analysis in its Prior Order analogizing this case to Rieckborn v.

8

Jefferies remains sound—not “utter nonsense” as Plaintiff argues—because TriNet’s disclosures

9

alleged on the face of the FAC and now bolstered in the SAC “provided precisely the information
that plaintiff[] claim[s] should have been disclosed earlier.” 81 F. Supp. 3d 902, 916 (N.D. Cal.

11
United States District Court
Northern District of California

10

2015). Plaintiff’s argument that “nothing on the face of the SAC” supports an inference that the

12

statute of limitations has run is unavailing. See Opp’n to Underwriter Defs’ Mot. at 5-6, ECF 125.

13

The Court also rejects Plaintiff’s suggestion, now for the second time, that subsequent

14

disclosures after TriNet’s March 3, 2015 disclosure requires denial of the Underwriter Defendant’s

15

motion to dismiss the claims as time barred. Id. at 4-6. That SAC pleads on its face that the

16

statute of limitations began to run on Plaintiff’s claims against the Underwriter Defendants on

17

March 3, 2015, and does not toll until the company has disclosed every specific allegation that

18

Plaintiff brings in his complaint. See Thomas v. Magnachip Semiconductor Corp., 167 F. Supp.

19

3d 1029, 1054 (N.D. Cal. 2016) (“[T]he one-year time period does not reset simply because

20

additional information is revealed that could make for a stronger claim.”).

21

Plaintiff has essentially asked the Court to reconsider its Prior Order, which he also chose

22

not to follow because the SAC lacks any new allegation to support an inference that Plaintiff was

23

not on notice of potential securities fraud claims against the Underwriter Defendants based on

24

TriNet’s March 3, 2015 disclosure. The Underwriter Defendants’ motion to dismiss the Section

25

11 and Section 12(a)(2) claims against them is therefore GRANTED WITHOUT LEAVE TO

26

AMEND on the grounds that these claims are time barred.

27
28

The Section 12(a)(2) claim against the Underwriter Defendants also independently fails
because the SAC does not cure the previously identified failure to allege that the Underwriter
52

1

Defendants are statutory sellers. See Prior Order at 38-39. Plaintiff once again ignores the Court’s

2

guidance in this respect and points to identical allegations that the Court previously rejected to

3

reargue the law on what is required to allege solicitation and direct sales of securities under this

4

provision. See Opp’n to Underwriter Defs’ Mot. at 6-7 (citing SAC ¶¶ 291-92, 299).
Plaintiff has once again failed to plead direct solicitation by the Underwriter Defendants.

5
6

See Pinter v. Dahl, 486 U.S. 622, 643 n.21 (1988) (stating that § 12 “imposes liability on only the

7

buyer’s immediate seller; remote purchasers are precluded from bringing actions against remote

8

sellers”). When it comes to underwriters specifically, courts have found that they are generally

9

not considered sellers within the meaning of Section 12 “unless they actively participate in the
negotiations with the plaintiff/purchaser.” In re Violin Memory Sec. Litig., No. 16-cv-5486, 2015

11
United States District Court
Northern District of California

10

WL 5525946, at *18 (N.D. Cal. Oct. 31, 2014) (emphasis added).
Plaintiff’s repeated allegations that the underwriter defendants “helped draft and

12
13

disseminate the Registration Statements, solicited plaintiff’s and potential class members’

14

purchases and were paid nearly $30 million for doing so,” are conclusory and insufficient to allege

15

solicitation such that the Underwriter Defendants are statutory sellers subject to Section 12(a)(2)

16

liability. See Opp’n to Underwriter Defs.’ Mot. at 7. As made clear in the Court’s Prior Order,

17

allegations that the Underwriter Defendants merely did their job and rendered professional

18

services to TriNet in connection with a transaction for securities do not amount to allegations that

19

the underwriters are “sellers” under § 12(a)(2). See Pinter, 486 U.S. at 651.
Therefore, Plaintiff’s Section 12(a)(2) claim against the Underwriter Defendants fails to

20
21

allege that they are “sellers” or that they directly solicited Plaintiff’s purchase of TriNet stock,

22

providing yet another ground for dismissal of this claim against the Underwriter Defendants.

23

VII.

LEAVE TO AMEND

24

The Court does not deny leave to amend lightly. The Court recognizes that leave to amend

25

“is to be granted with extreme liberality in securities fraud cases, because the heightened pleading

26

requirements imposed by the PSLRA are so difficult to meet.” Osher v. JNI Corp., 183 F. App'x

27

604, 605–06 (9th Cir. 2006) (citing Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052

28
53

1

(9th Cir.2003)). In Foman v. Davis, the Supreme Court offered the following factors for a district

2

court to consider in deciding whether to grant leave to amend:

3

In the absence of any apparent or declared reason—such as undue delay, bad faith or
dilatory motive on the part of the movant, repeated failure to cure deficiencies by
amendments previously allowed, undue prejudice to the opposing party by virtue of
allowance of the amendment, futility of amendment, etc.—the leave sought should, as the
rules require, be “freely given.”

4
5
6

371 U.S. 178 (1962). Not all of these factors carry equal weight. The Ninth Circuit has made

7

clear that prejudice to the opposing party carries the greatest weight. See Eminence Capital, 316

8

F.3d at 1051 (citing DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 185 (9th Cir. 1987)). Absent

9

prejudice, or a strong showing of any of the remaining Foman factors, there exists a presumption
under Federal Rule of Civil Procedure 15(a) in favor of granting leave to amend. Id. A district

11
United States District Court
Northern District of California

10

court’s failure to consider the Foman factors and “articulate why dismissal should be with

12

prejudice instead of without prejudice may constitute an abuse of discretion.” Id. at 1052 (citing

13

Foman, 371 U.S. at 182).
As the Ninth Circuit explained in Eminence Capital, a district court’s adherence to the

14
15

Foman factors and the presumption of liberality in granting amendment is especially important in

16

the context of a complaint under the PSLRA, which requires a securities fraud plaintiff to plead

17

“an unprecedented degree of specificity and detail” that gives rise to a strong inference of

18

deliberate recklessness.” 316 F.3d at 1052 (citing In re Silicon Graphics, 183 F.3d 970, 979 (9th

19

Cir. 1999)). The PSLRA was not intended to be an easy standard to comply with, “and plaintiffs

20

must be held to it.” Id. However, pleading a securities fraud complaint can become a matter of

21

“trial and error” until the plaintiff is able to allege sufficient detail to survive a motion to dismiss.

22

Id.

23

This Court has considered the factors set forth by the United States Supreme Court in

24

Foman v. Davis, and finds that there are sufficient justifications to deny leave to amend under

25

these circumstances. 371 U.S. 178, 182 (1962). The SAC represents the fourth operative

26

complaint in this securities fraud action against TriNet, and this analysis constitutes the Court’s

27

second intensive inquiry into the sufficiency of the pleadings. When the Court dismissed the

28

FAC, it did so with leave to amend accompanied by specific instructions regarding the type of
54

1

allegations necessary to surpass the PSLRA’s high standard. See ECF 112. Plaintiff then filed the

2

SAC, which is nearly identical to the FAC, resulting in a renewed round of motion to dismiss

3

briefing where Plaintiff’s oppositions at times read more like a motion for reconsideration. As

4

discussed above, Plaintiff’s efforts did not result in a successful attempt to meet the heightened

5

pleading requirements and to comply with the Court’s previous guidance, given the number of

6

recycled arguments and allegations that Plaintiff attempted to cast in a new light and requested the

7

Court to reevaluate.

8
9

After two years, four complaints, two rounds of motions to dismiss and two lengthy oral
arguments where Plaintiff had the opportunity to be heard, Plaintiff’s failure to correct the
identified deficiencies in the SAC “is a strong indication that the plaintiffs have no additional facts

11
United States District Court
Northern District of California

10

to plead.” Zucco Partners, LLC, 552 F.3d at 1007 (internal quotation marks omitted). “A district

12

court’s discretion to deny leave to amend is particularly broad where the plaintiff has previously

13

amended.” Salameh v. Tarsadia Hotel, 726 F.3d 1124, 1133 (9th Cir. 2013) (internal quotations

14

omitted). Although Plaintiff generally requests leave to amend in his opposition should the Court

15

dismiss any of his claims, he does not identify any specific allegations or theories that he may be

16

able to strengthen—rather, he found his previous allegations so sufficient that he failed to address

17

many of the Court’s concerns with them and simply reargued the law under the same set of facts.

18

Moreover, when the Court dismissed the FAC with leave to amend, it offered Plaintiff

19

additional time to investigate his claims. Plaintiff did not accept the offer and promptly filed the

20

SAC which has added very few material allegations and did not cure the deficiencies laid out in

21

the Court’s Order dismissing the FAC. These circumstances make clear that Plaintiff has

22

evidenced a repeated failure to cure deficiencies by amendments previously allowed. Plaintiff has

23

also not informed the Court that it has, or could obtain with time, any additional evidence that

24

would enable him to add necessary details to his complaint. Given Plaintiff’s apparent lack of

25

access to contemporaneous facts sufficient to allege falsity and scienter (and failure to inform the

26

Court otherwise), allowing further amendments of the pleadings would be futile.

27
28

This is also not a case where the motion to dismiss is granted on a narrow ground that the
Plaintiff may be able to remedy by focusing his amendments on a specific area. As detailed
55

1

above, all of Plaintiff’s claims suffer from pleading deficiencies, with some claims dismissed on

2

as many as three or four separate grounds. E.g. Granting Dismissal of Section 12(a)(2).

3

Most importantly, the weightiest Foman factor, prejudice to Defendants, is implicated in

4

this case. Defendants have been litigating this action for over two years since the Complaint was

5

filed on August 7, 2015. Each group of Defendants also faces unique harm. For example,

6

Individual Officers and Directors of TriNet are named in the Complaint in connection with

7

allegations casting doubt on the propriety of their business decisions and even their trading

8

activities during the Class Period, yet they have now (twice) successfully dismissed these claims

9

for failure to allege falsity and scienter under the securities laws. The Company TriNet itself also
suffers prejudice from allowing continued amendment of uncorrected deficiencies, as this

11
United States District Court
Northern District of California

10

litigation came on the heels of its IPO. Moreover, the Underwriter Defendants have now filed two

12

nearly identical motions to dismiss addressing the statute of limitations issue and Plaintiff’s failure

13

to plead that they are a statutory seller. However, the SAC’s allegations remained entirely

14

unchanged from the FAC in this respect. Requiring all of these Defendants to continue to defend

15

this lawsuit when Plaintiff has not demonstrated or represented that he can successfully amend,

16

constitutes undue prejudice. Foman makes clear that undue prejudice to the opposing party by

17

virtue of allowance of the amendment can weigh against Rule 15’s liberal standard. 371 U.S. 178.

18
19
20
21

For these reasons, the Court declines to permit Plaintiff leave to amend his complaint.
VIII. ORDER
For the foregoing reasons, the SAC is DISMISSED WITHOUT LEAVE TO AMEND.
The Clerk shall enter judgment for Defendants and against Plaintiff and close the file.

22
23
24
25

Dated: December 18, 2017
______________________________________
BETH LABSON FREEMAN
United States District Judge

26
27
28
56