IN RE ST. JUDE MEDICAL, INC. SECURITIES LITIGATION

Filing 57

MEMORANDUM OPINION AND ORDER: Defendants' motion to dismiss [Doc. No. 36] is GRANTED IN PART (insofar as it seeks dismissal of Count I with respect to Defendants Fain and Rousseau) and DENIED IN PART (insofar as it seeks dismissal of Count I with respect to Defendants Starks and Heinmiller and insofar as it seeks dismissal of Count II) (Written Opinion). Signed by Judge Susan Richard Nelson on 12/23/11. (LPH)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
In Re: St. Jude Medical, Inc. Securities
Litigation

Civil No. 10-0851 (SRN/TNL)

MEMORANDUM OPINION
AND ORDER

Dennis J. Herman, and Matthew S. Melamed, Robbins Geller Rudman & Dowd LLP,
Post Montgomery Center, One Montgomery St., Suite 1800, San Francisco, CA 94104;
Carolyn G. Anderson, and Brian C. Gudmundson, Zimmerman Reed, P.L.L.P., 651
Nicollet Mall, Suite 501, Minneapolis, MN 55402, for Plaintiffs.
James K. Langdon, Michelle S. Grant, and Eric R. Sherman, Dorsey & Whitney LLP, 50
South Sixth Street, Suite 1500, Minneapolis, MN 55402, for Defendants.

SUSAN RICHARD NELSON, United States District Judge
This matter is before the court on Defendants’ motion to dismiss (Doc. No. 36).
For the reasons stated below, this Court grants the motion in part and denies it in part.
I.

FACTUAL AND PROCEDURAL BACKGROUND
In this securities fraud action, Lead Plaintiff Building Trades Pension Trust Fund

and Plaintiff City of Taylor Police and Fire Retirement System claim that Defendant St.
Jude Medical, Inc. (“STJ”), and four of its officers–(1) Defendant Daniel J. Starks, STJ’s
Chairman, President and Chief Executive Officer, (2) Defendant John C. Heinmiller,
STJ’s Chief Financial Officer and Executive Vice President, (3) Defendant Eric S. Fain,
President of STJ’s Cardiac Rhythm Management Division, and (4) Defendant Michael T.
Rousseau, STJ’s Group President (collectively, the “Individual Defendants”)–violated the

Securities Exchange Act of 1934 and the implementing regulations issued by the
Securities Exchange Commission (“SEC”). Seeking class certification on behalf of all
persons similarly injured by acquiring STJ securities, Plaintiffs allege a Class Period from
April 22, 2009 to October 6, 2009, when STJ announced that revenues and earnings for
the third quarter of 2009 (“3Q09”) were expected to be substantially lower than what
Defendants had forecast. That day, shares of STJ’s common stock declined by $4.84, or
12.7%, on high trading volume (Doc. No. 23, ¶ 10), while the Dow Jones U.S. Medical
Devices Index Fund, which includes not only STJ, but also its two main competitors,
Medtronic Inc. and Boston Scientific Corporation, “fell by just 0.6% the same day” (Id. ¶
110).
On March 18, 2010, Plaintiffs filed their original Complaint (Doc. No. 1), and on
August 16, 2010, they filed their Consolidated and Amended Class Action Complaint
(“Complaint”), asserting claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(b), and the SEC’s Rule 10b-5, 17 C.F.R.
§ 240.10b-5.
Defendants now move to dismiss, claiming that the allegations of the Complaint
fail to satisfy the heightened pleading requirements of the Private Securities Litigation
Reform Act of 1985 (“PSLRA”), Pub. L. 104-67, 109 Stat. 743, 758 (codified at 15
U.S.C. § 78u-4), with respect to the identification of false or misleading statements and
the requisite state of mind, as well as other legal requirements for pleading securities
fraud claims, particularly with respect to loss causation.

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II.

DISCUSSION
Plaintiffs’ Complaint asserts two claims: (1) a claim under Section 10(b) and Rule

10b-5 against all of the Defendants, alleging that Defendants made false statements of
material fact that deceived Plaintiffs (Count I); and (2) a derivative claim under Section
20(a) against all Defendants, alleging that they were liable as “control persons” under the
Exchange Act (Count II). (Doc. No. 23, ¶¶ 189-95.)
With respect to the primary claim of liability under Count I, Section 10(b)
makes it unlawful for any person to “use or employ, in connection with the
purchase or sale of any security . . . any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the [Securities
Exchange] Commission may prescribe as necessary or appropriate in the
public interest or for the protection of investors.”
Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1317 (2011) (quoting 15 U.S.C. §
78j(b)).
SEC Rule 10b-5 implements this provision by making it unlawful to, among
other things, “make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading.
Id. (quoting 17 C.F.R. § 240.10b-5(b)).
At its core, the Complaint is premised largely on STJ’s alleged practice of
“channel stuffing,” that is, seeking or pressuring its customers to acquire large quantities
of STJ’s products at the end of a financial quarter so as to artificially inflate STJ’s
revenues and earnings for a particular quarter, and STJ’s accounting for such sales.1
1

As the Complaint notes, the American Institute of Certified Public
Accountants has defined “channel stuffing” as “inducing distributors to buy substantially
continue...
3

Plaintiffs contend that STJ’s practice of channel stuffing in 2009, while the U.S. economy
further descended into recession, eventually collapsed when its customers could not
continue to absorb the excess inventory. The Complaint alleges that Defendants–while
recognizing internally that sales were slowing–repeatedly misrepresented to the public
that STJ’s growth and revenues remained strong until they were forced to disclose, on
October 6, 2009, an earnings miss.
Defendants argue that “missing guidance does not constitute securities fraud,” and
that Plaintiffs may not pursue their securities fraud claims based on hindsight. (Doc. No.
38, at 8.) But Plaintiffs’ claim does not rest simply on the fact that STJ missed its
guidance:
The extent to which [STJ relied on heavily discounted, end-of-quarter bulk
sales to meet its sales and earnings estimates] was concealed from investors
during and prior to the Class Period, as were the risks to its business arising
from those sales. In particular, a deepening recession affecting the health
care industry in 2009 coupled with numerous hospitals having bloated
inventories of STJ CRM products at the outset of the year due to previously
completed bulk sales, made STJ particularly vulnerable to missing its
earnings forecasts during the Class Period. Despite this, defendants raised
STJ’s guidance and told investors that, due to the nature of the products it
sold, the Company was well insulated from the negative effects of the
economic downturn that existed during the Class Period.
(Doc. No. 23, ¶ 45.)

1

...continue
more inventory than they can promptly resell,” by means ranging from offering “deep
discounts” to threatening the loss of supply “if the inventory is not purchased.” (Doc. No.
23, ¶ 124.) It also notes that the SEC describes channel stuffing as the “pulling forward
of revenue from future fiscal periods by inducing customers–through price discounts,
extended payment terms or other concessions – to submit purchase orders in advance of
when they would otherwise do so.” (Id. ¶ 125.)
4

Plaintiffs generally allege that Defendants used various “improper artifices and
devices to inflate revenues and conceal declining demand” for STJ’s products. (Id. ¶ 2.)
In particular, they allege that Defendants “(i) failed to disclose” STJ’s reliance on
“heavily discounted, end-of-quarter bulk sales” to meet its sales forecasts; “(ii) issued
materially false and misleading financial statements that failed to account for revenues
from bulk sales” and other tactics; “(iii) issued financial guidance to investors that was
contradicted by STJ’s internal forecasts; and (iv) concealed the extent to which an
ongoing economic recession was affecting or could potentially affect sales of and demand
for” STJ’s products. (Id.; see also id. ¶¶ 3-5 (elaborating on basic allegations of
paragraph 2.) Plaintiffs contend that “[h]eading into the Class Period, prior sales of STJ’s
products had resulted in a large buildup of excess and unnecessary inventory on its
customers shelves,” which, “together with recessionary economic pressures, had caused
many hospitals to scale back on their . . . end-of-quarter bulk purchases of STJ’s
products.” (Id. ¶ 6.) They further allege that although STJ officers and employees
“recognized that 2009 was going to be an extraordinarily difficult year,” “STJ–alone
among its competitors–raised its financial guidance and told investors its business was
well insulated from the [negative] economic conditions.” (Id.) Although STJ’s practice
of “channel stuffing” created, Plaintiffs allege, a “great risk of declining [business] during
an extended recession, “STJ reaffirmed its earnings per share (“EPS”) guidance in the
first and second quarters of 2009.” (Id. ¶¶ 6, 7.)
Plaintiffs further allege that despite their public statements, Defendants knew that

5

their sales practices were “ultimately unsustainable”: “[r]ecognizing internally that sales
would be insufficient to meet their misleading guidance, [D]efendants caused STJ to issue
and sell $1.2 billion in debt securities at the end of 2Q09, [but] then used most of the
proceeds to buy back Company stock in a desperate attempt to make STJ’s EPS guidance
easier to meet by expediently reducing the number of shares outstanding in the market.”
(Id. ¶ 8.) Moreover, Plaintiffs allege, despite Defendants’ statements to the public that
STJ’s business was not only insulated from deteriorating economic conditions, but likely
to grow, “[b]efore the end of the third quarter, STJ had laid off more than 10% of its
domestic sales force due to the impact of negative economic conditions on its business.”
(Id.)
Then “[o]n October 6, 2009, just weeks after [D]efendants had reaffirmed that STJ
was purportedly on track to meet its forecast guidance, the Company shocked investors
by revealing a stunning miss in its 3Q09 forecast results,” that overall revenues “would be
20% below the forecast [D]efendants had just reaffirmed.” (Id. ¶ 9.) Upon the
announcement, the price of STJ’s common stock dropped 12.7%. (Id. ¶ 10.)
In the interim, however, the Individual Defendants, Plaintiffs allege, knew from
internal forecasts that sales were declining and thus “made STJ stock sales that were
suspicious in both timing and amount.” (Id. ¶ 166.) For example, Starks sold a total of
300,000 shares during the Class Period–100,000 shares in each of three sales in early June
2009, late July 2009, and mid September 2009. (Id.)
Defendants now seek dismissal on several grounds, contending that the Complaint

6

fails to plead (1) false statements with the requisite particularity, (2) facts giving rise to a
strong inference of scienter, and (3) loss causation. (Doc. No. 38.) Defendants further
argue that the Section 20(a) claim must also be dismissed because it is derivative of the
Section 10(b) claim. (Id. at 33.) Finally, Defendants seek to depose some of the
“Confidential Witnesses” if “the Court is unsure whether the Complaint pleads adequate
facts giving rise to a strong inference of scienter.” (Id.)2
A.

Dismissal Standard

The Court accepts as true the factual allegations of the Complaint and draws all
reasonable inferences in Plaintiffs’ favor, but does not defer to any legal conclusions or
formulaic recitations of the claims’ elements. Minneapolis Firefighters’ Relief Ass’n v.
MEMC Electronic Materials, Inc., 641 F.3d 1023, 1027 (8th Cir. 2011). Under Rule
12(b)(6), the Complaint “‘must contain sufficient factual matter, accepted as true, to ‘state
a claim to relief that is plausible on its face.’’” Id. (quoting Ashcroft v. Iqbal, 556 U.S.
___, 129 S. Ct. 1937, 1949 (2009)). Plausibility turns on whether the facts alleged allow
the Court to draw the reasonable inference that the Defendants are liable for the alleged
misconduct. Id.
In addition to these general pleading standards, the PSLRA imposes a heightened
pleading standard in securities fraud actions with respect to certain elements of securities
fraud claims. “The PSLRA requires plaintiffs to state with particularity both the facts

2

The Complaint attributes the sources of certain information to “Confidential
Witnesses,” that is, certain (former) employees of STJ who are identified by their
position, but not by name.
7

constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant’s
intention ‘to deceive, manipulate, or defraud.’” Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308, 313 (2007).3 The intent of the PSLRA was to “‘put an end to the
practice of pleading fraud by hindsight.’” Elam v. Neidorff, 544 F.3d 921, 927 (8th Cir.
2008) (quoting In re Navarre Corp. Sec. Litig., 299 F.3d 735, 742 (8th Cir. 2002)). Thus,
to survive a motion to dismiss, a securities fraud complaint must point to
“contemporaneous reports, witness statements, or any [other] information that had
actually been provided to defendants” at the time they were alleged to have
misrepresented material facts. Id.
But the heightened pleadings standards do not, of course, amount to any obligation
on securities fraud plaintiffs of “ultimately prov[ing] their allegations,” as that “is an
altogether different question” from adequately pleading securities fraud. Matrixx
Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1325 (2011). And, of course, the Court
presently takes no position on Plaintiffs’ ability to ultimately prove their claims.
The Court now turns to Plaintiffs’ main claim of primary liability for securities
fraud.

3

With respect to pleading misleading statements and omissions, “the
complaint shall specify each statement alleged to have been misleading, the reason or
reasons why the statement is misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint shall state with particularity all
facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). With respect to pleading
the required state of mind, “the complaint shall, with respect to each act or omission
alleged to violate this chapter, state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.” Id. § 78u-4(b)(2)(A).
8

B.

Count I: The Section 10(b) and Rule 10b-5 Claim

Count I essentially alleges that Defendants, in violation of Section 10(b) and Rule
10b-5, “disseminated or approved” false statements that “they knew . . . were materially
false and misleading,” or recklessly disregarded their falsity and misleading nature. (Doc.
No. 23, ¶¶ 190-91.) A plaintiff asserting liability under Section 10(b) and/or Rule 10b-5
must satisfactorily allege “‘(1) a material misrepresentation or omission by the defendant;
(2) scienter; (3) a connection between the misrepresentation or omission and the purchase
or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic
loss; and (6) loss causation.’” Minneapolis Firefighter Relief Ass’n, 641 F.3d at 1028
(quoting Stoneridge Inv. Partners, LLC v. Sci.-Atl., Inc., 552 U.S. 148, 157 (2008)).
Here, Defendants’ attack on the sufficiency of the Complaint’s allegations is focused on
(1) the alleged materiality and falsity of the statements at issue, (2) the allegations of
scienter, and (3) loss causation.
1.

Material False and Misleading Statements

A viable securities fraud claim under Section 10(b) and/or Rule 10b-5 first requires
that Defendants made a material misstatement or omission–that “the defendant made a
statement that was ‘misleading as to a material fact.’” Matrixx Initiatives, Inc. v.
Siracusano, 131 S. Ct. 1309, 1318 (2011) (emphasis in original) (internal citation
omitted). To be material, the statement must create “‘a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the reasonable investor as
having significantly altered the total mix of information made available.’” Parnes v.

9

Gateway 2000, Inc., 122 F.3d 539, 546 (8th Cir. 1997) (quoting Basic Inc. v. Levinson,
485 U.S. 224, 231-32 (1988)).
Material information is that which “would have assumed actual significance
in the deliberations of the reasonable shareholder.” This determination
requires “delicate assessments of the inferences a ‘reasonable shareholder’
would draw from a given set of facts and the significance of those
inferences to him.”
In re: K-Tel Int’l, Inc. Sec. Litig. 300 F.3d 881, 897 (8th Cir. 2002) (internal citations
omitted).
“In contrast, a fact is immaterial ‘[w]here a reasonable investor could not have
been swayed’ by the misrepresentation.” Id. And
some statements are so vague and such obvious hyperbole that no
reasonable investor would rely upon them. “The role of the materiality
requirement is not to attribute to investors a childlike simplicity but rather
to determine whether a reasonable investor would have considered the
omitted information significant at the time.” [Thus,] “soft, puffing
statements generally lack materiality because the market price of a share is
not inflated by vague statements predicting growth. No reasonable investor
would rely on these statements, and they are certainly not specific enough
to perpetrate a fraud on the market.”
Parnes, 122 F.3d at 547 (internal citations omitted), cited in Hutchinson, 536 F.3d at 96061.
With respect to pleading falsity, the “PSLRA’s heightened pleading requirements
compel the plaintiff to ‘plead the ‘who, what, when, where and how’ of the misleading
statements or omissions.’” In re 2007 Novastar Financial, Inc. Sec. Litig., 579 F.3d 878,
882 (8th Cir. 2009). “To meet the falsity requirement, a complaint must not only indicate
that false statements were made, but must indicate why the alleged misstatements were

10

false when made.” Lustgraaf v. Behrens, 619 F.3d 867, 874 (8th Cir. 2010). Accord In re
Cerner Corp. Sec. Litig., 425 F.3d 1079, 1083 (8th Cir. 2005).
Plaintiffs assert that there are three categories of false and misleading material
statements at issue: (1) statements regarding the state of STJ’s business, (2) statements
regarding revenues and earnings, and (3) statements of inflated guidance. (Doc. No. 45,
at 12.)
Defendants generally contend that the Complaint fails to “specify each false and
misleading statement and state with particularity why it was misleading.” (Doc. No. 38,
at 15). Defendants make four arguments in support of their position.
(a)

Identification of False Statements

Defendants first contend that Plaintiffs have not even specified the allegedly false
statements. (Id.) But unlike the allegations at issue in In re 2007 Novastar Financial, Inc.
Securities Litigation, here the Complaint plainly enumerates the individual statements that
Plaintiffs allege are false:
!

STJ’s April 22, 2009 press release announcing its financial results for 1Q09
and Starks’ related statements. (Doc. No. 23, ¶¶ 69, 71.)

!

STJ’s April 22, 2009 conference call in which Starks responded to
questions regarding the impact on STJ of the general economic conditions.
(Id. ¶¶ 72, 73, 74.)

!

STJ’s May 12, 2009 Report on Form 10-Q reflecting 1Q09 results and
signed by Starks and Heinmiller. (Id. ¶ 77.)

11

!

Starks’s May 12, 2009 statements at the Palace Hotel Conference. (Id. ¶
81.)

!

STJ’s July 12, 2009 press release announcing its results for 2Q09. (Id. ¶
83.)

!

STJ’s July 22, 2009 conference call in which Starks and Heinmiller
addressed STJ’s declining sales. (Id. ¶¶ 84, 85, 86.)

!

STJ’s August 12, 2009 Report on Form 10-Q reflecting 2Q09 results and
signed by Starks and Heinmiller. (Id. ¶ 87.)

!

Heinmiller’s September 10, 2009 statements at the Boston Four Seasons
Conference. (Id. ¶¶ 98, 99.)

!

Heinmiller’s September 15, 2009 statements at the Morgan Stanley
Conference. (Id. ¶¶ 101, 102.)

The fact that the Complaint addresses all of the allegedly false statements in a “twentythree-page segment” hardly means, as Defendants claim, that “Plaintiffs lump all alleged
misrepresentations” together in a fashion that fails to identify specific misstatements.
(Doc. No. 38, at 15.) Required under the PSLRA to identify the alleged misstatements
and their materiality, Plaintiffs devote a separate section of their Complaint–not
surprisingly–to “Materially False and Misleading Statements and Omissions and
Fraudulent Scheme and Course of Business by Defendants During The Class Period,” but
identify the individual statements at issue separately. In other words, Defendants may not
obtain dismissal by arguing that the fact that Plaintiffs congregate their allegations of

12

misstatements renders those allegations undifferentiated and unspecific.
In addition, Defendants suggest that the Complaint fails to identify specific
statements because it quotes statements of various STJ officers at some length. (Doc. No.
38, at 15-16.) But such an argument ignores the fact that an individual “statement” is not
necessarily confined to a single sentence. A securities fraud defendant may not insulate
himself from liability by the simple expedient of verbosity or loquaciousness. And as
Plaintiffs respond, “[t]he specific language that misled investors is highlighted, and each
quotation is preceded or followed by specific allegations describing why the quoted and
highlighted language was misleading.” (Doc. No. 45, at 15.)
Identifying a particular statement and differentiating it from others is a question of
content as well as context. For example, the statement attributed to Starks that was
included in the 1Q09 press release of April 22, 2009, while initially explaining that STJ’s
growth was “resilien[t],” “remarkably stable,” and “on track,” concludes with the clear,
succinct statement that “‘[w]e reaffirm our guidance for full year 2009 earnings.’” (Doc.
No. 23, ¶ 71.)
With respect to materiality, Defendants further contend that Plaintiffs rely on “soft
puffing statements.” (Doc. No. 38, at 16.) Although Defendants locate at least one
example of a statement similar to one found to be merely vague puffing in In re
Hutchinson Technologies, Inc. Securities Litigation, they do so only by pulling one
sentence out of one of many statements identified in the Complaint as constituting a false
statement. And even if some portions of individual statements might be too vague and

13

general to be actionable, particular statements by Defendants must be evaluated not only
in their entirety, but also in context.
Many of the statements at issue were provided in direct response to questions from
financial analysts at conferences held expressly to discuss STJ’s earnings and guidance.
As the Seventh Circuit has ruled in a case involving similar allegations of channel
stuffing, the line between mere “puffery” and an actionable misrepresentation often
depends on the context of a statement, particularly the fact that it was made in response to
either “investors’ frequently asked questions” or an analyst’s specific inquiry. Makor
Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.2d 588, 597-98 (7th Cir. 2006) (explaining
that in context of being responses to questions from analysts, statement “went well
beyond puffery: it was a direct response to an analyst’s inquiry about a possible decline”
in sales), vacated in part on other grounds, 551 U.S. 308 (2007) (scienter standard).
Here, the Complaint alleges that Starks’ statement of April 22, 2009, Heinmiller’s
statement to the St. Paul Pioneer Press, Starks’ statements to investors on May 12, 2009,
Starks’ and Heinmiller’s statements during the July 22, 2009 conference call, and
Heinmiller’s statements during the two September 2009 investor conferences were all
responses to questions or comments posed by investors, journalists or analysts. (Doc. No.
23, ¶¶ 74, 76, 81, 85, 86, 90, 91, 98-99, & 102.) Investors would reasonably find such
statements material.
(b)

Allegations of Financial Results

Defendants also argue that the allegations of falsity lack the requisite particularity.

14

(Doc. No. 38, at 16.) They further note that STJ’s “independent outside auditor issued an
unqualified audit opinion” in each of the relevant years and that it “has never been
required to restate its results.” (Doc. No. 38, at 17.) But the lack of any such formal
restatement does not preclude a claim for securities fraud. “[T]he fact that the financial
statements for the year in question were not restate does not end [Plaintiffs’] case when
[they have] otherwise met the pleading requirements of the PSLRA.” Aldridge v. A.T.
Cross Corp., 284 F.3d 72, 83 (1st Cir. 2002).
To hold otherwise would shift to accountants the responsibility that belongs
to the courts. It would also allow officers and directors of corporations to
exercise an unwarranted degree of control over whether they are sued,
because they must agree to a restatement of the financial statements.
Id. And here, the Court does not understand the Complaint to allege non-existent sales,
but rather to allege that STJ front-loaded sales to fraudulently inflate its present sales
without disclosing that such practices could not be maintained.
Defendants then contend that the allegations of four particular forms of falsity lack
the requisite particularity.
(i)

Consignment Accounting

With respect to consignment accounting, Defendants argue that Plaintiffs’
allegations fail because they are based on “a lone ‘Confidential Witness,’” the
identification of which Defendants then claim does not “show how or why CW13”
became privy to information about particular sales arrangements with a
particular distributor, who the sales representative was, who the distributor
was, when the transaction occurred, how CW13 became familiar with the
accounting treatment applied to the transaction, what expertise CW13
possessed to decipher and critique the accounting treatment, how CW13
15

came to see “paper documentation” reflecting it, what sort of documentation
it was, what became of it, how many units of product were involved, what
the dollar value was, or even which periods’ financial results were affected.
(Doc. No. 38, at 18-19.) Defendants contend that Hutchinson “dooms” such allegations.
(Id. at 19.)
But in Hutchinson, the “backbone” of the allegations came from statements made
by five CWs, the allegations that earnings were overstated were “either bare allegations or
allegations supported by anecdotal information about specific customers with no
historical context,” and the Complaint lacked “any allegations showing the basis of” the
knowledge of the sole CW who “provided the only basis for an allegation of an actual
increase in the customer return rate,” the alleged misrepresentation of which was the basis
for plaintiffs’ claim. 536 F.3d 952, 959 (8th Cir. 2008). The court explained that “without
any allegations showing the basis of CW1’s knowledge,” the claim “that the return
allowances were inadequate because of rising customer returns does not meet the standard
of the PSLRA”:
Nothing in the complaint puts the returns spoken of by CW1 in perspective
or suggests that they were something other than normal business
fluctuations. And these anecdotes offered by the CWs about specific plants
and specific customers are the only information that support the claim that
return allowances were inadequate. . . . Events at one specific plant or with
one individual customer are not enough to meet the PSLRA’s heightened
standard. . . . Allegations that production and errors were up at certain
plants is not enough to support a claim that Hutchinson knew their
company-wide EPS statements were false.
Id.
Here, in contrast, Plaintiffs allege that “revenue was not permitted to be recognized

16

at the time goods were consigned,” whereas in Hutchinson the plaintiffs claimed that the
defendant failed “to properly estimate returns of defective products for which revenues
had originally been properly recognized.” (Doc. No. 45, at 33-34.) In addition, Plaintiffs
effectively counter Defendants’ argument that the Complaint lacks sufficient allegations
of the basis of the witnesses knowledge. Plaintiffs assert that the witness “was no mere
‘technician’ as Defendants surmise,” but rather that the witness learned of the “repeated
consignment deals” because the witness “implemented the Siebel system that STJ used to
track and report sales of medical devices.” (Id. at 34.)4
(ii)

“Channel Stuffing” Allegations

With respect to the allegations of channel stuffing, Defendants argue that there “‘is
nothing inherently improper in’” channel stuffing because “‘there may be any number of
legitimate reasons for’” such practices. (Doc. No. 38, at 19-20 (internal citations
omitted).) They further contend that such claims are “routinely dismiss[ed]” where
“plaintiffs fail to plead ‘the amount of any overstatements, the extent of any pulling in
that took place, or the amount of any revenue that was pulled in from future quarters.’”
(Id. at 20 (quoting In re Cerner Corp. Sec. Litig., 425 F.3d 1079, 1084 (8th Cir. 2005)).)

4

Defendants note that with respect to consignments (and with respect to
other issues), Plaintiffs allege activity that occurred “before the putative class period.”
(Doc. No. 52, at 13.) But such allegations do not undermine Plaintiffs’ claims, because
the Complaint does not premise liability on STJ’s sales or consignments per se, but rather
on the alleged misstatements that occurred during the class period. The thrust of the
Complaint, as this Court understands it, is that the financial impact of STJ’s various sales
practices–channel stuffing, accounting for consignments as sales, etc.–whether they
occurred before or during the class period, were misrepresented by STJ during the class
period.
17

Defendants also assert that the Complaint
fails to identify any particular transaction at any particular time with any
particular customer for any particular device in any particular amount that
resulted from supposed channel stuffing. Nor do Plaintiffs plead any facts
to show that channel stuffing had a material effect on St. Jude’s financial
results. The Complaint leaves the reader with no clue as to what the total
dollar impact was in any particular reporting period.
(Id. (citing Cerner, 425 F.3d at 1084).) But the Cerner court also stated that a plaintiff “is
not required to describe in detail the circumstances of [a defendant’s channel-stuffing]
activities.” Cerner, 425 F.3d at 1084 (emphasis added). And in any event, Defendants
cannot shoehorn the particular facts as alleged here into the framework of those at issue in
Cerner.
Defendants further argue that “even if Plaintiffs had pleaded” the facts as required
under the PSLRA, “their channel stuffing theory still would not hold water” because
channel stuffing, to be actionable,
“must be a short-lived scheme in which the wrongdoer attempts to
capitalize on artificially increased sale before the resulting drop in sales. If
channel stuffing occurs over time, the pattern of increased sales toward the
end of each quarter and lower sales at the beginning of each quarter would
be quite transparent to investors, and thus could not form the basis for an
allegation of fraud.”
(Id. at 21 (quoting In re ICN Pharmaceuticals, Inc., Sec. Litig., 299 F. Supp. 2d 1055,
1062 (C.D. Cal. 2004) (emphasis in original)).) Defendants note that “Plaintiffs allege St.
Jude’s channel stuffing behavior began ‘prior to the Class Period,’” and contend that a
fraud claim is untenable because “quarter-end quantity purchases [“QPs”] are a perennial
feature of the market for CRM devices.” (Id.)

18

This Court recognizes that channel stuffing per se is not necessarily fraudulent.
The Supreme Court has observed that “channel stuffing” exists in two forms, the
“legitimate kind (e.g., offering customers discounts as an incentive to buy)” and the
“illegitimate kind (e.g., writing orders for products customers had not requested).”
Tellabs, 551 U.S. at 325. And “[w]hile there may be legitimate reasons for attempting to
achieve sales earlier via channel stuffing, providing excess supply to distributors in order
to create a misleading impression in the market of the company’s financial health is not
one of them.” Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.2d 588, 598 (7th Cir.
2006), vacated in part on other grounds, 551 U.S. 308 (2007). “Channel stuffing becomes
a form of fraud only when it is used . . . to book revenues on the basis of goods shipped
but not really sold because the buyer can return them.” Makor Issues & Rights, Ltd. v.
Tellabs, Inc., 513 F.3d 702, 709 (7th Cir. 2008).
Here, the Court does not understand Plaintiffs’ Complaint to be based merely on
the claim that STJ engaged in quarter-end bulk sales. Rather, Plaintiffs allege that STJ
mislead investors by stating that its earnings and growth rate would be maintained even
though STJ was engaging in an unsustainable pattern of channel stuffing and not properly
accounting for its sales. And the fact that the alleged channel stuffing began before the
Class Period is thus largely irrelevant because Plaintiffs’ claim is that the ongoing
practice became fraudulent when Defendants informed investors that their sales and
growth rates were stable.
Defendants correctly observe that STJ “successfully defended” against a previous

19

claim of channel stuffing. (Doc. No. 38, at 21.) But it did so only on summary judgment
after “discovery . . . ‘revealed no channel stuffing.’” (Id.) “Plaintiffs survived
defendants’ motion to dismiss on the channel stuffing theory.” In re: St. Jude Medical,
Inc. Sec. Litig., 629 F. Supp. 2d 915, 917 (D. Minn. 2009). Moreover, “[a]fter
completing discovery,” plaintiffs “jettisoned their claims of channel stuffing” and
“plaintiffs entire theory changed.” Id. Perhaps here too discovery and the resolution on
the merits will reveal no actionable fraud, but the PSLRA has not converted a motion to
dismiss into a motion for summary judgment, much less a trial on the merits.
(iii)

Exchange Accounting Allegations

Defendants next argue that the allegations regarding STJ’s accounting for product
exchanges lack the requisite particularity. (Doc. No. 38, at 21.) They argue that the
accounting standard on which Plaintiffs rely “distinguishes returns of product from
exchanges” and that the Complaint here alleges only improper accounting with respect to
exchanges. (Id. at 22 (emphases in original).) Defendants essentially argue that
exchanges “do not impact revenue.” (Id.)
Plaintiffs claim Defendants’ argument “is a red herring because such detail is not
required to establish the GAAP violation alleged here,” that is, that “[i]t was the
agreement to replace the devices, rather than the actual replacement, which gives rise to
the GAAP violation,” not that “STJ improperly recognized revenues only on the products
which ultimately were replaced by STJ.” (Doc. No. 45, at 28 (emphases in original).) As
Plaintiffs explain, “[b]ecause all of the devices sold by QPs were subject to being

20

replaced if they were not used before their expiration date, GAAP prohibited STJ from
recognizing any revenues on those sales until the devices were actually used.” (Id.
(further noting that it was not possible to reliably estimate the return rate due to the large
excess inventory already on hospitals shelves).)
Defendants’ reply–that there is no “specific ruling from the Public Company
Accounting Oversight Board” or any restatement of financial results, as there was in a
different case (Doc. No. 52, at 11)–is unpersuasive. The Court is unaware of any legal
requirement that such events are prerequisites to filing a complaint for securities fraud.
(iv)

Rebate Accounting Allegations

In addition, Defendants contend that the allegations regarding STJ’s accounting for
rebates lack the requisite particularity. (Doc. No. 38, at 23.) They challenge the factual
bases for statements regarding rebates attributed to several of the Confidential Witnesses
cited in the Complaint, including the CW that Defendants claim to have identified and
whom, Defendants assert, now disavows the statements the Complaint attributes to her.
(Id. at 23-24.)
Plaintiffs assert:
Defendants misread the Complaint to suggest that the witnesses themselves
opined as to the existence of a GAAP violation. They did not. The
witnesses provided factual information which was analyzed by Lead
Counsel, in consultation with forensic accountants experience in the field,
to determine whether or not STJ’s accounting complied with GAAP.
(Doc. No. 45, at 30.) Furthermore, “[e]ach of the witnesses here was plainly in a position
to learn the information attributed to them in the Complaint.” (Id. at 31.)

21

On a Rule 12(b)(6) motion to dismiss, the Court presently is in no position to
resolve the purported factual discrepancies between the Complaint and the Declaration of
Sherry Ashford. And even ignoring the allegations solely attributed to that witness, the
Court concludes that the remaining rebate allegations, attributed to other confidential
witnesses, are sufficient. (Doc. No. 23, ¶ 53.)
(c)

Financial Forecasts

Defendants’ next major argument is that the allegations of false financial forecasts
are insufficiently particularized. (Doc. No. 38, at 24.) With respect to such forwardlooking statements, a plaintiff may not premise a claim of fraud on allegations of false
statements that are shown to be false only later. In short, there is no viable claim for
fraud in hindsight. E.g., Elam v. Neidorff, 544 F.3d 921, 927 (8th Cir. 2008). Defendants
note that STJ did not restate its earnings for 2Q09, and argue that, with respect to 3Q09,
Plaintiffs have failed to plead that STJ’s earnings projections “were false when made.”
(Doc. No. 38, at 25.) Defendants assert that the Complaint fails to “‘point to any
contemporaneous reports, witness statements, or any information that had actually been
provided to defendants as of’ the time alleged false statements were made.” (Id. (quoting
Elam, 544 F.3d at 927).)
But Plaintiffs repeatedly allege that STJ’s contemporaneous “internal” and
presumably undisclosed forecasting data and sales reports contradicted the public
statements Starks and Heinmiller provided the market, investors, and analysts. (Doc. No.
23, ¶¶ 78, 80, 82, 88, 92, 100, & 103.) Moreover, Defendants’ argument that Plaintiffs

22

have not “identif[ied] any sale [that] STJ lost” (Doc. No. 38, at 26), is irrelevant. The
theory of the Complaint is not that STJ lost particular sales.
Defendants further take issue with the allegations regarding STJ’s use of the
software program “ForecastPro.” (Id. at 26-27.) The Court views such issues as matters
for discovery and resolution on the merits.
(d)

Safe Harbor Language

Defendants also contend that their forward-looking statements were accompanied
by meaningful cautionary language such that they are entitled to the safe harbor
protections under the PSLRA. (Doc. No. 38, at 28.) In particular, they argue that each of
STJ’s “press releases and conference calls” disclosed “that ‘expectations . . . [were]
subject to certain risks and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements.’” (Id. (quoting press releases
and conference calls cited in and attached to Complaint).) This Court agrees with
Plaintiffs that because this generic, “boiler-plate” statement lacks any specificity as to
particular risks or uncertainties, it may not serve as a “meaningful cautionary statement.”
Slayton v. American Express Co., 604 F.3d 758, 772 (2d Cir. 2010) (explaining that
“‘boilerplate warnings will not suffice,’” and that cautionary statements “‘must be
extensive and specific,’” “‘substantive and tailored to the specific future projections’”).
Defendants also assert that STJ disclosed, in its SEC filings, risks such as (1)
“increasing price competition,” (2) “cost containment pressures,” and (3) general
“economic factors.” (Id.) In response, Plaintiffs argue that “[n]ot one of those warnings,”

23

which are excerpted from “STJ’s 2008 Report on Form 10-K and 2Q09 Report on Form
10-Q,” “addresses the risks that Plaintiffs allege caused STJs guidance to be misleading.”
(Doc. No. 45, at 39.) Rather, Plaintiffs contend, “the warnings address risks STJ faced
from increasing competition or refusals by health insurers to pay for STJ’s devices, or
economic factors which play no role in STJ’s missed earnings.” (Id.) Defendants
contend that Plaintiffs’ argument fails “to explain how ‘increasing price competition’ and
‘[c]ost containment pressures’ did not feed into customers’ 3Q09 demands for
unacceptably steep price discounts and unwillingness ‘to commit capital to inventory.’”
(Doc. No. 52, at 14.)
The Court agrees with Plaintiffs that the purported “cautionary statements” on
which Defendants rely do not address the theory of Plaintiffs’ case, that is,
that STJ was overly reliant on end of quarter QPs to meet its guidance, that
as a result of prior QPs many of its customers had far more inventory than
needed to meet current demands, and that these conditions gave rise to
heightened risks of missing guidance when the economy turned sour.
(Doc. No. 45, at 39.) Plaintiffs’ theory of the alleged fraud, as this Court understands it,
is not simply that Defendants misrepresented the negative effect that the general
economic deterioration in 2009 had on STJ, but that within that negative context,
Defendants misrepresented that STJ’s revenues and earnings remained strong, and would
remain strong throughout the year, because those results were based on STJ’s
unsustainable practice of channel stuffing and forcing QPs on its customers. The
cautionary statements on which Defendants rely all concern exogenous variables–factors
such as “declining [insurer] reimbursement rates,” “inflation,” and changing “foreign
24

currency exchange rates”–not STJ’s undisclosed practice of channel stuffing and the
alleged improprieties of how STJ accounted for such sales. While such exogenous
variables might have had a negative impact on STJ’s results, the Court understands
Plaintiffs’ claim to be that STJ’s undisclosed sales and accounting practices materially
exacerbated the negative impact of the underlying deteriorating economic conditions.
In sum, with respect to pleading material misrepresentations, the Court concludes
that the allegations of the Complaint are sufficiently particularized to proceed. “On a
motion to dismiss, the question is not whether Plaintiff[s] can be successful on [their]
securities fraud claims, but rather, whether Plaintiff[s] [have] pled [their] allegations and
supporting facts with particularity such that the Complaint should remain for discovery.”
In re Nash Finch Co. Sec. Litig., 502 F. Supp. 2d 861, 877 (D. Minn. 2007). Cf. Matrixx
Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1323 (2011) (“We believe that these
allegations suffice to ‘raise a reasonable expectation that discovery will reveal evidence’
satisfying the materiality requirement.”).
2.

A “Strong Inference” of Scienter

As noted above, the PSLRA imposes heightened pleading requirements with
respect to not only the allegations of false or misleading statements, but also the
allegations of scienter. Tellabs, 551 U.S. at 321. The Supreme Court has clarified that
the scienter required for a Section 10(b) / Rule 10b-5 claim “refers to a mental state
embracing intent to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425

25

U.S. 185, 193, n.12 (1976). Thus, negligence alone is not enough. Id. at 201.5 If the
alleged misstatement or omission is a “forward-looking statement,” the “required level of
scienter is ‘actual knowledge.’” Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309,
1324 n.14 (2011) (quoting 15 U.S.C. § 78u-5(c)(1)(B)).
With respect to scienter, a plaintiff “must ‘state with particularity facts giving rise
to a strong inference that the defendant acted with the required state of mind.’” Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313, 314 (2007) (quoting 15 U.S.C. §
78u-4(b)(2)). This standard requires more than a showing “that a reasonable fact-finder
plausibly could infer from the complaint’s allegations the requisite state of mind.” Id.
Rather, on a motion to dismiss, the court “must engage in a comparative evaluation; it
must consider, not only inferences urged by the plaintiff, . . . but also competing
inferences rationally drawn from the facts alleged.” Id. In short, “an inference of scienter
must be more than merely plausible or reasonable–it must be cogent and at least as
compelling as any opposing inference of nonfraudulent intent.” Id. The heightened

5

The Supreme Court deferred addressing “the question whether, in some
circumstances, reckless behavior is sufficient for civil liability under” Section 10(b) and
Rule 10b-5. Id. But the Eighth Circuit, as well as most other federal circuits, recognizes
that, even under the PSLRA, a plaintiff may satisfy the scienter requirement “with proof
of severe recklessness, that is, ‘highly unreasonable omissions or misrepresentations that
. . . present a danger of misleading buyers or sellers which is either known to the
defendants, or is so obvious that the defendants must have been aware of it.’” In re
Ceridian Corp. Sec. Litig., 542 F.3d 240, 244 (8th Cir. 2008) (quoting Fla. State Bd. Of
Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 654 (8th Cir. 2001)). And since
Hochfelder, the Supreme Court has not yet ruled on the issue. S.E.C. v. Shanahan, 646
F.3d 536, 543-44 (8th Cir. 2011) (noting Supreme Court’s decision in Matrixx Initiatives,
Inc. v. Siracusano, 131 S. Ct. 1309, 1323-24 (2011), that it need not address issue of
sufficiency of recklessness).
26

pleading standards imposed by the PSLRA are confined, however, to these two
components–falsity and scienter–and do not apply to the issues of materiality and loss
causation. Gebhardt v. Conagra Foods, Inc., 335 F.3d 824, 830 n.3 (8th Cir. 2003).6
In evaluating the sufficiency of the allegations, “courts must consider the
complaint in its entirety,” inquiring “whether all of the facts alleged, taken collectively,
give rise to a strong inference of scienter, not whether any individual allegation,
scrutinized in isolation, meets that standard.” Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308, 322-23 (2007) (emphasis in original). And in determining whether
allegations “give rise to a ‘strong’ inference of scienter, the court must take into account
plausible opposing inferences.” Id. at 323. In other words, the elevated statutory
standard does not merely require that a plaintiff allege “facts from which an inference of
scienter rationally could be drawn. Instead, Congress requires plaintiffs to plead with
particularity facts that give rise to a ‘strong’–i.e., a powerful or cogent–inference.” Id.
(emphasis in original).
This “inquiry is inherently comparative,” requiring the court to “consider
plausible, nonculpable explanations for the defendant’s conduct, as well as inferences

6

Defendants also premise their motion to dismiss on Rule 9(b), but the
PSLRA “supercedes and embodies the standards of Rule 9(b).” In re Nash Finch Co. Sec.
Litig., 502 F. Supp. 2d 861, 871 n.5 (D. Minn. 2007). Accord Lustgraaf v. Behrens, 619
F.3d 867, 874 n.2 (8th Cir. 2010) (“The PSLRA requirements are more rigorous than those
under Rule 9(b) of the Federal Rules of Civil Procedure.”). Cf. In re Navarre Corp. Sec.
Litig., 299 F.3d 735, 742 (8th Cir. 2002) (“[T]he investors technically do not need to meet
the requirements of both Federal Rule of Civil Procedure 9(b) and the PSLRA, as the
PSLRA supersedes reliance on 9(b) in securities fraud cases and embodies the standards
of 9(b).”).
27

favoring the plaintiff. The inference that the defendant acted with scienter need not be
irrefutable, i.e., of the ‘smoking-gun’ genre, or even the ‘most plausible of competing
inferences.’” Id. at 323-24. But “the inference of scienter must be more than merely
‘reasonable’ or ‘permissible’–it must be cogent and compelling.” Id. at 324.
Accordingly, a complaint will survive a motion to dismiss “only if a reasonable person
would deem the inference of scienter cogent and at least as compelling as any opposing
inference one could draw from the facts alleged.” Id.
“Scienter can be established in three ways: (1) from facts demonstrating a mental
state embracing an intent to deceive, manipulate, or defraud, (2) from conduct which rises
to the level of severe recklessness; or (3) from allegations of motive and opportunity.”
Cornelia I. Crowell GST Trust v. Possis Med., Inc., 519 F.3d 778, 782 (8th Cir. 2008).
Accord In re K-Tel Int’l, Inc. Sec. Litig., 300 F.3d 881, 893-94 (8th Cir. 2002). See
generally In re Navarre Corp. Sec. Litig., 299 F.3d 735, 745 (8th Cir. 2002) (discussing
motive and opportunity and other means of establishing scienter).
With respect to “motive and opportunity,” the Eighth Circuit has explained that
this phrasing “is a term of art, ‘meaning something far narrower than what it appears to
mean,’ and is not per se required under the heightened PSLRA pleading requirements.”
In re Navarre Corp. Sec. Litig., 299 F.3d 735, 745 (8th Cir. 2002).
First, motive and opportunity are generally relevant to a fraud case, and a
showing of unusual or heightened motive will often form an important part
of a complaint that meets the Reform Act standard. Second, in some cases
the same circumstantial allegations that establish motive and opportunity
also give additional reason to believe the defendant’s misrepresentation was
knowing or reckless. . . . Third, when the complaint does not show motive
28

and opportunity of any sort–either the unusual, heightened motive
highlighted in the Second Circuit cases, or even an everyday motive such as
keeping one’s job–then other allegations tending to show scienter would
have to be particularly strong in order to meet the Reform Act standard.
Florida State Bd. Of Admin. v. Green Tree Financial Corp., 270 F.3d 645, 660 (8th Cir.
2001). “One ‘classic’ fact pattern giving rise to a strong inference of scienter is that
defendants made statements when they knew or had access to information suggesting
these public statements to be materially inaccurate.” Id.
“Evidence we have found relevant to the scienter issue includes: insider
trading in conjunction with false or misleading statements; a divergence
between internal reports and public statements; disclosures of inconsistent
information shortly after the making of a fraudulent statement or omission;
bribery by top company officials; evidence of an ancillary lawsuit, charging
fraud, which was quickly settled; disregard of current factual information
acquired prior to the statement at issue; accounting shenanigans; and
evidence of actions taken solely out of self-interest.”
In re Navarre Corp. Sec. Litig., 299 F.3d 735, 747 (8th Cir. 2002) (adopting First Circuit’s
reasoning).
Finally, Plaintiffs must make the requisite showing with respect to each alleged
misrepresentation and each Defendant separately. Horizon Asset Mgmt. Inc. v. H & R
Block, Inc., 580 F.3d 755, 761 (8th Cir. 2009). But insofar as Plaintiffs’ allegations are
similar with respect to the Individual Defendants as well as the corporate entity itself, the
Court addresses the allegations of their scienter together. Id.
With respect to pleading corporate scienter, the Eighth Circuit recently stated that
it appears to be an open question whether one may impute the scienter of a corporate
officer to the corporation, at least where the officer has not been named as a Defendant.

29

Id. at 767. But here, the Court faces no such issue as it appears that the Complaint alleges
that STJ’s scienter is that of the Individual Defendants, which include STJ’s CEO,
Defendant Starks, as well as its CFO, Defendant Heinmiller. The knowledge and scienter
of a corporate officer such as its CEO or CFO may of course be imputed to the corporate
entity. Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 603 (7th Cir. 2006),
vacated in part on other grounds, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.
308, 322-23 (2007); Cummings v. Paramount Partners, LP, 715 F. Supp. 2d 880, 906 (D.
Minn 2010). Thus, the Court will address scienter with respect to the Individual
Defendants. And if it concludes that any of them possessed the requisite state of mind,
such scienter is then imputed to STJ itself.
Defendants’ argument regarding scienter is as follows: (1) that the allegations
regarding the Confidential Witnesses (CWs) fail to provide the requisite details of how
the particular employees acquired personal knowledge of facts; (2) Starks’ and
Heinmiller’s certifications as required by the Sarbanes-Oxley Act of 2002 (“SOX”) fail to
plead a strong inference of scienter; (3) STJ’s alleged GAAP violations, standing alone,
do not support the necessary inference of scienter; (4) the Individual Defendants’ sale of
STJ stock during the class period does not support scienter; and (5) the Individual
Defendants’ compensation and other benefits does not support scienter. (Doc. No. 38, at
30-37 (addressing above components first individually and then collectively).)
Granted, a plaintiff’s reliance on CWs adds a “knotty complication” to the
PSLRA’s pleading requirements, Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.2d

30

588, 596 (7th Cir. 2006), vacated in part on other grounds, Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308 (2007) (scienter standard). And SOX certifications are not
necessarily sufficient to support a strong inference of scienter. Horizon Asset Mgmt. Inc.
v. H & R Block, Inc., 580 F.3d 755, 766 (8th Cir. 2009). The Court also recognizes that
accounting malpractice, as evidenced by GAAP violations, does not by itself amount to a
claim for securities fraud. In re Ceridian Corp. Sec. Litig., 542 F.3d 240, 246 (8th Cir.
2008); In re K-Tel Int’l, Inc. Sec. Litig., 300 F.3d 881, 889-93 (8th Cir. 2002) (clarifying
that GAAP violations must be “coupled with evidence of corresponding fraudulent
intent”). In addition, insider stock sales during the class period “‘are not inherently
suspicious’” unless they were “unusual in timing or amount” from the pattern of the
Individual Defendants’ other sales–that is, “dramatically out of line with prior trading
practices at times calculated to maximize the personal benefit from the undisclosed
information.’” In re Ceridian Corp. Sec. Litig., 542 F.3d at 246-47.7 Finally, there is no
dispute that a corporate officer’s motivation to keep the price of the corporation’s stock
high so as to increase the officer’s total compensation, including performance-based
bonuses, is generic and benign absent allegations that the benefit to the individual
defendant is unusual. Horizon Asset Mgmt. Inc., 580 F.3d at 766; In re Cerner Corp. Sec.
Litig., 425 F.3d 1079, 1085 (8th Cir. 2005) (“The desire to make a company seem more
7

Here, as in Cornelia Crowell GST Trust v. Possis Medical, Inc., Plaintiffs
have “failed to place the allegedly suspicious stock sales within any meaningful context.”
519 F.3d 778, 783 (8th Cir. 2008). Accord In re Cerner Corp. Sec. Litig., 425 F.3d 1079,
1085 (8th Cir. 2005) (“[T]he complaint lacks any additional allegations–such as prior
trading history–that would tend to show that [an individual defendant’s] trading activity
was otherwise unusual.”).
31

profitable is a desire ‘universally held among corporations and their executives, ‘ and thus
is insufficient to prove scienter as a matter of law.”); In re K-Tel Int’l, Inc. Sec. Litig.,
300 F.3d 881, 894-96 (8th Cir. 2002) (“[U]nsupported allegations with regard to motives
generally possessed by all corporate directors and officers are insufficient as a matter of
law.”).
But it is also true that reliance on CWs is permissible–if not necessary in light of
the fact that fraud, particularly those perpetrated by a group of corporate officials, are
rarely conducted in the open–if sufficient facts are plead to support the statements
attributed to the CWs. In re Nash Finch Co. Sec. Litig., 502 F. Supp. 2d 861, 874-75 (D.
Minn. 2007). And “false SOX certifications” may be probative of scienter “if they are
accompanied by ‘allegations of particular facts demonstrating how the defendants knew
of the scheme at the time they made their statements of compliance, that they knew the
financial statements over-represented the company’s true earnings, or that they were
aware of a GAAP violation and disregarded it.’” In re Moneygram Int’l, Inc. Sec. Litig.,
626 F. Supp. 2d 947, 973 (D. Minn. 2009) (quoting Ceridian, 542 F.3d at 248). Similarly,
“[c]lear violations of GAAP support falsity,” and that GAAP violations may support an
inference of scienter where “coupled with evidence of corresponding fraudulent intent.”
In re Moneygram Int’l, Inc. Sec. Litig., 626 F. Supp. 2d at 973. And although insider
stock sales are one way of showing motive and opportunity, “‘the absence of a motive
allegation is not fatal’ to a plaintiff’s claim. Id. at 981 (quoting Tellabs, 551 U.S. at 325).
As discussed above, motive and opportunity is only one of several general means of

32

establishing scienter. Possis Med., Inc., 519 F.3d at 782.
In addition, Defendants focus largely, if not entirely on the Complaint’s allegations
regarding scienter in the section devoted to “Additional Scienter and Control Person
Allegations.” Plaintiffs’ allegations pertaining to scienter, however, pervade much of the
Complaint, including the section devoted to the allegedly false statements. For example,
with respect to STJ’s 1Q09 press release, conference call and Form 10-Q Report–which
“reaffirm[ed]” STJ’s guidance for full year 2009 earnings and denied that the negative
economic conditions of early 2009 had any impact on its earnings–Plaintiffs allege that
“[a]t the time [these] statements were made, internal forecasting data and daily sales
reports that were circulated among the Company’s executives and management reflected
a downwards sales trend across the CRM and AF product lines contradicting the positive
outlook the statements were intended to create.” (Doc. No. 23, ¶ 78, at 38.)
Similarly, with respect to STJ’s 1Q09 guidance–which generally “reiterat[ed] the
increased guidance STJ had issued at the close of FY08”–Plaintiffs allege that “[t]he
published guidance exceeded STJ’s own internal forecasts of sales,” that “[a]s early as
2008, STJ’s internal forecasts indicated that the sales of STJ’s CRM devices through
2009 were trending downward, and hospitals were telling STJ that they were going to be
unable to continue engaging in bulk sales,” and “STJ’s financial guidance lacked a
reasonable basis because it failed to account for the practice of QPs sales that were highly
sensitive to changing market conditions, and because it failed to account for STJ’s
improper accounting violations.” (Id. ¶ 80.)

33

With respect to the May 12, 2009 investor conference–at which Starks “reiterated
defendants’ bullish outlook,” “denied, in no uncertain terms, that STJ’s growth was
slowing, and strongly reaffirmed the Company’s guidance”–Plaintiffs allege that “[a]t the
time of Starks’ statement, weakening market conditions were already impacting STJ’s
sales operations, and internal forecasting numbers showed that the effects would only
worsen,” thereby “contradict[ing] the positive outlook the statements were intended to
create.” (Id. ¶¶ 81, 82.)
With respect to STJ’s 2Q09 guidance–with respect to which Heinmiller told
financial analysts that the slightly lowered top-end of the guidance was only a cautious
reaction to the “market, not market share”–Plaintiffs allege that “[c]ontrary to their
representations about current market conditions, by the time of the 2Q09 call, defendants
were aware of, or recklessly disregarded, the deepening impact the economic recession
was having on STJ’s business . . . . In fact, by this time, defendants were already making
plans for and commencing a significant reduction in force that would not be revealed until
months later,” that “published guidance exceeded STJ’s own internal sales forecasts,” that
“[a]s early as 2008, STJ’s internal forecasts indicated that the sales of STJ’s CRM devices
through 2009 were trending downward,” and that “[b]y June 2009, there were increasing
efforts to reduce corporate expenses, including a complete prohibition on corporate
travel.” (Id. ¶¶ 90, 92.)
With respect to the first of two September 2009 investor conferences–at which
Heinmiller stated STJ was “sticking by the guidance that we’ve given in July,” and

34

characterized substantial layoffs in its sales force as “really more of just a tweak in the
way we are managing our business”–Plaintiffs allege that “[b]y the time these statements
were made, the Company had begun laying off workers in response to the severe impact
economic conditions were having on” STJ, “[t]he published guidance exceeded internal
forecasts” as the guidance “failed to account for the practice of quarter-end QP sales” and
“for STJ’s improper accounting practices.” (Id. ¶ 100.) Likewise, with respect to the
second conference–at which Heinmiller, just a few weeks before STJ announced its
expected earnings shortfall, expressed “confidence that we can continue to grow our
business on the top-line at a double-digit rate”–Plaintiffs allege that “Defendants knew, at
the time these statements were made, that end-of-quarter QPs would not permit the
Company to meet its forecast guidance,” that “[a]s early as 2008, STJ’s internal forecasts
indicated that the sales of STJ’s CRM devices through 2009 were trending downward,”
and that “[a]t the time of Heinmiller’s statements, weakening market conditions were
impacting STJ’s sales operations, and internal forecasting numbers showed that the
effects would only worsen.” (Id. ¶ 103.)
Such allegations–essentially that STJ’s undisclosed internal numbers contradicted
what Defendants were telling the public–plainly support the “strong inference of scienter”
necessary to survive a motion to dismiss. Although Plaintiffs do not elaborate on the
“internal forecasts” that they allege contemporaneously contradicted what Defendants
were telling the markets and investors, the Complaint elsewhere makes frequent reference
to the new software program STJ had begun using–allegedly in response to a prior

35

earnings miss–to track its sales more accurately. (E.g., Doc. No. 23, ¶¶ 51, 52, 63, & 64.)
It also alleges that various STJ personnel, including sales representatives, recognized that
STJ’s channel stuffing and bulk sales practices were not sustainable and informed their
superiors–including Rousseau–that “the forecasts provided to the Street were unsupported
by ForecastPro’s analysis.” (Id. ¶ 49, 59, 60, 65, 66, & 68.)
Furthermore, the Complaint includes various additional allegations that support an
inference of scienter. For example, it alleges that STJ changed its practice with respect to
replacing expiring products from documenting such “swaps” to confining
communications regarding such transactions only to oral statements. (Id. ¶ 128.) It also
alleges that with respect to QP transactions, serial numbers for devices sold in such bulk
sales were not recorded in order to “conceal the exchange of ‘stale’ products for newer
ones.” (Id. ¶ 130.)
Of the various arguments Defendants raise with respect to scienter, only their
argument regarding the Confidential Witnesses cited in the Complaint merits further
discussion. Defendants argue that the individual statements attributed to such witnesses
lack the requisite details of scienter, concluding that the Complaint “is simply bereft of
any allegation by any Confidential Witness that any Individual Defendant knew or
recklessly disregarded any material false statement in St. Jude’s reported financial
results.” (Doc. No. 38, at 30-31.) But no such requirement exists. Rather, the requisite
inference of scienter is drawn from all of the plausible allegations and weighed against
any competing inference of non-culpable conduct.

36

Defendants assert various deficiencies in the CW’s statements, but the CW
statements they address occur in either the “Sources” or “Background” sections of the
Complaint. (Doc. No. 38, at 31-32.) Defendants do not address the numerous
attributions to the CWs throughout the rest of the Complaint, including in the section
devoted to “Materially False and Misleading Statements and Omissions and Fraudulent
Scheme and Course of Business by Defendants During The Class Period,” as well as the
section asserting that “STJ’s Financial Statements Were Materially Misstated In Violation
of GAAP And SEC Rules.” (E.g., Doc. No. 23, ¶¶ 92, 93, 94, 96, 118, 128-31, 136, 141,
143, 147-48, & 150-52.)8
8

Defendants do not flatly contend that Plaintiffs may not rely on confidential
witnesses in their Complaint. In a recent decision issued after the Complaint was filed,
the Eighth Circuit stated that it “disregard[s]” any “reliance on the allegations of
confidential sources.” Minneapolis Firefighters’ Relief Ass’n v. MEMC Electronic
Materials, Inc., 641 F.3d 1023, 1030 (8th Cir. 2011). The court relied on the Seventh
Circuit’s decision in Higginbotham v. Baxter Int’l Inc., which ruled that “[o]ne upshot” of
Tellabs “is that we must discount allegations that the complaint attributes to five
‘confidential witnesses.’” 495 F.3d 753, 757 (7th Cir. 2007). But as the Seventh Circuit
clarified, “allegations from ‘confidential witnesses’ must be ‘discounted’ rather than
ignored. Usually that discount will be steep. It is unnecessary to say more today.” Id. at
757. And the Seventh Circuit later distinguished Higginbotham as “a very different case
from this one.” Makor Issues and Rights, 513 F.3d 702, 711 (7th Cir. 2008). In
Higginbotham, “[t]he misconduct alleged consisted of frauds committed by [the
defendant’s] Brazilian subsidiary, but because the suit was against the parent, the
plaintiffs had to show that the parent knew about the Brazilian fraud.” Id. “The
subsidiary had tried to conceal it from its parent as well as from the Brazilian
government.” Id. “There was no basis other than the confidential sources, described
merely as three ex-employees of Baxter and two consultants, for a strong inference that
the subsidiary had failed to conceal the fraud from its parent and thus that the
management of the parent had been aware of the fraud during the period covered by the
complaint.” Id. at 712. Here, however, as in Makor, the confidential sources “are
numerous and consisted of persons who from the description of their jobs were in a
position to know at first hand the facts to which they are prepared to testify.” Id.
continue...
37

Moreover, the “Background” allegations regarding the Confidential Witnesses are
sufficient under the PSLRA. First, the allegations attributed to Confidential Witnesses
are not plead as being “on information and belief.” Therefore, the Complaint need not
satisfy the requirement imposed by 15 U.S.C. § 78u-4(b)(1) that “if an allegation
regarding the statement or omission is made on information and belief, the complaint
shall state with particularity all facts on which that belief is formed.” Florida State Bd. Of
Admin. v. Green Tree Financial Corp., 270 F.3d 645, 667 (8th Cir. 2001). Second, if such
allegations pertain to scienter, “each fact supporting the inference of scienter [must] be
stated with particularity.” Id. Third,
[i]f the shareholders’ attorneys do not have a factual basis for [these]
allegation[s], they will be subject to Rule 11 sanctions. Therefore, there is
already a mechanism in place to deter and punish fabrication.
Consequently, there is no need for the name of the [Confidential Witness]
to be pleaded in the complaint, although it appears it will soon have to be
8

...continue
Although “[i]t would be better were the informants named in the complaint,” as many
circuits have ruled, “the absence of proper names does not invalidate the drawing of a
strong inference from informants’ assertions.” Id. Moreover, until Minneapolis
Firefighters’ Relief Ass’n, the Eighth Circuit addressed allegations by confidential
witnesses without flatly discounting or ignoring them, e.g., In re Hutchinson Technology,
Ins. Sec. Litig., 536 F.3d 952, 957-58 (8th Cir. 2008), and the panel in Minneapolis
Firefighters’ Relief Ass’n did not mention, much less distinguish, any of those decisions,
such as Florida State Board of Administration v. Green Tree Financial Corporation, 270
F.3d 645, 667-68 (8th Cir. 2001). As the Seventh Circuit explained, it agrees with the
other circuits–including the Eighth Circuit–that “it would be too much to require plaintiffs
to provide ‘name, rank, and serial number’ for each of” any confidential sources on which
a complaint relies. Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.2d 588, 596 (7th
Cir. 2006), vacated in part on other grounds, 551 U.S. 308 (2007) (scienter standard).
Although plaintiffs must “describe their sources with sufficient particularity ‘to support
the probability that a person in the position occupied by the source would possess the
information alleged,’” any “bright line rule obliging the plaintiffs to reveal their sources
has the potential to deter informants from exposing malfeasance.” Id.
38

disclosed under [Rule 26] if the shareholders intend to make use of it.
Id. at 668.
Here, the Complaint includes allegations based on information derived from fifteen
“Confidential Witnesses,” which the Complaint describes as former employees of STJ
whose information is
reliable and credible because: (a) each of the witnesses worked at STJ
during or immediately prior to the Class Period; (b) each witness stated that
she/he had personal knowledge of the information provided; (c) the
witnesses’ job titles and responsibilities show that they had personal
knowledge of the information provided; (d) the witness accounts
corroborate one another; and (e) the witness accounts are corroborated by
other information alleged herein.
(Doc. No. 23, ¶ 23.) And, in fact, the Complaint includes, for each CW, their job title,
and the time frame of their employment with STJ. In addition, it usually identifies their
particular employment responsibilities. (Id. ¶¶ 24, 26, 28, 30, 31, 32, 33, 34, 36, 37, 38.)9
As discussed above, the PSLRA requires that the Complaint support a “strong
inference” of scienter, a standard that the Supreme Court has construed to require a
showing–based on a comparative consideration of all of the relevant allegations
together–that a “reasonable person would deem the inference of scienter cogent and at
least as compelling as any opposing inference one could draw from the facts alleged.”
Tellabs, 551 U.S. at 324. But again, the requisite inference “need not be irrefutable, i.e.,
9

Defendants purport to have identified one of the Confidential Witnesses and
submit the Affidavit of Sherry Ashford, contending that the Complaint has
misrepresented her recollections. (Doc. No. 38, at 13-14.) This Court doubts the
propriety of addressing the factual accuracy of an affidavit on a Rule 12(b)(6) motion. At
this juncture, the Court will simply ignore the few allegations attributed solely to that
witness.
39

of the ‘smoking-gun’ genre, or even the ‘most plausible of competing inferences.’” Id.
Defendants argue that “the more compelling inference–the only reasonable one to
be drawn–is of innocent and appropriate business practices.” (Doc. No. 52, at 14.) But
taking the allegations of scienter as a whole, this Court concludes that the inference of
fraudulent conduct that may be drawn from the Complaint satisfies the Tellabs
requirement that it be as least as compelling as any opposing inference of non-culpable
conduct with respect to Starks and Heinmiller, but not with respect to Fain and Rousseau.
Defendants first contend that “Plaintiffs attempt to pass off vague statements from
hindsight analyses of 3Q09 events as evidence of specific, contemporaneous knowledge
that forecast earnings could not be attained.” (Doc. No. 52, at 14.) Defendants highlight
the January 2010 research report made by William Blair & Co., L.L.C.–and quoted in
paragraph 116 for the proposition that STJ’s management knew in early 2009 that its
customers were engaged in ongoing “inventory destocking”–to argue that it does not
support any inference “that Defendants knew months earlier that 3Q09 earnings would
disappoint,” and that it “is nothing more than a restatement of adverse conditions that
Defendants themselves disclosed during the putative Class Period.” (Id. at 14-15.)
But paragraph 116 is in the “Damages, Loss Causation and Reliance” section of
the Complaint. Plaintiffs apparently are not relying on the allegations of paragraph 116 to
establish an inference of scienter. Rather, Plaintiffs rely on the William Blair report as
evidence that the disappointing 3Q09 results and lowered FY 09 expectations were not, as
Defendants claimed at the time, “caused by a sudden or unexpected change in hospital

40

purchasing behavior,” but rather by conditions impacting STJ all year that “had been
concealed from investors by defendants’ publication of unsupported guidance and
misleading sales reports.” (Doc. No. 23, ¶ 116).
Defendants also focus on the Complaint’s citation of a Summer Street Research
Partners report in paragraph 103 to support their “hindsight” defense. (Doc. No. 52, ¶
15.) With respect to the research report, the Complaint alleges that
Defendants knew, at the time these statements [of September 2009] were
made, that end-of-quarter QPs would not permit the Company to meet its
forecast guidance, as reflected in a Summer Street Research Partners
analyst report which stated that “STJ management acknowledged that the
weakness in ordering patterns became pronounced in the last 2-3 weeks of
the quarter, but they are still working on a root-cause analysis. We remain
cautious of blaming the economy or the overhang for this surprising miss.”
(Doc. No. 23, ¶ 103.) Defendants assert that “Plaintiffs claim this statement shows that
Mr. Heinmiller was aware that earnings guidance could not be achieved when he spoke at
investor conferences on September 10 and 15.” (Doc. No. 52, at 15.) Defendants argue,
however, that because three weeks before the third quarter ended on October 3, 2009 was
September 12, 2009, the weakness in the ordering pattern began no earlier than
September 12, that is “after Heinmiller’s September 10 statements.” (Id. at 16.) Thus,
Defendants contend, Plaintiffs’ Complaint alleges only “fraud by hindsight” that the
PSLRA was intended to preclude, because Plaintiffs’ theory only supports the claim that
the “pattern was discernible after the fact.” (Id.)
Defendants appear to misconstrue Plaintiffs’ Complaint, if not also the “fraud by
hindsight” problem. The scienter requirements of the PSLRA require that a plaintiff

41

allege facts that a defendant knew (or recklessly disregarded facts showing) that his or her
statement was false when made, not just that a defendant’s statement was later shown to
be false. Elam v. Neidorff, 544 F.3d 921, 927 (8th Cir. 2008). Contrary to Defendants’
characterization, Plaintiffs’ Complaint alleges that on September 10, 2009, Heinmiller
announced to investors that STJ was “sticking by the guidance that we’ve given in July,”
that the recent layoffs of about 200 salespeople were just a “tweak in the way [STJ is]
managing [its] business,” and that, on September 15, 2009, Heinmiller reaffirmed STJ’s
ability to continue its growth rate. (Doc. No. 23, ¶¶ 98-102.) Moreover, the Complaint
does not allege that the undisclosed weakness in STJ’s sales first occurred only in the last
two or three weeks of the third quarter–that is, after Heinmiller’s September 2009
statements, but rather that “[a]s early as 2008, STJ’s internal forecasts indicate that the
sales of STJ’s CRM devices through 2009 were trending downward, and hospitals were
telling STJ that they were going to be unable to continue engaging in bulk sales,” and that
“[a]t the time of Heinmiller’s statements, weakening market conditions were impacting
STJ’s sales operations, and internal forecasting numbers showed that the effects would
only worsen.” (Id. ¶ 103 (emphasis added).) Moreover, the analyst report quoted in the
Complaint does not allege that the weakness began two to three weeks before the end of
the quarter, but rather states that STJ acknowledged that the weakness in orders “became
pronounced in the last 2-3 weeks of the quarter.” (Id. (emphasis added).) In sum,
Plaintiffs’ theory is not that Defendants erroneously failed to predict the future.
Next, Defendants dispute the validity of, as well as the satisfaction here of, the

42

“core business theory.” (Doc. No. 52, at 16-17.) Plaintiffs argue that the “importance of
QPs to STJ’s ability to meet forecast estimates, and the fact that QPs were managed by a
specialized group of senior representatives working out of STJ’s corporate headquarters,
also supports an inference that each of the Individual Defendants were aware of those
transactions and the sales practices that the Company was using to induce customers to
agree to make them.” (Doc. No. 45, at 44.)
The Eighth Circuit has deferred on deciding “whether the core operations approach
can be utilized to plead scienter,” but ruled that if that approach is warranted, it requires
factual allegations that the relevant information “was known within the company at that
time.” Elam v. Neidorff, 544 F.3d 921, 929 (8th Cir. 2008). A plaintiff relying on that
theory must show, with all requisite particularity, that the critical facts were actually
known within the company, not just speculate that “this information must have existed
and must have been known.” Id. at 930.
The Court first observes that Plaintiffs’ scienter argument does not rely solely on
the “core business theory” approach. Plaintiffs also rely on the allegations that the
Individual Defendants and other STJ supervisory and managerial personnel had actual
knowledge–based on sales and forecasting software and reports from the sales force–that
the guidance STJ was offering the public could not be supported by the actual data of
genuine sales. (Doc. No. 23, ¶¶ 78, 80, 82, 88, 92, 100, & 103.)
In any event, after a thorough review of the Complaint and the parties’ respective
arguments, this Court is satisfied that Plaintiffs have alleged, with sufficient particularity,

43

that the critical facts regarding QPs, channel-stuffing, and STJ’s accounting for sales were
known within STJ, such that this core business information could be imputed to the
Individual Defendants. (E.g., Doc. No. 23, ¶¶ 46, 52, 59, 63, 65 & 66.) Defendants
attempt to minimize the relevance of their alleged sales and accounting practices with
respect to the CRM products at issue by noting that “Plaintiffs readily admit that the
CRM division” is “one of only four divisions” at STJ. (Doc. No. 52, at 19.) But as the
Complaint alleges, “CRM devices” account “for approximately 60% of the Company’s
sales.” (Doc. No. 23, ¶ 40.) Moreover, the CRM division appears to have been the main
focus of STJ at the time, as STJ sought continuing growth in that market relative to the
other two companies that dominated that field. (Id. ¶¶ 42-44.)
Defendants next attack Plaintiffs’ allegations regarding the software program that
the Complaint alleges STJ adopted in the wake of an earlier forecasting error, the
ForecastPro system. (Doc. No. 52, at 19-20.) Defendants characterize the Complaint as
alleging that ForecastPro “possessed the magical power to predict sales with consistent 98
percent accuracy” but ignoring that the program “is an off-the-shelf software program that
has been around since 1997” and has never been implicated in any prior securities fraud
or other legal action. (Id.)
But Plaintiffs are not alleging that the program was somehow defective, such that
it should have been the subject of earlier litigation. Nor is the fact that the software is “an
off-the-shelf” program, much less a dated one, of any relevance here. The Complaint
alleges that “defendants issued guidance that was deliberately inflated from STJ’s internal

44

financial forecasts,” because STJ continued to rely on its “historic and unreliable” “topdown” method of basing forecasts on management’s sales goals, rather than the “highly
accurate statistical forecast model” generated by the software at issue. (Doc. No. 23, ¶ 5.)
In the wake of “significant earnings miss in 2007,” Starks told STJ employees “that it was
his ‘number one objective’ to improve the accuracy of STJ’s forecasting methods.” (Id. ¶
63.) Accordingly, STJ developed “a new computer-based forecasting methodology based
on Forecast Pro software.” (Id.) The new system “quickly proved to be much more
reliable than the Company’s historical qualitative approach to forecasting based on
mandated predictions of sales results” and was “particularly accurate in predicting sales
results within the U.S.” (Id. ¶ 64.)
The Complaint further alleges that STJ’s management rejected the new system’s
forecasts in favor of the higher results that “they wanted to present to the Street.” (Id.)
Based on that “consistent” difference in results, one of the Confidential Witnesses asked
his or her supervisor “whether the forecasts were being provided to management.” (Id. ¶
65.) That employee also “told Rousseau that the forecasts provided to the Street were
unsupported by ForecastPro’s analysis,” but “senior management” “continued to rely on
STJ’s historical forecasting method to support guidance given to the Street.” (Id.) “To
make up the difference, . . . STJ continued pushing its largest customers to take additional
CRM devices they didn’t need through end-of-quarter bulk sales negotiated at substantial
discounts under its QPs program.” (Id.)
Defendants further contend that Plaintiffs admit that “they have no clue how” this

45

employee (along with another Confidential Witness) “arrived at the software’s supposed
98 percent accuracy rate,” and that they “cap [this] failure . . . with the additional failure
to plead what the ‘true’ forecast was that the software was supposed to have generated for
3Q09.” (Doc. No. 52, at 20.) But Plaintiffs simply argue that
Defendants’ quibble that the Complaint does not plead how these
percentages were calculated misses the point. The numbers reflect what the
witnesses learned during their employment. Regardless of how STJ
determined the rates, the basic point remains the same – the computer
model was significantly more accurate than the historic method, yet
Defendants consistently ignored the former and relied on the latter in
providing financial guidance to investors.
(Doc. No. 45, at 36.) The Confidential Witnesses at issue were, respectively, “a Senior
Financial Analyst from 2006 to August 2008” who “was involved in developing revenue
forecasting methodologies,” and “a Senior Marketing Manager and then . . . a Regional
Sales Manager” “tasked with improving STJ’s CRM sales forecasting methodologies for
its internal forecasts reflecting the sales goals the Company hoped to achieve within a
given period.” (Doc. No. 23, ¶¶ 31, 32.) Although the PSLRA imposes certain
heightened pleading standards, it does not require a securities fraud plaintiff to prove its
case in the Complaint. Discovery–generally “stayed during the pendency of any motion
to dismiss” under the PSLRA, 15 U.S.C. § 78u-4(b)(3)(B)–remains to begin.
Finally, Defendants argue that Plaintiffs have not established the requisite “strong
inference” of scienter based on the Complaint’s “allegations regarding layoffs, a stock
buyback program, and GAAP violations.” (Doc. No. 52, at 24.)10 That “Plaintiffs cite no
10

The Court largely agrees with Defendants’ other remaining scienter
continue...
46

case in which a reduction in force or a repurchase of company stock has been held to
show fraudulent intent” is not only irrelevant here, but also wide of the mark. Plaintiffs
do not allege that the 2009 layoffs themselves support an inference of scienter, but rather
that the unannounced substantial layoffs of salespeople–while STJ was publicly
reiterating its revenue and earnings forecasts and its growth rate–contributes to an
inference of scienter that Defendants fraudulently represented STJ’s earnings. (Doc. No.
23, ¶¶ 99, 100.)
Similarly, Defendants also miss the mark when they argue that “spending $49
million [to layoff numerous employees] and decimating the sales force” is no way to
“artificially inflate 3Q09 financial results.” (Doc. No. 52, at 24.) Incurring such
costs–presumably in order to save more in the long-run, as the necessary consequence of
declining sales that the company is not revealing while it maintains its public growth and
revenue guidance–thus does not support innocent motivations.
Finally, with respect to the alleged GAAP violations, Defendants’ arguments again
fail to accurately represent the Plaintiffs’ allegations. Defendants first attempt to
shoehorn the allegations of Plaintiffs’ Complaint into the facts at issue in Ceridian in
order to argue that the individual alleged violations are not linked to any of the Individual
Defendants. (Doc. No. 52, at 24-25.) But the accounting problems alleged here are of a

10

...continue
argument–that regarding the Individual Defendants’ stock sales during the Class Period.
Without any context into which the Court may place those sales in order to determine
whether they were “unusual,” the Court may not base any inference of scienter on such
sales.
47

nature different than those Ceridian concerned:
“a sprawling jumble of a securities-fraud action . . . based on dozens, if not
hundreds, of accounting errors–errors of many different types committed by
many different employees over many different years.”
542 F.3d 240, 245 (8th Cir. 2008) (quoting district court’s decision). Here, the allegations
of GAAP violations are much more focused–centering on the proper methods for
accounting for end-of-quarter bulk sales, rebates, the replacement of “stale” products, and
purported “sales” that were in fact only consignments (Doc. No. 23, ¶ 120) –and the
particular violations at issue dove-tail with the general thrust of the Complaint–that is,
that STJ manipulated its earnings by inappropriately front-loading sales.
With respect to STJ’s sales-tracking software, Defendants argue that “the mere fact
that certain data are not entered into an available data management system does not
automatically give rise to a ‘manipulation,’” and that “Plaintiffs fail even to plead that
there was a failure to enter the data,” but only that it was not entered immediately and
without specifying the length of the delay. (Doc. No. 52, at 25.) But again, Defendants’
attempt to isolate specific allegations fails to consider the nature and context of the fraud
Plaintiffs allege. Plaintiffs’ theory is that STJ misled investors by issuing earnings and
growth forecasts that were not supported by STJ’s sales and accounting practices,
primarily an unjustifiable and unsustainable “front-loading” of purported sales. (Doc. No.
23, ¶¶ 2, 45.)
Defendants further contend that “Plaintiffs contradict themselves” because while
the Complaint alleges that “the timely entry of data [into the Siebel system] was

48

important ‘so that the sales personnel were aware of when [CRM devices] . . . needed to
be swapped out,” it also alleges “that not entering the data was key to keeping the swaps
secret.” (Doc. No. 52, at 25.) This argument misunderstands the gravamen of Plaintiffs’
Complaint. Plaintiffs’ claim that Defendants misused the Siebel system to hide the reality
of their QP sales. The Complaint alleges that the Siebel system was deployed to facilitate
“the timely and accurate reporting of sales information by sales personnel,” but that
corporate account managers failed to enter QP sales in a timely fashion in order to
manipulate the sales data. (Doc. No. 23, ¶¶ 51, 52.) This is no contradiction.
As the Court already has concluded, at least several of the statements at issue were
false and misleading. The question then becomes which of two competing inferences is
more likely: “One is that the company knew (or was reckless in failing to realize . . .) that
the statements were false, and material to investors. The other is that although the
statements were false and material, their falsity was the result of innocent, or at worst
careless, mistakes at the executive level.” Makor Issues & Rights, Ltd. v. Tellabs, Inc.,
513 F.3d 702, 707 (7th Cir. 2008).
Of the four Individual Defendants, the Court finds that Plaintiffs have alleged
sufficient facts to establish a strong inference of scienter with respect to Starks and
Heinmiller, but not with respect to Fain or Rousseau. With respect to Starks (STJ’s
Chairman, President and CEO), and Heinmiller (STJ’s CFO and Executive Vice
President), the Complaint alleges that both “prepared or authorized and signed STJ’s SEC
filings” and SOX certifications, “prepared or authorized the press releases” at issue, and

49

“participated in or directed STJ’s conference calls” in which the allegedly false
statements were made. (Doc. No. 23, ¶¶ 18, 19.) Most importantly, all of the statements
that the Complaint identifies as allegedly false are attributed either to Starks or to
Heinmiller or both. (Id. ¶¶ 70, 73, 74, 76, 81, 85, 86, 90, 91, 98, 99, 101, 102.)
With respect to the latter two Individual Defendants, the Complaint simply alleges
that each “helped prepare for and participated in each of the quarterly conference calls . . .
in which false statements were made.” (Doc. No. 23, ¶¶ 20, 21.) There are no allegations
that either participated in any of the press releases at issue, or that they contributed to or
signed off on any of the SEC filings or SOX certifications.11 Although the Complaint
alleges that “each” of the Individual Defendants “participated” in certain conference calls
(Doc. No. 23, ¶¶ 72, 84), such generalized allegations do not satisfy the PSLRA. More
importantly, none of the particular statements addressed in the section delineating the
“Materially False And Misleading Statements and Omissions” is attributed either to Fain
or to Rousseau. (Id. ¶¶ 69-103.) On these facts (taken as true where sufficiently plead),
11

The “group pleading doctrine” might suffice to keep Fain and Rousseau on
the hook. See In re Nash Finch, 502 F. Supp. 2d at 877-78. The doctrine is “a judicial
presumption that statements in group-published documents including annual reports and
press releases are attributable to officers and directors who have day-to-day control or
involvement in regular company operations.” Makor Issues & Rights, Ltd., 513 F.3d at
710. The Eighth Circuit apparently has not yet ruled on its validity. Hutchinson, 536
F.3d at 961 n.6 (noting it “need not consider the issue of whether this doctrine survived
the PSLRA or whether the doctrine applies” in that case). But as the Seventh Circuit
concluded, the doctrine cannot survive the PSLRA’s references to “the defendant” with
respect to scienter–that the complaint must “state with particularity facts giving rise to a
strong inference that the defendant acted with the required state of mind”–such that while
allegations may be aggregated “to determine whether [the complaint] creates a strong
inference of scienter, plaintiffs must create this inference with respect to each individual
defendant in multiple defendant cases.” Makor Issues & Rights, Ltd., 437 F.3d at 602-03.
50

the Court cannot conclude that the Complaint’s allegations support liability under Section
10(b) and / or Rule 10b-5 for Fain or Rousseau.12
Weighing the competing inferences with respect to Starks and Heinmiller, in
contrast, the Court notes that Defendants merely offer the generic explanation that their
conduct and statements reflect business tactics that are “common, appropriate, and even
necessary practice[s] to compete in the market for medical devices.” (Doc. No. 38, at 8;
accord Doc. No. 52, at 25 (asserting that the “undisputed facts” support “the innocent
inferences” more than Plaintiffs’ claims).) The Court recognizes that practices such as
channel stuffing are not necessarily fraudulent. But it is also obvious that a company
cannot engage in channel stuffing, quarter after quarter, in a deteriorating economic
environment while also claiming that it will maintain its growth and revenue rates–sooner
or later, a company’s customers can no longer absorb a quantity of products beyond what
the market demands.
Thus, it is not difficult to draw the inference that a company’s management could
intentionally engage in such practices in order to front-load sales from the future to the
present quarter and thereby artificially inflate quarterly earnings, at least in the near term.
Or perhaps management simply hoped that such a company expected the overall market,
or that company’s share of the market, to grow fast enough to absorb the excess
inventory. But see Makor Issues & Rights, Ltd., 513 F.3d at 710 (“The fact that a
gamble–concealing bad news in the hope that it will be overtaken by good news–fails is
12

The Complaint also alleges, however, that they are liable as “control
persons” under Section 20 of the Exchange Act. See infra Section II.C.
51

not inconsistent with its having been a considered, though because of the risk a reckless,
gamble.”). On the other hand, such a hope, perhaps myopic even in the best of economic
times, might simply be untenable in the deteriorating economic conditions from late 2008
through 2009. In sum, taking the well-pled allegations at face value, the Court cannot
conclude at this juncture that an innocent inference outweighs an inference of culpable
conduct by Starks and Heinmiller. Such questions remain for discovery and beyond.
This conclusion also controls the issue of scienter with respect to the corporate
Defendant itself, St. Jude. “To establish corporate liability for a violation of Rule 10b-5
requires ‘look[ing] to the state of mind of the individual corporate official or officials who
make or issue the statement (or order or approve it or its making or issuance, or who
furnish information or language for inclusion therein, or the like) rather than generally to
the collective knowledge of all the corporation’s officers and employees acquired in the
course of their employment.’” Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d
702, 708 (7th Cir. 2008). This is simply an application of the general rule that “[a]
corporation is liable for statements by employees who have apparent authority to make
them.” Id. “[T]he doctrines of respondeat superior and apparent authority remain
applicable to suits for securities fraud.” Id. Because this Court has found that the
Complaint alleges sufficient facts to support a strong inference of scienter with respect to
at least some of the Individual Defendants, the requisite showing may be imputed to STJ
itself. E.g., In re St. Paul Travelers Sec. Litig., 2006 WL 2735221, *4 n.3 (D. Minn. Sep.
25, 2006) (“The scienter of senior executives can be imputed to the corporate

52

defendants.”).
3.

Loss Causation

Finally, Defendants challenge the sufficiency of the Complaint’s allegations of
loss causation. (Doc. No. 38, at 37.) “To adequately plead loss causation, the complaint
must state facts showing a causal connection between the defendant’s misstatements and
the plaintiff’s losses.” McAdams v. McCord, 584 F.3d 1111, 1114 (8th Cir. 2009).
Unlike the elements of material misrepresentations and scienter, which are subject to
heightened pleadings standards imposed by the PSLRA, the pleading of loss causation is
subject only to “the simple test” of Rule 8(a)(2)’s requirement of a short and plain
statement of the claim. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 346 (2005)
(assuming “that neither the Rules nor the securities statutes impose any special further
requirement in respect to the pleading of proximate causation or economic loss”).13 “[I]t
should not prove burdensome for a plaintiff who has suffered an economic loss to provide
a defendant with some indication of the loss and the causal connection that the plaintiff
has in mind.” Id. at 347. Alleging loss causation “‘is not a probability requirement . . . it
simply calls for enough facts to raise a reasonable expectation that discovery will reveal
evidence of loss causation.’” In re Retek Inc., 621 F. Supp. 2d 690, 701 (D. Minn. 2009)
(quoting In re Gilead Sci. Sec. Litig., 536 F.3d 1049, 1057 (9th Cir. 2008)).
“Loss causation in a securities fraud case is analogous to the common law’s
13

The PSLRA addresses loss causation, but simply provides that “the plaintiff
shall have the burden of proving that the act or omission of the defendant alleged to
violate this chapter caused the loss for which the plaintiff seeks to recover damages.” 15
U.S.C. § 78u-4(b)(4).
53

requirement of proximate causation.” McAdams, 584 F.3d at 1114. A plaintiff “must
show ‘that the loss was foreseeable and that the loss was caused by the materialization of
the concealed risk.’” Id. As the Supreme Court has explained, a reduced stock price
“may reflect, not the earlier misrepresentation, but changed economic circumstances,
changed investor expectations, new industry-specific or firm-specific facts, conditions or
other events, which taken separately or together account for some or all of that lower
price.” Dura Pharmaceuticals, Inc., 544 U.S. at 342-43.14 Plaintiffs thus must “show that
the defendant’s fraud–and not other events–caused the security’s drop in price.” Schaaf
v. Residential Funding Corp., 517 F.3d 544, 550 (8th Cir. 2008).
Here, Defendants argue that Plaintiffs have failed to plead facts showing “that any
of the alleged false statements actually caused the October 6, 2009, drop in St. Jude’s
stock price.” (Doc. No. 38, at 38.) As Defendants elaborate, Plaintiffs have not plead any
facts showing that “the market has ever questioned St. Jude’ revenue recognition policies
or the accuracy of St. Jude’s audited financial results for 2008 or 2009.” (Id.)
Defendants also argue that “with respect to St. Jude’s sales and earnings guidance,
Plaintiffs have failed to identify any corrective disclosure of the alleged concealed truth.
The mere announcement of disappointing earnings cannot serve as a corrective
disclosure.” (Id. at 39.) Finally, Defendants assert that even if the October 6, 2009
14

The Court rejected the argument that a plaintiff may satisfy its losscausation requirement simply by pleading that the stock price “‘on the date of purchase
was inflated because of the misrepresentation.’” Id. at 338. In a fraud-on-the-market
case, “[a]n inflated purchase price will not itself constitute or proximately cause the
relevant economic loss.” Id. at 342. Rather, a plaintiff must then show that revelation of
the fraud “deflated” that price.
54

announcement of STJ’s earnings miss could serve as a corrective disclosure, “Plaintiffs
plead no facts to show that the market interpreted the announcement as demonstrating the
falsity of St. Jude’s earlier statements.” (Id.)
In response to Defendants’ motion, Plaintiffs argue that “investors were misled by
Defendants’ concealment of declining demand for STJ’s devices caused by its prior
shipment of excess inventory to customers and the impact of an ongoing economic
recession,” which concealment inflated the price of STJ’s stock until STJ missed its 3Q09
guidance. (Doc. No. 45, at 56.) “The resulting stock drop on October 6, 2009, therefore
is alleged to have been caused by the manifestation of risks that were concealed during
the Class Period.” (Id. (citing paragraphs 108 through 110 of the Complaint).)
“Subsequent disclosures revealed the extent to which those concealed risks and
conditions had caused the 3Q09 earnings miss and resultant economic injury to
Plaintiffs.” (Id. (citing paragraphs 111 through 119 of the Complaint).) The Complaint
alleges that
[c]ontrary to defendants’ claims in the October 2009 press releases and on
the 3Q09 conference call, the disappointing 3Q09 results and lowered FY09
expectations were not caused by a sudden or unexpected change in hospital
purchasing behavior. Instead, those disclosures were caused by and
reflected conditions that had been impacting the Company all year, but had
been concealed from investors by defendants’ publication of unsupported
guidance and misleading sales reports that relied on undisclosed end-ofquarter QPs, rebates and product swaps that created the appearance of
greater demand for STJ’s products than actually existed.
(Doc. No. 23, ¶ 116.)
Defendants contend that the sole “corrective” disclosure on which Plaintiffs rely,

55

the 3Q09 earnings announcement, pertains “only to the results of that period,” not any
“supposed ‘prior shipment of excess inventory,’” much less “improper accounting, secret
return agreements, or any other element of Plaintiffs’ fraud theory.” (Doc. No. 52, at 26.)
Finally, Defendants contend that Plaintiffs may not now assert that the 3Q09 earnings
announcement “revealed an unrelated fraud,” because the Complaint “affirmatively
allege[s] that the market understood St. Jude’s earnings announcement as revealing a loss
of market share.” (Id. at 27 (citing Complaint, ¶¶ 117, 119).)
This Court does not read the Complaint to allege that the market understood that
announcement as revealing a loss of market share. Rather, it alleges that analysts
questioned STJ’s claim that the miss was “due to a sudden or unexpected change in
hospital stocking procedures” because STJ’s two main rivals had not noted any
comparable customer behavior. (Doc. No. 23, ¶ 117.) The fact that one analyst thus
speculated that STJ was “likely failing to take market share” does not define (or confine)
Plaintiffs’ theory of fraud. Moreover, Defendants’ emphasis on the fact that the October
6, 2009 preliminary announcement of STJ’s 3Q09 results and the expected 3Q09 earnings
miss did not expressly “correct” the details of STJ’s practices such as channel stuffing is
not persuasive. Granted, the October 6, 2009 announcement identifies “one factor” as “a
slowdown in hospital stocking of certain medical devices”–which Starks attributed to
“macro economic factors coupled with the continued pressures surrounding healthcare
reform.” (Doc. No. 23, 109.) But the fact that Starks thereby did not “correctively
disclose” the particular practices that Plaintiffs allege, largely channel stuffing

56

accompanied by misleading accounting for such sales, does not warrant dismissal on a
Rule 12(b)(6) motion for failure to adequately plead loss causation.
“Since Dura, courts . . . have found loss causation satisfied, at least at the pleading
stage, by allegations that the plaintiff bought securities at a price artificially inflated by a
defendant’s misrepresentations, and that the price dropped once the truth was revealed.”
In re Motorola Sec. Litig., 505 F. Supp. 2d 501, 538 (N.D. Ill. 2007), abrogated in part on
other grounds, Merck & Co., Inc. v. Reynolds, 130 S. Ct. 1784 (2010) (notice for
purposes of statute of limitations). What Defendants contend is required here to survive
their motion to dismiss is the type of specificity that the Motorola court found that Dura
does not require.
Rather than speaking in terms of a single event in which all is revealed, the
Dura court referred to a hypothetical loss that might occur “after the truth
makes its way into the market,” and the lack of any such loss if the investor
sells “before the relevant truth begins to leak out. This language suggests
that a disclosure sufficient to satisfy loss causation can occur in ways other
than an announcement that points directly to a previous representation and
proclaims its falsity.
Id. at 540. As the Motorola court elaborated, to establish loss causation, a plaintiff is not
confined to only “showing a corrective disclosure that both identifies a specific prior false
representation and ‘calls [it] into question.’” Id. at 542. Thus, the court did “not read
Dura to imply that a plaintiff cannot satisfy loss causation without identifying a
corresponding, mirror-image prior representation for every disclosure that precedes a
share price decline.” Id. at 544.
Although, as Defendants note, an earnings warning itself does not disclose fraud

57

(Doc. No. 52, at 26), the Motorola court–cognizant of this principle–concluded that
a securities fraud plaintiff is not necessarily precluded from establishing
loss causation where a corrective disclosure does not, on its face,
specifically identify or explicitly correct a previous representation, or
expressly disclose the particular fraudulent scheme the plaintiff alleges.
505 F. Supp. 2d at 546. Here, as in In re Retek Inc. Securities, the ultimate chain of
causation might be “long and somewhat tortured,” 2005 WL 3059566 (D. Minn. Oct. 21,
2005) (denying motion to dismiss), but at the pleading stage Plaintiffs have alleged
enough to provide Defendants with “‘notice of what the relevant loss might be or of what
the causal connection might be between that loss and the misrepresentation,’” 621 F.
Supp.2d 690, 701 (D. Minn. 2009) (contrasting motion-to-dismiss standard with
summary-judgment standard) (quoting Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S.
336, 347 (2005)).
C.

Count II: The Section 20(a) Claim

In Count II of the Complaint, Plaintiffs allege the Individual Defendants were
controlling persons of STJ, and that STJ itself “controlled each of the Individual
Defendants and all of its employees,” such that they are liable under Section 20(a) of the
Exchange Act of 1934. (Doc. No. 23, ¶ 195.) Under Section 20(a) of the Exchange Act,
“[e]very person who, directly or indirectly, controls any person liable” under Section
10(b) and Rule 10b-5 “shall also be liable jointly and severally with and to the same
extent as such controlled person is liable.” 15 U.S.C. § 78t. In short, the statute generally
subjects to liability “those who, subject to certain defenses, ‘directly or indirectly’ control
a primary violator of the federal securities laws.” Lustgraaf v. Behrens, 619 F.3d 867,
58

873 (8th Cir. 2010).
To meet the statutory standard, “a plaintiff must prove: (1) that a ‘primary violator’
violated the federal securities laws; (2) that ‘the alleged control person actually exercised
control over the general operations of the primary violator’; and (3) that ‘the alleged
control person possessed–but did not necessarily exercise–the power to determine the
specific acts or omissions upon which the underlying violation is predicated.’” Id. At the
pleading stage, to state a claim under Section 20(a), a plaintiff must plead “‘(1) an alleged
control person actually exercised control over the general operations of the primary
violator; and (2) the alleged control person possessed but did not necessarily exercise the
power to determine the specific acts or omissions upon which the underlying violation is
predicated.’” Cummings v. Paramount Partners, LP, 715 F. Supp. 2d 880, 907 (D. Minn.
2010) (quoting In re Retek, 621 F. Supp. 2d 690, 709 (D. Minn. 2009)). A Section 20(a)
claim, however, “‘is not subject to the heightened pleading standards of either the Reform
Act or Fed. R. Civ. P. 9(b).’” Id. (citation omitted).
A claim under Section 20(a) for control person liability is thus derivative of a
primary claim, that is, “[c]ontrol-person claims are predicated on plaintiffs first
establishing that a controlled person was a primary violator.” Id.; accord In re
Hutchinson Technology, Ins. Sec. Litig., 536 F.3d 952, 957-58 (8th Cir. 2008) (“[A]
Section 20 claim is derivative and requires an underlying violation of the 1934 Act.”).
The failure to satisfactorily plead a Section 10(b) / Rule 10b-5 claim thus also precludes a
Section 20(a) claim. E.g., Lustgraaf v. Behrens, 619 F.3d 867, 873 (8th Cir. 2010)

59

(“[A]bsent a primary violation, a claim for control-person liability must fail.”); In re
Hutchinson Technology, Ins. Sec. Litig., 536 F.3d at 961.
“Whether an individual is a controlling person is ‘an intensely factual question,
involving scrutiny of the defendant’s participation in the day-to-day affairs of the
corporation and the defendant’s power to control corporate actions.’” Cummings, 715 F.
Supp. 2d at 907. Here, however, Defendants’ opposition to the Section 20(a) claim is
confined to the purported failure of the Section 10(b) claim.
Because this Court has concluded that Count I survives Defendants’ motion to
dismiss, Plaintiffs’ Section 20(a) claim also survives. The Court notes that although it has
found that the Complaint does not support the requisite inference of scienter with respect
to Fain and Rousseau, the Complaint alleges that they are liable not only for primary
violations of Section 10(b) and Rule 10b-5, but also as “control persons.”15 Defendants
do not challenge the allegations that Fain and Rousseau were “control persons.”
The Court also notes that the Complaint includes STJ itself, in addition to the
Individual Defendants, as a “control person” subject to liability under Section 20. The
governing definitional section provides that “[t]he term ‘person’” includes a “company”
in addition to “a natural person” (among others). 15 U.S.C. § 78c(a)(9). Defendants do
not presently challenge the sufficiency of the allegations that STJ itself was a “control

15

Finally, Defendants request that if this Court does not dismiss the
Complaint with prejudice, that they be permitted to depose the confidential witnesses.
(Doc. No. 38, at 41.) Defendants provide no authority for such early depositions, and the
PSLRA provides for a stay of discovery pending the resolution of any motion to dismiss.
Defendants shall be able to depose those witnesses soon enough.
60

person” during the purported Class Period.
III.

ORDER
Based on the foregoing, and all the files, records and proceedings herein, IT IS

HEREBY ORDERED that:
1.

Defendants’ motion to dismiss [Doc. No. 36] is GRANTED IN PART

(insofar as it seeks dismissal of Count I with respect to Defendants Fain and Rousseau)
and DENIED IN PART (insofar as it seeks dismissal of Count I with respect to
Defendants Starks and Heinmiller and insofar as it seeks dismissal of Count II).

Dated: December 23, 2011

s/ Susan Richard Nelson
SUSAN RICHARD NELSON
United States District Judge

61