Apple v. Zagg et al

Filing 75

MEMORANDUM DECISION AND ORDER granting 56 Motion to Dismiss for Failure to State a Claim ; granting 59 Motion to Dismiss. Signed by Judge Dee Benson on 2/4/14. (jlw)

FILED
U.S. DISTRICT COURT

ltIl4 FEB - 5 A fO; 14 3
DISTRICT Of UTAH

BY:

~DE::-:P:'7"U=TY-CL-E-R-X- ­

IN THE UNITED STATES COURT FOR THE DISTRICT OF UTAH
CENTRAL DNISION

IN RE: ZAGG SECURITIES LITIGATION
. MEMORANDUM DECISION
AND ORDER
CLASS ACTION
This Document relates to: All Actions

Case No. 2: 12-CV-852
Judge Dee Benson

This is a securities class action on behalf of all persons who purchased ZAGG, Inc.
("ZAGG") common stock between February 28,2012 and August 17,2012 (the "Class Period").
The action was brought against Zf.-GG and certain officers and directors, for violations of
Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934.

1

On July 5,2013, the Court received two motions to dismiss pursuant to Rule 12(b)(6) of
the Federal Rules of Civil Procedure. The flrst was flIed by defendants ZAGG, Randall Hales,
Brandon T. O'Brien, Edward D. Ekstrom and Cheryl A. Larabee (the "Moving Defendants").
(Dkt. No. 56.) The other was flIed by defendant Robert G. Pedersen. (Dkt. No. 59.) After
briefing by the parties, the Court heard oral argument on the motions. Having considered the
memoranda submitted by the parties, the relevant law, and the arguments of counsel, the Court
enters the following Memorandum Decision and Order.

BACKGROUND
. In deciding whether to dismiss a securities fraud complaint pursuant to Rule 12(b)(6) of
the Federal Rules of Civil Procedure, the Court presumes the truth of all well-pleaded facts in the
complaint. Tal v. Hogan, 453 F.3d 1244, 1252 (2006), cert. denied, 549 U.S. 1209 (2007). In
addition, the Court may consider "other sources courts ordinarily examine when ruling on Rule
12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by
reference, and matters of which a court may take judicial notice." Tellabs. Inc. v. Makor Issues
& Rights, LTD., 551 U.S. 308, 322 (2007).

At the outset, the Court notes that the Moving Defendants and Pedersen have each filed
unopposed requests for judicial notice of various publicly-available documents, including ZAGG
press releases, forms flIed with the SEC, transcripts of earnings conference calls, and a Google
Finance chart showing opening and closing stock prices of ZAGG common stock from October
15,2010 through August 17,2012. (Dkt. Nos. 57,60.) The Court takes judicial notice of these
documents pursuant to Federal Rule of Evidence 201 (b)(2).1 See id.; GFF Com. v. Associated
Citations to judicially noticed documents are labeled as either Pedersen's RJN Ex. -y or
Moving Defendants' RJN Ex. .
2

Wholesale Grocers, 130 F.3d 1381, 1384 (10th Cir. 1997). With this in mind, the Court
considers the facts and allegations in this case.
Corporate defendant ZAGG is a Nevada corporation with its principal executive offices
in Salt Lake City, Utah. (Am. Compl. ~ 18.) ZAGG designs, manufactures and distributes
protective coverings, audio accessories and power solutions for consumer electronic and hand~
held devices. (Am. Compl. ~ 2, 18.) ZAGG's common stock trades on the NASDAQ Global
Market ("NASDAQ") under the ticker symbol "ZAGG." (Am. Compl. ~ 18.)
The six individual defendants, Robert G. Pedersen, Randall Hales, Brandon T. O'Brien,
Edward D. Ekstrom, Shuichiro Ueyama, and Cheryl A. Larabee, were all officers or directors of
ZAGG during the Class Period? (Am. CompL ~ 19~24). Ueyama has been dismissed from this
action based on Plaintiff's failure to effectuate timely service. (Dkt. No. 71.)
At some point prior to the Class Period, Pedersen pledged more than two million shares
of ZAGG stock on margin as collateral. (Am. Compl. ~ 28.) SEC regulations require the
disclosure of whether certain parties have pledged company shares as security. (Am. Compl. ~
40.) Specifically, Item 403(b) of SEC Regulation S-K requires disclosure of the number of
shares pledged as security by named executive officers, directors, and director nominees. Q!L)
Despite this requirement, during the Class Period ZAGG filed two annual reports,3 six quarterly
2Specifically, Pedersen, a co-founder ofZAGG, was Chairman of the Board of Directors
and CEO, during the class period. Hales was President, Chief Operating Officer and Director of
ZAGG, and on August 17,2012, he was appointed as Interim Chief Executive Officer. O'Brien
was the Chief Financial Officer ofZAGG. Ekstrom was a Director ofZAGG. Larabee was a
Director of ZAGG, and onAugust 17,2012, she was appointed as Chairman of the Board of
Directors.
30n March 25, 2011, and March 15,2012, ZAGG filed annual reports on Form 1O~K for
the fiscal years ended December 31,2010, and December 31,2011, respectively. Each 10~K
included a section discussing "Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters," in which ZAGG was required to disclose the
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reports,4 and two proxies5 with the SEC, none of which disclose Pedersen's pledged shares. (Am.
CompI. ~~ 49,50-53,57-60.)
On December 12, 2011, ZAGG announced the appointment of Hales as ZAGG's
President and Chief Operating Officer. (Am. CompI. ~ 54.) On December 16,2011, ZAGG filed
an 8-K with the SEC, disclosing Hales's hire, and stating that Pedersen would continue to "serve
as Chairman and Chief Executive Officer of the Company." (Am. CompI. ~ 55.) On February
27,2012, ZAGG held its fourth quarter 2011 and full year 2011 earnings call, during which
Pedersen described Hales's role as "help[ing] to manage the overall day-to-dayoperations of
ZAGG." Moving Defendants' RJN, Ex. 3 at 2.
On December 21,2011, Pedersen sold 345,200 shares of ZAGG stock, worth
approximately $2.6 million, as a result of a margin calL (Am. CompI. ~ 6.) That day, ZAGG's
stock price dropped from $8.65 to $8.09. (Am. CompI. ~ 62.) On December 23, 2011, Pedersen
filed a Form 4 with the SEC, disclosing the sale. (Am. CompI. ~ 29.) The Form 4 stated that the
sale was made to meet an "immediate fmancial obligation." CI!i) ZAGG's stock price dropped
even further on December 23, falling from $S.45 to $7.85. (Am. CompI. ~ 63.) The following
day it fell again, from $7.S5 to $6.73. (ld.) On December 22,2011, Pedersen prepared a Form

information mandated by Item 403.
'7be quarterly reports were filed on Form 10-Q on the following dates: May 5,2011;
August 15,2011; November IS, 2011; May 10, 2012; and AugustS, 2012. Each quarterly report
directed investors to consider the risk factors identified in that year's corresponding lO-K.
SOn May 2, 2011 and April 27, 2012, ZAGG filed proxies with the SEC. Each proxy
sought shareholder action on, inter alia, the re-election of the company's five directors, which
included Pedersen. Both proxies disclosed Pedersen's ZAGG shareholdings, but did not address
whether any of Pedersen's shares were pledged as security.

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144 to be sent to the SEC, which disclosed that the sale was made to meet margin calls. See
Pedersen's RJN, Ex. C. The SEC received Pedersen's Form 144 on December 30,2011. Id.
On August 14,2012, a second margin call forced Pedersen to se11515,000 shares of
ZAGG stock, worth approximately $4.2 million. (Am. Compl. ~11O.) That day ZAGG's stock
price fell from $8.80 to $8.24. ilih) On August 17,2012, Pedersen fileda Form 4, which
disclosed that the sale was made "to meet margin calls on [Pedersen]'s account." (Am. CompL ~
30.) Also on August 17, ZAGG disclosed in a press release that Pedersen had stepped down as
CEO and Chairman of the Board. ad.) On August 20,2012, ZAGG filed an 8-K with the SEC,
announcing it had implemented a policy prohibiting directors, officers and 10% holders of
ZAGG's securities from pledging ZAGG shares in a margin account. (Am. CompL ~ 48.)
On August 23,2012, a third margin call forced Pedersen to sell an additional 1.25 million
shares ofZAGG stock. (Am. CompL ~ 68.) On August 28,2012, Pedersen filed a Form 4
disclosing that the sale was made to meet margin calls, and that the sale satisfied "all margin
obligations." (Am. Compl. ~ 30.) That same day, ZAGG held a conference call to discuss
Pedersen's resignation, during which Hales stated that Pedersen's departure was "entirely related
to the margin call situation that started last December and, unfortunately, surfaced again two
weeks ago." (Am. Compl. ~ 38); Moving Defendants' RJN, Ex. 5 at 5. During that same
conference call, Pedersen declared that "[b]y completely deleveraging my ZAGG stock, I have
removed the element of uncertainty around future unwanted sales and have taken a step towards
building investor confidence in ZAGG." (Am. CompL ~ 69); Moving Defendants' RJN, Ex. 5 at

3.

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The Plaintiffs in this case - people who purchased ZAGG, Inc. ("ZAGG") common stock
between February 28,2012 and August 17,2012 - allege that (1) Defendants failed to disclose in
various SEC filings and press releases that Pedersen had pledged more than 48% ofhis ZAGG
stock as collateral on margin and (2) ZAGG began a secret succession plan to replace Pedersen
with Hales as CEO and Larabee as Chairman.
Plaintiffs assert that these actions by the Defendants deceived the investing public,
artificially inflated and maintained the market price of ZAGG common stock, and caused the
Plaintiffs to purchase ZAGG stock at artificially inflated prices. (Am. CompI. ~ 86.) Based on
this conduct, Plaintiffs assert that Defendants violated Sections 1O(b), 14(a), and 20(a) of the
Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b)' 78n(a) and 78t(a),
and Rules 10b-5 and 14a-9 promulgated thereunder, 17 C.F .R. § 240.lOb-5, 17 C.F.R. § 240.14a­

9.
All Defendants seek to dismiss Plaintiffs' Section 10(b) and 14(a) claims on the grounds
that Plaintiffs have failed to plead fraud with the specificity required under the Private Securities
Litigation Reform Act, 15 U.S.C. § 78u-4(b). Additionally, all Defendants seek to dismiss
Plaintiffs' Section 20(a) claim, on the grounds that Plaintiffs have failed to plead an underlying
primary violation ofthe Act.

DISCUSSION
I. Motion to Dismiss Standards
In deciding a motion to dismiss for failure to state a claim upon which relief may be
granted under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the Court presumes the
truth of all well.,pleaded facts in the complaint, but need not consider conclusory allegations. Tal

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v. Hogan, 453 F.3d 1244, 1252 (10th Cir. 2006), cert. denied, 549 U.S. 1209 (2007). The Court
is not bound by a complaint's legal conclusions, deductions and opinions couched as facts. Bell
Atlantic Corp. v. Twombly, 550 U.s. 544 (2007). Further, though all reasonable inferences must
be drawn in the non-moving party's favor, a complaint will only survive a motion to dismiss if it
contains "enough facts to state a claim to relief that is plausible on its face." Id. at 570. "A claim
has facial plausibility when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal,
129 S. Ct 1937, 1949 (2009).

n. Securities Fraud Pleading Requirements
Rule 9(b) of the Federal Rules of Civil Procedure requires that "in all avennents offraud
or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. II
Fed. R. Civ. P. 9(b). In addition to this heightened pleading standard, precedent from the United
States Court ofAppeals for the Tenth Circuit requires Plaintiffs' § 1O(b) and § 20(a) claims to
satisfy the additional pleading requirements of the Private Securities Litigation Refonn Act
("PSLRA"). See Adams v. Kinder-Morgan, Inc., 340 F.3d 1083 (10th Cir. 2003)
The PSLRA goes further than Rule 9(b) by requiring a complaint alleging securities fraud
to "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
infonnation and belief, the complaint shall state with particularity all facts on which that belief is
fonned." Id. at 1095 (quoting 15 U.S.C.A. § 78u-4(b)(1)).With regard to the element of
scienter, the PSLRA requires that plaintiffs alleging securities fraud must "state with particularity

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facts giving rise to a strong inference that the defendant acted with the. required state of mind."
Id. (quoting 15 U.S.C.A. §78u-4(b)(2».
The United States Supreme Court has defmed the "strong inference of scienter" pleading
requirement set forth in the PSLRA as:
The inference of scienter must be more than merely "reasonable" or "pennissible"
it must be cogent and compelling, thus strong in light of other explanations. A
complaint will survive ... 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.
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,324 (2007). In making this inquiry,
the Court must consider "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." Id. at 323.
Additionally, the Moving Defendants contend, and Plaintiffs do not dispute, that the
PSLRA's scienter pleading requirements apply to Plaintiffs' § 14(a) claims. Although the Tenth
Circuit has not been required to decide whether the PSLRA applies to § 14(a) claims, the Court
finds the statutory language unambiguous. All relevant sections of the PSLRA commence with
the phrase, "[i]n any private action arising under this chapter," 15 U.S.C. §§ 78u-4(b)(1), (2)
(emphasis added). Accordingly, all of Plaintiffs' claims must satisfy the heightened pleading
standards of the PSLRA.

m. Whether Plaintiffs Have Stated a Claim for Relief Under § lOeb)
To state a claim under § 1O(b) of the Exchange Act and Rulel Ob-5 promulgated
thereunder, plaintiffs must sufficiently allege that the defendant: (1) mad~ a material
misrepresentation or omission; (2) with scienter; (3) in connection with the purchase or sale of a

8

security; (4) upon which the plaintiff relied; (5) that the plaintiff suffered an economic loss; and
(6) that the material misrepresentation was the cause of that loss. In re Williams Secs. Litig.
WCG Subclass, 558 F.3d 1130, 1136 (10th Cir. 2009), citing Stoneridge Inv. Partners, LLC v.
Scientific-Atlant§, 552 U.S. 148 (2008).
Here, all Defendants challenge Plaintiffs' § 1O(b) claims as to the element of scienter,
while Pedersen alone also challenges Plaintiffs' claim as to materiality, loss, and loss causation.
A. Scienter under § 10(b) and Rule lOb

The requisite "scienter" for a § 1O(b) claim is "a mental state embracing intent to deceive,
manipulate, or defraud." Tellabs, 551 U.S. at 319. Proof ofrecklessness is sufficient to establish
a § 1O(b) claim. In this context, a defendant acts recklessly when his or her conduct amounts to
an extreme departure from the standards of ordinary care, and presents 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 the danger. City of Philadelphia v. Fleming Companies. Inc., 264 F.3d 1245,
1260 (10th Cir. 2001). In the context of a claim based on non-disclosure of material facts, a
plaintiff must show that the defendant 1) knew of the material fact; and 2) knew that failure to
reveal the fact likely would mislead investors. Id. at 1261.
Plaintiffs allege that all Defendants failed to disclose that (1) Pedersen had pledged more
than 48% ofhis ZAGG stock as collateral on margin and (2) ZAGG directors and officers
instituted a secret succession plan to replace Pedersen with Hales as CEO, and Larabee as
Chairman. Each allegation is taken up in turn.

9

-;."

".,'

i. Pedersen's Stock Pledges

Plaintiffs assert that all Defendants had actual knowledge of Pedersen's stock pledges
(Am. CompI. ,-r 45.) Further, Plaintiffs claim that Defendants failed to disclose Pedersen's stock
pledges in various SEC filings during the Class Period. (Am. CompI. ,-r,-r 49-60.) Additionally,
Plaintiffs allege that all Defendants had the "motive and opportunity" to issue the misleading
statements and omit material information about Pedersen. (Am. CompI. ~ 72.)
In support of these allegations, Plaintiffs correctly point out that an SEC regulation
required the disclosure of the number of shares pledged as security by named executive officers
and directors, which the Defendants failed to do in ZAGG's two annual reports, six quarterly
reports, and two proxies, that ZAGG filed with the SEC during the Class Period. See 17 C.F.R. §
229.403. Plaintiffs also rely on the indisputable fact that Pedersen knew about the shares of
ZAGG stock that he had pledged on margin.
However, the knowledge requirement to establish scienter under § 10(b) is two-fold.
Fleming, 264 F.3d at 1261. Although Plaintiffs have provided facts sufficient to show that
Pedersen knew that he had pledged his ZAGG shares, Plaintiffs have failed to allege any facts
that Pedersen knew that his failure to reveal his pledges would likely mislead investors. Id.
Additionally, Plaintiffs' allegations are completely unsupported by any particularized facts that
might give rise to a strong inference that the pledged shares were "so obviously material" that
Pedersen must have been aware that its non-disclosure would likely mislead investors.
Accordingly, Plaintiffs' § 10(b) claim against Pedersen regarding his stock pledges fails.
With regard to the Moving Defendants, Plaintiffs further allege that "by virtue of their
position" at ZAGG, Moving Defendants either "had actual knowledge" of Pedersen's stock
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pledges, or acted with "reckless disregard for the truth." (Am. CompI. ~ 88.) However, absent
particularized facts, "[g]eneralized imputations of knowledge do not suffice, regardless of
defendants' positions within the company." Fleming at 1264 (quoting Maldonado v. Dominguiz,
137F.3d 1, 10 (1stCir. 1998)).
Plaintiffs make no allegations of any meetings between Pedersen and any of the Moving
Defendants or anyone else, which gave rise to Plaintiffs' suspicion that the Moving Defendants
knew about the stock pledging prior to each margin call. There are no allegations of any
memoranda, e-mails, or other written documentation to suggest that the Moving Defendants
knew about the stock pledging prior to each margin call. There are no allegations as to any
statements made by any Moving Defendant that could suggest that such Defendant knew about
the stock pledging. The allegations are simply insufficient to suggest that the Moving
Defendants knew about the stock pledging prior to each margin call. Therefore, the Court
concludes that the Plaintiffs have not alleged sufficient facts about Pedersen's stock pledges to
support their § 1O(b) claim against the Moving Defendants.
ii.

The Secret Succession Plan

Plaintiffs' also allege that ZAGG began a secret succession plan to remove Pedersen as
CEO and Chairman of the Board in response to Pedersen's "rampant pledging of ZAGG shares."
(Am. CompI. ~ 7.) Plaintiffs argue that Defendants made material omissions when they failed to

disclose the secret succession plan in a press release issued the day Hales was hired, or in an 8-K
filed with the SEC on December 16,2011. Plaintiffs claim that the 8-K that announced Hales's
appointment as President and Chief Operating Officer, but "misleadingly informed investors"
that Pedersen would continue to serve as Chairman and CEO. Plaintiffs also assert that ZAGG
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failed to disclose the succession plan in its quarterly and annual reports filed during the Class
Period. Plaintiffs claim that the secret succession plan "came to light" on August 28, 2012, when
Hales admitted that Pedersen had stepped down as CEO and Chairman because of the "margin
call situation that started last December and unfortunately surfaced again two weeks ago."
In support of these allegations, Plaintiffs essentially point to three facts. First, that Hales

was hired to be in charge of "day to day operations." Second, that Hales eventually took over as
interim-CEO once Pedersen had relinquished the position. Third, that Hales stated that Pedersen
stepped down because of the margin call situation.
However, Plaintiffs fail to acknowledge that day-to-day operations are typically the
responsibility of any company's chief operating officer. Plaintiffs also fail to account for the
facts that Hales was hired nine days prior to Pedersen's first margin call, or that Pedersen
continued to serve as CEO for more than nine months after Hales was hired. Additionally, as
stated above, Plaintiffs have failed to plead any particularized facts that any of the Moving
Defendants actually knew about Pedersen's stock pledging prior to each margin call.
While the replacement of one person by another is a necessary component to a secret
succession plan, it is by no means sufficient. If it were, any shuffling of executive positions
would immediately become suspect, and could become the subject of a lawsuit. This is precisely
what Congress intended to avoid through the enactment of the heightened pleading requirements
in the PSLRA. Plaintiffs' general, conclusory assertions to the contrary are not sufficient to
satisfy the heightened pleading requirements of Rule 9(b), much less the PSLRA's strong
inference requirement.

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Because the Court finds Plaintiffs have failed to sufficiently plead scienter, the Court will
dismiss the § 1O(b) claims without addressing the sufficiency of Plaintiffs' allegations as to
materiality, loss, and loss causation.
IV. Whether Plaintiffs Have Stated a Claim for Relief Under

§ 14(a)

Liability under § 14(a) of the Exchange Act occurs when a corporate officer "solicit[s]
any proxy" in violation of SEC regulations. 15 U.S.C. § 78n(a). SEC Rule 14a-9, in turn,
provides that proxy statements may not contain false or misleading representations or omissions
of material fact. Id., citing 17 C.F .R. § 240. 14a-9.
The parties agree that a § 14(a) claim has three elements: "(1) that the proxy contained a
material misrepresentation or omission; (2) that the defendant acted with the requisite state of
mind, and (3) that the proxy was the essential link in completing the transaction in question."
Britton v. Parker, Civ. A. No. 06-cv-1797-MSK-KLM, 2009 U.S. Dist. LEXIS 87829, at *20 (D.
Colo. Sept. 23, 2009); see also Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S. Ct. 616, 24.L.
Ed. 2d 593 (1970). Though negligence may satisfy the state of mind element in certain
circumstances, where a claim is based in fraud, plaintiffs must meet the heightened scienter
pleading requirement of the PSLRA. See, e.g., Police & Fire Ret. Sys. v. SafeNet. Inc., 645 F.
Supp. 2d 210 (S.D.N.Y. 2009).
The Moving Defendants contend that Plaintiffs' allegations are insufficient to support the
state of mind and essential link elements, while Pedersen only challenges the essential link
element.

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A

Scienter

The Moving Defendants contend, and Plaintiffs do not dispute, that the PSLRA's scienter
pleading requirements apply to Plaintiffs' § 14(a) claims. In their opposition to the Moving
Defendants' motion to dismiss, Plaintiffs point to their § 10(b) allegations regarding Pedersen's
stock pledges as sufficient to also satisfy the scienter requirement of § 14(a). Because the Court
finds Plaintiffs' § 1O(b) claims to insufficiently plead scienter, the Court likewise finds Plaintiffs'

§ 14(a) claims lacking.
B. Essential Link

Even if Plaintiffs had properly plead scienter, their § 14(a) claim would still fail for
insufficiently pleading the essential link element. The essential link element "examines the issue
of causation, inquiring whether the transaction described in the allegedly misleading Proxy
Statement was one that, once approved by shareholders, resulted in a loss to the Plaintiff."
Britton, 2009 U.S. Dist. LEXIS 87829, at *38. Damages under § 14(a) are only recoverable
''when the votes for a specific corporate transaction require[ed] shareholder authorization ... and
that transaction was the direct cause of the pecuniary injury for which recovery is sought").
General Elec. Co v. Cathcart, 980 F.2d 927, 932-33 (3d Cir. 1992).
Here, Plaintiffs allege that Defendants failed to disclose Pedersen's stock pledges in
ZAGG's 2011 and 2012 Proxies. Those proxies sought election of five directors, including
Pedersen, to serve until the next annual meeting of the stockholders. Though Plaintiffs correctly
point out Item 403(b) of Regulation S-K required ZAGG to disclose the number of share pledged
as security by named executive officers and directors in the Proxies, Plaintiffs fail to allege how
Pedersen's re-election as a director directly caused Plaintiffs' injury. In fact, in Plaintiffs' own

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words, it was Pedersen's pledging of ZAGG shares prior to the start of the class period that
created a "material risk to the market price and stability of ZAGG stock, arising from a potential
margin call" and that later had a "devastating impact" on ZAGG - not Pedersen's re-election as a
director. Accordingly, Plaintiffs failure to plead any particularized facts as to how the Proxies
directly caused their loss is fatal to their § 14(a) claim.
V.

Whether Plaintiffs Have Stated a Claim for Relief Under § 20(a)

Section 20(a) of the Exchange Act provides for "control person" liability. Section 20(a)
claims are essentially derivative of other securities claims - § 1O(b) and § 14(a) claims in this
case.
Section 20(a) provides that:
Every person who, directly or indirectly, controls any person liable under any
provision of this chapter or of any rule or regulation thereunder shall also be liable
jointly and severally with and to the same extent as such controlled person to any
person to whom such controlled person is liable, unless the controlling person acted
in good faith and did not directly or indirectly induce the act or acts constituting the
violation or cause of action.
15 U.S.C. § 78t(a) (2008). The Tenth Circuit has interpreted this statutory provision to require
that, "to state a prima facie case of control person liability, the plaintiff must establish (1) a
primary violation of the securities laws and (2) 'control' over the primary violator by the alleged
controlling person." Fleming, 264 F.3d at 1270-71 (quoting Maher v. Durango Metals, Inc., 144
F.3d 1302, 1305 (10th Cir. 1998)).
As noted above, Plaintiffs have not sufficiently alleged a primary violation of either

§ 1O(b) or § 14(a) by any of the Defendants. Therefore, Plaintiffs' § 20(a) claims fail as a matter
oflaw. See, e.g., Fleming, 264 F.3d at 1270-71.

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CONCLUSION
In sum, Plaintiffs' §§ 10(b) and 14(a) allegati<:ms do not raise the strong inference of
scienter required to defeat Defendants' motions to dismiss. Because Plaintiffs have failed to
sufficiently plead a primary violation of the Exchange Act, Plaintiffs' § 20(a) claims necessarily
fail as well. Accordingly, both motions to dismiss are GRANTED.

Dated this 4th day of February, 2014.

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