Defense Motion to Dismiss Securities Class Action Claims Granted in Part, but Class Action Plaintiffs Adequately Alleged Existence of Certain Omissions or Misrepresentations as to Most Defendants as well as Control Person Liability as to All Individual Defendants Illinois Federal Court Holds
Plaintiffs filed a class action against Motorola and some of its officers and directors alleging violations of federal securities law; the class action complaint alleged that defendants artificially inflated the company’s stock price by issuing statements that omitted important facts or contained material misrepresentations in violation of Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5. Silverman v. Motorola, Inc., ___ F.Supp.2d ___ (N.D.Ill. September 23, 2008) [Slip Opn., at 1-2]. Count I of the class action complaint was premised on the Section 10(b) and Rule 10b-5 violations (material misrepresentations and omissions); Count II of the class action complaint was premised on the Section 20(a) violation (asserting control person liability). Id., 1-2. The allegations in the class action centered on Motorola’s development of its third generation cell phones, or “3G” cell phones. Id., at 3. Defense attorneys moved to dismiss the class action complaint for failure to satisfy the heightened pleading requirements under the PSLRA (Private Securities Litigation Reform Act), id., at 2. The federal court granted defendants’ motion in part, but refused to dismiss the class action in its entirety.
After detailing the statements underlying the class action complaint, see Silverman, at 3-12, the district court noted that plaintiffs’ misrepresentation claims fall into two categories: (1) the drop in price of the company’s RAZR cell phones, and (2) the delayed rollout of the company’s new 3G cell phones, id., at 15. The federal court readily rejected the RAZR category, noting that the company had expressly discussed the price drop in the RAZR line and the reasons for the price reductions. See id. “Therefore, any allegations of fraud based on statements regarding the RAZR price decrease are dismissed.” Id. With respect to the 3G cell phone claims in the class action complaint, the district court agreed that some of the alleged misrepresentations were “mere puffery,” see id., at 15-16, and that company representations concerning projected sales and revenue were protected as “forward-looking statements,” see id., at 18-19. However, the federal court rejected the puffery defense as to other company statements, finding that representations such as whether new products will be “competitive” and “on track” would be material if defendants knew these statements to be untrue, id., at 16-17, and found that the “forward-looking” safe harbor did not apply to statements of present or future facts that could have materially affected an investor’s decisions, id., at 18-19. Similarly, omissions concerning potential delays in the 3G rollout could be actionable, id., at 17-18, particularly as the delay severely impacted sales during the Christmas holiday season, see id., at 27.
The district court agreed that certain class action claims were barred by the PSLRA’s safe harbor provision, holding that defendants issued cautionary language that was not “boilerplate” but rather “specifically tailored to the risks Motorola could face.” See Silverman, at 19-20. Accordingly, the federal court dismissed with prejudice “the allegations of Count I that rest on statements that are forward-looking in nature.” Id., at 22. However, with respect to scienter as to the remaining class action claims, the district court found that the class action failed to adequately allege scienter under the PSLRA standard only as to two individual defendants, but otherwise adequately alleged scienter as to the other five individual defendants. See id., at 22-26. The district court also concluded that plaintiffs’ class action complaint adequately alleged loss causation, see id., at 26-27. Finally, the district court denied the motion to dismiss the control person liability class action claims under Section 20(a), finding that the allegations in the class action complaint were sufficient for pleading purposes, even as to the two individual defendants for whom scienter had not been adequately alleged. See id., at 27-29.
NOTE: The district court opinion must be read carefully: it opens by stating that the motion is “granted,” see Silverman, at 2, ends by stating that it is granted only as to the Count I claims against two individual defendants, see id., at 29, and throughout identifies various alleged omissions and misrepresentations that it concludes are not actionable, see e.g., id., at 15-16 and 18-19, even dismissing some of those claims with prejudice, see id., at 22. The court also dismissed from the class action all claims that involve the RAZR, see id., at 15. Thus, the opening is an overstatement and the conclusion is an understatement of the district court’s actual ruling.