ATI delayed inventory writeoff until May, 2000, and carried
obsolete inventory for as long as two years. Id. at ¶¶ 75, 97.
Half of the inventory writeoff in the period 2000 pertained to
inventory disregarded in 1998. Id. at ¶ 75.
4. Component Shortage
The last reason plaintiffs argue the statements of ATI were
misleading is that defendants allegedly concealed from the
investing public information about a worldwide component
shortage. Plaintiffs allege that a critical shortage existed in
components that third-party manufacturers produced. Am. Compl.
at ¶ 73. By failing to disclose this material industry fact, and
relaying optimistic profit and sales forecasts, defendants
allegedly misled investors. Plaintiffs point to defendants'
statements on May 24, 2000 acknowledging the severe component
ATI filed a Material Change Report with the SEC on May 24th,
which said: "A significant factor behind the revised outlook was
a severely constrained supply of components to the computer
industry, including such items as CPU's DVD's and capacitors.
This caused particular hardships to system builders. . . ."
Id. at ¶ 77. In a conference call the same day, ATI officers
emphasized the severity of the components shortage. Id. at ¶
78; see also Tr. of Conference Call of May 24, 2000. In an
interview later that day, CEO Ho said, "In the last year the
overall environment has been not that good, so some
semiconductor manufacturers have cut down their investment, so
we have some worldwide component shortages. . . ." Am. Compl. at
1. General Securities Case Standards
A motion to dismiss tests the legal sufficiency of the
complaint. Holder v. City of Allentown, 987 F.2d 188, 194 (3d
Cir. 1993). In considering a motion to dismiss, a court must
accept as true the facts alleged in the complaint and view them
in the light most favorable to the plaintiffs. In re Burlington
Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997). A
Court may grant a motion to dismiss under Rule 12(b)(6) "only if
it is certain that no relief can be granted under any set of
facts which could be proved." Klein v. General Nutrition
Company, 186 F.3d 338, 342 (3d Cir. 1999); see Weiner v.
Quaker Oats, Co., 129 F.3d 310, 315 (3d Cir. 1997).
As is well known, § 10(b) of the Securities and Exchange Act
of 1934 makes it illegal to "use or employ, in connection with
the purchase or sale of any security . . ., any manipulative or
deceptive device or contrivance in contravention of such rules
and regulations as the Commission may prescribe. . . ."
15 U.S.C. § 78j(b). Rule 10b-5 promulgated thereunder makes it
unlawful to "make any untrue statement of a 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 . . . in connection with the
purchase or sale of any security." 17 C.F.R. § 240.10b-5(b).
Together these provisions "create liability for false or
misleading statements or omissions of material fact that affect
trading on the secondary market." Burlington Coat Factory, 114
F.3d at 1417.
To state a claim under Section 10(b) and Rule 10b-5,
plaintiffs must allege that defendants (1) made misstatements or
omissions of material fact, (2) with scienter, (3) in connection
with the purchase or sale of securities, (4) upon which
plaintiffs reasonably relied, and (5) that plaintiffs' reliance
was the proximate cause of their damages. See EP Medsystems,
Inc. v. EchoCath, Inc., 235 F.3d 865, 871
(3d Cir. 2000); In re Advanta Corp. Sec. Litig., 180 F.3d 525,
537 (3d Cir. 1999); Weiner v. Quaker Oats, 129 F.3d 310, 315
(3d Cir. 1997). In their motion to dismiss, defendants only
challenge materiality and scienter.
Not every misstatement or omission of fact gives rise to
liability. The fact at issue must be material.
17 C.F.R. § 240.10b-5(b). A fact is material if there is a substantial
likelihood that a reasonable investor would consider it
important in making his or her investment decision. Burlington
Coat Factory, 114 F.3d at 1425; Oran v. Stafford,
226 F.3d 275, 282 (3d Cir. 2000). "There must be a substantial likelihood
that the disclosure of the omitted fact [or misrepresentation]
would have been viewed by the reasonable investor as having
significantly altered the `total mix' of information made
available." EP Medsystems, 235 F.3d at 872 (quoting TSC
Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct.
2126, 48 L.Ed.2d 757 (1976)) (alteration in original).
Since materiality is a mixed question of law and fact, it
typically is a question for the factfinder. EP Medsystems, 235
F.3d at 875; Burlington Coat Factory, 114 F.3d at 1426.
However, "[i]f the representation is so obviously unimportant to
an investor that reasonable minds could not differ on the
question of materiality, the representation or omission will be
immaterial as a matter of law." EP Medsystems; see also
Burlington Coat Factory.
For a material misrepresentation to be actionable under
Rule 10b-5, it must be made with conscious or reckless disregard of
its falsity. Advanta, 180 F.3d at 534. A reckless
representation is "one `involving not merely simple, or even
inexcusable negligence, but an extreme departure from the
standards of ordinary care, and which presents a danger of
misleading buyers or sellers that is either known to the
defendant or is so obvious that the actor must have been aware
of it.'" Id. at 535 (quoting Sundstrand Corp. v. Sun Chem.
Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)). A complaint that
suggests "simple mismanagement," but not "an egregious departure
from the range of reasonable business decisions," does not
adequately plead recklessness. Id. at 540.
As an alternative to pleading facts that would constitute
circumstantial evidence of recklessness or conscious behavior, a
plaintiff may establish scienter by "alleging facts establishing
a motive and an opportunity to commit fraud." Id. at 535.
Because a private cause of action under Section 10(b) and
Rule 10b-5 sounds in fraud, a securities law complaint must satisfy
the heightened pleading standard of Federal Rule of Civil
Procedure 9(b). Burlington Coat Factory, 114 F.3d at 1417.
"[T]he circumstances constituting fraud . . . must be stated
with particularity." Fed.R.Civ.P. 9(b). Plaintiffs must set
forth "the `who, what, when, where and how'" regarding any
alleged fraud. Id. at 1422 (quoting DiLeo v. Ernst & Young,
901 F.2d 624, 627 (7th Cir. 1990)); Advanta, 180 F.3d at 534.
The pleading requirement "gives defendants notice of the claims
against them, provides an increased measure of protection for
their reputations, and reduces the number of frivolous suits
brought solely to extract settlements." Burlington Coat
Factory, 114 F.3d at 1418.
2. The PSLRA's Specific Impact on Securities Cases
The Private Securities Litigation Reform Act of 1995
("PSLRA"), 15 U.S.C. § 78u-4, et seq, requires a sharp pencil
when pleading securities cases. "By establishing a `uniform and
stringent pleading' standard, Congress intended this reform
legislation to resolve inconsistencies
among the circuits as to the appropriate pleading standard and
to provide added protection against what was perceived as a
growing number of frivolous `strike suits' aimed at achieving
quick settlements." Wilson v. Bernstock, 195 F. Supp.2d 619,
624-25 (N.J. 2002) (quoting S.Rep. No. 104-98, at 15 (1995)).
"While the PSLRA does not resolve the tension between deterring
securities fraud and stymieing meritless suits, it was designed
to favor the second consideration." In re CDnow, Inc. Sec.
Litig., 138 F. Supp.2d 624, 639 (E.D.Pa. 2001), quoted in
Wilson, 195 F. Supp.2d at 625.
Under the PSLRA, a complaint 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). Moreover, the
complaint must "state with particularity facts giving rise to a
strong inference that the defendant acted with the required
state of mind." Id. at § 78u-4(b)(2) (emphasis added).
In securities cases, a court must now analyze each statement
at issue in order to assess whether each alleged
misrepresentation is pleaded with the requisite specificity.
See In re Westinghouse Sec. Litig., 90 F.3d 696, 712 (3d Cir.
1996); see, e.g., EP Medsystems v. EchoCath, Inc.,
235 F.3d 865 (3d Cir. 2000); In re Advanta Corp. Sec. Litig.,
180 F.3d 525 (3d Cir. 1999); Klein v. General Nutrition Companies,
Inc., 186 F.3d 338 (3d Cir. 1999); In re NAHC, Inc. Sec.
Litig., 2001 WL 1241007 (E.D.Pa. 2001); Wilson v. Bernstock,
195 F. Supp.2d 619 (N.J. 2002). If any alleged misrepresentation
is not set out with sufficient particularity, the complaint
should be dismissed in whole or part as appropriate. See
15 U.S.C. § 78u-4(b)(3)(A).
The PSLRA also effected a change in substantive law,
establishing a "safe harbor" for "forward-looking statements."
See 15 U.S.C. § 78u-5(c). The safe harbor immunizes statements
that are forward-looking in trajectory*fn3 "if and to the
extent that —
(A) the forward-looking statement is —
(i) identified as a forward-looking statement, and is
accompanied by meaningful cautionary statements
identifying important factors that could cause actual
results to differ materially from those in the
forward-looking statement; or
(ii) immaterial; or
(B) the plaintiff fails to prove that the
forward-looking statement —
(i) if made by a natural person, was made with actual
knowledge by that person that the statement was false
or misleading; or
(ii) if made by a business entity;[,] was —