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Kumar v. Kulick and Soffa Industries, Inc.

United States District Court, E.D. Pennsylvania

October 9, 2019

MANDIRA KUMAR, Individually and on behalf of all other similarly situated; DENNIS DANDELES, Co-Lead Plaintiff; and, THOMAS WALSH, Co-Lead Plaintiff Plaintiffs,
v.
KULICKE AND SOFFA INDUSTRIES, INC.; FUSEN CHEN; and, JONATHAN CHOU Defendants.

          MEMORANDUM

          C. Darnell Jones, II J.

         I. INTRODUCTION

         Plaintiffs 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”).[1], [2] 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 amend.

         II. FACTUAL AND PROCEDURAL BACKGROUND

         Kulicke 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.)

         Kulicke 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.[3] (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. ¶¶ 22-23.)

         By 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.)

         On 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. ¶ 38.)

         On May 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.”[4] (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. ¶ 27.)

         Nearly 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.[5] (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. ¶ 31.)

         On the following day, the Company filed an amended annual report for the 2017 fiscal year (“2017 10-K/A”).[6] (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.)

         On that same day, the Company filed an amended quarterly report for the first fiscal quarter of 2018 (“December 2018 10-Q1/A”).[7] (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.[8] (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.)

         This 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.

         III. STANDARDS OF REVIEW

         A. Federal Rule of Civil Procedure Rule 12(b)(6)

         In 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)).

         Second, “[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.”[9] 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 252-53.

         B. Rule 9(b) and the PSLRA

         A 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).

         The 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.

         Unlike 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.

         To that 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.

         IV. DISCUSSION

         A. Plaintiffs' Section 10(b) and Rule 10b-5 Claims

          Count 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.”[10] In re NAHC, 306 F.3d at 1330 (internal quotation marks and citation omitted).

         To 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.

         1. Material misrepresentations on the part of Defendants Chou, Chen, and Kulicke

         Defendants 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).

         In this 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.[11] (Am. Compl. ΒΆ 25.) These ...


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