United States District Court, E.D. Pennsylvania
MANDIRA KUMAR, Individually and on behalf of all other similarly situated; DENNIS DANDELES, Co-Lead Plaintiff; and, THOMAS WALSH, Co-Lead Plaintiff Plaintiffs,
KULICKE AND SOFFA INDUSTRIES, INC.; FUSEN CHEN; and, JONATHAN CHOU Defendants.
Darnell Jones, II J.
Dennis Dandeles and Thomas Walsh (“Plaintiffs”)
are Co-Lead Plaintiffs in this class action securities fraud
claim brought against Defendants Kulicke and Soffa
Industries, Inc. (“Kulicke” or the
“Company”), Jonathan Chou (“Defendant
Chou”), and Fusen Chen (“Defendant
Chen”).,  Defendants filed the instant Motion to
Dismiss Plaintiffs' Amended Complaint pursuant to Federal
Rules of Civil Procedure 8(a)(2), 9(b), and 12(b)(6). For the
reasons set forth below, Defendants' Motion to Dismiss
shall be granted, and Plaintiffs shall be granted leave to
FACTUAL AND PROCEDURAL BACKGROUND
is a publicly traded company incorporated in Pennsylvania and
headquartered in Singapore. (Am. Compl. ¶¶ 2, 14.)
The Company designs, manufactures, and sells capital
equipment and expendable tools used to assemble
semi-conductor devices. (Am. Compl. ¶¶ 2, 14.)
During the relevant time period, Defendant Chou served as
Kulicke's Chief Financial Officer (“CFO”),
Principal Accounting Officer, and Executive Vice President,
while Defendant Chen served as Kulicke's President and
Chief Executive Officer (“CEO”). (Am. Compl.
¶¶ 15-16.) Co-Lead Plaintiffs Dandeles and Walsh
allege that they purchased shares of Kulicke at an
artificially inflated price between November 16, 2017 and May
10, 2018 (“Class Period”). (Am. Compl.
¶¶ 1, 12-13.)
submitted its 2017 annual report (“2017 10-K”)
with the Securities and Exchange Commission
(“SEC”) on November 16, 2017. (Am. Compl. ¶
22.) The 2017 10-K provided the Company's financial
statements and position for the 2017 fiscal year which had
concluded on September 30, 2017. (Am. Compl. ¶ 22.) In
addition to signing the 2017 10-K, Defendants Chou and Chen
signed the Sarbanes-Oxley Act certifications (“SOX
certifications”) contained therein. (Am. Compl.
signing and certifying the 2017 10-K, Defendants Chou and
Chen attested to its accuracy. (Am. Compl. ¶ 23.) Each
Defendant certified that “[b]ased on [their]
knowledge” the 2017 10-K did not contain any untrue
statement of material fact. Additionally, the certifications
stated that “based on [Defendant Chou and Chen's]
most recent evaluation of internal controls over financial
reporting” both Defendants had disclosed to the
Company's auditor and audit committee “[a]ll
significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting; and [a]ny fraud . . . involv[ing] management or
other employees who have a significant role in the
[Company's] internal control over financial
reporting.” (Am. Compl. ¶ 23.) The filing also
stipulated that Kulicke's management was responsible
“for establishing and maintaining adequate internal
control over financial reporting[.]” (Am. Compl. ¶
24.) Lastly, the 2017 10-K stated that Kulicke's
management concluded that the Company had maintained
effective internal controls over its financial reporting as
of September 30, 2017. (Am. Compl. ¶ 24.)
November 27, 2017-eleven days after Kulicke filed its 2017
10-K-the Company issued a press release (“November
27th Press Release”) announcing that
Defendant Chou resigned from his positions, effective
immediately, in order “to spend more time with his
family and to pursue other interests[.]” (Am. Compl.
¶ 37.) However, in an effort to ensure an orderly
transition, Defendant Chou remained with Kulicke until
February 28, 2018. (Am. Compl. ¶¶ 37-38; Mot.
Dismiss Am. Compl. 9 n.3.) On March 5, 2018, Defendant Chou
was named the CFO of Nanometrics Incorporated. (Am. Compl.
¶ 38.) He remained in that role until June 25, 2018, at
which point Nanometrics informed Defendant Chou that his
employment was being terminated immediately. (Am. Compl.
10, 2018, over two months after Defendant Chou left Kulicke,
the Company filed an 8-K with the SEC (“May
10th 8-K”). (Am. Compl. ¶¶ 26,
29.) In a press release associated with the May
10th 8-K, the Company announced that it would not
be filing its second quarter 10-Q on time, and that its 2017
10-K could no longer be relied upon. (Am. Compl. ¶ 26.)
The press release stated that “[f]ollowing the end of
the [second] fiscal quarter [of 2018], the Company learned of
certain unauthorized transactions by a senior finance
employee.” (Am. Compl. ¶ 26.) Up until that
point, an ongoing internal investigation had uncovered that
“certain warranty accruals in prior periods were
accounted for incorrectly and [were] therefore
misstated.” (Am. Compl. ¶ 26.) On the following
day, the Company's stock price dropped $1.80 (a 7.5%
decline) from the prior day's closing price. (Am. Compl.
three weeks later, Kulicke announced the results of its
internal investigation as an amendment to the May
10th 8-K (“May 30th
8-K/A”). (Am. Compl. ¶ 29.) Therein, Kulicke
disclosed that its investigation had uncovered “an
unauthorized payment . . . initiated by a senior finance
employee to an unapproved vendor in the second fiscal quarter
of fiscal 2018.” (Am. Compl. ¶ 30.)
“The payment was made based on falsified accounting
records where two manual journal entries totaling $5.8
million . . . had been recorded in accounts payable and costs
of sales.” (Am. Compl. ¶ 30.) Kulicke's
management classified the payments as “a
misappropriation of [the Company's] assets.” (Am.
Compl. ¶ 30.) The May 30th 8-K/A further
stated that “effective controls over the recording and
review of manual journal entries related to [the
Company's] warranty accrual [were] not maintained as of
September 30, 2017, and journal entries related to [the
Company's] warranty accrual and accounts payable [were]
not maintained as of December 30, 2017.” (Am. Compl.
following day, the Company filed an amended annual report for
the 2017 fiscal year (“2017
10-K/A”). (Am. Compl. ¶ 32.) The 2017 10-K/A
stated that Kulicke did not maintain “effective control
over review of journal entries . . . as a result of [a]
management override of journal entries of the accrual for
warranty.” (Am. Compl. ¶ 33.) Consequently,
Kulicke misstated its warranty expense, warranty accrual
accounts, and related financial disclosures. (Am. Compl.
¶ 33.) The deficiency was classified as a material
weakness in the Company's internal controls over
financial reporting. (Am. Compl. ¶ 33.) Contrary to
statements contained in the 2017 10-K, the Company had failed
to maintain effective internal control over financial
reporting as of September 30, 2017. (Am. Compl. ¶ 32.)
same day, the Company filed an amended quarterly report for
the first fiscal quarter of 2018 (“December 2018
10-Q1/A”). (Am. Compl. ¶ 34.) The December 2018
10-Q1/A disclosed that Kulicke's investigation identified
additional payments made to a different vendor during the
first fiscal quarter of 2018. (Am. Compl. ¶ 35.) The
payments-made by the same senior finance employee-were also
made through falsified accounting records. (Am. Compl. ¶
35.) As a result, the Company announced that it was “in
the process of assessing its plan for remediation of the
material weaknesses[, ]” through which Kulicke
anticipated changes in its finance leadership personnel. (Am.
Compl. ¶ 36.)
matter comes before this Court via transfer from the Central
District of California. (ECF No. 54.) Upon transfer,
Defendants filed the present Motion to Dismiss
Plaintiffs' Amended Complaint.
STANDARDS OF REVIEW
Federal Rule of Civil Procedure Rule 12(b)(6)
deciding a Rule 12(b)(6) motion, courts must first
“accept all factual allegations as true, construe the
complaint in the light most favorable to the plaintiff, and
determine whether, under any reasonable reading of the
complaint, the plaintiff may be entitled to relief.”
Phillips v. County of Allegheny, 515 F.3d 224, 233
(3d Cir. 2008) (internal quotation marks and citation
omitted). Nevertheless, “[t]hreadbare recitals of the
elements of a cause of action, supported by mere conclusory
statements, do not suffice.” Id. (internal
quotation marks and citation omitted). This standard, which
applies to all civil cases, “asks for more than a sheer
possibility that a defendant has acted unlawfully.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
“[A]ll civil complaints must now set out sufficient
factual matter to show that the claim is facially
plausible.” Fowler v. UPMC Shadyside, 578 F.3d
203, 210 (3d Cir. 2009) (internal quotation marks omitted).
“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.” Iqbal, 556 U.S. at 678
(citing Bell Atlantic Corp. v. Twombly, 550 U.S.
544, 556 (2007)).
“[the] court[ ] must consider the complaint in its
entirety as well as . . . documents incorporated into the
complaint by reference, and matters of which a court may take
judicial notice.” Institutional Investors Grp. v.
Avaya, Inc, 564 F.3d 242, 252 (3d Cir. 2009)
(“Avaya”) (quoting Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 310
(2007) (“Tellabs”)). However, in the
context of a securities fraud claim, courts do not simply ask
whether plaintiff may be entitled to relief based upon any
reasonable reading of the Complaint. Id. Plaintiffs
must instead satisfy the heightened pleading standards
prescribed by Rule 9(b) and the PSLRA. Id. at
Rule 9(b) and the PSLRA
securities fraud Complaint may be dismissed apart from Rule
12(b)(6) if it fails to meet Rule 9(b) or the PSLRA's
pleading requirements. Cal. Pub. Emps.' Ret. Sys. v.
Chubb Corp., 394 F.3d 126, 145 (3d Cir. 2004). Under
Rule 9(b) and the PSLRA, Plaintiffs “may not benefit
from inferences flowing from vague or unspecific allegations
- inferences that may arguably have been justified under a
traditional Rule 12(b)(6) analysis.” In re
Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198,
224 (3d Cir. 2002). Rather, the PSLRA requires that a
Complaint “specify each statement alleged to have been
misleading, the reason or reasons why the statement is
misleading, and if an allegation . . . 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). Secondly, it requires a Complaint to
“state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of
mind.” 15 U.S.C. § 78u-4(b)(2).
Third Circuit has recognized that Rule 9(b)'s requirement
for particularity is subsumed by Section 78u-4(b)(1) of the
PSLRA. Avaya, 564 F.3d at 253. Consequently, a
plaintiff must plead the “who, what, when, where and
how: the first paragraph of any newspaper story.”
Id. (quoting In re Advanta Corp. Sec.
Litig., 180 F.3d 525, 534 (3d Cir. 1999)). However, the
pleading standards of the PSLRA and the Rule 9(b) standards
diverge in one crucial respect. Id.
Rule 9(b), Section 78u-4(b)(2) of the PSLRA does not permit a
plaintiff to generally allege a defendant's state of
mind. Avaya, 564 F.3d at 253. Instead, the PSLRA
imposes an “exacting pleading standard for
scienter.” Avaya, 564 F.3d at 253. Under this
standard, a plaintiff must allege facts with particularity
that when pled establish a strong inference that the
defendant acted with the requisite degree of scienter.
Tellabs, 551 U.S. at 321.
end, the Supreme Court has recognized that “[t]he
strength of an inference cannot be decided in a
vacuum.” Id. at 323. Courts “must
consider plausible, nonculpable explanations for the
defendant's conduct, as well as inferences favoring the
plaintiff.” Id. at 310. A Complaint will only
survive “if a reasonable person would deem the
inference of scienter cogent and at least as compelling as
any plausible opposing inference one could draw from the
facts alleged.” Id. at 317.
Plaintiffs' Section 10(b) and Rule 10b-5 Claims
I of Plaintiffs' Amended Complaint alleges that
Defendants Chou, Chen, and Kulicke violated Section 10(b) of
the Exchange Act and the incorporated SEC Rule 10b-5. (Am.
Compl. ¶ 54.) Section 10(b) prohibits the “use or
employ[ment], in connection with the purchase or sale of any
security registered on a national securities exchange[, ] . .
. [of] any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the [SEC] may
prescribe as necessary or appropriate[.]” 15 U.S.C.
§ 78j(b). SEC Rule 10b-5 implements Section 10(b) by
making it unlawful “[t]o 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.” 17 C.F.R. § 240.10b-5(b). A fact or
omission is deemed to be material “if there is a
substantial likelihood that it would have been viewed by the
reasonable investor as having significantly altered the total
mix of information available to the
investor.” In re NAHC, 306 F.3d at 1330
(internal quotation marks and citation omitted).
successfully state a securities fraud claim, a plaintiff must
allege “(1) a material misrepresentation or omission
[by the defendant], (2) scienter, (3) a connection between
the misrepresentation or omission and the purchase or sale of
a security, (4) reliance upon the misrepresentation or
omission, (5) economic loss, and (6) loss causation.”
In re Hertz Global Holdings Inc., 905 F.3d
106, 114 (3d Cir. 2018) (quoting City of Edinburgh
Council v. Pfizer, Inc., 754 F.3d 159, 167 (3d
Cir. 2014)). Defendants' contend Plaintiffs failed to
sufficiently plead the material misrepresentation and
scienter elements with respect to each Defendant, and that
certain Plaintiffs failed to allege that they suffered
economic loss. Accordingly, this Court shall address these
three elements below.
Material misrepresentations on the part of Defendants Chou,
Chen, and Kulicke
argue that Plaintiffs failed to plead any “actionable
misstatements with the particularity required by the
PSLRA.” (Mot. Dismiss Am. Compl. 2-3.) Specifically,
Defendants contend Plaintiffs did not plead that the SOX
certifications and other statements contained within the 2017
10-K were false at the time they were made. (Mot. Dismiss Am.
Compl. 14 n.4.) As previously stated, to satisfy the material
misrepresentation element under Rule 10b-5, a Complaint must
“specify each statement alleged to have been
misleading, the reason or reasons why the statement is
misleading, and, if an allegation . . . is made on
information and belief . . . all facts on which that belief
is formed.” City of Cambridge Ret. Sys. v.
Altisource Asset Mgmt. Corp., 908 F.3d 872, 879 (3d Cir.
2018). Plaintiffs must plead “the who, what, when,
where and how: the first paragraph of any newspaper
story.” Avaya, 564 F.3d at 253. Allegations
are only actionable if the alleged statements or omissions
were false or misleading at the time they were made.
Id. at 267 (quoting In re NAHC, 306 F.3d at
1330); see also City of Cambridge Ret. Sys., 908
F.3d at 883 (concluding that an attempt to plead falsity
through “speculative fraud by hindsight” did not
satisfy the material misrepresentation element); Wanca v.
Super Micro Computer Inc., No. 5:15-cv-04049-EJD, 2018
U.S. Dist. LEXIS 107758, at *14 (N.D. Cal. June 27, 2018)
(stating that pleading later-discovered inaccuracies in a SOX
certification did not meet the PSLRA's pleading standards
if the plaintiff failed to allege facts which showed that the
defendants knew the reports were false at the time they were
made); Williams v. Globus Med., Inc., 869 F.3d 235,
244 (3d Cir. 2017) (relying on conjecture based on subsequent
events did not sufficiently satisfy the heightened pleading
standards of the PSLRA); SEPTA. v. Orrstown Fin. Servs.,
Inc., No. 1:12-cv-00993, 2015 U.S. Dist. LEXIS 80584, at
*137 (M.D. Pa. June 22, 2015) (finding that allegations were
improperly based on hindsight and therefore not actionable
when plaintiffs failed to plead that a company knew its
internal controls were ineffective at the time it issued the
reports in question).
case, Plaintiffs' Amended Complaint alleges that
Defendants' statements in the 2017 10-K and the
associated SOX certifications were false or misleading. (Am.
Compl. ¶¶ 22-24.) The Amended Complaint offers
three reasons as to how Defendants' statements were false
or misleading. (Am. Compl. ¶ 25.) First, it alleges that
contrary to statements in the 2017 10-K, Kulicke “did
not maintain effective controls over the recording and review
of manual journal entries [as of September 30, 2017],
constituting a material weakness in the Company's
internal control over financial reporting.” (Am. Compl.
¶ 25.) Second, during the first and second fiscal
quarters of 2018, a senior finance employee made unauthorized
payments based on falsified accounting records. (Am. Compl.
¶ 25.) These ...