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David M. Jolley, SB # 191164 Jonathan A. Patchen, SB # 237346 COVINGTON & BURLING One Front Street San Francisco, CA 94111 Telephone: [phone] Facsimile: [phone] [e-mail] Harris Weinstein COVINGTON & BURLING 1201 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Telephone: [phone] Facsimile: [phone] Attorneys for Defendant John V. Hashman UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION In re: NEXTCARD, INC. SECURITIES LITIGATION Master File No. C-01-21029-JF(RS) JOINT REPLY MEMORANDUM OF YINZI CAI, JOHN V. HASHMAN, JEREMY LENT, AND BRUCE RIGIONE IN SUPPORT OF MOTIONS TO DISMISS SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT Date: Time: Courtroom: Judge: October 28, 2005 9:00 a.m. 3 Hon. Jeremy Fogel
Filed concurrently: 1. 2. Separate reply memos Response to Plaintiffs Opposition to Defendants Supplemental Request for Judicial Notice Defendants Objection to Declaration of Christopher P. Seefer
3.
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TABLE OF CONTENTS Page INTRODUCTION ............................................................................................................. 1 ARGUMENT..................................................................................................................... 1 A. The SAC Does Not Adequately Allege Accounting Fraud. .................................. 1 1. Plaintiffs Do Not Satisfy the Reform Act by Copying from Vague Non-Reform Act Complaints or Government Documents Published Long After the End of the Class Period................. 1 Plaintiffs Allegations Do Not Satisfy The PSLRAs Standards for Pleading Falsity or Scienter. ................................................................ 2
The SAC Does Not Allege Facts Raising a Strong Inference of Scienter. ................................................................................................................. 5 1. The SACs Allegations of GAAP Violations Do Not Raise a Strong Inference of Scienter. ..................................................................... 5 The SACs Allegations About E&Y Negate Any Inference of Scienter. ..................................................................................................... 7 The SACs Allegations of Defendants Stock Sales Are Insufficient to Raise a Strong Inference of Scienter.................................. 7 The SACs Allegations of Defendants Job Titles and Responsibilities Do Not Raise a Strong Inference of Scienter. ................. 8
The Group Pleading Doctrine Does Not Salvage Plaintiffs Failure to Attribute All Alleged Misleading Statements to All Defendants. ......................... 8 The SACs Generic Allegations Do Not Adequately Allege Control Person Liability.................................................................................................... 10
CONCLUSION................................................................................................................ 11
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TABLE OF AUTHORITIES
FEDERAL CASES Dura Pharm., Inc. v. Broudo, 125 S. Ct. 1627 (2005)...........................................................................................................3, 4 Ferber v. Travelers Corp., 802 F. Supp. 698 (D. Conn. 1992).............................................................................................1 Fezzani v. Bear, Stearns & Co., 99 Civ. 0793, 2004 U.S. Dist. LEXIS 5825 (S.D.N.Y. 2004)........2 Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645 (8th Cir. 2001) .........6 GSC Partners Fund v. Washington, 368 F.3d 228 (3d Cir. 2004) ......................................................................................................6 Gompper v. VISX, Inc, 298 F.3d 893 (9th Cir. 2002) .................................................................................................7, 9 Heliotrope Gen., Inc. v. Ford Motor, Co., 189 F.3d 971 (9th Cir. 1999) ...................................................................................................10 Howard v. Everex Sys., 228 F.3d 1057 (9th Cir. 2000) ...................................................................................................9 In re Adaptive Broadband Sec. Litig., No C 01-1092 SC, 2002 U.S.Dist. LEXIS 5887 (N.D. Cal. 2002)........6 In re Burlington Coat Factory sec. Litig., 114 F.3d 1410 (3d Cir. 1997) ........6 In re Bus. Objects S.A. Sec. Litig., No. C 04-2401, MJJ 2005 WL. 1787860 (N.D. Cal. July 27, 2005).....................................1, 8 In re Daou Sys., Inc., 411 F.3d 1006 (9th Cir. 2005) ...............................................................................................4, 6 In re Enron Corp. Sec. Litig., 235 F. Supp. 2d 549 (S.D. Tex. 2002)........2 In re Exodus Sec. Litig., No. C 01-2661 MMC, 2005 WL. 1869289 (N.D. Cal. Aug. 5, 2005).......................................1
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In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994) .. ......6 In re GlenFed, Inc. Sec. Litig., 60 F.3d 591 (9th Cir. 1995) .......................................................................................................9 In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248 (N.D. Cal. 2000)......6 In re Microstrategy, Inc. Sec. Litig., 115 F. supp. 2d 620 (E.D. Va. 2000)......5 In re Omnivision Techs., Inc., No. C-04-2297 SC, 2005 U.S. Dist. LEXIS 16009 (N.D. Cal. July 29, 2005) .........................4 In re PDI Sec. Litig., No. 02CV0211...........................................................................................................................9 In re Read-Rite Corp. Sec. Litig., 335 F.3d 843 (9th Cir. 2003) .....................................................................................................8 In re Splash Tech. Holdings, Inc. Sec. Litig., No. C 99-00109 SBA, 2000 WL. 1727405 (N.D. Cal. 2000) .................................................10 In re Vantive Corp. sec. Litig., 283 F.3d 1079 (9th Cir. 2002) ...........2 In re Worldcom, Inc. Sec. Litig, 294 F. Supp. 2d 392 (S.D.N.Y. 2003)........2 In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994) .....................................................................................................6 Lawrence E. Jaffe Pension Plan v. Household Intl Inc., 02 C 5893, 2004 U.S. Dist. LEXIS 4659 (N.D. Ill. 2004).....2 Levitt v. Bear Stearns & Co., 340 F.3d 94 (2d Cir. 2003) ........2 Nursing Home Pension Fund Local 144 v. Oracle Corp., 380 F.3d 1226 (9th Cir. 2004) ...................................................................................................8 Reiger v. Altris Software, Inc., (1999) Fed. Sec. L. Rep. (CCH) 90,491, 1999 WL. 540893 (S.D. Cal. 999).........................6 Sekuk Global Enterprises v. KVH Industrial Inc., C.A. No. 04-306ML, 2005 U.S. Dist. LEXIS 16628 (D.R.I. Aug. 11, 2005) ...........................4
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Theoharous v. Fong, 256 F.3d 1219 (11th Cir. 2001) ...............................................................................................10 Wool v. Tandem Computers, Inc., 818 F.2d 1433 (9th Cir. 1987) ...................................................................................................9 FEDERAL STATUTES 15 U.S.C. 78t(a) ..........................................................................................................................10 15 U.S.C. 78u-4(b)(1) ..............................................................................................................2, 9
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I.
INTRODUCTION In their opening papers, Defendants explained why the Second Amended Complaint
(SAC) fails to remedy the deficiencies of the previous complaint (the FAC). Plaintiffs Opposition merely regurgitates the SACs inadequate allegations and inappropriately attaches documents that, even if properly considered on a motion to dismiss, contain nothing to suggest that Defendants made any false statements or acted with scienter. The SAC fails to state a cause of action for securities fraud and should be dismissed without leave to amend. II. ARGUMENT A. The SAC Does Not Adequately Allege Accounting Fraud.
The SAC raises four accounting issues: fraud losses; loans held for sale; the calculation of the allowance for loan and lease losses (ALLL); and exclusion of securitized loans from the balance sheet. Defendants have addressed each, pointing out the SACs failure to identify any GAAP rules, banking regulations or industry standards violated by NextCards accounting, or contemporaneous documents suggesting that defendants knew NextCards accounting was wrong. Joint Mem. at 4-11. To most of these points, Plaintiffs have no response. Instead, they all but abandon the SAC in favor of arguments about what is alleged in the SECs complaint, the FDICs complaint, or the OIGs report. See Opp. at 15-27. These arguments do not save the SAC from dismissal. 1. Plaintiffs Do Not Satisfy the Reform Act by Copying from Vague Non-Reform Act Complaints or Government Documents Published Long After the End of the Class Period.
Trying to compensate for their failure to plead specific facts demonstrating falsity and scienter, Plaintiffs rely heavily on complaints filed by the SEC and the FDIC. Plaintiffs argue that these complaints corroborate the SACs allegations. See Opp. at 15. Plaintiffs reliance is misplaced. First, no inference of fraud arises simply because a government agency opens an investigation or files a complaint. In re Exodus Sec. Litig., No. C 01-2661 MMC, 2005 WL 1869289, at *22 (N.D. Cal. Aug. 5, 2005); In re Bus. Objects S.A. Sec. Litig., No. C 04-2401 MJJ, 2005 WL 1787860, at *7 (N.D. Cal. July 27, 2005); Ferber v. Travelers Corp., 802 F. Supp. 698, 714 (D. Conn. 1992). Second, the SECs and FDICs allegations are every bit as
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generalized as the SACs and often even more so. The SEC and FDIC are not subject to the Reform Acts heightened pleading standards. Joint Mem. at 4. Thus, the mere fact that the SECs complaint survived a motion to dismiss in no way suggests that the SAC should survive these motions. Unlike the agencies, Plaintiffs must state with particularity all facts supporting their belief that Defendants have committed fraud. See 15 U.S.C. 78u-4(b)(1) (emphasis added). Plaintiffs assert that they have independently examined the materials underlying the FDIC and SEC allegations (Opp. at 15), but they still do not because they cannot point to any relevant facts to support their claims. The Reform Act mandates dismissal of the SAC.1 Plaintiffs also repeatedly cite to the OIG report (which dates from 2002) and the criminal complaint against Thomas Trauger (Trauger), a former Ernst & Young (E&Y) auditor (dating from 2003). Beyond the fact that neither is attached to the SAC or properly the subject of judicial notice (were one to make such a request, which Plaintiffs have not), there are two problems with this. First, Plaintiffs are going outside of their complaint and relying on extrinsic documents for the truth of matters asserted therein. One cannot save a complaint by such means. Joint Mem. at 4. Second, neither document existed until well after the end of the putative class period, so neither can have any relevance to scienter. Plaintiffs cannot show that Defendants engaged in deliberate recklessness or conscious misconduct by referring to accusations leveled at them (or, in the case of Trauger, others) long after the fact. 2. Plaintiffs Allegations Do Not Satisfy The Reform Acts Standards for Pleading Falsity or Scienter.
Fraud Losses: Defendants moving papers made the following points, none of which the Opposition answers: (a) The SAC attempts to quantify NextCards fraud losses but never alleges what percentage of them were improper. Joint Mem. at 5. (b) Nothing in GAAP or banking regulations called into question NextCards accounting for losses that were fraud losses. Id. at 5-6. (c) The SAC says NextCards rules for determining whether a loss was a None of Plaintiffs cases suggests otherwise. See Opp. at 15. Both Levitt and Fezzani discuss whether government complaints put plaintiffs on notice for statute of limitations purposes, not whether they support Reform Act pleading standards. Lawrence E. Jaffe Pension Plan deals with a section 11 claim, for which the court found no heightened pleading standard. And the plaintiffs in WorldCom and Enron alleged requisite facts (not vague conclusions) to satisfy the Reform Act.
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fraud loss were contrary to industry standard but does not say what that standard was, or whether any of the Defendants knew of it. Id. at 5-6. (d) E&Y knew of NextCards fraud-loss accounting but at no time during the class period (or thereafter) disapproved it, or told defendants to do things differently. Id. at 6.2 (e) NextCard explicitly disclosed in its 10-Ks and 10-Qs that it included fraud losses not in ALLL but in noninterest expense, and once the fraud loss number met OCC standards for disclosure, NextCard disclosed the specific dollar amount of fraud losses as a line item in its publicly available OCC Call Reports. Joint Mem. at 6. Unable to answer these points, Plaintiffs attempt to improve upon the SAC by distorting what it says. In their argument about the first three quarters of 2000, Plaintiffs accuse Defendants of classifying challenged bankruptcies as frauds. Opp. at 17. But the SAC alleges that this practice began a year later, in the second quarter of 2001. SAC 96, 102-07. In the same argument, Plaintiffs make the unsupported and implausible assertion (nowhere mentioned in the SAC) that it is wrong to classify check kiting as a fraud. Opp. at 15. And they cite various paragraphs of the SAC for the proposition that Defendants knew their fraud-loss classifications were wrong, when the cited paragraphs say no such thing. See, e.g., Opp. at 16, 18 (incorrectly citing SAC 3 and 56 to attribute handwritten notes globally to all Defendants, and SAC 49 for the proposition that it was not possible to determine intent). Loans Held for Sale: Defendants moving papers made the following points, none of which the Opposition answers: (a) Excluding loans held for sale from a banks ALLL and charge-off rate is a common and accepted practice. The SAC does not identify any GAAP rule or banking regulation that says otherwise. Joint Mem. at 9. (b) The same quarter that NextCard started using loans held for sale accounting, it disclosed the practice in its 10-K. Id. at 9. Unable to answer these points, Plaintiffs make two other arguments: First, they question Defendants loss causation argument. Opp. at 23. But their argument is wrong. Dura Pharm., Inc. v. Broudo, 125 S. Ct. 1627, 1634 (2005), held that
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The Opposition, citing the Trauger criminal complaint, notes several places where Trauger, after the end of the Class Period, altered work papers. But neither version, original or altered, expressed any disapproval of NextCards practices. Nor does the Trauger complaint allege any wrongdoing by NextCard or any of its officers, directors, or employees. 3
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allegations that misrepresentations caused a stock price to be inflated were insufficient to plead loss causation, in the absence of other allegations of a later curative disclosure and resulting drop in the price, demonstrating the causal connection between the misrepresentation and the alleged loss. Plaintiffs contend that they did allege loss causation with regard to loans held for sale because they allege that NextCards stock price fell after the October 31, 2001 disclosure. But that is precisely the problem. The October 31, 2001 press release (RJN Ex. 20) does not mention loans held for sale. Nor does the OCCs November 15, 2001 Prompt Corrective Action directive (RJN Ex. 21) or the OCCs February 7, 2002 press release (RJN Ex. 22). The SAC, along with judicially noticeable documents, show the stock price drop was attributable to other disclosures. SAC 113-122, RJN Exs. 20-22. Where, as here, disclosures on other topics caused the drop, Plaintiffs have no claim. Dura, 125 S. Ct. at 1632; see also In re Daou Sys., Inc., 411 F.3d 1006, 1027 (9th Cir. 2005) (holding that a stock drop unrelated to the allegedly curative disclosure cannot satisfy loss causation).3 Second, Plaintiffs argue that Trauger altered some of E&Ys workpapers relating to loans held for sale. Opp. at 20-21. This ignores the fact that neither version of the work papersoriginal or alteredsuggest that E&Y disapproved of NextCards accounting for loans held for sale or gave Defendants anything other than the green light to do what they did. ALLL: Defendants moving papers made the following points, none of which the Opposition answers: (a) The OCC specifically allows a bank to use historic loss data, adjusted for changes in conditions, when setting ALLL rates, and this is what NextCard did. Joint Mem. at 10. (b) The SAC identifies no GAAP rule banking or regulation violated by NextCards methodology for calculating its ALLL; in fact the contemporaneous OCC guidance supported NextCards ALLL methodology. Id. at 10-11. (c) NextCards reported ALLL almost doubled during the class period. Id. at 11. Unable to answer these points, Plaintiffs again make two other arguments:
3
Plaintiffs other authorities (In re Omnivision Techs., Inc., No. C-04-2297 SC, 2005 U.S. Dist. LEXIS 16009 (N.D. Cal. July 29, 2005) and Sekuk Global Enters. v. KVH Indus. Inc., C.A. No. 04-306ML, 2005 U.S. Dist. LEXIS 16628 (D.R.I. Aug. 11, 2005)) are inapposite where, as here, not only is there no curative disclosure, but the entirety of the stock drop is alleged to be attributable to curative disclosures relating to other alleged misrepresentations. 4
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First, Plaintiffs argue that Defendants should not have relied on a new collections policy when setting ALLL because it was untried. Opp. at 22. But that ignores the fact that ALLL is an allowance for future losses. Of necessity, it is based on predictions about the future. Predicting future collections is an aspect of setting ALLL, and properly so. Plaintiffs point to no authority that says otherwise. Second, Plaintiffs say Trauger altered work papers about ALLL, and that the original work papers said NextCards assumptions were aggressive. Opp. at 25. If so, so what? Aggressive is not wrongful, and both sets of work papersoriginal and alteredexplicitly referred to NextCards collections practices and ALLL calculations without suggesting they were wrong. Seefer Decl., Ex. I, 54, at 21. Exclusion of securitized assets from NextCards balance sheet: Plaintiffs argue that defendants should have predicted the actions of regulators in requiring that NextCard unwind $1.2 billion of securitized receivables (Opp. at 26-27), but Plaintiffs do not distinguish or even address Defendants authorities to the contrary. Joint Mem. at 8. Nothing that Plaintiffs cite suggests that Defendants had any inkling that the OCC would do what it did in October 2001. The Court held that the FAC failed to adequately allege facts demonstrating that the challenged statements were false or misleading when made. Order at 9-10 (Lent), 12 (Hashman), 13 (Rigione), 14 (Cai and Qureshey), 15 (One of the primary defects in the FAC is Plaintiffs failure to match each alleged false statement with facts demonstrating that statements falsity . . . .). Though the organization of Plaintiffs allegations has changed from the FAC to the SAC, the substance of those allegations (at least in this regard) has not. The Oppositions abundant use of the word improper is no substitute for facts showing the allegedly false statements were false when made and made with scienter. B. The SAC Does Not Allege Facts Raising a Strong Inference of Scienter. 1. The SACs Allegations of GAAP Violations Do Not Raise a Strong Inference of Scienter.
Plaintiffs argue that numerous GAAP violations raise a strong inference of scienter. Opp. at 28. They cite four cases for the proposition that pervasive and repetitive GAAP violations raise an inference of scienter. Id. However, in three of those cases, Microstrategy,
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Adaptive Broadband, and McKesson, the company had restated its financial results, thus admitting to GAAP violations. Here, in contrast, no restatement occurred. Moreover, as shown above and unlike in the fourth case Plaintiffs cite, Daou the GAAP violations here are not adequately pled.4 Defendants moving papers showed that Plaintiffs had failed even to allege what provisions of GAAP or what existing banking regulations were violated. The Opposition points only to SFAS Nos. 114 (as amended by No. 118) and 5, which generally require the maintenance of adequate loan loss reserves. Opp. at 28. However, setting reserves is a flexible process that requires a great deal of judgment and do[es] not always (or perhaps ever) yield a single correct figure. In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1549 (9th Cir. 1994) (en banc). And Plaintiffs do not respond to Defendants argument that the SACs criticisms of the reserve setting process do not state a claim. Joint Mem. at 10-11. As for agency guidelines, the only thing Plaintiffs can point to is one regarding loans held for sale. Opp. at 29. But Plaintiffs do not respond to Defendants point that those guidelines do not prohibit what NextCard allegedly did. Joint Mem. at 9.5 Finally, Plaintiffs argue the magnitude of the reserve increase that the OCC required at the end of the third quarter of 2001 raises an inference of scienter. Opp. at 29. However, the mere fact that the increase may have been substantial does not raise a strong inference of scienter. See, e.g., GSC Partners Fund v. Washington, 368 F.3d 228, 243 (3d Cir. 2004); Reiger v. Altris Software, Inc., [1999] Fed. Sec. L. Rep. (CCH) 90,491, 1999 WL 540893, at *8 (S.D. Cal. 1999) (mere magnitude does not indicate knowledge of falsity). Indeed, GlenFed, 42 F.3d at 1549, holds that a later increase in reserves does not imply they were previously known to be Plaintiffs reference to fact-bound defenses (Opp. at 16) also misses the point. Burlington was not decided under the Reform Act, and the plaintiffs in Green Tree unlike Plaintiffs here pleaded facts with particularity. The only other GAAP provision mentioned concerns Plaintiffs allegation regarding capitalization of credit card acquisition costs. This allegation, briefly mentioned in only one paragraph of the SAC ( 116) concerns an immaterial sum. Even as to this allegation, Plaintiffs fail to respond to the cases cited in the moving papers holding that mere violations of GAAP do not show scienter. See, e.g., In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1426 (9th Cir. 1994).
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impermissibly low.6 Moreover, the required increase in reserves came shortly after the terrorist attacks of September 11, 2001, which were an independent cause for an increase in customer delinquencies in that period. 2. The SACs Allegations About E&Y Negate Any Inference of Scienter.
As Defendants noted in their opening brief, their consultation with and reliance upon the guidance of outside auditors at E&Y who never warned Defendants against the challenged accounting classifications or required a restatement from NextCard tends to negate any possible inference of scienter. Joint Mem. at 13. Plaintiffs respond by asserting that E&Ys decision not to withdraw its audit opinion letter or to require a restatement is not dispositive of the scienter requirement. Opp. at 35-36. But E&Ys actions and its relationship with Defendants are important facts that do not establish but tend to rebut scienter. See Gompper v. VISX, Inc, 298 F.3d 893, 897 (9th Cir. 2002). And, contrary to Plaintiffs suggestion otherwise, Ninth Circuit precedent dictates that the Court must consider all plausible inferences, including inferences unfavorable to Plaintiffs, to determine whether the allegations of scienter are sufficiently strong. Id. Defendants open consultation with E&Y (SAC 49, 74, 78, 81), E&Ys lack of concern about the accounting determinations, E&Ys decision not to require a restatement, and Defendants reliance on E&Ys opinion (which has never been withdrawn) are inconsistent with an intent to defraud. Therefore, an inference negating scienter is appropriate. Joint Mem. at 13. 3. The SACs Allegations of Defendants Stock Sales Are Insufficient to Raise a Strong Inference of Scienter.
As Plaintiffs acknowledge (Opp. at 32), this Court previously held that the individual defendants stock sales in this case are insufficient to raise a strong inference of scienter. See 2/7/05 Order at 11, 13, 14, 15. These sales are not any more suspicious than before.
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Plaintiffs also claim Defendants violated NextCards internal policies, thus raising an inference of scienter. Opp. at 29-30. However, they do not refer to any such policy that was allegedly violated apart from GAAP or regulatory provisions that, as shown above, they have not adequately alleged. 7
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4.
The SACs Allegations of Defendants Job Titles and Responsibilities Do Not Raise a Strong Inference of Scienter.
Plaintiffs attempt to circumvent their burden of alleging specific facts showing that a particular defendant possessed the requisite scienter by trying to revive the core operations doctrine. See Opp. at 30-31. That doctrine had held that a court could infer scienter from allegations of irregularities in a companys core operations because a companys executives would presumably have knowledge regarding those operations. However, the Ninth Circuit has held that this doctrine is inconsistent with the Reform Act and that such allegations are insufficient to raise a strong inference of scienter. In re Read-Rite Corp. Sec. Litig., 335 F.3d 843, 848 (9th Cir. 2003); see also In re Bus. Objects S.A. Sec. Litig., 2005 WL 1787860, at *8 n.3. Instead, the plaintiff must plead particular facts. Id. As shown above, Plaintiffs here have failed to do so. Similarly, Plaintiffs rely on Nursing Home Pension Fund Local 144 v. Oracle Corp., 380 F.3d 1226 (9th Cir. 2004), for the proposition that it is reasonable to infer that hands on managers knew of accounting improprieties. See Opp. at 30. Oracle, however, actually reaffirmed the holding of In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1087 (9th Cir 2002), that allegations of hands on management or access to information are inadequate. Oracle, 380 F.3d at 1234. The court in Oracle relied on very specific allegations that the defendants publicly admitted using a software system to monitor the companys business in detail. See id. There are no allegations remotely like that here. C. The Group Pleading Doctrine Does Not Salvage Plaintiffs Failure to Attribute All Alleged Misleading Statements to All Defendants.
In granting Defendants motion to dismiss the FAC, this Court held that it must look to the statements of each individual defendant in order to determine whether Plaintiffs have stated a claim against that defendant, because [section] 10(b) misrepresentation/omission claims cannot be maintained against defendants who neither make nor contribute to the drafting of the allegedly misleading statements. 2/7/05 Order at 6, 7. Although Plaintiffs had argued that all Defendants were responsible for all alleged misleading statements through the group pleading
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doctrine (see dkt. #199 at 21-22), the Court properly attributed to each defendant only direct quotations or those statements that he or she had signed. See 2/7/05 Order at 9-14. Plaintiffs offer no basis to change this analysis. The only new allegation in the SAC that Plaintiffs opposition identifies is a single, conclusory statement that each of these defendants [Lent, Hashman, Rigione, and Cai] participated in the preparation and review of the Companys press releases and SEC filings. SAC 16; Opp. at 11. Even assuming Plaintiffs could in theory properly bolster their wholly inadequate complaint by referring to the SECs complaint, as they have attempted to do, the latter alleges nothing more than the same conclusory language. Neither complaint alleges any facts showing that any defendant had any role in preparing statements not directly attributed to him or her, let alone the substantial participation or intricate involvement that Plaintiffs own cited authority contemplates. See Howard v. Everex Sys., 228 F.3d 1057, 1061 n.5 (9th Cir. 2000). Furthermore, unlike the SECs complaint, the SAC must satisfy the stringent requirements of the Reform Act. For allegations based on information and belief, a private securities fraud complaint must state with particularity all facts on which that belief is formed. Gompper, 298 F.3d at 895 (quoting 15 U.S.C. 78u-4(b)(1)); see also 2/7/05 Order at 9-10 (rejecting conclusory allegations of what defendants collectively knew). Plaintiffs here cannot and do not point to any supporting facts. Plaintiffs remaining arguments regarding the group pleading doctrine are an almost verbatim rehash of their unsuccessful opposition to Defendants previous motion to dismiss (see dkt. #199 at 21-22) and should be rejected once again. While the Ninth Circuit has not ruled on whether the group pleading doctrine survives the Reform Act, recent district court cases have followed the Fifth Circuit in finding that it does not. See In re PDI Sec. Litig., No. 02CV0211 JLL, 2005 U.S. Dist. LEXIS 18145, *73-75 (D.N.J. Aug. 17, 2005); Cai Mot. at 5. Even assuming that the doctrine is still valid, Plaintiffs have misstated it. It does not broadly apply to all officers but only to a narrowly defined group of officers who had direct involvement not only in the day-to-day affairs of [the company] in general but also in [the companys] financial statements in particular. In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 593 (9th Cir. 1995)
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(quoting Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1440 (9th Cir. 1987)).7 Finally, Plaintiffs have once again ignored Defendants changing roles during the class period. See SAC 11(a), 12(a), 13(a), 14(a). Thus, even relying purely on titles (which they are not permitted to do), Plaintiffs cannot indiscriminately attribute all class period statements to all Defendants. D. The SACs Generic Allegations Do Not Adequately Allege Control Person Liability.
Plaintiffs control person claims fail for three independent reasons: First, Plaintiffs do not dispute that they have alleged Defendants controlled NextCard, not each other, and that NextCard is not even a defendant in this action. Section 20(a) provides that [e]very 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. 15 U.S.C. 78t(a) (emphasis added). As NextCard cannot be liable to Plaintiffs in this action, there is no basis for a control person claim against Defendants. Second, even assuming one defendants primary violation could be the basis for another defendants secondary liability, as discussed above, no primary violation has been pled against any defendant. The section 20(a) claim must therefore also be dismissed. See Heliotrope Gen., Inc. v. Ford Motor, Co., 189 F.3d 971, 978 (9th Cir. 1999). Third, Plaintiffs have not alleged with particularity that each Defendant had the power to control the specific corporate policy which resulted in primary liability. Theoharous v. Fong, 256 F.3d 1219, 1227 (11th Cir. 2001); In re Splash Tech. Holdings, Inc. Sec. Litig., No. C 9900109 SBA, 2000 WL 1727405, at *15 (N.D. Cal. 2000). Plaintiffs confuse the issues of actual exercise of power and culpable participation (Opp. at 37) with the nature of control that they are required to allege. Plaintiffs also ignore that Defendants had different responsibilities at NextCard at different times and thus cannot be indiscriminately held liable for all alleged misstatements. See Joint Mem. at 15. And finally, contrary to Plaintiffs suggestion, courts can and do reject inadequate control allegations at the pleading stage. See id. at 14-15.
7
The court emphasized the quality and extent of the involvement, not the corporate title of any particular officer. Id. 10
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III.
CONCLUSION The SAC should be dismissed without leave to amend.
DECLARATION PURSUANT TO GENERAL ORDER 45, X.B I, DAVID M. JOLLEY, hereby declare pursuant to General Order 45, X.B, that I have obtained the concurrence in the filing of this document from each of the other signatories listed below. I declare under penalty of perjury that the foregoing declaration is true and correct. Executed on September 26, 2005, at San Francisco, California. DATED: September 26, 2005 COVINGTON & BURLING
By
/s/ David M. Jolley Harris Weinstein David M. Jolley Jonathan A. Patchen Attorneys for Defendant JOHN V. HASHMAN
PILLSBURY WINTHROP SHAW PITTMAN LLP BRUCE A. ERICSON JACOB R. SORENSEN KRISTIN M. LEFEVRE RANAH L. ESMAILI 50 Fremont Street Post Office Box 7880 San Francisco, CA 94120-7880 Telephone: [phone] Facsimile: [phone] By [concurrence obtained, General Order 45, X.B] Bruce Ericson Attorneys for Defendant BRUCE RIGIONE
DEFS JOINT REPLY MEM. ISO MOTIONS TO DISMISS C-01-21029-JF(RS)
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JORDAN ETH MARGARET L. WU MORRISON & FOERSTER LLP 425 Market Street San Francisco, CA 94105-2482 Telephone: [phone] Facsimile: [phone] By [concurrence obtained, General Order 45, X.B] Margaret L. Wu Attorneys for Defendant YINZI CAI
SHIRLI FABBRI WEISS PAUL A. REYNOLDS DLA PIPER RUDNICK GREY CARY LLP 4365 Executive Drive, Suite 1100 San Diego, CA 92121-2133 Telephone: [phone] Facsimile: [phone] By [concurrence obtained, General Order 45, X.B] Shirli Fabbri Weiss Attorneys for Defendant JEREMY LENT
DEFS JOINT REPLY MEM. ISO MOTIONS TO DISMISS C-01-21029-JF(RS)
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