Joseph Rodriguez v. Gigamon Inc. et al

Filing 66

ORDER granting 54 Motion to Dismiss with leave to amend; setting case management conference. Signed by Judge Edward J. Davila on 7/11/2018. (ejdlc3S, COURT STAFF) (Filed on 7/11/2018)

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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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JOSEPH RODRIGUEZ,

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Case No. 5:17-cv-00434-EJD

Plaintiff,
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v.
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GIGAMON INC., et al.,

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Defendants.

ORDER GRANTING MOTION TO
DISMISS WITH LEAVE TO AMEND;
SETTING CASE MANAGEMENT
CONFERENCE
Re: Dkt. No. 54

United States District Court
Northern District of California

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I. INTRODUCTION
In this securities fraud class action suit, Plaintiffs allege that executive officers of

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Defendant Gigamon Inc. (“Gigamon” or “Company”) made false and misleading statements about

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the Company’s revenue and sales backlog in violation of Sections 10(b) and 20(a) of the Securities

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Exchange Act of 1934 (the “Exchange Act”). Defendants Gigamon, Paul A. Hooper (“Hooper”),

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and Michael J. Burns (“Burns”) move to dismiss the Amended Class Action Complaint for

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Violation of the Federal Securities Laws (“Complaint”). The Court finds it appropriate to take the

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motion under submission for decision without oral argument pursuant to Civil Local Rule 7-1(b).

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Based upon all pleadings filed to date1, Defendants’ motion to dismiss is granted with leave to

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amend.

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II. BACKGROUND2
Plaintiffs purport to bring this securities fraud suit on behalf of all persons and entities who

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purchased or otherwise acquired the securities of Gigamon between October 27, 2016 and

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The parties’ respective requests for judicial notice (Dkt. 56 and 60) are granted.
The Background is a summary of the allegations in the Complaint.
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February 2, 2017 (the “Class Period”). Complaint, ¶ 1. Gigamon is a technology company that

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provides software and services to other companies. Id. at ¶ 2. Gigamon’s products are designed

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to monitor and control data traveling across internet networks. Id. Hooper is Gigamon’s Chief

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Executive Officer. Id. at ¶ 3. Burns is Gigamon’s Chief Financial Officer. Id. Hooper and Burns

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routinely provided investors with estimates concerning Gigamon’s future revenue. Id.

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On October 27, 2016, the Company held a conference call with investors and analysts to

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discuss the Company’s third quarter 2016 financial results. Id. at ¶¶ 4, 46. During that call,

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Defendants provided the public with estimates concerning the Company’s revenue and backlog for

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the fourth quarter, which was almost halfway complete. Id. Hooper stated, “As we enter our
fourth quarter with a healthy backlog, we are on track to deliver our second consecutive year of

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accelerating top-line revenue growth and expanding profitability.” Id. at ¶¶ 4, 32, 46. Defendants

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estimated fourth quarter revenue to be “in the range of $91 million to $93 million.” Id. More

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specifically, Burns stated in pertinent part as follows:

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Now for our Q4 outlook. We’re excited to provide the following
guidance, using our same disciplined guidance methodology for our
fiscal fourth quarter ending December 31, 2016. It’s based on nonGAAP results and excludes any stock-based compensation and
related expenses. Our large deferred service, healthy product
backlog, and consistent quarterly linearity continue to provide good
visibility on growth, profits and execution. We expect fourth quarter
revenue in the range of $91 million to $93 million, 37% year-overyear growth at the midpoint. As we continue to execute on the profit
drivers in all aspects of our business, we are confident that we will
sustain gross margins at approximately the range of 82% to 83%.
We continue to believe that now is a great time for us to invest in
our business. We are investing with conviction to expand our
security portfolio, deliver next generation technology, and increase
sales capacity to ensure continued strong growth next year.
In the fourth quarter of 2016 we also expect to accrue accelerated
year-end commissions due to our strong performance throughout the
year. As a result, we are forecasting fourth-quarter operating
expenses in the range of $54.5 million to $55.5 million. We expect
to book a 32% non-GAAP tax provision, and with the diluted share
count of approximately 39 million, we expect to deliver non-GAAP
earnings per share in the range of $0.36 to $0.38. Achieving the
midpoint of our fourth-quarter guidance will bring our 2016 annual
revenue growth to 43%, our second consecutive year of accelerating
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revenue growth. We would deliver annual EPS growth of 56% and
would result in annual gross margin above 82% and annual
operating margin of 22%.
In summary, the third quarter was another great quarter of execution
and we are well-positioned for a strong finish to the year. We
continue to see significant demand for our solutions across all of our
verticals and plan to next update you on our progress during our
fourth-quarter and full-year 2016 conference call preliminarily
scheduled for Thursday, February 2, 2017.

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Id. at ¶ 47 (emphasis added). These statements led investors to believe that Gigamon “had

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significant unrecognized revenue, that there were product bookings in the backlog which would

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significantly increase revenue, and that, overall, increased revenue was guaranteed.” Id. at ¶ 48.

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On October 28, 2016, the first trading day following the conference call, the price of Gigamon’s

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common stock increased from $47.38 per share to $55.01 per share. Id. at ¶ 5.
Unbeknownst to investors, Defendants did not have a reasonable basis in fact for the

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revenue estimate that they provided. Id. at ¶ 6. “As of October 27, 201[6], Defendants knew that

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key customers were in the process of deferring purchases that were likely to have a significant

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negative impact on the Company’s revenue for the quarter.” Id. “Moreover, Defendants were

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aware that Gigamon’s sales ‘backlog’ would not be sufficient to compensate for the deferred

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purchase from this customer, i.e., the Company would not be able to meet its revised revenue

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estimate by relying on its ‘backlog.’” Id.

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On November 2, 2016, Hooper mentioned in an interview that Gigamon was expecting

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$315 million in revenue for the year, “which meant that revenue for the fourth quarter was

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expected to be approximately $89 million.” Id. at ¶ 6. Plaintiffs allege that Hooper’s November

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2, 2016 statement showed Gigamon was expecting less revenue than what was publicly stated just

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a few days earlier on October 27. Id.

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Plaintiffs allege that Defendants’ knowledge about Gigamon’s true revenue estimates was

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materially adverse and not public. Id. at ¶ 7. A number of Gigamon’s insiders sold stock while in

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possession of the material, non-public information. Id. In total, the proceeds from the insider

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sales amounted to more than $14.5 million, not including Burns’ sale of over 20,000 shares of

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stock. Id. Plaintiffs allege that these sales were atypical in timing and size and support a strong

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inference that Defendants acted with scienter. Id.
The truth about Gigamon’s fourth quarter revenue emerged on January 17, 2017, when the

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Company issued a press release entitled “Gigamon Announces Preliminary Fourth Quarter and

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Fiscal Year 2016 Results.” Id. at ¶ 8. The press release disclosed preliminary fourth quarter 2016

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revenue of $84.5 million to $85.0 million, compared to the Company’s prior guidance of $91

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million to $93 million.” Id. The press release also quoted Hooper stating that “fourth quarter

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revenue was below our prior guidance” and that “[f]ourth quarter revenue fell short primarily due

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to lower than expected product bookings in our North America West region, as several significant

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existing customer accounts deferred purchasing decisions into 2017.” Id. The price of Gigamon’s

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common stock fell $12.65 per share (or 28.7%) to close at $31.40 per share on January 18, 2017.

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Id.

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Two weeks later, during an investor call on February 2, 2017, Defendant Hooper explained

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that the shortfall was “due to lower than expected bookings in our North America west region, as

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several significant larger accounts deferred purchasing decisions into 2017.” Id. at ¶ 10. Hooper

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also stated: “We understand that the reasons for the deferrals range from changes in their

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purchasing patterns to network upgrade decisions that we believe are unrelated to our customer’s

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commitments to add solutions.” Id. at ¶ 56. Rex Jackson, the Chief Financial Officer that

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replaced Burns, stated further that “product backlog at quarter end was $3.1 below our range of

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approximately $6 million to $8.5 million of proceeding six quarters.” Id. at ¶ 10. Between

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February 2, 2017 and February 3, 2017, Gigamon’s common stock declined from $32.10 to $30.40

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(or 5.3%). Id.

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III. STANDARDS

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Federal Rule of Civil Procedure 8 requires that a complaint contain a short and plain

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statement showing the pleader is entitled to relief. A motion to dismiss under Rule 12(b)(6), Fed.

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R. Civ. P., “tests the legal sufficiency” of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th

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Cir. 2001). A court may dismiss a claim for “lack of a cognizable legal theory or the absence of

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sufficient facts alleged under a cognizable theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d

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696, 699 (9th Cir. 1988). In reviewing the sufficiency of a claim, the court accepts as true all of

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the plaintiff’s allegations and construes them in the light most favorable to the plaintiff. In re

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Gilead Sciences Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).

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“To recover damages for violations of section 10(b) and Rule 10b-5, a plaintiff must prove

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

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

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the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Halliburton Co. v.
Erica P. John Fund, Inc., 134 S. Ct. 2398, 2407 (2014) (internal quotation marks omitted).

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Because a section 10(b) claim sounds in fraud, a plaintiff asserting such a claim must satisfy the

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heightened pleading standard of Rule 9(b), Fed. R. Civ. P. A plaintiff averring securities fraud

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must plead with particularity the circumstances constituting fraud. Fed. R. Civ. P. 9(b).

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Securities fraud claims must also satisfy the pleading requirements of the Private Securities

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Litigation Reform Act (“PSLRA”), which states that the complaint “shall specify each statement

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alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an

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allegation regarding the statement or omission is made on information and belief, the complaint

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shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u–4(b)(1).

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The PSLRA also requires a plaintiff to state with particularity facts giving rise to a strong

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inference of a defendant’s scienter. See 15 U.S.C. §78u-4(b)(2). To plead scienter, a plaintiff

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must allege “specific facts indicating no less than a degree of recklessness that strongly suggests

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actual intent.” Bielousov v. GoPro, Inc., No. 16-6654 CW, 2017 WL 3168522, at *3 (N.D. Cal.

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July 26, 2017) (quoting In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 979 (9th Cir. 1999)).

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IV. DISCUSSION

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Defendants move to dismiss the Complaint for two fundamental reasons: the challenged
statements are not actionable and the Complaint lacks sufficient facts to support a strong inference
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of scienter. As to the first argument, Defendants contend that the challenged statements are

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forward-looking and protected by the PSLRA’s Safe Harbor, vague statements of corporate

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optimism, and that Plaintiffs have failed to allege particular facts showing that any alleged

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misstatement was false or misleading when made. As to the second argument, Defendants

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contend that neither Hooper’s November 2 statement nor the stock sales allegations, viewed

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individual or holistically, are sufficient to support a compelling inference of scienter.

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A. Whether The Challenged Statements Are Forward-Looking

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The Safe Harbor of the PSLRA immunizes forward-looking statements from liability if the

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statements are (i) “identified as forward-looking” and (ii) “accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to differ materially from

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those in the forward-looking statement.” 15 U.S.C. § 78u-5(c)(1)(A)(i); see also In re Cutera

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Securities Litig., 610 F.3d 1103, 1112-13 (9th Cir. 2010); City of Royal Oak Ret. Sys. v. Juniper

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Networks, Inc., 880 F. Supp. 2d 1045, 1061 (N.D. Cal. 2012). “Under subsection (A)(i), . . . if a

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forward-looking statement is identified as such and accompanied by meaningful cautionary

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statements, then the state of mind of the individual making the statement is irrelevant, and the

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statement is not actionable regardless of the plaintiff’s showing of scienter.” In re Cutera

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Networks, Inc., 610 F.3d at 1112.

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The term “forward-looking” statement means:
(A) a statement containing a projection of revenues, income
(including income loss), earnings (including earnings loss) per
share, capital expenditures, dividends, capital structure, or other
financial items;
(B) a statement of the plans and objectives of management for future
operations, including plans or objectives relating to the products or
services of the issuer;
(C) a statement of future economic performance, including any such
statement contained in a discussion and analysis of financial
condition by the management or in the results of operations included
pursuant to the rules and regulations of the Commission;
(D) any statement of the assumptions underlying or relating to any
statement described in subparagraph (A), (B), or (C);
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(E) any report issued by an outside reviewer retained by an issuer, to
the extent that the report assesses a forward-looking statement made
by the issuer; or

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(F) a statement containing a projection or estimate of such other
items as may be specified by rule or regulation of the Commission.

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15 U.S.C. § 78u-5(i)(1).
1. Defendant Burns’ Statements

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Plaintiffs identify the following statements by Burns as actionable: “Our large deferred
service, healthy product backlog, and consistent quarterly linearity continue to provide good

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visibility on growth profits and execution. We expect fourth quarter revenue in the range of $91

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million to $93 million.” Complaint, ¶ 47. Plaintiffs contend that the references to “large deferred

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service” and “healthy product backlog” do not fall within the Safe Harbor because they were false

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or misleading statements about the present state of Gigamon’s affairs, and not forward-looking

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statements.

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Burns’ statements are similar to those at issue in In re Quality Systems, Inc. Securities

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Litigation, 865 F.3d 1130 (9th Cir. 2017). In Quality Systems, the defendants repeatedly made

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revenue and earnings projections based upon Quality Systems, Inc.’s (“QS”) “pipeline” of future

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business. One individual defendant stated that “opportunities” for sales to first-time electronic

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healthcare system purchasers “are plentiful,” and predicted a revenue range and earnings per

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share. The defendant characterized these predictions as “quite conservative” given QS’s “large”

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pipeline. Other individual defendants similarly made predictions for revenue growth and earnings

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per share that were based upon, among other things, QS’s pipeline. Id. at 1147-48 (“growing”

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pipeline; “the state of the current sales pipeline”; “[y]ou wouldn’t know that by our pipeline”;

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“$183 million worth of pipeline”; “the sales pipeline has grown every quarter . . . since February

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of 2009 and we view it as continually growing”). The Ninth Circuit described these statements as

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“forward-looking statements made as part of mixed statements in which the non-forward-looking

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statements were materially false or misleading.” Id. at 1146. The Ninth Circuit next considered

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whether the non-forward looking portions of these “mixed” statements were accompanied with

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adequate cautionary language under the PSLRA, and concluded that they were not. Id. at 1148.

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The Ninth Circuit reasoned that the cautionary language used by defendants failed to correct the

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materially false or misleading non-forward looking statement regarding the current state of QS’s

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pipeline, and therefore reversed the trial court’s dismissal of the mixed statements. Id. at 1150.
Here, Burns similarly made mixed statements containing forward-looking and non-

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forward-looking statements. Burns made a forward-looking prediction about fourth quarter

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revenue. Burns’ forward-looking prediction was accompanied by a non-forward-looking

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statement regarding Gigamon’s “large deferred service,” “healthy product backlog,” and

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“consistent quarterly linearity,” which provided the factual predicate for Burns’ revenue

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prediction. Plaintiffs contend that the “large deferred service,” “healthy product backlog,” and

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“consistent quarterly linearity” refer to the present business conditions at Gigamon. Plaintiffs’

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Opposition at 15:4-5 (“This refers to a present state of affairs, and is not a projection or forecast.”).

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Defendants nevertheless contend that the Safe Harbor provision applies because the “large

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deferred service,” “healthy product backlog,” and “consistent quarterly linearity” are

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“assumptions” underlying the revenue prediction that are protected pursuant to 15 U.S.C. § 78u-

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5(i)(1)(A) & (D). Westley v. Oclaro, Inc., 897 F. Supp. 2d 902, 918 (N.D. Cal. 2012).

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Defendants’ argument is unpersuasive. Burns’ statement includes facts regarding the present state

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of the Company, not assumptions. “To interpret the safe harbor protection of underlying

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assumptions in the manner suggested by the defendants would allow the exception to swallow the

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rule. Virtually any factual assertion by a business entity would be subject to safe harbor

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protection.” In re Boeing Securities Litig., 40 F. Supp.2d 1160, 1169 (W.D. Wash. 1998).

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Defendants’ reliance on Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051 (9th

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Cir. 2014) is misplaced. In Intuitive Surgical, the company issued forward-looking growth and

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revenue projections for its robotic surgical devices based upon assumptions underlying future

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economic performance, such as “[g]ynecology plays a bigger and bigger role each day,” which the

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court held fell within the Safe Harbor. Id. at 1059. Burns’ factual representations regarding

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Gigamon’s existing “large deferred service,” “healthy product backlog,” and “consistent quarterly

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linearity” are clearly distinguishable from the “assumptions” regarding gynecology underlying the

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statements at issue in Intuitive Surgical.

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In sum, the non-forward-looking portions of Burns’ statement are not protected by the Safe

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Harbor Provisions of the PSLRA. See Quality Systems, 865 F.3d at 1141 (“We hold a defendant

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may not transform non-forward-looking statements into forward-looking statements that are

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protected by the safe harbor provisions of the PSLRA by combining non-forward-looking

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statements about past or current facts with forward-looking statements about projected revenues

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and earnings.”).
2. Defendant Hooper’s Statement
Hooper’s statement that “[a]s we enter our fourth quarter with a healthy backlog, we are on

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track to deliver our second consecutive year of accelerating top-line revenue growth and

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expanding profitability” is arguably a forward-looking statement because it contains a projection

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regarding revenues and profitability. See, e.g., Police Ret. Sys. of St. Louis v. Intuitive Surgical,

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Inc., No. 10-03451 LHK, 2012 WL 1868874, at *10 (N.D. Cal. May 22, 2012), aff’d, 759 F.3d

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1051 (9th Cir. 2014) (statement that “revenue ‘is on track to grow 55% this year’” was forward-

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looking); Guangyi Xu v. ChinaCache Int’l Holdings Ltd., No. 15-07952 CASR, 2017 WL 114401,

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at *5-6 (C.D. Cal. Jan. 9, 2017) (statement that company was “on track” to complete migration to

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new platform was forward-looking); In re ECOtality, Inc. Securities Litig., No. 13-3791 SC, 2014

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WL 4634280, at *5-7 (N.D. Cal. Sept. 16, 2014) (“on track to begin delivery in the third quarter to

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satisfy our healthy pipeline of interest in [the Minit-Charger]” is forward-looking).

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Hooper’s statement, however, could also be interpreted as a statement about Gigamon’s

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current business condition. See e.g. Bielousov v. GoPro, Inc., 2017 WL 3168522, at *3 (“[w]e

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believe we’re still on track to make [revenue guidance]” is a statement of present opinion and not

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forward-looking); In re Secure Computing Corp. Securities Litig., 120 F. Supp. 2d 810, 818 (N.D.

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Cal. 2000) (in analyzing statement that company was “on track to meet analysts’ earnings

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expectations,” the court “accepts [p]laintiffs’ representation that they are alleging that [d]efendants

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misrepresented current business conditions” and concludes that the statement is not forward-

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looking); In re Copper Mountain Securities Litig., 311 F. Supp.2d 857, 880 (N.D. Cal. 2004)

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(statement that company was “on track” to meet future goals was not forward-looking “to the

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extent that such statement[] rested upon a characterization of the present state of the company).

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Plaintiffs contend that they are challenging Hooper’s reference to “healthy backlog” as a
fraudulent representation about the present state of affairs at the Company. Plaintiffs’ Opposition

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at 15:4-5. The Court accepts Plaintiffs’ characterization of their claim and will treat Hooper’s

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statement as a mixed statement. It follows that the non-forward-looking portion of Hooper’s

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statement is not protected by the Safe Harbor provisions of the PSLRA. See Quality Systems, 865

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F.3d at 1141.
3. Defendants’ “Cautionary Statements”

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Because Burns and Hooper made forward-looking statements as part of mixed statements,

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the Court next considers Defendants’ contention that their statements were accompanied by

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“meaningful” cautionary language and are therefore protected by the PSLRA’s Safe Harbor.

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“The requirement for ‘meaningful’ cautions calls for substantive company-specific warnings based

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on a realistic description of the risks applicable to the particular circumstances.” In re Harman

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Intern. Industries, Inc. Securities Litig., 791 F.3d 90, 102 (D.C. Cir. 2015) (quoting Southland Sec.

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Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 372 (5th Cir. 2004) (some internal quotation

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marks omitted)). “[C]autionary statements must be substantive and tailored to the specific future

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projections, estimates or opinions in the [statements] which the plaintiffs challenge.” Id. (quoting

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Institutional Inv’rs Grp. v. Avaya, Inc., 564 F.3d 242, 256 (3d Cir. 2009) (internal quotation marks

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omitted)).

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A boilerplate statement, such as “[t]his is a forward-looking statement: caveat emptor” is

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not “meaningful” cautionary language under the PSLRA. Id. (quoting Asher v. Baxter Int’l Inc.,

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377 F.3d 727, 729 (7th Cir. 2004). Generalized warnings that statements are “not guarantees of

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future performance . . . and involve known and unknown risks and other factors that could cause

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actual results to be materially different from any future results expressed or implied by them” are

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also insufficient to satisfy the PSLRA. Id. (quoting Lormand v. US Unwired, Inc., 565 F.3d 228,

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244 (5th Cir. 2009) (internal quotation marks omitted)).

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The Quality Systems decision is also instructive. In that case, the defendants allegedly

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made mixed statements that contained predictions about future revenue and earnings per share that

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were supported by, among other things, positive characterizations about the current state of the

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defendant company’s pipeline. The Ninth Circuit opined as follows with regard to the PSLRA’s

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Northern District of California

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cautionary language provision:
Where a forward-looking statement is accompanied by a nonforward-looking factual statement that supports the forward-looking
statement, cautionary language must be understood in the light of
the non-forward-looking statement. If the non-forward-looking
statement is materially false or misleading, it is likely that no
cautionary language—short of an outright admission of the false or
misleading nature of the non-forward-looking statement—would be
“sufficiently meaningful” to qualify the statement for the safe
harbor.

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Adequate cautionary language under the PSLRA must identify
“important factors that could cause actual results to differ materially
from those in the forward-looking statement.” See 15 U.S.C. § 78u5(c)(1)(A)(i). For cautionary language accompanying a forwardlooking portion of a mixed statement to be adequate under the
PSLRA, that language must accurately convey appropriate,
meaningful information about not only the forward-looking
statement but also the non-forward-looking statement.
Quality Systems, 865 F.3d at 1146-1148.
In the present case, Gigamon issued the following cautionary statement at the beginning of
the October 27 conference call:
During the course of today’s presentation, our executives will make
forward-looking statements within the meaning of the federal
securities laws. Forward-looking statements generally relate to
future events or future financial or operating performance. ForwardCASE NO.: 5:17-cv-00434-EJD
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United States District Court
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looking statements in this presentation include, but are not limited
to, statements related to our business and financial performance and
expectations, and guidance for future periods, our expectations
regarding our product initiatives and the related benefits, and our
expectations regarding the market. Our expectations and beliefs
regarding these matters may not materialize, and actual results in
future periods are subject to risks and uncertainties that could cause
actual results to differ materially from those projected. These risks
include those set forth in the press release that we issued earlier
today as well as those more fully described in our filings with the
Securities and Exchange Commission, including our annual report
on Form 10-K and our most recent quarterly report on Form 10-Q.
The forward-looking statements in this presentation are based on
information available to us as of the date hereof, and we disclaim
any obligation to update any forward-looking statements, except as
required by law. Please note that other than revenue or as otherwise
specifically stated, the financial measures to be discussed on this call
will be on a non-GAAP basis. The non-GAAP financial measures
are not intended to be considered in isolation or as a substitute for
results prepared in accordance with GAAP. A discussion of why we
present non-GAAP financial measures and a reconciliation of the
non-GAAP financial measures discussed in this call to most directly
comparable GAAP financial measures, are included in our earnings
press release that’s available on our website. On this call, we will
give guidance for the fourth quarter of fiscal year 2016 on a nonGAAP basis. We do not make available the reconciliation of nonGAAP guidance measures to corresponding GAAP measures on a
forward-looking basis due to the high variability and low visibility
with respect to the changes, which are excluded from these nonGAAP measures.
Decl. of Nicholas R. Miller, Ex. 14, p. 3.
Plaintiffs contend that the cautionary statement above was inadequate because it amounted

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to only a general disclaimer and failed to disclose the true state of the company’s backlog as of

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October 27, which analysts described as “almost nonexistent.” Complaint, ¶ 59. Plaintiffs also

20

contend that the cautionary statement was not “meaningful” because Burns and Hooper did not

21

disclose to the public that as of October 27, Gigamon customers had already deferred purchases

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and that revenue would be less than represented. Plaintiffs’ Opposition at 17:22-23 (citing In re

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Countrywide Fin. Corp. Sec. Litig., 588 F. Supp.2d 1132, 1178, n. 62 (C.D. Cal. 2008)

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(“cautionary words about future risk cannot insulate from liability the failure to disclose that the

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risk has transpired”)).

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Gigamon’s cautionary statement and its SEC filings contained extensive lists of important

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risk factors that could cause its actual revenue results to differ from those forecasted. In particular,

3

Defendants highlight two warnings in Gigamon’s Form 10-Q:

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• “if we fail to close a large transaction or multiple smaller
transactions that we expect to close in a given period, our operating
results . . . may be materially adversely affected”; and,
• “[a]ctual results may vary from our guidance and the variations
may be material” because of “the timing of orders from our channel
partners and end-user customers” or “the budgeting cycles and
internal purchasing priorities of our enduser customers . . . .”
Dkt. 55, Ex. 21 at 35, 37, 50. Gigamon also warned that actual results could vary because of
“customer acceptance and purchase of our existing products” and “our ability to retain existing

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customers . . . .” Id., Ex. 3 at Ex. 99.1. Defendants contend that the Company’s cautionary

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statements described the very risk that came to pass and ultimately caused Gigamon to miss its

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revenue guidance, namely “lower than expected product bookings . . . as several significant

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existing customer accounts deferred purchasing decisions into 2017.” Complaint, ¶53.

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Conspicuously absent from the numerous cautionary warnings, however, is any mention of

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Gigamon’s backlog. Plaintiffs define product backlog as including “orders for products scheduled

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to be shipped within 90 days to customers with approved credit status, and is net of service

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revenue allocations and any rebates and discounts.” Id. at ¶ 29. Construing the Complaint

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liberally in favor of Plaintiffs, the Court treats the “orders” included in the backlog as firm

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commitments to purchase that existed as of the date of Defendants’ alleged misstatements.

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Defendants do not explain how Gigamon’s cautionary statement about the potential failure to

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“close” transactions, which presumably refers to future transactions, provides a meaningful

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warning about orders existing at the time of Defendants’ alleged misstatements. Defendants also

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do not explain how a cautionary statement about the “timing of orders” and “the budgeting cycles

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and internal purchasing priorities” of customers, which also presumably refer to future orders and

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future purchasing priorities of customers, provides a meaningful warning about orders existing at

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the time of Defendants’ alleged misstatements. Because it is not apparent from the pleadings that

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Defendants’ cautionary language corrected the alleged misstatement regarding Gigamon’s

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backlog, it is premature to decide whether the Safe Harbor immunizes Defendants’ from liability.

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See Bodri v. GoPro, Inc., 252 F. Supp.3d 912, 930 (N.D. Cal. 2017) (if there is a legitimate

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dispute as to whether cautionary language is sufficient, dismissal of claim is not warranted).3

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B. Whether the Challenged Statements are “Puffery”

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Defendants next contend that the challenged statements about “healthy” product backlog,

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“large” deferred service revenue, “consistent” quarter linearity, and “on track” to deliver

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“accelerating top-line revenue growth and expanding profitability” are vague and subjective
statements of corporate optimism that should be dismissed as mere puffery. Defendants

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characterize these phrases as vague and subjective statements of corporate optimism that cannot

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support a claim for securities fraud. In response, Plaintiffs argue that Defendants’ statements are

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similar to the statements found actionable in Quality Systems regarding the condition of the

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company’s pipeline.

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Puffery is an expression of opinion, while a misrepresentation is a knowingly false

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statement of fact. Oregon Public Employees Retirement Fund v. Apollo Group Inc., 774 F.3d 598,

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606 (9th Cir. 2014). Generalized statements of corporate optimism, such as business is “healthy,”

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may be considered puffery. See Fadia v. FireEye, Inc., No. 14-5204 EJD, 2016 WL 6679806, at

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*9 (N.D. Cal. Nov. 14, 2016) (statements about business being “very healthy” and sales cycles

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being “consistent” were non-actionable puffery); see also Intuitive Surgical, 759 F.3d at 1060

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(statement that “opportunity for system placement at hospitals ‘is still very, very large’” not

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actionable); In re Nimble Storage, Inc. Sec. Litig., 252 F. Supp. 3d 848, 854 n.8 (N.D. Cal. 2017)

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(“statements indicating that a company is ‘on track’ to meet a certain goal are, without more,

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inactionable puffery.”); In re Rackable Sys., Inc. Sec. Litig., No. 09-0222 CW, 2010 WL 199703,

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For the same reason, it is premature to determine whether the bespeak caution doctrine precludes
liability.
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at *6 (N.D. Cal. Jan. 13, 2010) (statements that relationship with customers was “pretty strong”

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and “solid” not actionable) (citation omitted).

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Defendants’ statements in this case, however, are not as generalized as those at issue in

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Fadia, Intuitive Surgical, Nimble Storage, or Rackable. Rather than describing the Company,

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opportunities, goals, or relationships with customers in broad strokes, Defendants made factual

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statements regarding certain aspects of Gigamon’s business, in particular Gigamon’s backlog. In

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Quality Systems, the Ninth Circuit found that the defendants “went beyond ‘feel good’ optimistic

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statements” when they represented that the company’s pipeline was “very robust,” “deep,” at

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“record levels,” and “keeps growing.” Quality Systems, 865 F.3d at 1137-1138. According to the
Ninth Circuit, the defendants in Quality Systems “did not just describe the pipeline in subjective

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or emotive terms. Rather they provided a concrete description of the past and present state of the

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pipeline.” Id. at 1144. Consistent with Quality Systems, the Court finds that Defendants in this

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case went beyond just providing subjective or emotive descriptions of Gigamon’s product

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backlog, deferred service revenue, revenue and profitability. Defendants’ challenged statements

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cannot be dismissed as mere puffery.

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C. Whether Plaintiffs Pled Facts Showing That Challenged Statements Were False or
Misleading
Defendants next contend that the Complaint should be dismissed because Plaintiffs fail to

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plead contemporaneous facts showing that any of the challenged statements were false or

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misleading at the time they were made. Plaintiffs cite to Hooper’s November 2 annual revenue

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estimate to show that the October 27 guidance of $91-93 million was false. On November 2,

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Hooper said that Gigamon was “currently running to around that $315 million revenue this year . .

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. .” ¶ 6; Ex. 16 at 5. Gigamon’s Q3 revenue was $226 million, and the difference between the

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projected $315 million and previously-earned $226 million is $89 million, which is lower than the

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October 27 guidance range. ¶ 62; Ex. 16 at 5. The fact that Gigamon’s financial results turned out

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differently from the guidance, however, does not establish that the guidance was false when made.

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See In re Rackable Sys., Inc. Sec. Litig., 2010 WL 3447857, at *8 (failing to meet projection

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“does not make the projection a misrepresentation”).

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Plaintiffs’ Complaint also includes information provided by five former sales employees

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(“CWs”) to show Defendants’ statements were false when made. Complaint, ¶¶ 37-43.

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Defendants contend that these employees do not provide any information about Gigamon’s Q4

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2016 revenue guidelines or the assumptions underlying the guidelines, or what Hooper or Burns

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allegedly knew about the Q4 2016 guidance or the Company’s backlog, deferred service revenue

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or quarterly linearity. Inexplicably, Plaintiffs do not mention CWs even once in their Opposition,

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much less attempt to refute Defendants’ arguments. The Court treats Plaintiffs’ failure to address

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Defendants’ arguments as a tacit acknowledgement of their merit.
Plaintiffs have failed to plead facts to show Defendants’ statements were false or
misleading when made.

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D. Scienter

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Defendants also contend that Plaintiffs fail to allege facts to support a strong inference of

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scienter. Plaintiffs’ counter that scienter can be inferred from Hooper’s November 2 statement, as

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well as the stock sales of the individual Defendants and other officers and directors.

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The PSLRA requires a plaintiff to “state with particularity facts giving rise to a strong

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inference that the defendant acted with the required statement of mind.” 15 U.S.C. § 78u-4(b)(2).

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“A defendant is liable under Section 10(b) and Rule 10b-5 when he acts with scienter, a ‘mental

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state that not only covers intent to deceive, manipulate, or defraud, but also deliberate

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recklessness.’” City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align

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Tech., Inc., 856 F.3d 605, 619 (9th Cir. 2017) (quoting Schueneman v. Arena Pharm., Inc., 840

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F.3d 698, 705 (9th Cir. 2016). “Deliberate recklessness is ‘an extreme departure from the

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standards of ordinary care . . . which presents a danger of misleading buyers or sellers that is either

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known to the defendant or is so obvious that the actor must have been aware of it.’” Schueneman,

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840 F.3d at 705 (italics in original). In ruling on a motion to dismiss, the inquiry is “whether all of

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

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individual allegation, scrutinized in isolation, meets that standard.” Tellabs, Inc. v. Makor Issues

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& Rights, Ltd., 551 U.S. 308, 310 (2007) (italics in original). “A securities fraud complaint will

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survive a motion to dismiss under Rule 12(b)(6) ‘if a reasonable person would deem the inference

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

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facts alleged.’” New Mexico State Investment Council v. Ernst & Young LLP, 641 F.3d 1089,

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1095 (9th Cir. 2011) (quoting Tellabs, 551 U.S. at 324).

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Hooper’s November 2 Statement
Hooper’s November 2 statement does not support a strong inference that Defendants made
false or misleading statements intentionally or with deliberate recklessness. As Defendants point

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out, Hooper’s choice of words—“currently running to around that $135 million revenue this

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year”—suggests that Hooper was approximating the annual revenue number. Hooper’s November

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2 statement cannot reasonably be construed as an admission that Hooper was modifying the Q4

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guidance. Indeed Hooper’s statement did not prompt analysts at the November 2 conference to

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announce a change in Gigamon’s Q4 guidance.

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Stock Sales

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In the Ninth Circuit, only “unusual” or “suspicious” stock sales by corporate insiders may

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support a strong inference of scienter. In re Silicon Graphics, 183 F.3d at 986. “Three factors are

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

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

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

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Here, Plaintiffs’ stock sale allegations are also insufficient to support an inference of

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scienter. Hooper sold 45,000 shares of Gigamon stock on October 31, 2016 pursuant to a Rule

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10b5-1 trading plan adopted in May of 2015, more than a year before the alleged fraud. This sale

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occurred days after Gigamon’s announcement of Q3 results and represented about 16% percent of

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his Class Period Holdings. In general, automatic sales made pursuant to Rule 10b5-1 plans do not

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support a strong inference of scienter. See e.g. Kotun v. VIVUS, Inc., No. 10-4957 PJH, 2012

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WL 4477647, at *21 (N.D. Cal. Sept. 27, 2012).4 Moreover, Plaintiffs have not shown that the

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timing of Hooper’s stock sales is unusual or suspicious. “Officers of publicly traded companies

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commonly make stock transactions following the public release of quarterly earnings and related

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financial disclosures.” Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1037 (9th Cir. 2002). Nor

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have Plaintiffs shown that the amount and percentage of Hooper’s stock sales are unusual or

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suspicious. “The Ninth Circuit has held that typically ‘larger sales amounts’ than 37% of a

8

defendant's holdings are necessary to support scienter.” Wozniak v. Align Techs., Inc., No. 09-

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3671 MMC, 2011 WL 2269418, at *14 (N.D. Cal. June 8, 2011) (citing Metzler Inv. GMBH v.
Corinthian Colleges, Inc., 540 F.3d at 1067) (finding allegation defendant sold 37% of total stock

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holdings insufficient; noting “[w]e typically require larger sales amounts-and corroborative sales

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by other defendants-to allow insider trading to support scienter”)). Plaintiffs cite Nursing Home

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Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1232 (9th Cir. 2004), and argue that

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“[t]here is no hard-and-fast rule as to how much stock a defendant must sell before he or she can

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be found to have acted with scienter.” Opposition, pp. 23-24. In Oracle, the Ninth Circuit held

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that defendants’ sales were sufficient to support a finding of scienter, even though the sales

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comprised only 2.1% and 7% of defendants’ respective holdings. In doing so, the Ninth Circuit

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noted, however, that the sales amounted to over $900 million in proceeds. Id. Hooper’s stock

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proceeds in this case are hardly comparable. Further, Hooper’s stock sales were consistent with

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his prior trading history. Hooper sold 45,000 shares in August 2016 and 30,000 shares in each of

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the prior three quarters, in May 2016, February 2016 and November 2015.

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4

Contrary to Plaintiffs’ assertion, Plaintiffs’ out-of-district cases do not hold otherwise. In
Employees’ Retirement System of Gov’t of the Virgin Islands v. Blanford, 794 F.3d 297, 309 (2nd
Cir. 2015), the defendants entered into 10b5-1 trading plans after the alleged fraudulent scheme
began. In Stocke v. Shuffle Master, Inc., 615 F. Supp.2d 1180, 1193, n. 5 (D. Nev. 2009), the
defendant entered into a 10b5-1 trading plan during the class period. In contrast, Hooper entered
into a 10b5-1 trading plan more than a year before the alleged fraud.
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As to Burns, Plaintiffs allege that he “sold stock at atypical times and in atypical amounts”

1
2

without setting forth sufficient facts to support such a conclusion. Complaint, ¶68. Instead,

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Plaintiffs compare the number of shares Burns held as of September 23, 2016 to those he held as

4

of April 30, 2017, and assume that Burns sold those shares at the highest price during the Class

5

Period. No inference of scienter can be drawn from such speculative allegations, much a strong

6

inference of scienter as required by the PSLRA.
Plaintiffs’ allegations of Gigamon stock sales by several non-defendant officers and

7
8

directors also fail to support an inference of scienter. Plaintiffs allege that Shehzad Merchant,

9

Chief Technology Officer, sold 37,935 shares for $2,166,064.06; Ted Ho, a Director, sold 180,000
shares for $8,731,310.49; Helmut Wilke, Sr. VP Worldwide Sales, sold 8,032 shares for

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United States District Court
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$462,573.40; and Paul Shinn, Secretary and General Counsel, sold 5,064 shares for $293,972.00.

12

Complaint, ¶¶ 69-73. Plaintiffs do not, however, allege any facts to show that these stock sales

13

were unusual or suspicious. In sum, Plaintiffs’ allegations, whether viewed separately or

14

holistically5, are insufficient to raise an inference of scienter.

15

V. CONCLUSION
For the reasons set forth above, Defendants’ motion to dismiss is granted with leave to

16
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amend.6 Plaintiffs may file and serve an amended complaint no later than July 30, 2018.

18

The Court will conduct a case management conference at 10:00 a.m. on October 11, 2018. The

19

parties shall file a joint case management statement no later than October 1, 2018.
IT IS SO ORDERED.

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Dated: July 11, 2018

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______________________________________
EDWARD J. DAVILA
United States District Judge

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5

Tellabs, 551 U.S. at 310.
Defendants’ motion challenges other statements made by Hooper during three analyst
conferences and interview. Complaint, ¶ 44. Plaintiffs do not address Defendants’ arguments,
and thus implicitly concede that Hooper’s statements during the three analyst conferences and
interview are not actionable. In the event Plaintiffs elect to amend their Complaint, Plaintiffs are
precluded from realleging these statements.
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6