N.Y. City Employees' Retirement System v. Berry

616 F.Supp.2d 987

The NEW YORK CITY EMPLOYEES' RETIREMENT SYSTEM, et al., Plaintiffs, v. Lisa C. BERRY, Defendant.

No. C 08-00246 JW.

United States District Court, N.D. California, San Jose Division.

May 15, 2009.

Barbara Hart, David Harrison, and Todd Garber of Lowey Dannenberg Cohen & Hart, P.C., White Plains, NY, for Plaintiff.

ORDER DENYING DEFENDANT'S MOTION TO DISMISS

JAMES WARE, District Judge.

I. INTRODUCTION

Plaintiffs¹ bring this putative securities fraud class action on behalf of investors who acquired Juniper Networks, Inc. ("Juniper") securities between January 15, 2003 and August 10, 2006 (the "Class Period") against Lisa Berry ("Defendant"), a former General Counsel, Vice President, and Corporate Secretary of Juniper. Plaintiffs allege that, in her capacity as a Juniper executive, Defendant engaged in the backdating of stock options and falsification of financial statements, which resulted in the systematic overstatement of Juniper's income throughout the Class Period. Plaintiffs assert claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), and under Securities and Exchange Commission ("SEC") Rule 10b-5.

Presently before the Court is Defendant's Motion to Dismiss Class Action Complaint. (hereafter, "Motion," Docket Item No. 42.) The Court found it appropriate to take the matter under submission without oral argument. See Civ. L.R. 7-1(b). Based on the papers submitted to date, the Court DENIES Defendant's Motion to Dismiss.

II. BACKGROUND

A. Factual Allegations

In a Complaint filed on January 14, 2008, Plaintiffs allege as follows:

Plaintiffs are individual investment funds that together comprise the New York City Pension Funds. (Complaint ¶ 15, Docket Item No. 1.) Plaintiffs purchased or acquired Juniper common stock during the Class Period and suffered damages as a result of the federal securities law violations committed by Defendant and other Juniper officers and directors. (Id. ¶ 21.)

Defendant was employed as Juniper's General Counsel beginning on June 18, 1999. (Complaint ¶ 22.) Beginning in July 1999, Defendant also served as a Juniper Vice President, Secretary, and member of the Stock Option Committee ("SOC"). (Id.) Defendant served in these roles until her departure from Juniper at the end of 2003. For the three years prior to her tenure at Juniper, Defendant served as Vice President and General Counsel of KLA-Tencor Corporation, where she engaged in stock option backdating practices. (Id. ¶ 23.) After her arrival at Juniper, Defendant implemented stock option backdating practices at Juniper. (Id.)

From June 1999 through 2003, Defendant and other Juniper senior executives falsified financial statements and backdated option grants to purchase millions of shares of stock, and then falsely reported how Juniper granted these options in order to conceal their backdating scheme. (Complaint ¶ 2.) This false reporting and concealment resulted in Juniper's material systematic overstatement of income from June 1999 through mid-2006, eventually requiring Juniper to restate its financial results to record $900 million in compensation expenses over a several-year period. (Id.)

To implement this backdating scheme, Juniper used two Stock Option Plans, both of which provided that the exercise price of a stock option would be set by the Board of Directors or a Board-designated committee. (Complaint ¶ 4.) Although the Compensation Committee was responsible for grants to officers and directors, and the SOC was responsible for grants to non-officer employees, the actual practice was that the SOC was responsible for the selection of the exercise price for most option grants. (Id.) The SOC was comprised of Defendant Berry, Juniper Chief Executive Officer Scott Kriens ("Kriens"), and Juniper Chief Financial Officer Marcel Gani ("Gani"). (Id. ¶ 5.) Together, Berry, Kriens, and Gani caused Juniper to issue over 110 million backdated or otherwise intentionally mispriced stock options, which they concealed by filing false public filings with the SEC. (Id. ¶ 6.) Before leaving Juniper in 2003, Defendant cashed in her own underpriced options for millions of dollars in profits. (Id. ¶ 7.)

In May 2006, the Wall Street Journal and other major newspapers reported on studies released by independent financial analysts identifying Juniper as a high-risk candidate for having backdated executive stock options. (Complaint ¶ 9.) On August 10, 2006, Juniper confessed that its improper accounting for backdated option grants would require restatement of more than three years of financial results. Juniper share price dropped over 20% in response to these corrective disclosures, causing hundreds of millions of dollars of damages to investors. (Id.)

On the basis of the allegations outlined above, Plaintiffs allege two causes of action: (1) Violation of § 10(b) of the Exchange Act and SEC Rule 10b-5; and (2) violation of § 20(a) of the Exchange Act.

B. Procedural History

On July 14, 2006, the first of several securities fraud actions against former Juniper officers and directors was filed in the Northern District of California. On November 20, 2006, these actions were consolidated as In re Juniper Networks, Inc. Sec. Litig., Case No. C 06-04327 JW, 2006 WL 3365547 ("the Consolidated Action"). The New York City Pension Funds were designated as Lead Plaintiff in the Consolidated Action. On March 31, 2008, the Court granted in part and denied in part Defendants' motion to dismiss in the Consolidated Action. In re Juniper Networks, Inc. Sec. Litig., 542 F.Supp.2d 1037 (N.D.Cal.2008).

On January 14, 2008, the New York City Pension Funds filed this action as a related case to the Consolidated Action, for the purposes of adding Lisa Berry as a Defendant. (Complaint ¶ 1.) On October 1, 2008, the Court denied the Juniper Defendants' motion to consolidate the Berry action with the Consolidated Action, on the ground that consolidation would prejudice Plaintiffs' ability to conduct discovery in the Consolidated Action. (See Docket Item No. 162 in Case No. C 06-04327 JW.)

Presently before the Court is Defendant's Motion to Dismiss.

III. STANDARDS

Pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed against a defendant for failure to state a claim upon which relief may be granted against that defendant. Dismissal may be based on either the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.1990); Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-534 (9th Cir.1984). For purposes of evaluating a motion to dismiss, the court "must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the nonmoving party." Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir.1987). Any existing ambiguities must be resolved in favor of the pleading. Walling v. Beverly Enters., 476 F.2d 393, 396 (9th Cir. 1973).

However, mere conclusions couched in factual allegations are not sufficient to state a cause of action. Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986); see also, McGlinchy v. Shell Chem. Co., 845 F.2d 802, 810 (9th Cir.1988). The complaint must plead "enough facts to state a claim for relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007). Courts may dismiss a case without leave to amend if the plaintiff is unable to cure the defect by amendment. Lopez v. Smith, 203 F.3d 1122, 1129 (9th Cir.2000).

Claims brought under Section 10(b) of the Exchange Act and Rule 10b-5 must meet the particularity requirements of Federal Rule of Civil Procedure 9(b). In re Daou Sys., Inc. Sec. Litig., 411 F.3d 1006, 1014 (9th Cir.2005). Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b).

Moreover, claims brought under Section 10(b) and Rule 10b-5 must also meet the stringent pleading standards of the Private Securities Litigation Reform Act of 1995. The PSLRA amends the Exchange Act to require that a private securities fraud litigation complaint "plead with particularity both falsity and scienter." In re Daou, 411 F.3d at 1014. Specifically, a complaint alleging securities fraud must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1); In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1085 (9th Cir.2002).

To plead a violation of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, a plaintiff must allege that (1) defendants made a material misrepresentation or omission; (2) the misrepresentation was in connection with the purchase or sale of a security; (3) the misrepresentation caused plaintiffs loss; (4) plaintiff relied on the misrepresentation or omission; (5) defendants acted with scienter; and (6) plaintiff suffered damages. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). Each of these elements must be pleaded as to each defendant. Id.

IV. DISCUSSION

Defendant moves to dismiss the Complaint on the grounds that (1) Plaintiffs do not adequately plead Defendant's primary liability for any false statement or omission; (2) Plaintiffs do not adequately allege scheme liability; (3) Plaintiffs to not plead facts sufficient to give rise to a strong inference of scienter; and (4) Plaintiffs fail to state a claim for control person liability under § 20(a) of the Exchange Act.²

The Court considers each contention in turn.

A. Liability Under § 10(b) and ...