Luna et al v. Marvell Technology Group, Ltd. et al

Filing 98

ORDER by Judge Ronald M. Whyte granting defendants' Motions to Dismiss 68 , 70 , 71 , 72 , with leave to amend. (rmwlc1, COURT STAFF) (Filed on 10/12/2016)

1
2
3
4
5
6
7
8

UNITED STATES DISTRICT COURT

9

NORTHERN DISTRICT OF CALIFORNIA

10

SAN JOSE DIVISION

United States District Court
Northern District of California

11
12

DANIEL LUNA,

Case No. 15-cv-05447-RMW

Plaintiff,
13
ORDER GRANTING DEFENDANTS’
MOTIONS TO DISMISS

v.
14
15

MARVELL TECHNOLOGY GROUP LTD,
et al.,

Re: Dkt. Nos. 68, 70, 71, 72

Defendants.

16
17

This is a putative securities class action against Marvell Technology Group, Ltd. and three

18

of its executives. Lead plaintiff Plumbers and Pipefitters National Pension Fund seeks to represent

19

the class of all persons who purchased Marvell securities between November 20, 2014 and

20

December 7, 2015. See Dkt. No. 57. Each of the four defendants moves to dismiss. Dkt. Nos. 68,

21

70, 71, 72. Plaintiff opposes defendants’ motions. Dkt. No. 77. The court heard argument on July

22

29, 2016. The consolidated complaint is dismissed with leave to amend.

23

I.

24

BACKGROUND
Marvell Technology Group, Ltd. produces storage, communications, and consumer

25

semiconductor products. Compl. ¶ 2. Marvell is a publicly-traded Bermuda corporation with its

26

U.S. headquarters in Santa Clara, California. Id. ¶ 15. Defendant Sehat Sutardja co-founded

27

Marvell in 1995 and served as the company’s CEO throughout the class period. Id. ¶ 16.

28

1
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

Defendant Michael Rashkin joined Marvell in 1999 and was named interim CFO in December

2

2013. Id. ¶¶ 17, 59. Mr. Rashkin then served as full-time CFO from February 17, 2014 until his

3

retirement on March 21, 2015. Id. Defendant Sukhi Nagesh joined Marvell in 2011 and served as

4

interim CFO between March 22, 2015 and October 15, 2015. Id. ¶ 18.

5

Plaintiff alleges that defendants made material misrepresentations about Marvell’s key

6

business metrics in press releases and SEC filings during the class period. See id. ¶¶ 25-62.

7

Specifically, plaintiff alleges that defendants 1) misrepresented Marvell’s financials by failing to

8

record domestic royalties owed to Carnegie Mellon University, 2) misrepresented Marvell’s

9

financials by prematurely recognizing revenue from “pull-in” transactions, and 3) falsely certified
that Marvell had adequate internal controls in place. Id. ¶ 3. According to plaintiff, these

11
United States District Court
Northern District of California

10

misrepresentations “caused Marvell securities to trade at artificially inflated levels throughout the

12

Class Period.” Id. ¶ 125. Plaintiff contends that class members suffered harm when Marvell’s

13

stock price dropped in response to a series of “partial disclosures that revealed the truth regarding

14

the prospects of the Company.” Id. ¶ 126. Plaintiff claims that defendants are liable for the alleged

15

misrepresentations under section 10(b) of the Exchange Act and SEC Rule 10b-5 and are also

16

liable as “controlling persons” under section 20(a) of the Exchange Act. Id. ¶¶ 166-172.

17

Marvell moves to dismiss plaintiff’s section 10(b) and Rule 10b-5 claims, arguing that

18

plaintiff has failed to adequately allege 1) a material misrepresentation, 2) scienter of any

19

defendant, and 3) a causal relationship between the alleged misstatements and losses suffered by

20

the putative class members. See Dkt. No. 72. Each of the individual defendants joins Marvell’s

21

motion to dismiss, see Dkt. Nos. 68 at 2, 70 at 2 n.2, 71 at 1 n.1, and brings a separate motion to

22

dismiss for failure to adequately allege scienter, see generally Dkt. Nos. 68, 70, 71. All four

23

defendants also move to dismiss plaintiff’s section 20(a) claims for failure to adequately plead a

24

predicate violation of section 10(b) and Rule 10b-5. See Dkt. Nos. 72 at 25, 68 at 22-23, 70 at 25,

25

71 at 14-15. Mr. Nagesh and Mr. Rashkin further argue that plaintiff has failed to adequately

26

allege that they are “controlling persons” within the meaning of section 20(a). See Dkt. Nos. 68 at

27

23-25, 71 at 15.

28

2
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

II.

ANALYSIS
Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), makes it

2

unlawful for any person “[t]o use or employ, in connection with the purchase or sale of any

3
security . . . any manipulative or deceptive device or contrivance in contravention of such rules
4
5
6

and regulations as the [Securities and Exchange Commission] may prescribe.” 15 U.S.C. § 78j(b).
The SEC’s Rule 10b-5 makes it unlawful for any person, in connection with the purchase or sale
of a security, “[t]o make any untrue statement of a material fact or to omit to state a material fact

7
necessary in order to make the statements made, in the light of the circumstances under which they
8
were made, not misleading.” 17 C.F.R. § 240.10b-5(b). The elements of a securities fraud claim
9

are “‘(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection

10
between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon
11
United States District Court
Northern District of California

the misrepresentation or omission; (5) economic loss; and (6) loss causation.’” Matrixx Initiatives,
12
Inc. v. Siracusano, 563 U.S. 27, 37-38 (2011) (quoting Stoneridge Inv. Partners, LLC v. Sci.13

Atlanta, 552 U.S. 148, 157 (2008)). At the pleading stage, plaintiff “must satisfy the dual pleading

14
requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform
15

Act (‘PSLRA’).” Reese v. Malone, 747 F.3d 557, 568 (9th Cir. 2014) (citing In re VeriFone

16
Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir. 2012)). Rule 9(b) requires that plaintiff
17

“state with particularity the circumstances constituting fraud or mistake,” while the PSLRA

18
requires that plaintiff plead both falsity and scienter with particularity. Fed. R. Civ. P. 9(b); 15
19
U.S.C. § 78u-4(b).
20
21

Section 20(a) of the Exchange Act makes certain “controlling persons” liable for violations
of section 10(b) and its implementing regulations. See 15 U.S.C. § 78t(a). “[A] defendant

22
employee of a corporation who has violated the securities laws will be jointly and severally liable
23
24

to the plaintiff, as long as the plaintiff demonstrates ‘a primary violation of federal securities law’
and that ‘the defendant exercised actual power or control over the primary violator.’” Zucco

25
Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009), as amended (Feb. 10, 2009)
26

(quoting No. 84 Emp’r-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320

27
28

3
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

F.3d 920, 945 (9th Cir. 2003)). The section 20(a) inquiry “is normally an intensely factual

2

question;” such claims “may be dismissed summarily, however, if a plaintiff fails to adequately

3

plead a primary violation of section 10(b).” Id. at 990.

4

When faced with a motion to dismiss a securities fraud action, “courts must, as with any

5

motion to dismiss for failure to plead a claim on which relief can be granted, accept all factual

6

allegations in the complaint as true.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,

7

322 (2007) (citing Leatherman v. Tarrant Cnty Narcotics Intelligence & Coordination Unit, 507

8

U.S. 163, 164 (1993)). “[C]ourts must consider the complaint in its entirety, as well as other

9

sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular,
documents incorporated into the complaint by reference, and matters of which a court may take

11
United States District Court
Northern District of California

10

judicial notice.” Id. (citing 5B Wright & Miller § 1357 (3d ed. 2004 and Supp. 2007)). Courts are

12

not required to accept allegations that “contradict matters properly subject to judicial notice or by

13

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

14

Defendants request that the court take judicial notice of several documents, including SEC filings

15

and court documents. The court will consider the documents that are relevant to resolution of the

16

instant motions to the extent such documents are central to plaintiff’s allegations or otherwise

17

subject to judicial notice.

18

A. CMU Litigation Reserve Claims

19

In 2009, Carnegie Mellon University filed a patent infringement action against Marvell in

20

the Western District of Pennsylvania. Compl. ¶ 4. On December 26, 2012, a jury awarded CMU a

21

$0.50 per chip royalty on Marvell’s worldwide sales of certain semiconductor chips, resulting in a

22

total damages award of $1,169,140,271.00. Id. Marvell disclosed the jury’s verdict in an SEC

23

filing the next day, noting that Marvell intended to “vigorously challenge the judgment through all

24

appropriate post trial motions and appeal processes,” and that no liability had yet been accrued in

25

Marvell’s financial statements. See Dkt. No. 73-1, RJN Ex. 1 at 2.

26
27
28

In May 2014, the district court entered judgment against Marvell in the amount of
$1,535,889,387.60, which included supplemental and enhanced damages. See Dkt. No. 73-24,
4
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

RJN Ex. 24; see also Compl. ¶ 4. Marvell disclosed that it planned to appeal the judgment and that

2

while company believed that “the low end of the possible range of loss is zero,” it could not

3

reasonably estimate the upper range of the possible loss “as a number of factors could significantly

4

change the assessment of damages.” Dkt. No. 73-9, RJN Ex. 9 at 20.

5

Marvell appealed the judgment to the Federal Circuit, arguing that CMU’s patents were

6

invalid and not infringed as a matter of law. See Dkt. No. 73-27, RNJ Ex. 27. Marvell also

7

appealed several aspects of the district court’s damages award, including the award of royalties on

8

foreign chips, the calculation of the royalty rate, the enhancement for willfulness, and the award of

9

pre-suit damages. Id. On August 4, 2015, the Federal Circuit affirmed in part the CMU judgment

10

United States District Court
Northern District of California

11
12
13
14
15
16
17
18
19
20
21
22
23
24

against Marvell:
We affirm the judgment of infringement and validity. As to the monetary relief: We
affirm the rejection of Marvell’s laches defense to pre-suit damages. We reverse the
grant of enhanced damages under the governing willfulness standard, which does
not require that Marvell have had a reasonable defense in mind when it committed
its past infringement. We reject Marvell’s challenge to the royalty (past and
continuing) with one exception.
That exception involves an issue of extraterritoriality—whether the royalty, in
covering all Marvell sales of certain chips made and delivered abroad, improperly
reaches beyond United States borders. We conclude that the royalty properly
embraces those Marvell-sold chips that, though made and delivered abroad, were
imported into the United States, and we affirm the judgment to the extent of
$278,406,045.50 in past royalties (50 cents for each of the 556,812,091 chips the
jury could properly find were imported), plus an amount to be calculated on
remand that brings that figure forward to the time of judgment, and the ongoing
royalty order to the extent it reaches imported Marvell-sold chips. But as to the
Marvell chips made and delivered abroad but never imported into the United States,
we conclude that a partial new trial is needed to determine the location, or perhaps
locations, of the “sale” of those chips. To the extent, and only to the extent, that the
United States is such a location of sale, chips not made in or imported into the
United States may be included in the past-royalty award and ongoing-royalty order.
Dkt. No. 73-29, RJN Ex. 29 at 3-4; see also Compl. ¶ 94.
On September 11, 2015, Marvell disclosed a “litigation accrual of approximately $394

25

million recognized by the Company under ASC Topic 450, ‘Contingencies,’ in connection with

26

the Carnegie Mellon University and certain other pending litigation.” Dkt. No. 73-12, RJN Ex. 12

27

at Ex. 99.1 at 4; see also Compl. ¶ 88. Marvell also referenced its ongoing accrual of litigation

28

5
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

reserve in connection with the CMU royalties in its December 7, 2015 disclosures. Dkt. No. 73-

2

15, RJN Ex. 15 at Ex. 99.1; see also Compl. ¶ 139. On February 17, 2016, Marvell disclosed that

3

it had settled the CMU litigation for $750 million and no ongoing royalty. Dkt. No. 73-16, RJN

4

Ex. 16; see also Compl. ¶ 139.

5

Plaintiff’s theory is that defendants violated Generally Accepted Accounting Principles—

6

specifically Accounting Standards Codification 450—by not accruing a loss contingency for the

7

domestic portion of the CMU patent judgment. See Compl. ¶¶ 83-87. ASC 450 states that

8

“estimated loss from a loss contingency is recognized only if the available information indicates

9

that (1) it is probable that an asset has been impaired or a liability has been incurred at the
reporting date and (2) the amount of the loss can be reasonably estimated.” See id. ¶ 84. Plaintiff

11
United States District Court
Northern District of California

10

contends that because “Marvell made no meaningful arguments against applying the royalty rate

12

to chips that enter or entered the United States” and thus defendants knew that “it was probable

13

that the royalty award would be applied to at least all domestic transactions.” Id. ¶ 29 (emphasis in

14

complaint). Plaintiff also contends that the amount of the loss could be reasonably estimated

15

because defendants were tracking ongoing royalties and could have calculated the domestic

16

portion of the royalty award. Id. ¶¶ 93-95. Plaintiff alleges that, as a result of defendants’ failure to

17

accrue a litigation reserve for domestic royalties owed to CMU, Marvell overstated its net income,

18

earnings per share, and margin metrics in its financial results disclosed on November 20, 2014

19

(3Q15), February 19, 2015 (4Q15), and May 21, 2015 (1Q16). See id. ¶¶ 26-29, 33-34, 56-58.

20

Although the court declines to dismiss plaintiff’s CMU litigation reserve claims as time-

21

barred, the court dismisses plaintiff’s claims for failure to adequately plead a material

22

misstatement, scienter, and loss causation.

23
24

1. Statute of Limitations
Section 10(b) claims “may be brought not later than the earlier of—(1) 2 years after the

25

discovery of the facts constituting the violation; or (2) 5 years after such violation.” 28 U.S.C.

26

§ 1658. “‘[D]iscovery’ as used in this statute encompasses not only those facts the plaintiff

27

actually knew, but also those facts a reasonably diligent plaintiff would have known,” and the

28

6
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

statute requires “‘discovery’ of scienter-related ‘facts.’” Merck & Co. v. Reynolds, 559 U.S. 633,

2

648 (2010). In this case, plaintiff alleges that defendants misstated Marvell’s financials in late

3

2014 and 2015 as a result of Marvell’s failure to accrue a CMU litigation reserve for domestic

4

royalties. See Compl. ¶¶ 1, 3, 87. Plaintiff relies on the contents of the briefs filed in Marvell’s

5

2014 appeal to show the falsity of the financial statements, as well as defendants’ scienter. The

6

cases that are now consolidated in this action were all filed in 2015. Plaintiff’s claims, therefore,

7

fall within 2 years of plaintiff’s discovery of the alleged violations.

8
9

Defendants assert that the facts underlying plaintiff’s CMU litigation reserve claim—the
2012 trial and jury verdict, Marvell’s active “tracking” of ongoing royalties, and the Federal
Circuit decision that was the basis for Marvell’s appeal of the extraterritorial royalties award—

11
United States District Court
Northern District of California

10

were all publicly disclosed by May 24, 2013 at the latest. According to defendants, a reasonably

12

diligent plaintiff would have known by then that Marvell was not accruing a reserve for domestic

13

royalties. Defendants contend that there is no logical way for plaintiff to distinguish the obligation

14

to accrue a reserve after the jury’s verdict and the obligation to accrue a reserve after the court’s

15

entry of judgment. The court is not persuaded by this argument.

16

Plaintiff claims that Marvell’s post-judgment disclosures were misleading because

17

defendants knew that Marvell’s appeal was not likely to succeed with respect to the domestic

18

portion of the judgment. See, e.g., Compl. ¶ 86 (“defendants were aware during the Class Period

19

that an adverse outcome on the U.S. portion of the judgment was probable (i.e., the Court of

20

Appeals would not reverse the District Court judgment) and defendants had the ability to precisely

21

estimate the amount of damages attributable to the U.S. portion of the CMU patent judgment”)

22

(emphases in complaint). Defendants have not shown that plaintiff could have discovered the facts

23

constituting the alleged violation—including the likelihood of success on appeal and defendants’

24

knowledge of that likelihood—before the appeal briefs were filed. Therefore, the court declines to

25

dismiss on statute of limitations grounds. See Merck, 559 U.S. at 654 (affirming finding that

26

plaintiff’s suit was timely where “plaintiffs did not discover, and [defendant had] not shown that a

27

reasonably diligent plaintiff would have discovered, ‘the facts constituting the violation,’ more

28

7
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

than 2 years before filing).

2

2. Material Misrepresentation
The parties agree that GAAP requires Marvell to accrue a reserve for any litigation loss

3
4

that is probable and can be reasonably estimated. Defendants argue, however, that plaintiff does

5

not plead facts to support plaintiff’s contention that the loss of the domestic royalties awarded to

6

CMU was both probable and capable of reasonable estimation. Having reviewed the allegations of

7

the complaint, the court concludes that plaintiff has not adequately alleged a material

8

misrepresentation based on Marvell’s failure to accrue a reserve for the domestic royalties.
“‘GAAP is not a set of rules ensuring identical treatment of identical transactions; rather, it

10

tolerates a range of reasonable treatments, leaving the choice among alternatives to management.’”

11
United States District Court
Northern District of California

9

In re Oak Tech. Sec. Litig., No. 96-20552 SW, 1997 WL 448168, at *9 (N.D. Cal. Aug. 1, 1997)

12

(quoting In re Cirrus Logic Sec. Litig., 946 F. Supp. 1446, 1457 (N.D. Cal. 1996)). Plaintiff

13

appears to concede that the existence of an adverse judgment alone does not imply that a litigation

14

loss is “probable” loss, as plaintiff “does not allege that defendants knew it was probable that the

15

extraterritorial portion of the judgment would be upheld” on appeal. See Dkt. No. 77 at 16. Rather,

16

plaintiff acknowledges that “[]under GAAP, an assessment of the probability of a loss contingency

17

incorporates an analysis of several factors,” including the “nature of the litigation, claim, or

18

assessment;” “progress of the case;” “strategy by the defendant to respond to the case;” and

19

“experience of the entity in similar cases and the experience of other entities in similar cases.”1

20

Compl. ¶ 90.

21

Nor may plaintiff may rely solely on Marvell’s eventual accrual of a reserve to show that

22

Marvell’s financial statements were misleading: “The fact that an allegedly fraudulent statement

23
24
25
26
27
28

1

In its opposition brief, plaintiff claims that because the Federal Circuit reverses in only 10% of
cases, defendants knew or should have known the loss was probable “in the absence of extreme
circumstances, such as the existence of binding precedent that was ignored by the District Court.”
Dkt. No. 77 at 16. Plaintiff does not rely on the Federal Circuit’s reversal rate in the complaint,
and defendants dispute the accuracy of plaintiff’s statistics. See Dkt. No. 84 at 5 and n.4. In any
case, the court is not convinced that a low reversal rate at the Federal Circuit is sufficient by itself
to sustain allegations of an impermissible judgment by defendants because a loss contingency
assessment requires analysis of several factors.
8
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

and a later statement are different does not necessarily amount to an explanation as to why the

2

earlier statement was false. For example, both the valuation of assets and the setting of loan loss

3

reserves are based on flexible accounting concepts, which, when applied, do not always (or

4

perhaps ever) yield a single correct figure.” In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1549

5

(9th Cir. 1994) (emphasis in original), superseded by statute on other grounds as recognized in

6

Ronconi v. Larkin, 253 F.3d 423, 429 n.6 (9th Cir. 2001). “In order to allege the circumstances

7

constituting fraud, plaintiff must set forth facts explaining why the difference between the earlier

8

and the later statements is not merely the difference between two permissible judgments, but

9

rather the result of a falsehood . . . . [P]laintiff may need to draw on contemporaneous statements
or conditions to make that demonstration.” Id. Here, the complaint lacks factual allegations

11
United States District Court
Northern District of California

10

explaining why defendants’ decision not to accrue a reserve was fraudulent, rather than a

12

permissible judgment call.

13

Plaintiff relies on two factual allegations to show the falsity of defendants’ determination

14

that no reserve need be accrued: 1) “Marvell made no meaningful argument against the domestic

15

royalty” on appeal and 2) an “amicus brief filed by Google and other technology companies before

16

the Federal Circuit actually assumed ‘that Marvell must pay Carnegie Mellon some reasonable

17

royalty’ for those chips sold domestically.” Compl. ¶¶ 5, 91. The record shows, however, that

18

Marvell made both invalidity and non-infringement arguments on appeal. See generally Dkt. No.

19

73-27, RNJ Ex. 27 (Marvell’s Appeal Brief). If Marvell had won its appeal on either of these

20

issues, Marvell would not have been liable for any royalties—domestic or foreign. At the hearing,

21

plaintiff described Marvell’s invalidity and non-infringement arguments as part of a “run-of-the-

22

mill, kitchen sink” appeal. But some standard invalidity and non-infringement appeals

23

undoubtedly succeed. Plaintiff does not allege any contemporaneous facts demonstrating that

24

defendants must have known that Marvell would lose.2 The amici, furthermore, took “no position

25
26
27
28

2

In fact, as part of its assessment of the district court’s willfulness finding, the Federal Circuit
determined that Marvell’s invalidity argument was objectively reasonable, noting that the “the
district court itself referred to Marvell’s invalidity defense as a ‘close call’ at the summaryjudgment stage.” Dkt. No. 73-29, RJN. Ex. 29 at 27 (quoting Carnegie Mellon Univ. v. Marvell
9
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

on the validity and infringement of Carnegie Mellon’s patent claims” in the briefs cited by

2

plaintiff. Dkt. No. 73-28, RJN Ex. 28 at 1, 3. The amici were interested in challenging only the

3

award of extraterritorial royalties and assumed that some domestic royalty would be awarded for

4

that reason—not because they believed that Marvell’s other arguments were likely to fail, and

5

their statements are therefore not relevant to whether the loss was probable. See id. Marvell had a

6

strong argument against the award of extraterritorial royalties that eventually prevailed on appeal,

7

but the strength of that argument does not necessarily imply that Marvell’s other arguments on

8

appeal were weak.
Furthermore, Marvell also challenged the award of a royalty—rather than a flat licensing

10

fee—and the rate of the royalty awarded. See generally Dkt. No. 73-7, RJN. Ex. 27 at 45-50, 60-

11
United States District Court
Northern District of California

9

66. If Marvell had prevailed on any of these damages arguments, the amount owed to CMU would

12

have changed. As with Marvell’s invalidity and non-infringement arguments, plaintiff does not

13

explain why or how defendants should have known in advance that Marvell would lose on these

14

issues at the Federal Circuit.

15

With no other specific factual allegations as to falsity, plaintiff “fail[s] to meet the

16

particularity requirements of Rule 9(b) and the Reform Act.” Oak Tech, 1997 WL 448168, at *9

17

(finding “conclusory allegation that Defendants should have recognized a loss earlier”

18

insufficient); see also Caprin v. Simon Transp. Servs., 112 F. Supp. 2d 1251, 1256 (D. Utah 2000),

19

aff’d sub nom. Caprin v. Simon Transp. Servs., Inc., 99 F. App’x 150 (10th Cir. 2004) (finding

20

that plaintiffs had not pleaded “facts demonstrating that STS employed impermissible judgment

21

when calculating its reserves” because the “application of accounting principles often ‘tolerate a

22

range of reasonable treatments, leaving the choice among alternatives to management’”) (quoting

23

Oak Tech, 1997 WL 448168, at *9); Christidis v. First Pennsylvania Mortgage Trust, 717 F.2d 96,

24

100 (3d Cir. 1983) (affirming dismissal of complaint based on “complete absence of any

25

disclosure of the manner in which, in establishing reserves for bad debts in the financial

26
27
28

Tech. Grp., Ltd., No. CIV. 09-290, 2011 WL 4527353, at *1 (W.D. Pa. Sept. 28, 2011)).
10
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

statements relied upon, the defendants knowingly departed from reasonable accounting

2

practices”); Siegel v. Lyons, No. C-95-3588 DLJ, 1996 WL 634206, at *2 (N.D. Cal. Sept. 16,

3

1996) (dismissing claims that defendants “fraudulently overstated [] financial performance by

4

reporting inadequate reserves for bad debts” where plaintiff failed to allege facts showing that

5

“reserve figure was the result of fraud, rather than a permissible business judgment”); cf. Maiman

6

v. Talbott, No. SACV090012AGANX, 2010 WL 11421950, at *4 (C.D. Cal. Aug. 9, 2010)

7

(denying motion to dismiss plaintiff’s claims that defendants “falsely characterized” level of loan

8

reserves because plaintiffs provided “specific data underlying those statements to show that they

9

were misleading when made”).

10

Plaintiff argues that there is at least a question of fact as to Marvell’s GAAP compliance,

United States District Court
Northern District of California

11

citing four cases from outside this circuit. In three of these cases, however, plaintiffs made specific

12

factual allegations that explained why and how the alleged GAAP violations were fraudulent. See

13

Barrie v. Intervoice-Brite, Inc., 397 F.3d 249, 257 (5th Cir.), opinion modified on denial of reh’g,

14

409 F.3d 653 (5th Cir. 2005) (“plaintiffs’ claim that the Company improperly recognized unearned

15

revenue in violation of SOP 97-2 is supported by sworn expert analysis”); Fla. State Bd. of Admin.

16

v. Green Tree Fin. Corp., 270 F.3d 645, 665 (8th Cir. 2001) (“the investors alleged that defendants

17

published statements with knowledge of facts indicating crucial information in the statements was

18

based on discredited assumptions”); In re Ambac Fin. Grp., Inc. Sec. Litig., 693 F. Supp. 2d 241,

19

273 (S.D.N.Y. 2010) (noting that “allegations of GAAP violations or accounting irregularities,

20

standing alone, are insufficient to state a securities fraud claim,” but finding claims actionable

21

where complaint included detailed factual allegations to show scienter).

22

In In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410 (3d Cir. 1997), the

23

Third Circuit found that plaintiffs had adequately pleaded a material misrepresentation under both

24

Rule 12(b)(6) and Rule 9(b) by alleging that defendants overstated the company’s earnings by

25

failing to properly match their operating expenses with sales in accordance with GAAP. 114 F.3d

26

at 1420-22. The decisions to accrue a loss reserve requires more detailed analysis than matching

27

expenses; therefore, more detailed allegations are required to explain how defendants violated

28

11
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

GAAP in this case. To the extent In re Burlington Coat Factory implies that general allegations of

2

GAAP violations are sufficient to meet the heightened pleading requirements for falsity, it is

3

inconsistent with the law of this circuit. See, e.g., In re Daou Sys., Inc., 411 F.3d 1006, 1016 (9th

4

Cir. 2005) (“a general allegation that the practices at issue resulted in a false report of company

5

earnings is not a sufficiently particular claim of misrepresentation”) (quoting Greebel v. FTP

6

Software, Inc., 194 F.3d 185, 203 (1st Cir. 1999)).

7

Moreover, even if plaintiff had alleged facts to show that defendants made an
impermissible accounting judgment, the court is doubtful that defendants’ fully-disclosed decision

9

not to accrue a reserve could give rise to a material misrepresentation as a matter of law. See In re

10

BellSouth Corp. Sec. Litig., 355 F. Supp. 2d 1350, 1367 & n.16 (N.D. Ga. 2005) (finding that, as a

11
United States District Court
Northern District of California

8

matter of law, “no reasonable investor could have been misled” by BellSouth’s failure to accrue

12

litigation reserve where “BellSouth timely disclosed in public filings the Florida PSC’s decision,

13

the status of the company’s appeals, updated current amounts subject to potential refund, and that

14

that the company had not accrued a reserve in connection with the matter”). In this case,

15

defendants disclosed the total amount of the potential loss, the status of Marvell’s appeal, and

16

Marvell’s decision not to accrue a reserve for any part of the award. Under these circumstances,

17

the court is not persuaded that a reasonable investor would have viewed Marvell’s financial

18

statements “as having significantly altered the ‘total mix’ of information made available” because

19

they did not account for a reserve. Matrixx, 563 U.S. at 38 (quoting Basic Inc. v. Levinson, 485

20

U.S. 224, 231-32 (1988)). In sum, the court finds that plaintiff has failed to allege any

21

misstatement—much less a material misstatement—with respect to Marvell’s CMU litigation

22

reserve.

23

3. Scienter

24

Relatedly, plaintiff fails to adequately allege defendants’ scienter with respect to the CMU

25

litigation reserve claims. The PSLRA requires plaintiff to “state with particularity facts giving rise

26

to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-

27

4(b)(2). “The inference must be that ‘the defendant[ ] made false or misleading statements either

28

12
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

intentionally or with deliberate recklessness.’” Reese, 747 F.3d at 569 (emphasis in original)

2

(quoting Zucco, 552 F.3d at 991). “Deliberate recklessness means that the reckless conduct

3

‘reflects some degree of intentional or conscious misconduct.’” Id. (quoting S. Ferry LP, No.2 v.

4

Killinger, 542 F.3d 776, 782 (9th Cir. 2008)). The court must inquire “whether all of the facts

5

alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual

6

allegation, scrutinized in isolation, meets that standard.” Tellabs, 551 U.S. at 323 (emphasis in

7

original). A complaint survives a motion to dismiss “only if a reasonable person would deem the

8

inference of scienter cogent and at least as compelling as any opposing inference one could draw

9

from the facts alleged.” Id. at 324.
Even accepting plaintiff’s contention that defendants’ made an impermissible accounting

11
United States District Court
Northern District of California

10

judgment and therefore materially misstated Marvell’s financials, the complaint lacks allegations

12

of facts giving rise to a strong inference of scienter. “[T]he mere publication of inaccurate

13

accounting figures, or a failure to follow GAAP, without more, does not establish scienter.” Lloyd

14

v. CVB Fin. Corp., 811 F.3d 1200, 1207 (9th Cir. 2016) (quoting DSAM Glob. Value Fund v.

15

Altris Software, Inc., 288 F.3d 385, 390 (9th Cir. 2002)); see also In re BellSouth Corp. Sec. Litig.,

16

355 F. Supp. 2d at 1375 (finding that “simply challenging the accounting judgment of the

17

company . . . is insufficient to establish scienter” on a motion to dismiss). Plaintiffs do not allege

18

“specific contemporaneous statements or conditions that demonstrate the intentional or the

19

deliberately reckless false or misleading nature of the statements when made.” Metzler Inv. GMBH

20

v. Corinthian Colls., Inc., 540 F.3d 1049, 1066 (9th Cir. 2008) (quoting Ronconi, 253 F.3d at 432).

21

The complaint lacks, “for example,” allegations “that a company’s external auditors counseled

22

against a practice or that a company’s CFO was aware that the practice was improper.” Lloyd, 811

23

F.3d at 1207 (citing Metzler, 540 F.3d at 1068-69). Plaintiff makes a general allegation that the

24

“Individual Defendants participated in the drafting, preparation and/or approval of the various

25

public, shareholder and investor reports and other communications complained of,” Compl. ¶ 21,

26

but plaintiff does not allege the role of the individual defendants in determining whether to accrue

27

a reserve or “what knowledge they had of GAAP principles,” Lloyd, 811 F.3d at 1207.

28

13
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

Furthermore, any inference that defendants intended to deceive investors is negated by

2

Marvell’s full disclosure of the CMU judgment and the company’s decision not accrue a reserve.

3

See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1425 (9th Cir. 1994) (“detailed risk

4

disclosure in the Debenture Prospectus negates an inference of scienter”); In re Taleo Corp. Sec.

5

Litig., No. C 09-00151 JSW, 2010 WL 597987, at *10 (N.D. Cal. Feb. 17, 2010) (“fact that

6

Defendants applied [an accounting rule] in such a consistent and transparent manner raises a

7

plausible inference that Defendants’ error was innocent”).

8

Taken collectively, plaintiff’s allegations do not create an inference at least as strong as

9

inference that defendants believed the reserve was not required.

10

4. Loss Causation

United States District Court
Northern District of California

11

Plaintiff also fails to allege loss causation for its CMU litigation reserve claims. “[T]he

12

plaintiff in a securities fraud action must demonstrate that an economic loss was caused by the

13

defendant’s misrepresentations, rather than some intervening event.” Lloyd v, 811 F.3d at 1209

14

(citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 343-44 (2005)). “The burden of pleading loss

15

causation is typically satisfied by allegations that the defendant revealed the truth through

16

‘corrective disclosures’ which ‘caused the company’s stock price to drop and investors to lose

17

money.’” Id. (quoting Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398, 2406 (2014)).

18

The alleged misrepresentation need not be the “the sole reason for the investment’s decline in

19

value,” but plaintiff’s allegations must provide “some indication that the drop in [defendant’s]

20

stock price was causally related to [the defendant’s] financial misstatement[s].” Metzler, 540 F.3d

21

at 1062 (alterations in original) (quoting In re Daou, 411 F.3d at 1025, 1026). Plaintiff need not

22

allege an actual “admission or finding of fraud,” but plaintiff may not “plead loss causation

23

through ‘euphemism’ and thereby avoid alleging the necessary connection between defendant’s

24

fraud and the actual loss.” Id. at 1064.

25
26
27
28

Plaintiff alleges that Marvell’s stock price dropped in response to the following
disclosures:


Marvell’s September 11, 2015 disclosure of a litigation accrual in connection with the
14

15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

CMU litigation.3 Compl. ¶ 88.

1



Marvell’s September 11, 2015 disclosure that the Audit Committee was “reviewing
certain aspects of the Company’s internal control over financial reporting, including
controls for the establishment of reserves for litigation . . . .” Compl. ¶¶ 133-34, 88.



Marvell’s October 26, 2015 disclosure that “PwC, the Company’s auditor for over 15
years had abruptly resigned” after indicating that, if PwC were to continue as auditor, it
would have to expand the scope of the 2016 audit to cover Marvell’s process and
controls for establishing litigation reserves. Id. ¶¶ 135, 137.



Marvell’s December 7, 2015 disclosure that “two government agencies, the U.S.
Attorney’s Office and the SEC are investigating its accounting and other issues.” Id. ¶
140-41.

2
3
4
5
6
7
8

These disclosures are not sufficient to plead loss causation because they do not reveal any

9

inaccuracy in Marvell’s prior financial statements.

10

As noted above, that fact that Marvell eventually accrued a reserve in connection with the

United States District Court
Northern District of California

11

CMU litigation—after resolution of its appeal to the Federal Circuit—is not sufficient to show that

12

Marvell was required to do so earlier. Similarly, the announcement of an investigation into

13

Marvell’s controls for establishing litigation reserves, “‘standing alone and without any

14

subsequent disclosure of actual wrongdoing, does not reveal to the market the pertinent truth of

15

anything, and therefore does not qualify as a corrective disclosure.’” Lloyd, 811 F.3d at 1209-10

16

(quoting Loos v. Immersion Corp., 762 F.3d 880, 890 n.3 (9th Cir. 2014), as amended (Sept. 11,

17

2014)). Likewise, PwC’s statement that Marvell’s next audit should cover the company’s controls

18

for establishing litigation reserves does not constitute a corrective disclosure because plaintiff does

19

not allege that PwC ever concluded that Marvell’s decision not accrue a reserve was in error. See

20

Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 608 (9th Cir. 2014) (finding that

21

Department of Education’s “expression of concern” about enrollment practices “does not

22

constitute a corrective disclosure” of alleged fraud); Metzler, 540 F.3d at 1064 (rejecting “notion

23
24
25
26
27
28

3

In different sections of the complaint, plaintiff suggests that Marvell disclosed the accrual of a
CMU litigation reserve on September 11, 2015 and on December 7, 2015. Compare ¶ 88, with ¶
139. The SEC filings submitted by defendants indicate that Marvell first disclosed its accrual of
the CMU litigation reserve in September 11, 2015. See Dkt. No. 73-12, RJC Ex. 12 at 4 (“Cost of
goods sold includes a litigation accrual of approximately $394 million recognized by the Company
under ASC Topic 450, “Contingencies,” in connection with the Carnegie Mellon University and
certain other pending litigation.”).
15
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

that loss causation is pled where a defendant’s disclosure reveals a ‘risk’ or ‘potential’ for

2

widespread fraudulent conduct”). The court concludes, therefore, that plaintiff has failed to allege

3

loss causation with respect to its litigation reserve claims.

4

B. Pull-In Transaction Claims

5

Plaintiff alleges that Marvell’s key business metrics were fraudulently inflated during the

6

class period because defendants prematurely recognized revenue that should have been earned in

7

subsequent periods. Compl. ¶¶ 6, 36-37. Plaintiff’s allegations are based on the results of an

8

investigation by Marvell’s Audit Committee. Id. ¶¶ 36-37, 132, 138, 142-45.
On September 11, 2015, Marvell disclosed that the Audit Committee was reviewing

9

“certain revenue recognition issues in the second quarter of fiscal 2016 and any associated issues

11
United States District Court
Northern District of California

10

with whether senior management’s operating style during the period resulted in an open flow of

12

information and communication to set an appropriate tone for an effective control environment.”

13

Dkt. No. 72-12, RJN Ex. 12 at Ex. 99.1 at 1-2. Specifically, the Audit Committee focused on “7 to

14

8 percent of revenue recognized in the second quarter of fiscal 2016 that, based upon the original

15

customer request date, would have been received and earned in the third quarter of fiscal 2016 and

16

is no longer available for receipt in that quarter.” Id. On December 7, 2015, Marvell disclosed that

17

the Audit Committee was also investigating the effect of pull-in transactions recognized in 4Q15

18

and 1Q16.4 Dkt. No. 72-15 at 11, RJN Ex. 15 at Ex. 99.1. According to plaintiff, Marvell’s

19

premature recognition of pull-in transactions during the class period concealed softening demand

20

in the HDD segment of the market for storage products—one of Marvell’s most important market

21

segments. Compl. ¶¶ 74-75.
On March 1, 2016, the Audit Committee announced that it had completed its investigation,

22
23

concluding that “revenue related to pull-in transactions during the subject period was for most

24

such transactions properly recognized in accordance with Marvell’s revenue recognition policy

25

and generally accepted accounting principles,” but that there were certain transactions for which

26
27
28

4

Marvell’s fiscal year 2015 ended on January 31, 2015. See Compl. ¶ 6 n.2; Dkt. No. 72 at 4.
Therefore, the expanded audit investigation period covered November 2014 through July 2015.
16
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

“Marvell’s internal controls were not fully followed and revenue from certain pull-in and

2

distributor transactions was recognized prematurely.” Dkt. No. 72-17 at 6-7, RJN Ex. 17 at Ex.

3

99.1. The Audit Committee identified “a limited number of transactions that had the effect of

4

recognizing revenue prematurely, generally involving the extension of payment terms beyond

5

Marvell’s customary terms.” Id.
Although plaintiff has adequately alleged material misstatement and loss causation,

6
7

plaintiff’s pull-in transaction claims are dismissed for failure to adequately plead scienter.

8

1. Material Misrepresentation

9

a. Specific Transactions
Defendants argue that plaintiff’s claims must be dismissed for failure to identify specific

11
United States District Court
Northern District of California

10

pull-in transactions. The Ninth Circuit, however, has held that where a complaint “‘identifies the

12

circumstances of the alleged fraud so that defendants can prepare an adequate answer,’” the details

13

of specific transactions are not required. Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)

14

(quoting Warshaw v. Xoma Corp., 74 F.3d 955, 960 (9th Cir. 1996) (“It is not fatal to the

15

complaint that it does not describe in detail a single specific transaction (i.e. shipment) in which

16

Merisel transgressed as above, by customer, amount, and precise method.”)).5 In this case, plaintiff

17

alleges that Marvell’s Audit Committee identified specific transactions in its report. Defendants

18

should be able to investigate the transactions identified by the Audit Committee and prepare an

19

adequate answer.
Defendants rely on In re Connetics Corp. Sec. Litig., No. C 07-02940 SI, 2008 WL

20
21

3842938 (N.D. Cal. Aug. 14, 2008), in which the district court noted that “[r]ecent authority

22

suggests that for an allegation of channel stuffing to be pled with sufficient particularity, it must

23
24
25
26
27
28

5

Defendants object that the Ninth Circuit decided Cooper under pre-PLSRA pleading standards.
Although the PLSRA heightened the pleading standard for scienter, Rule 9(b) already required
that allegations of falsity be plead with particularity. See, e.g., Rubke v. Capitol Bancorp Ltd., 551
F.3d 1156, 1165 (9th Cir. 2009) (noting that “inquiry into whether plaintiffs have pled falsity with
the requisite particularity under the PSLRA is nearly identical to that under Federal Rule of Civil
Procedure 9(b)”). The court is unaware of binding authority abrogating the Ninth Circuit’s holding
in Cooper as to the specificity required to plead misrepresentation based on improper revenue
recognition.
17
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

allege specific transactions, specific shipments, specific customers, specific times, or specific

2

dollar amounts.” 2008 WL 3842938, at *9 (internal quotation marks omitted). In the cases cited in

3

Connetics, however, plaintiffs failed to allege any “corroborating details” that would allow

4

defendants to identify the challenged transactions. In re ICN Pharm., Inc., Sec. Litig., 299 F. Supp.

5

2d 1055, 1062 (C.D. Cal. 2004); see also Greebel, 194 F.3d at 204 (“The allegations in the

6

complaint do not include such basic details [as amounts, products, dates, customers, or salespeople

7

involved]. We do not say that each of these particulars must appear in a complaint, but their

8

complete absence in this case is indicative of the excessive generality of these allegations.”); In re

9

Ashworth, Inc. Sec. Litig., No. 99CV0121-L(JAH), 2000 WL 33176041, at *6 (S.D. Cal. July 18,

10

2000) (“The Complaint fails to allege any specific facts to substantiate these allegations, such as a

11
United States District Court
Northern District of California

1

detailed example where these events occurred.”). In this case, as in Connetics itself, there is “no

12

dispute between the parties that defendants’ financial statements were misstated.” 2008 WL

13

3842938 at *10 (noting that only the element of scienter is at issue). Accordingly, this court

14

declines to dismiss plaintiff’s pull-in transactions claims based on failure to identify specific

15

transactions.

16
17

b. Materiality
Defendants also argue that plaintiff’s allegations do not show that it is “substantially likely

18

that a reasonable investor would have viewed this information ‘as having significantly altered the

19

total mix of information made available.’” Matrixx, 563 U.S. at 38 (quoting Basic, 485 at 224)

20

(internal quotation marks omitted). “‘[D]etermining materiality in securities fraud cases should

21

ordinarily be left to the trier of fact,’” but “‘conclusory allegations of law and unwarranted

22

inferences are insufficient to defeat a motion to dismiss for failure to state a claim.’” Reese, 747

23

F.3d at 568 (quoting In re Cutera Sec. Litig., 610 F.3d 1103, 1108 (9th Cir. 2010)).

24

Plaintiff relies on the scope of the Audit Committee’s investigation to show materiality by

25

alleging that “as much as 8% of [Marvell’s] quarterly revenue as the result of channel stuffing,”

26

and that “[w]ithout the artificial boost from channel stuffing, Marvell would have been forced to

27

disclose significantly lower revenues in its Storage market.” Compl. ¶ 74. Plaintiff also relies on

28

18
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

Marvell’s eventual disclosure of “weaker than expected demand for HDD products . . . .” Id. at 75

2

(emphasis omitted). Plaintiff also cites subsequent events to confirm the materiality of the

3

misstated financials—including the drop in Marvell’s stock price, the resignation of Marvell’s

4

long-time auditor, the terminations of Marvell’s co-founders, and the government investigations

5

into Marvell’s accounting practices.
Defendants, on the other hand, argue that the financial misstatements cannot be material

6

because “all that is known about the volume of pull-ins in 4Q15 and 1Q16 is that it is smaller than

8

8%” and because Marvell disclosed at the end of 2Q16 that some amount of revenue from pull-ins

9

would no longer be available receipt in the next quarter. Dkt. No. 72 at 14. Defendants also claim

10

that Marvell “disclosed softening demand trends throughout the relevant time period.” Id. at 14-

11
United States District Court
Northern District of California

7

15. Defendants further argue that the allegations of the complaint do not connect subsequent

12

events—such as resignations and terminations—to the prematurely recognized revenue. Id. at 15-

13

17.

14

Whether plaintiff will be able to establish materiality remains to be seen, but the

15

allegations in the complaint “suffice to raise a reasonable expectation that discovery will reveal

16

evidence satisfying the materiality requirement” for the transactions identified by the Audit

17

Committee. Reese, 747 F.3d at 568 (quoting Matrixx, 563 U.S. at 46). There is no “bright-line

18

rule” for determining materiality,6 Basic, 485 U.S. at 236, and “not every mixture with the true

19

will neutralize the deceptive,” Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1097 (1991).

20

Plaintiff relies heavily on the Audit Committee’s findings, but even if plaintiff is not able to

21

connect subsequent events to the pull-in transactions, the complaint contains more than

22

“conclusory allegations of law and unwarranted inferences” of materiality. Reese, 747 F.3d at 568;

23
24
25
26
27
28

6

Defendant Sukhi Nagesh argues that the premature revenue recognition is quantitatively
immaterial as matter of law. See Dkt. No. 82 at 4 (citing In re Silicon Graphics, Inc. Sec. Litig.,
970 F. Supp. 746, 766 (N.D. Cal. 1997) (finding 5% shortfall immaterial as a matter of law)).
Defendant’s position is inconsistent with the Supreme Court’s guidance in Basic and Matrixx, as
well as guidance from the SEC guidance. See 17 C.F.R. Part 211, Release No. SAB 99 (Aug. 12,
1999) (“misstatements are not immaterial simply because they fall beneath a numerical
threshold”).
19
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

see also Washtenaw Cty. Emps Ret. Sys. v. Avid Tech., Inc., 28 F. Supp. 3d 93, 107 (D. Mass.

2

2014) (“Here, one can argue that the Plaintiffs rely too much on Avid’s voluntary disclosure of

3

errors [in revenue recognition]. This should not lead, however, to the dismissal of the case.”).

4

2. Loss Causation
Plaintiff’s reliance on the Audit Committee’s March 1, 2016 disclosure is also sufficient to

5

plead loss causation: “The Audit Committee stated that it identified a limited number of

7

transactions that had the effect of recognizing revenue prematurely, generally involving the

8

extension of payment terms beyond Marvell’s customary terms.”7 Compl. ¶ 145 (emphasis in

9

complaint). Not only has plaintiff alleged investigation of the pull-in transactions at issue, but also

10

that defendants subsequently made a “corrective disclosure.” Lloyd, 811 F.3d at 1210 (noting that

11
United States District Court
Northern District of California

6

“any other rule would allow a defendant to escape liability” by waiting until the market reacted to

12

the announcement of an investigation before revealing that the representations subject to

13

investigation were false). Defendants argue that the Audit Committee “identified no fraudulent

14

activity in the course of [its] investigation.” Dkt. No. 73-17 at 6, RJN Ex. 17, at Ex. 99.1. This

15

court declines to rely on the accuracy of the Audit Committee’s assessment in dismissing

16

plaintiff’s claims.

17

3. Scienter
The allegations in the complaint, however, do not give rise to a strong inference of

18
19

defendants’ scienter with respect to the alleged pull-in transaction misstatements.

20

a. GAAP Violations
Plaintiff argues that “[v]iolations of GAAP standards can also provide evidence of

21
22

scienter.” In re Daou Sys., Inc., 411 F.3d at 1016. However, “[t]o support even a reasonable

23

inference of scienter, much less a strong inference, the complaint must describe the violations with

24
25
26
27
28

7

Defendants argue that plaintiff’s loss causation arguments relying on Marvell’s March 1, 2016
SEC filing must be disregarded because plaintiff made no mention of the disclosures in the section
of its opposition on loss causation. See Dkt. No. 87 at 1. Defendants are correct that plaintiff did
not discuss the March 1, 2016 disclosures on pages 39-40 of the brief, but plaintiff did reference
these specific disclosures in its opposition. See Dkt. No. 77 at 1, 27. Moreover, defendants are not
prejudiced because they addressed the disclosures in their motion. See Dkt. Nos. 72 at 24.
20
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

sufficient particularity.” Id.; see also Lloyd, 811 F.3d at 1207 (“the mere publication of inaccurate

2

accounting figures, or a failure to follow GAAP, without more, does not establish scienter”)

3

(quoting DSAM Glob. Value Fund, 288 F.3d at 390)). The complaint lacks allegations showing

4

that “defendants knew specific facts at the time that rendered their accounting determinations

5

fraudulent.” In re Cadence Design Sys., Inc. Sec. Litig., 654 F. Supp. 2d 1037, 1046 (N.D. Cal.

6

2009) (quoting Rudolph v. UTStarcom, 560 F.Supp.2d 880, 889 (N.D. Cal. 2008)).

7
8

b. Significant Pressure
Plaintiff relies on the Audit Committee’s March 1, 2016 finding that Marvell’s senior
management applied significant pressure on finance and sales personnel to meet revenue targets.

10

See Compl. ¶¶ 144-45. “However, ‘there is nothing inherently improper in pressing for sales to be

11
United States District Court
Northern District of California

9

made earlier than in the normal course.’” Curry v. Hansen Med., Inc., No. 5:09-CV-05094-JF

12

HRL, 2011 WL 3741238, at *6 (N.D. Cal. Aug. 25, 2011) (quoting Greebel, 194 F.3d at 202-03)).

13

As previously noted, the Audit Committee indicated in the same disclosure that it had “identified

14

no fraudulent activity.” Dkt. No. 73-17 at 6, RJN Ex. 17, at Ex. 99.1. While the court does not

15

accept the Audit Committee’s finding of no fraud as true, the Committee’s finding of “significant

16

pressure” applied by management does not raise an inference of fraud that is as compelling as the

17

inference that the individual defendants were unaware of the premature recognition of revenue or

18

were merely pressing for sales to be made earlier.

19
20

c. Core Operations Theory
Plaintiff alleges that the “pressure and control exerted by senior management set an

21

improper ‘tone at the top.’” Compl. ¶ 38. “Where a complaint relies on allegations that

22

management had an important role in the company but does not contain additional detailed

23

allegations about the defendants’ actual exposure to information, it will usually fall short of the

24

PSLRA standard. In such cases the inference that defendants had knowledge of the relevant facts

25

will not be much stronger, if at all, than the inference that defendants remained unaware.” S.

26

Ferry, 542 F.3d at 784. Allegations under a “core operations” theory may only “independently

27

satisfy the PSLRA” if there are particular allegations suggesting that “defendants had actual access

28

21
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

to the disputed information,” or where “it would be ‘absurd’ to suggest that management was

2

without knowledge of the matter.” Id. at 786 (citations omitted).

3

Plaintiff alleges that Dr. Sutardja was a “micro manager and had his fingers in everything,”

4

leaving “little room for mid-level managers to make decisions,” and that “[a]pproximately 50% of

5

Marvell’s sales were made to three customers and one distributor, who were taken care of

6

personally by Marvell co-founder and defendant Sutardja’s wife, Dai.” Compl. ¶¶ 54-55. But the

7

complaint does not tie Dr. Sutardja or these “three customers and one distributor” to the pull-in

8

transactions identified by the Audit Committee as improper. See Police Ret. Sys. of St. Louis v.

9

Intuitive Surgical, Inc., 759 F.3d 1051, 1063 (9th Cir. 2014) (“Missing are allegations linking
specific reports and their contents to the executives . . . .”); In re Cadence Design, 654 F. Supp. 2d

11
United States District Court
Northern District of California

10

at 1048 (finding general allegation that defendants “‘spent time’ with customers” and had roles in

12

approval process not sufficiently particular to raise strong inference that defendants “possessed the

13

relevant facts”). The complaint contains no allegations whatsoever to show that Mr. Rashkin or

14

Mr. Nagesh had actual access to information regarding the identified transactions—“Sarbanes–

15

Oxley certifications are not sufficient, without more, to raise a strong inference of scienter.”

16

Zucco, 552 F.3d at 1004 (quoting Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736, 747-748

17

(9th Cir. 2008)).

18

Nor does this case fit into the “exceedingly rare category of cases” where it would be

19

“absurd” to suggest that defendants were without knowledge of the improper revenue recognition.

20

See S. Ferry, 542 F.3d at 785 n.3 (citing Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 987

21

(9th Cir. 2008), in which the Ninth Circuit accepted plaintiff’s inference that “high-level managers

22

must have known about the orders because of their devastating effect on the corporation’s

23

revenue”). The premature recognition of 7-8% of revenue cannot plausibly be described as “core”

24

to Marvell’s operations.

25

d. Resignations and Terminations

26

Plaintiff claims that Dr. Sutardja and his wife were fired one month after the Audit

27
28

Committee announced the results of its investigation, and that Mr. Rashkin, Mr. Nagesh, and
22
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

Marvell’s auditor resigned during the pendency of the investigation. Dkt. No. 77 at 35-40. As

2

defendants point out, most of plaintiff’s allegations about resignations and terminations do not

3

appear in the complaint. In any case, “resignations, terminations, and other allegations of

4

corporate reshuffling may in some circumstances be indicative of scienter,” but only where

5

plaintiff pleads additional facts. Zucco, 552 F.3d at 1002. For example, “[w]here a resignation

6

occurs slightly before or after the defendant corporation issues a restatement, a plaintiff must plead

7

facts refuting the reasonable assumption that the resignation occurred as a result of restatement’s

8

issuance itself in order for a resignation to be strongly indicative of scienter.” Id. “For other

9

resignations occurring during the relevant time period, a plaintiff must allege sufficient
information to differentiate between a suspicious change in personnel and a benign one.” Id.

11
United States District Court
Northern District of California

10

“Absent allegations that the resignation at issue was uncharacteristic when compared to the

12

defendant’s typical hiring and termination patterns or was accompanied by suspicious

13

circumstances, the inference that the defendant corporation forced certain employees to resign

14

because of its knowledge of the employee’s role in the fraudulent representations will never be as

15

cogent or as compelling as the inference that the employees resigned or were terminated for

16

unrelated personal or business reasons.” Id.

17

Defendants contend that Mr. Rashkin reasonably retired at age 70 after sixteen years of

18

service and that Mr. Nagesh was in fact promoted from interim CFO to Senior VP, Corporate

19

Development and Strategy, Financial Planning and Analysis and Investor Relations at Marvell.

20

Defendants suggest there are any number of reasons other than fraud—including corporate

21

mismanagement—for PwC’s resignation as auditor or the Board’s termination of Dr. Sutardja and

22

Ms. Dai. Plaintiff does not allege any facts, other than the general timing of the departures, to

23

suggest that they “were connected to any purported wrongdoing or fraudulent activity.” In re

24

Downey Sec. Litig., No. CV08-3261-JFW (RZX), 2009 WL 736802, at *11 (C.D. Cal. Mar. 18,

25

2009); see also In re Cornerstone Propane Partners, L.P., 355 F. Supp. 2d 1069, 1093 (N.D. Cal.

26

2005) (finding that “notable departures” of executives—whether they were terminated or

27

resigned—“are not in and of themselves evidence of scienter”). Under these circumstances, an

28

23
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

inference of fraud is not as compelling as the inference that the departures were prompted by

2

personal or business reasons unrelated to fraud—for example, the Audit Committee’s

3

identification of “tone at the top” and other management issues.

4

The cases cited by plaintiff do not suggest that resignations and terminations are sufficient

5

to establish scienter in the absence of other allegations connecting the departures to the alleged

6

fraud. See, e.g., In re UTStarcom, Inc. Sec. Litig., 617 F. Supp. 2d 964, 975 (N.D. Cal. 2009)

7

(defendants’ departures add “one more piece to the scienter puzzle” where plaintiff alleged that

8

defendants “received critical reports from the Company’s auditing firm, and that the revenue

9

detection problems were well known throughout the Company”); In re Sipex Corp. Sec. Litig., No.
C 05-00392 WHA, 2005 WL 3096178, at *1 (N.D. Cal. Nov. 17, 2005) (finding that the Board’s

11
United States District Court
Northern District of California

10

adoption of a variety of “house-cleaning” and other remedial measures, including terminations of

12

certain employees, combined with its announcement of a restatement of the company’s financials,

13

established “a strong inference that the company itself believes that fraud led to materially

14

misleading financials”); In re McKesson HBOC, Inc. Sec. Litig., 126 F.Supp.2d 1248, 1273-74

15

(N.D. Cal. 2000) (finding strong inference of scienter based on public statements by new CEO

16

stating that executives were fired because they knew or should have known of fraudulent

17

accounting practices).

18

e. Holistic Review

19

None of plaintiff’s allegations describe “specific contemporaneous statements or

20

conditions that demonstrate the intentional or the deliberately reckless false or misleading nature

21

of the statements when made.” Metzler, 540 F.3d at 1066 (quoting Ronconi, 253 F.3d at 432); cf.

22

In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d at 705 (finding overwhelming inference drawn

23

from holistic view of allegations that defendant executives, “[i]n three consecutive quarters, . . .

24

received accurate reports at quarter-end indicating that VeriFone had not met its financial targets”

25

and each time “addressed these ‘unacceptable’ results by providing [company’s supply chain

26

controller] with accounting adjustments necessary to conform results to expectations”). Therefore,

27

even read together, plaintiff’s myriad allegations fail to raise an inference of scienter that is at least

28

24
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

as compelling as the alternative explanation—that whether or not they were good managers, the

2

individual defendants did not engage in fraud.

3

C. Adequacy of Internal Controls Claims

4

Plaintiff fails to allege a material misstatement, scienter, and loss causation with respect to

5

its adequacy of internal controls claims. Plaintiff points to Marvell’s Form 10-K for the year ended

6

January 31, 2015, which states: “Based on our evaluation, management has concluded that we

7

maintained effective internal control over financial reporting as of January 31, 2015 based on

8

the COSO criteria.” Compl. ¶ 45 (emphasis in complaint).

9
10

1.

Material Misrepresentation

Plaintiff has failed to plead the falsity of any defendants’ evaluation of Marvell’s internal

United States District Court
Northern District of California

11

controls. A “plaintiff must set forth an explanation as to why the statement or omission

12

complained of was false or misleading.” In re GlenFed, 42 F.3d at 1548. On March 1, 2016,

13

Marvell disclosed the Audit Committee’s findings that there were “tone at the top” issues, that

14

there was significant pressure on sales and finance personnel to meet revenue targets, that revenue

15

had been recognized prematurely, and that Marvell lacked a well-structured process for

16

establishing litigation reserves. Compl. ¶¶ 142-44. Although these disclosures indicate that

17

Marvell’s controls were not adequate and had in fact failed, none of the Audit Committee’s

18

findings “clearly contradict[s]” the statements made by defendants in Marvell’s Form 10-Ks—that

19

defendants evaluated the controls and concluded that they were effective. In re Invision Techs.,

20

Inc. Sec. Litig., No. C04-03181 MJJ, 2006 WL 538752, at *6 (N.D. Cal. Jan. 24, 2006); see also

21

Morgan v. AXT, Inc., No. C 04-4362 MJJ, 2005 WL 2347125, at *15 (N.D. Cal. Sept. 23, 2005)

22

(“Plaintiff has not alleged particularized facts to support his claim that Defendant Young’s

23

averments that he had examined the Company’s internal disclosure controls and believed they

24

were adequate, were false.”).

25

2. Scienter

26

Moreover, plaintiff does not allege facts giving rise to an inference of scienter more

27

compelling than the inference that defendants were simply wrong in their assessment of the

28

25
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

company’s internal controls. “Sarbanes–Oxley certification is only probative of scienter if the

2

person signing the certification was severely reckless in certifying the accuracy of the financial

3

statements.” Glazer, 549 F.3d at 747. An admission that “the controls were inadequate is perhaps

4

an indication of incompetence, but incompetence, even gross incompetence, is no basis for a

5

securities fraud claim.” In re Loudeye Corp. Sec. Litig., No. C06-1442MJP, 2007 WL 2404626, at

6

*7 (W.D. Wash. Aug. 17, 2007) (quoting In re Watchguard Sec. Litig., 2006 WL 2927663, at * 10

7

(W.D. Wash. Oct.12, 2006)). Plaintiff has not alleged facts to show that defendants were severely

8

reckless in their assessment of Marvell’s internal controls. See In re Maxwell Techs., Inc. Sec.

9

Litig., 18 F. Supp. 3d 1023, 1040-41 (S.D. Cal. 2014) (“Plaintiff has not presented the necessary
information about accounting principles and internal controls to allow this Court to evaluate

11
United States District Court
Northern District of California

10

whether the individual defendants should have been or must have been aware of the violations.”).

12
13

3. Loss Causation
Similarly, plaintiff fails to adequately allege a causal connection between class members’

14

losses and any misstatements as to the adequacy of Marvell’s internal controls. As previously

15

discussed, the announcement of an investigation into Marvell’s internal controls, “‘standing alone

16

and without any subsequent disclosure of actual wrongdoing, does not reveal to the market the

17

pertinent truth of anything, and therefore does not qualify as a corrective disclosure.’” Lloyd, 811

18

F.3d at 1209-10 (quoting Loos, 762 F.3d at 890 n.3). Plaintiff does not identify any subsequent

19

disclosure that reveals the “truth” about defendants’ evaluation of Marvell’s internal controls.

20

D. Section 20(a) Claims

21

Plaintiff asserts that defendants acted as controlling persons under section 20(a) of the

22

Exchange Act. Because plaintiff has not adequately alleged a section 10(b) violation, plaintiff’s

23

claims under section 20(a) are also dismissed. See Zucco, 552 F.3d at 990, 1008 (affirming

24

dismissal of section 20(a) claims where plaintiffs failed to allege violation of section 10(b)). The

25

court does not reach the parties’ arguments with respect to plaintiff’s allegations that individual

26

defendants were “control persons” within the meaning of the statute.

27
28

26
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC

1

III.

CONCLUSION
For these reasons, the consolidated complaint is dismissed with thirty days leave to amend.

2
IT IS SO ORDERED.
3
Dated: October 12, 2016
4
5

______________________________________
Ronald M. Whyte
United States District Judge

6
7
8
9
10

United States District Court
Northern District of California

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

27
15-cv-05447-RMW
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FC