Pound v. Stereotaxis, Inc. et al
Filing
64
OPINION, MEMORANDUM AND ORDER re: 31 ORDERED that Defendants' Motion to Dismiss Plaintiff's First Consolidated Amended Class Action Complaint [#31], is granted and this matter is dismissed.. Signed by District Judge Henry E. Autrey on 3/18/14. (CEL)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
KEVIN POUND, on Behalf of Himself and All )
Others Similarly Situated,
)
)
Plaintiff,
) Case No. 4:11CV1752 HEA
)
CLASS ACTION
v.
)
)
STEREOTAXIS, INC., MICHAEL P.
)
KAMINSKI, and DANIEL J. JOHNSTON,
)
)
Defendants.
)
OPINION, MEMORANDUM AND ORDER
This matter has now come before the court on Defendants’ Motion to
Dismiss Plaintiff’s First Consolidated Amended Class Action Complaint. [Doc.
#31]. Plaintiff has filed a response in opposition to the motion. [Doc. #48].
Defendants has filed a reply. [Doc. #49]. The parties have also had the opportunity
to supplement their authorities in their memoranda. For the reasons set forth herein
the Motion to Dismiss will be granted.
Factual Background1
Plaintiff has filed his complaint against Stereotaxis, its Chief Executive
Officer ("CEO"), Michael P. Kaminski ("Kaminski") and its former Chief
The factual circumstances are taken from the pleadings and other attachments to the pleadings. The facts
and inferences from these documents are taken solely for the purpose of the resolution of the motion and
for no other purposes in this piece of litigation. This recitation in no way relieves any party of the
necessary proof of any fact in later proceedings.
1
Financial Officer ("CFO"), Daniel J. Johnston ("Johnston") (collectively,
"Defendants"), for violations of sections 10(b) and 20(a) of the Exchange Act, and
U.S. Securities and Exchange Commission ("SEC") Rule 10b-5 during the alleged
class period between February 28, 2011 and August 8, 2011.
Stereotaxis designs, manufactures, and markets robotic devices for use in
complex cardiac interventions to treat arrhythmias and other coronary artery
disease. Stereotaxis’s flagship product has been its Niobe system. This system
allows doctors to navigate a catheter (or other device) through blood vessels and
into the chambers of the heart using computer-controlled externally applied
magnetic fields. Because these products require dedicated rooms, the sales cycle
for Stereotaxis products can be lengthy and subject to contingencies outside of
Stereotaxis’s control. Additionally, Stereotaxis developed the Odyssey Enterprise
Solution, which consolidates all laboratory information into one source for
optimum efficiency. Finally, Stereotaxis receives revenue from the sale of
proprietary disposable devices, ongoing license and service contracts, and
catheters.
Plaintiff has alleged further that defendants misled investors by claiming the
Niobe system made substantial progress towards "setting a new standard of care"
for interventional cardiology instruments, and had gained broad acceptance in the
medical community that would support a "predictable ramp to [Niobe System]
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usage and clinical adoption" in the "robust market" for robotic cardiac ablation
solutions. Defendants told investors that the Niobe System had entered a
new phase of accelerating clinical adoption, evidenced by the "strength in global
new capital orders" and increasing "backlog," which they claimed consisted of
"outstanding purchase orders and other commitments that management believes
will result in recognition of revenue upon delivery or installation of [the] systems."
Defendants touted "$43 million of backlog, consisting of outstanding purchase
orders and other commitments for these systems" as of December 31, 2010.
Defendants repeatedly acknowledged that investors considered the Niobe System
backlog a "significant indicator of future performance" for the Company. They
assert that by the same token Defendants knew that the Niobe System would never
achieve broad clinical adoption because most customers were demanding
"fundamental product improvements."
Plaintiff alleges that Defendants knew or recklessly disregarded the
softening backlog would be accelerated by the strategy to address the fundamental
problem of the Niobe System.
Stereotaxis’s February 2011 Statements. On February 28, 2011,
Stereotaxis issued a press release announcing year-end and fourth-quarter 2010
financial results. That release was followed by a same-day conference call with
investors. On March 11, 2011, Stereotaxis filed its Form 10-K. Although Niobe-3-
based revenue in 2010 was lower than expected, Stereotaxis experienced an
increase in orders and completed sales, and decreased expenses. Looking forward,
Stereotaxis provided the following guidance for 2011:
• New capital order growth expected to be in the mid-30% range
• Total revenue growth expected to be in the 20%-30% range
• Gross margins expected to be in the high-60% range
• Operating expenses expected to be in the $62-$63 million range
In addition, Stereotaxis noted (1) its progress toward widespread clinical adoption
of the Niobe system, and (2) its “backlog” of “outstanding purchase orders and
other commitments that management believes will result in recognition of
revenue.”
At the same time, Stereotaxis advised investors that these statements were
“forward-looking,” and “inherently involve risks and uncertainties” that “could
cause actual results to differ materially” – such as the “ability and willingness of
customers to purchase our systems and the timing of such purchases.” With respect
to its “backlog,” the Company advised that “these purchase orders and other
commitments are subject to contingencies that are outside of the Company’s
control . . . and . . . may be revised, modified, delayed or canceled . . .” and warned
that “[t]here can be no assurance that the Company will recognize revenue related
to its purchase orders and other commitments in any particular period or at all. . . .”
In addition, each of these statements specifically referenced the Company’s
extensive, 17-page disclosure of “Risk Factors” in Item 1A of its 10-K, including:
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• Hospital decision-makers may not purchase our Niobe . . . system. . .
• Physicians may not use our products . . .
• [W]e may not be able to achieve future sales growth.
The Company reiterated that “negative changes to this backlog . . . could
negatively impact our future operating results or our share price.” Id. at 24.
Stereotaxis’s April Announcement of the New Epoch Solution. In late 2010,
Stereotaxis began developing an upgrade called Niobe ES, which was incorporated
into a suite of products called the Epoch Solution. This upgrade was designed to
improve the Niobe system in precisely those areas that the Amended Complaint
alleges were shortcomings, including shorter training times, better ease of use, and
a shorter physician learning curve. In a press release issued April 27, 2011, the
Company announced that its Epoch Solution, including the Niobe ES, would be
unveiled at the annual Heart Rhythm Society meeting on May 5-7, 2011 in San
Francisco.
Stereotaxis’s May 2011 Statements. When announcing its first quarter 2011
results in May, 2011, the Company noted that results were down slightly from
expectations. Stereotaxis specifically noted the difficult market conditions and
uncertainty regarding the market’s acceptance of Epoch: “[w]ith the Epoch
transition and the soft order pattern in Q1, achieving our outlook for new capital
orders and revenue growth will largely depend on the market acceptance of
Epoch.”
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Stereotaxis’s August 2011 Statements. On August 8, 2011, the Company
announced its financial results for the second quarter of 2011. Those results were
disappointing. As compared to the second quarter of the prior year, revenue was
down, gross margin was down, and the Company posted a higher net loss. As for
its financial outlook, the Company said:
As a result of corporate developments and an uncertain business
environment, Stereotaxis announced that it has withdrawn previous financial
guidance [for 2011] and temporarily suspended providing financial guidance
for 2011 until there is more predictability to the Company’s magnetic
platform business.
Discussion
Pleading Standard
Section 10(b) of the Exchange Act and SEC Rule 10b-5 “prohibit[]
fraudulent conduct in connection with the sale or purchase of securities.” Kushner
v. Beverly Enterprises, 317 F.3d 820, 826 (8th Cir. 2003). To state a claim, a
plaintiff must allege that a defendant made a misleading statement or omission of
material fact, with scienter, on which plaintiff relied, and which caused plaintiff’s
losses. See In re K-Tel Int’l, Inc. Sec. Litig., 300 F.3d 881, 888 (8th Cir. 2002).
Under the Private Securities Litigation Reform Act of 1995 (the Reform Act), 15
U.S.C. § 78u-4(b)(1) and (2) the pleading requirements necessary to state a claim
for private securities fraud are set forth. The appropriate pleaded elements are thus:
(1) a material misrepresentation of fact; (2) scienter; (3) a connection with the
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purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss
causation. See Minneapolis Firefighters’ Relief Ass’n v. MEMC Elec. Materials,
Inc., 641 F. 3d. 1023, 1028 (8th Cir. 2011). The prosecution of claims under
Section 10(b) must comply with Federal Rule of Civil Procedure 9(b) and the
PSLRA.
Although the Court must view the factual allegations in the light most
favorable to plaintiffs, Parnes v. Gateway 2000, Inc., 122 F.3d 539, 546 (8th Cir.
1997), the Reform Act dictates a modified analysis due to its special heightened
pleading Rules, such that the Court must “disregard ‘catch-all’ or ‘blanket’
assertions that do not live up to the particularity requirements of the [Reform
Act],” [Florida State Bd. of Admin v. ] Green Tree 270 F.3d [645,] 660 [(8th Cir.
2001)].” Kushner v. Beverly Enterprises, 317 F.3d 820, 824 (8th Cir. 2003).
“Complaints brought under Rule 10b-5 and section 10(b) are governed by special
pleading standards adopted by Congress in the [Reform Act]. These pleading
standards are unique to securities and were adopted in an attempt to curb abuses of
securities fraud litigation.” In re Navarro Corp. Sec. Litig., 299 F.3d 735, 741 (8th
Cir. 2002).
Congress enacted two heightened pleading requirements in the
Reform Act. First, the Reform Act requires the plaintiff’s complaint
to specify each misleading statement or omission and specify why the
statement or omission was misleading. 15 U.S.C. § 78u-4(b)(1)
(Supp. IV 1998). If the allegation “is made on information and belief,
the complaint shall state with particularity all facts on which that
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belief is formed.” Id. Similarly, Rule 9(b) of the Federal Rules of
Civil Procedure had long required that “in all averments of fraud or
mistake, the circumstances constituting fraud or mistake shall be
stated with particularity. The text of the Reform Act was designed “to
embody in the Act itself at least the standards of Rule 9(b).” Greebel
v. FPT Software, Inc., 194 F.3d 185, 193 (1st Cir. 1999).
Second, Congress stated in the Reform Act that a plaintiff’s
complaint must “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.” 15
U.S.C. § 78u-4(b)(2); Green Tree, 270 F.3d at 654. The Reform Act
requires the court to dismiss the complaint if these requirements are
not met. 15 U.S.C. § 78u-4(b)(3). “[U]nder the Reform Act, a
securities fraud case cannot survive unless its allegations collectively
add up to a strong inference of the required state of mind.” Green
Tree, 270 F.3d at 660.
“Congress has effectively mandated a special standard
for measuring whether allegations of scienter survive a
motion to dismiss. While under Rule(12)(b)(6) all
inferences must be drawn in plaintiffs’ favor, inferences
of scienter do not survive if they are merely reasonable...
Rather, inferences of scienter survive a motion to dismiss
only if they are both reasonable and ‘strong’ inferences.”
Id. (quoting Greebel, 194 F.3d at 195-96) (alterations in original).
Kushner, 317 F.3d at 826.
Defendants argue that under these standards, plaintiff cannot maintain his
action. Defendants claim the statements are protected under the “Safe harbor”
provision of the Reform Act; that the plaintiff has failed to establish the falsity of
the allegations and that plaintiff has failed to plead specific facts giving rise to a
strong inference of scienter.
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Defendants assert the alleged misstatements set forth by plaintiff are all
forward-looking. The Defendants further assert that while not all of the statements
may be forward-looking, none of the statements rise sufficiently to the level of
material misrepresentations to raise, or satisfy, a claim under the Securities Act.
The PSLRA provides insulation from liability regarding “forward looking”
statements. These are statements “containing a projection of revenues, income, …
or other financial items,” “plans and objectives of management for future
operations” and “future economic performance,” as well as any “assumptions
underlying or relating to any” such statements. See 15 U.S.C. § 78u-5(i)(1). A
claim based upon such statements must show not only that the projection failed to
materialize, but that Defendants failed to adequately caution the market about the
risks inherent in achieving such projections, and that the statements were made
with “actual knowledge” of their falsity. See, e.g. In re Patterson Cos., 479 F.
Supp. 2d 1014, 1035 (D. Minn. 2007) (“[F]orward-looking statements cannot form
the basis for liability under the Exchange Act if accompanied by meaningful risk
disclosures or if not made with actual knowledge of falsity.”).
Forward Looking Statements
Here, Plaintiff has raised a challenge to certain types of statements issued by
Defendants. Those statements include guidance statements, progress statements
relating to clinical adoption of the Niobe system and statements relating to
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backlog. These statements of financial guidance and projections of future
performance are “quintessential forward-looking statements.” See W. Wash.
Laborers-Employers Pension Trust v. Panera Bread Co., 697 F. Supp. 2d 1081,
1093 (E.D. Mo. 2010). The statements about progress toward meeting the
Company’s goals relating to clinical adoption of the Niobe system are likewise
forward-looking, because “statement[s] about the state of a company whose truth
or falsity is discernible only after it is made necessarily refer[] only to future
performance.” Harris v. Ivax Corp., 182 F.3d 799, 805 (11th Cir. 1999); W. Wash.
Laborers-Employers Pension Trust, 697 F. Supp. 2d at 1093. “Regardless of the
tense of the statement [a] statement concerning ongoing progress is forwardlooking because it does not make any specific, verifiable representation about the
present state of affairs.” W. Wash. Laborers-Employers Pension Trust, 697 F.
Supp. 2d at 1094 (finding “the consolidation continues as planned” and “2006 is
shaping up to be another strong year” both to be forward-looking). Statements
regarding “backlog” are forward-looking as well, where “backlog” is defined as
outstanding orders and commitments that management “believes will result in
recognition of revenue.” Only time can tell whether the orders and commitments
included in “backlog” would ever result in revenue. It is therefore axiomatic that
the company statements relating to backlog is forward-looking.
Cautionary Language
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The safe harbor provision is satisfied where cautionary language is not mere
boilerplate but “company-specific warnings.” In re Nash Finch Co., 502 F. Supp.
2d 861, 872 (D. Minn. 2007). The “cautionary statements must warn of risks of a
significance similar to that actually realized.” W. Wash. Laborers-Employers
Pension Trust, 697 F. Supp. 2d at 1090. With reference to the 2011 financial
outlook of the company, Stereotaxis issued warnings of risks and uncertainties that
could cause actual results to differ materially, listed manifold specific risks, and
incorporated by reference the risk disclosures set forth in the Company’s SEC
filings. As to its progress in meeting the Company’s goals for clinical acceptance
of the Niobe system, Stereotaxis warned that hospital decision-makers may not
purchase their Niobe … system, physicians may not use their products, and market
acceptance could be delayed by lack of physician willingness to attend training
sessions, or by the time required to complete this training. As to the backlog,
Stereotaxis warned that orders could be revised, modified, delayed or canceled and
that negative changes to this backlog or its failure to grow commensurate with
expectations could negatively impact its future operating results or its share price.
This cautionary language was “substantive and tailored to the specific future
projections, estimates, or opinions . . . which the plaintiff[ ] challenge[s].” See In re
Daktronics, Inc. Sec. Litig., No. CIV 08-4176, 2010 WL 2332730, at *16 (D.S.D.
June 9, 2010) (quoting Helwig v. Vencor, Inc., 251 F.3d 540, 559 (6th Cir. 2001)).
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All of these statements as challenged are forward-looking and therefore fall within
the calm waters of the safe harbor.
Actual Knowledge of Falsity
In addition, the pleading requirements of particularity relating to the falsity of
statements allegedly made leaves Plaintiff’s assertions severely wanting. He has
merely pleaded, as to each alleged false statement, that Defendants “knew and
failed to disclose.” There are no particular facts alleging the statements to be false
when made or that the Defendants had actual knowledge of the falsity of the
statements. Catch all or blanket assertions that do not survive the expectations of
the particularity requirements must be disregarded. (“Rote allegations that the
defendants knowingly made false statements of material fact alone are
insufficient.”). In re Navarre Corp. Sec. Litig., 295 F. 3d 791.
Plaintiff alleges and argues that statements made by Defendants regarding
growth projections were false. Plaintiff would also have this Court believe by way
of inference that the discontinued guidance information three months after
reaffirming defendants’ financial guidance and claims of a predictable ramp to
broad clinical acceptance for the Niobe System establishes the fraudulent shroud
over the statements. Plaintiff has not made any allegations establishing that the
guidance information lacked a reasonable basis or was made in bad faith. Forward
–looking statements are protected from liability unless the statement was made or
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reaffirmed without any reasonable basis or was not disclosed in good faith. In re
NationsMart Corp. Sec. Litig., 130 F. 3d 309, 316 (8th Cir. 1997).
Backlog/clinical Acceptance and Confidential Witness Statements
Plaintiff provides statements/affidavits of a number of “confidential
witnesses” to demonstrate the backlog reporting was misleading. Three of these
witnesses – CW1, CW2 and CW4 – state that certain customers expressed
dissatisfaction with the Niobe product, which Plaintiff relies on to suggest that the
Niobe system was not being clinically adopted. CW2 and CW3 also state that they
believed in their opinion the Company’s reported backlog reports were misleading.
The Eighth Circuit has made clear that confidential witness allegations will be
disregarded as unreliable where a plaintiff “fail[s] to provide any information
regarding how employees at this level of the company would have access to the [ ]
information” alleged (Cornelia, 519 F.3d at 783); relies on witnesses whose
information comes only second or third-hand (Horizon Asset Mgmt. v. H&R Block,
Inc., 580 F.3d 755, 763 (8th Cir. 2009)); or fails to establish that the witnesses
“would have a basis to know what [defendants] knew.” Id.
There is no allegation that the confidential witnesses were in a position to
testify reliably about any relevant fact. Two of them – CW3 and CW4 – were not
even employed by Stereotaxis during the Class Period, having terminated their
employment 8 months and 1 year, respectively, prior to its commencement. They
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cannot therefore have relevant information about facts as they existed during the
Class Period. See Horizon Asset Mgmt., 580 F.3d at 763. These witnesses do not
have a position within Stereotaxis that would provide them with any relevant
insight. Id. Specifically, CW1, CW2 and CW3 are alleged to have operated three
reporting levels below the Defendants, and none is alleged to have had anything
other than anecdotal information regarding individual customer complaints. There
is no allegation that any of the CWs were involved in preparing projections,
analyzing trends, or financial reporting. These statements fail to support Plaintiff’s
claims. See Cornelia, 519 F.3d at 783 (rejecting witness statement that “fail[ed] to
provide any information regarding how employees at this level of the company
would have access to the [ ] information.”).
Plaintiff provides no allegation of how any of the witnesses was in position to
testify concerning what “Defendants knew,” or what was “well understood” or
“widely understood.” This lack of specificity fails to satisfy Rule 9(b) and the
pleading requirements of the PSLRA. See, e.g. Cal. Pub. Emples. Ret. Sys. v.
Chubb Corp., 394 F.3d 126, 153 (3d Cir. 2004) (“Incredulously, without providing
any further description, Plaintiffs attribute to these same former employees the
bald assertion that ‘this conduct occurred throughout the Company.’”); Ley v.
Visteon Corp., 543 F.3d 801, 811 (6th Cir. 2008) (“Plaintiffs fail to allege who at
[the Company] knew about these alleged [ ] improprieties and what, when, where,
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and how they knew.”). There are no contemporaneous facts showing that
defendants’ statements were false when made. The sole information provided by
Plaintiff is anecdotal information from low-level employees which fails the test of
particularity. See In re Hutchinson Tech., Inc., Secs. Litig., 536 F.3d 952 (8th Cir.
2008).
Omission of Material Fact
Are there any pearls of allegation that might give boost to the position of
Plaintiff? What about omissions of material fact that might inflate the statements to
the level of misleading? Suffice to say that it is “an insuperable bar to relief when
alleged omissions are immaterial.” In re Medtronic Inc. Sec. Litig., 618 F. Supp. 2d
1016, 1023 (D. Minn. 2009) (quoting In re Amdocs Ltd. Sec. Litig., 390 F.3d 542,
547 (8th Cir. 2004). An omitted fact is immaterial unless there is “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.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). The
court has finely combed through the pleadings and documents, and, alas Plaintiff
has not identified any omitted fact that would have significantly altered the terrain
of information available to investors.
Plaintiff has claimed the Company touted “progress toward our goal” of
establishing Niobe as a new standard of care and “progress in our key initiatives of
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driving stronger Niobe reference sites,” but omitted to disclose that doctors were
“abandoning the Niobe System before becoming clinically proficient” due to
shortcomings in the technology. Defendants, however, clearly disclosed that the
Company faced a “challenge” with then-current adoption rates for the Niobe
system noting in one instance by way of example, adoption at only “4% of the
market share.” Even in those hospitals with an installed Niobe System, the
Company explained that the system was used for only 15-23% of the procedures
performed in those hospitals. Plaintiff’s anecdotal evidence of “stalled accounts”
provide anything to the milieu of information available to investors, who had
already been warned of these issues and challenges facing the Company. See In re
Medtronic Inc., Sec. Litig., 618 F. Supp. 2d at 1034 (Dismissing complaint for
failing to explain how “the accumulation of additional anecdotal data … would
have added anything to the disclosures already made”).
Plaintiff alleges that Defendants cited to the Company’s “backlog” while
omitting to disclose that the orders included in backlog “carried no obligation to
actually complete the purchase of a Niobe System.” The record however belies this
assertion. Defendants disclosed exactly how they defined “backlog,” as consisting
of outstanding purchase orders and commitments. The Company even noted that
the commitments may be revised, modified or canceled and that there could be no
assurances that the company will recognize revenue related to its purchase orders
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and other commitments in any particular period or at all. Plaintiff has failed to
demonstrate any material omissions in these regards.
A Strong Inference Of Scienter
A Plaintiff must plead particularized facts giving rise to a strong inference
that Defendants acted with knowledge or “reckless disregard of a substantial risk”
that the statement was false with regard to each act or omission alleged to violate
the PLSRA. See Minneapolis Firefighters’ Relief Ass’n v. MEMC Elec. Materials,
Inc., No. 08-CV-1411, 2010 WL 889864, at*2 (E.D. Mo. Mar. 8, 2010). “[S]trong
means strong.” In re Ceridian Corp. Secs. Litig., 504 F. Supp. 2d 603, 615 (D.
Minn. 2007). “Negligence – even gross or inexcusable negligence – is not
sufficient to meet this standard.” Id. Recklessness requires a showing of:
highly unreasonable omissions or misrepresentations that involve not
merely simple or even inexcusable negligence, but an extreme
departure from the standards of ordinary care, and that present a danger
of misleading buyers or sellers which is either known to the defendant
or is so obvious that the defendant must have been aware of it.
Id. at 616.
Here, Plaintiff alleges that the corporate officers had a desire to keep the
Company profitable and hoped to conceal the truth because they knew the
Company was in desperate need of capital. This is the only motive alleged by
Plaintiff. In order to show motive and opportunity sufficient to establish scienter,
“the allegations must show that the particular defendant benefitted in some
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concrete and personal way from the alleged fraud, such as through insider trading.
Even allegations of insider trading are insufficient unless the trades are unusual
…” In re Hutchinson Technology, Inc., 502 F. Supp. 2d 884, 898 (D. Minn. 2007).
Motive-and-opportunity allegations must go beyond alleging a general desire to
increase stock prices . . . because that desire is universal among corporate insiders.
Id. The pleadings are devoid of any facts giving rise to a strong inference that any
of the Defendants stood to benefit in a “concrete and personal way” from the
alleged fraud.
Plaintiff having failed to demonstrate any motive or opportunity the court
must now consider whether any other allegations which might tend to show
scienter are particularly strong. Fla. State Bd. of Admin., 270 F.3d at 660. Claims
such as made here by Plaintiff have been rejected. The claim of individual
Defendants having the requisite scienter because their corporate positions afforded
them access to a wide range of information is insufficient. See In re Medtronic
Inc., Sec. Litig., 618 F. Supp. 2d at 1034 (“allegation of data monitoring, “access to
data,” and “general allegations about a hands-on management style” are
insufficient). Defendants were close to and directly involved in the Company’s
operations, sales, and financial reporting; defendants had access to order, sales, and
backlog data al all non-particularized allegations of scienter and therefore
insufficient. See Elam v. Neidorff, 502 F. Supp. 2d 988, 990 (E.D. Mo. 2007).
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The use of the confidential witnesses by Plaintiff is likewise dubious on the
issue of setting forth a strong inference of scienter. None of the witnesses claims to
have had any direct contact with the Defendants, or provides first-hand testimony
of communications with them concerning the matters alleged. Such conclusory and
third-hand allegations are insufficient to show scienter. See Horizon Asset Mgmt.,
580 F.3d at 763 (rejecting witness who was relying on second-hand reports).
Additionally, none of the confidential witnesses is alleged to have been in position
to know what the Defendants knew. CWs 1-3 were each employed three reporting
levels below Defendants and Plaintiff presents no facts describing CW4’s role in
the Company.
THE CLAIM IN COUNT II
In order to state a claim under Section 20(a) of the Act, a Plaintiff must
adequately plead a primary violation of securities laws. See In re K-tel Int’l, Inc.
Sec. Litig., 300 F.3d 881, 904 n.20 (8th Cir. 2002). Stating a claim for control
person liability requires a showing of “actually participated in” and “possessed the
power to control” the activity which is the foundation for the primary violation.
Metge v. Baehler, 762 F.2d 621, 631 (8th Cir. 1985). Simply being in the position
of an officer or director does not necessarily make one a control person. Jakobe v.
Rawlings Sporting Goods Co., 943 F. Supp. 1143, 1163 (E.D. Mo. 1996). In the
matter here, Plaintiff simply alleges the corporate positions of the defendants
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without more. No facts are alleged to sufficiently establish control person liability
under the heightened pleading requirements.
Conclusion
Based upon the foregoing analysis, Plaintiff has failed to sufficiently plead a
cause of action under the Securities Act, in light of the heightened pleading
requirements and the safe harbor provisions of the Reform Act. The Complaint
fails to state a cause of action against the individual Defendants as well the
Company. The claims against the individual Defendants and Stereotaxis cannot
prevail.
Accordingly,
IT IS HEREBY ORDERED that Defendants’ Motion to Dismiss Plaintiff's
First Consolidated Amended Class Action Complaint [#31], is granted and this
matter is dismissed.
Dated this 18th day of March, 2014.
___________________________________
HENRY EDWARD AUTREY
UNITED STATES DISTRICT JUDGE
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