Pipefitters Local No. 636 Defined Benefit Plan v. Tekelec et al

Filing 31

ORDER granting 24 Motion to Dismiss. Plaintiffs' amended complaint [D.E. 20] is DISMISSED WITHOUT PREJUDICE. Plaintiffs may address the errors identified by the court, make any other changes plaintiffs deem appropriate, and file a second ame nded complaint. If plaintiffs choose to file a second amended complaint, plaintiffs must do so on or before April 30, 2012. If plaintiffs file a second amended complaint, defendants shall respond in accordance with Federal Rule of Civil Procedure 15(a)(3). Signed by Chief Judge James C. Dever III on 3/26/2012. (Sawyer, D.)

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF NORTH CAROLINA

WESTERN DIVISION

No.5:II-CV-4-D

PIPEFITTERS LOCAL NO. 636
DEFINED BENEFIT PLAN, and
NORFOLK COUNTY RETIREMENT
SYSTEM,
Plaintiffs,

v.
TEKELEC, FRANCO PLASTINA,
WILLIAM H. EVERETT, and
GREGORY RUSH,
Defendants.

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ORDER

Pipefitters Local No. 636 Defined Benefit Plan ("Pipefitters") and Norfolk County
Retirement System ("Norfolk") (collectively, "plaintiffs") are unhappy with some investments they
made between February 2010 and August 2010. On January 6, 2011, Pipefitters, as lead plaintiff,
filed a class action complaint alleging various securities law violations against Tekelec, Franco
Plastina ("Plastina"), William H. Everett ("Everett"), and Gregory Rush ("Rush") (collectively,
"defendants") [D.E. 1]. On June 30, 2011, Pipefitters and Norfolk filed an amended class action
complaint, alleging against defendants various securities law violations occurring from February 11,
2010, to August 5, 2010. Am. Compl. [D.E. 20]

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1,67-96. On August 29,2011, defendants

moved to dismiss the amended complaint [D.E. 24]. In support of that motion, defendants filed a
memorandum [D.E. 25], and a declaration from Carl Volz [D.E. 23]. On October 31, 2011,
Pipefitters and Norfolk responded in opposition to defendants' motion [D.E. 27]. On November 30,
2011, defendants replied [D.E. 30]. As explained below, the court grants defendants' motion to
dismiss and dismisses the amended complaint without prejudice.

I.

Tekelec is a publicly traded telecommunications corporation providing various products "for
wireless [telephone] and landline service providers," including "systems and software that support
signaling networks." Am. Compl. ~~ 2-3,23. Plastina served as Tekelec's president and chief
executive officer from February 2006 to January 2011. Id. ~ 24. Everett was Tekelec's chief
financial officer ("CFO") from April 2005 to March 2010, as well as executive vice president from
February 2007 to March 2010. Id. ~ 25. Rush was Tekelec's corporate comptroller and one ofthe
company's vice presidents from May 2005 until Everett's retirement in March 2010. In May 2006,
Rush became Tekelec's chief accounting officer. In March 2010, Rush became interim CFO. In
April 2010, he became Tekelec's CFO and senior vice president. ld. ~ 26.
Tekelec has a geographically extensive business and brands itself as a global
telecommunications provider. "The Company has more than 25 offices around the world serving
customers in more than 100 countries." Id.

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23. By 2009, international markets represented 61

percent of Tekelec's total revenue. Id. ~ 3. Among Tekelec's most robust foreign markets is India,
where Tekelec has been conducting business since February 2004. See id. ~~ 3,33-34,36, 109, 113.
One of Tekelec's most profitable product lines in India and elsewhere was the EAGLE 5 family of
signalingsoftwareandsystems. Seeid. ~~28, 109-13. Thecompany'sEAGLEXGproductfamily,
launched in 2008, was intended to replace the EAGLE 5 family and "to keep pace with customers'
evolving needs." Id.

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28.

Plaintiffs allege that from February 11, 2010, to August 5, 2010, defendants made materially
false or misleading statements "regarding the true state of [Tekelec's] business in India, as well as
the state ofbusiness for Tekelec's primary signaling products, the EAGLE 5 and EAGLE XG." Id.
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4; see also id. ~~ 1, 7-13, 67-96. As a result of these statements, plaintiffs allege that Tekelec's

stock price became artificially inflated. See id.

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14, 116-17. On August 3,2010, a USA Today

article disclosed problems in the Indian telecommunications market. Id. ~ 88; see also [D.E. 23-6].

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Thereafter, on August 4, 2010, Tekelec's stock price fell $0.52 per share (3.64 percent). Am. Compl.
~~ 14,89; see also Tekelec Stock Price Table [D.E. 23-2]. The following day, Tekelec revealed

disappointing financial results for the second quarter of20 I 0, after which the company's stock price
dropped another $1.29 (9.37 percent). Am. Compl. ~~ 14, 90-96,117; see also Tekelec Stock Price
Table. When Tekelec's stock price fell, so too did the value of all investments in Tekelec's stock
that Pipefitters, Norfolk, and others had made between February 11,2010, and August 5, 2010. See
Am. Compl. ~~ 101,115,117.
Plaintiffs' amended class action complaint alleges that defendants violated Section 10(b)
("section lO(b)") of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j, and the
corresponding Securities and Exchange Commission ("SEC") Rule 10b-5 ("Rule 10b-5"), 17 C.F.R.

§ 240.lOb-5. Am. Compl.

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140-50. The amended class action complaint also alleges that

Plastina, Everett, and Rush violated section 20(a) of the 1934 Act ("section 20(a)"), 15 U.S.C. §
78t(a). Am. Compl. ~~ 151-55.

II.
In analyzing amotion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for "failure
to state a claim upon which relief can be granted," a court must determine whether the complaint is
legally and factually sufficient. Fed. R. Civ. P. 12(b)(6); see Ashcroft v. Iqbal, 129 S. Ct. 1937,
1949-50 (2009); Bell Atl. CoW. v. Twombly, 550 U.S. 544, 555-56 (2007); Coleman v. Md. Ct. of
Appeals, 626 F.3d 187, 190 (4th Cir. 2010), affd, No. 10-1016,2012 WL 912951 (U.S. Mar. 20,
2012); Giarratano v. Johnson, 521 F.3d298, 302 (4th Cir. 2008); Goodman v. Praxair. Inc., 494 F.3d
458, 464 (4th Cir. 2007) (en banc). A court need not accept a complaint's "legal conclusions,
elements of a cause of action, and bare assertions devoid of further factual enhancement." Nemet
Chevrolet. Ltd. v. Consumeraffairs.com. Inc., 591 F.3d 250,255 (4th Cir. 2009); see Iqbal, 129 S.
Ct. at 1949-50. Similarly, a court "need not accept as true unwarranted inferences, unreasonable
conclusions, or arguments." Giarratano, 521 F.3d at 302 (quotation omitted); see Iqbal, 129 S. Ct.

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at 1949-50. Furthermore, in analyzing a Rule 12(b)(6) motion to dismiss, a court may consider
"documents incorporated into the complaint by reference, and matters of which a court may take
judicial notice." Tellabs. Inc. v. Makor Issues & Rights. Ltd., 551 U.S. 308,322 (2007).
A.
The 1934 Act's section 1O(b) prohibits
any person, directly or indirectly, by the use of any means or instrumentality of
interstate commerce or of the mails, or of any facility of any national securities
exchange ... [t]o use or employ, in connection with the purchase or sale of any
security registered on a national securities exchange or any security not so registered,
... any manipulative or deceptive device or contrivance in contravention of such
rules and regulations as the [SEC] may prescribe as necessary or appropriate in the
public interest or for the protection of investors.
15 U.S.C. § 78j(b). One such rule is Rule lOb-5. See 17 C.F.R. § 240.lOb-5. In relevant part, Rule
10b-5 prohibits
any person, directly or indirectly, by the use of any means or instrumentality of
interstate commerce, or of the mails ... [t]o make any untrue statement ofa 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, or .
. . [t]o engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in connection with the purchase or sale
of any security.
Id. To establish section 1O(b) and Rule 10b-5 liability, a plaintiff must prove four elements: that
"(1) the defendant made a false statement or omission of material fact (2) with scienter (3) upon
which the plaintiff justifiably relied (4) that proximately caused the plaintiff's damages." Hillson
Partners Ltd. P'ship v. Adage. Inc., 42 F.3d 204,208 (4th Cir. 1994); see Dura Pharm.. Inc. v.
Broudo, 544 U.S. 336,341-42 (2005).
To survive a Rule 12(b)(6) motion to dismiss fraud claims, a plaintiff generally must "state
with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). When
alleging a violation of section 1O(b) or Rule lOb-5, however, the pleading standard for certain
elements is even higher. See Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L.
No. 104-67, § 101, 109 Stat. 737 (1995); 15 U.S.C. § 78u-4(b); Tellabs, 551 U.S. at 313-14;

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Teachers'Ret. Sys. ofLa. v. Hunter, 477 F.3d 162,170-72 (4th Cir. 2007). As to the first element,
for example, a plaintiff must "specifY each statement alleged to have been misleading [and] the
reason or reasons why the statement is misleading." PSLRA § 101(b); see also 15 U.S.C. § 78u­
4(b)(1); Tellabs, 551 U.S. at 313; Teachers' Ret. Sys., 477 F.3d at 172. As to the second element,
a plaintiff must "state with particularity facts giving rise to a strong inference" ofscienter. PSLRA
§ 101 (b); see also 15 U.S.C. § 78u-4(b)(2)(A); Tellabs, 551 U.S. at 313-14; Teachers' Ret. Sys.,477

F.3d at 172. In other words, with regard to each allegedly false or misleading statement, a complaint
must provide specific facts identifYing which defendant made the allegedly false or misleading
statement, when the defendant "learned that [the] statement was false, how that defendant learned
that the statement was false, and the particular document or other source ofinformation from which
the defendant came to know that the statement was false." In re First Union Corp. Secs. Litig., 128
F. Supp. 2d 871,886 (W.D.N.C. 2001); see Matrix Capital Mgmt. Fund. LP v. BearingPoint. Inc.,
576 F.3d 172, 182 (4th Cir. 2009); Teachers' Ret. Sys., 477 F.3d at 184; Southland Secs. Corp. v.
INSpire Ins. Solutions Inc., 365 F.3d 353, 365 (5th Cir. 2004); Iron Workers Local 16 Pension Fund
v. HUb Rogal & Hobbs Co., 432 F. Supp. 2d 571,579 (E.D. Va. 2006). Additionally, a complaint
against multiple, known defendants must specifY precisely which defendant is allegedly responsible
for which legal violation. See Southland Secs. Corp., 365 F.3d at 365; Juntti v. Prudential-Bache
Secs.. Inc., 933 F.2d 228, 1993 WL 138523, at *2 (4th Cir. May 3, 1993) (per curiam) (unpublished
table decision); David F. Apple. MD. ProrI Corp. Pension Plan v. Prudential-Bache Secs.. Inc., 820
F. Supp. 984, 987 (W.D.N.C. 1992), aff'd sub nom. Juntti, 1993 WL 138523. A complaint failing
to meet this requirement cannot be saved merely by incorporating by reference more specifically pled
facts. Juntti, 1993 WL 138523, at *2. Whether in the facts or enumerated claims, then, a complaint
alleging section 10(b) or Rule 10b-5 violations against mUltiple, known defendants may not group
or aggregate the defendants. If a plaintiff fails to meet the PSLRA's heightened specificity
requirements, courts "shall, on the motion of any defendant, dismiss the complaint ...." PSLRA

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§ 101(b); see 15 U.S.C. § 78u-4(b)(3).
Here, the amended complaint's facts are improperly group pled. In general, Pipefitters and
Norfolk have properly specified which defendants made which allegedly false or misleading
statements. See Am. CompI. ~~ 68--69, 73-74, 76, 78, 80, 83-84, 86; but see id. ~~ 67, 82, 85
(providing improperly group-pled allegations). Pipefitters and Norfolk have also stated with
particularity why they believe the statements were materially false or misleading. See id. ~~ 72, 75,
77, 79, 81-82, 84, 86-87; but see id. ~ 83. But Pipefitters and Norfolk have failed to specify when
and on what basis each defendant knew or was reckless in not knowing that his statement was false
or misleading. See id. ~~ 72, 75, 77, 79, 81-82, 84, 86-87, 100-03, 108-14, 118-24; cf. id. ~~ 5--6,
9,32,35--66. 1 Pipefitters and Norfolk have also failed to allege specifically which of defendants'
actions caused Pipefitters's and Norfolk's alleged injury. See id. ~ 115-17.
Even if Pipefitters and Norfolk had pled their facts with proper specificity, their amended
complaint still would have fallen short of Rule 9(b)'s and the PSLRA's heightened pleading
standards, for the complaint's legal claims are likewise improperly group pled. See id. ~~ 141-50,
152-55. The complaint does incorporate the more specifically pled facts by reference. Id.

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140,

151. But as explained, not even those facts are sufficiently pled. In any event, such incorporation
by reference cannot salvage otherwise improperly group-pled claims.

See,~,

Southland Secs.

Corp., 365 F.3d at 365; Juntti, 1993 WL 138523, at *2; David F. Apple. MD. Profl Corp. Pension
Plan, 820 F. Supp. at 987.
In sum, plaintiffs' amended complaint is improperly group pled and, as such, fails to meet

Rule 9(b)'s and the PSLRA's heightened pleading requirements for section 1O(b) and Rule 10b-5
actions.
Paragraphs 77, 79, and 81 appear at first blush to be pled with specificity. See id. ~~ 77,
79,81. But the facts underlying those paragraphs are improperly group pled. See id. ~~ 5--6,9,32,
35--66. Those group-pled facts do not, and cannot, support plaintiffs' more specific allegations. The
court rejects the unwarranted inferential leap Pipefitters and Norfolk espouse. See Iqbal, 129 S. Ct.
at 1949-50; Giarratano, 521 F.3d at 302.
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B.

The 1934 Act's section 20(a) imposes joint and several liability on "[e]very person who,
directly or indirectly, controls any person liable under any provision of [the 1934 Act] or ofany rule
or regulation thereunder." 15 U.S.C. § 78t(a). A claim under section 20(a) "requires a predicate
allegation ofa violation oflaw." Teachers' Ret. Sys., 477 F.3d at 188. Here, Pipefitters and Norfolk
have not properly alleged that any of the defendants violated section lOeb) or Rule 10b-5, the only
other 1934 Act claims in the amended class action complaint. Plaintiffs' section 20(a) claim
therefore fails. See id.

III.
Accordingly, the court GRANTS defendants' motion to dismiss [D.E. 24]. The court's
decision is based on plaintiffs' improper group pleading as to the section lOeb) and Rule lOb-5
claims, and on the fact that a section 20(a) claim requires a properly alleged predicate violation. The
court has not reached the other arguments that the parties raised. Plaintiffs' amended complaint
[D.E. 20] is DISMISSED WITHOUT PREJUDICE. Plaintiffs may address the errors identified by
the court, make any other changes plaintiffs deem appropriate, and file a second amended complaint.
See Fed. R. Civ. P. 15(a)(2). Ifplaintiffs choose to file a second amended complaint, plaintiffs must
do so on or before April 30, 2012. Ifplaintiffs file a second amended complaint, defendants shall
respond in accordance with Federal Rule of Civil Procedure l5(a)(3).
SO ORDERED. This...2J'e day of March 2012.

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