See Hennessy v. Penril Datacomm Networks, Inc. To establish a claim for securities fraud under these provisions, a plaintiff must prove 1 a misstatement or omission 2 of a material fact 3 made with scienter 4 on which the plaintiff relied 5 that proximately caused the plaintiff's injury. Cyrak v. Lemon, F. Scienter is defined as "a mental state embracing intent to deceive, manipulate, or defraud.
Hochfelder, U. A plaintiff will not survive a Rule 9 b motion to dismiss on the pleadings by simply alleging that a defendant had fraudulent intent. In order to adequately plead scienter, a plaintiff must set forth specific facts to support an inference of fraud.
Tuchman v. DSC Communications Corp. Alleged facts are sufficient to support such an inference if they either 1 show a defendant's motive to commit securities fraud, or 2 identify circumstances that indicate conscious behavior on the part of the defendant. Plaintiffs allege that Defendants knew, but did not disclose, that Software Spectrum's earnings were materially affected by financial incentives from its suppliers based on product sales goals. Plaintiffs allege that the Defendants knew prior to the fiscal quarter beginning October 1, , but did not disclose, that earnings for that quarter would suffer due to a failure to meet product sales goals in the previous quarter.
Plaintiffs further allege that Defendants stated Software Spectrum's earnings for the first nine months of in a manner inconsistent with generally accepted accounting principles, and that Defendants changed auditors because their former auditors insisted that credits be removed and earnings restated. We must determine whether these allegations suffice to indicate conscious behavior on the part of Defendants. A number of our recent cases have addressed the degree of particularity with which a plaintiff must plead a securities fraud claim in order to identify conscious behavior on the part of the defendant.
In Tuchman, shareholders brought an action for securities fraud against the corporation and its officers. In an attempt to identify circumstances that indicate conscious behavior on the part of the defendants, the Tuchman plaintiffs alleged that corporate officers made contradictory statements regarding the corporation's commitment to quality, the adequacy of the testing of corporate software, the reasons for corporate telephone network outages, and the reasons for the corporation's economic downturn.
We found these allegations inadequate to indicate conscious behavior on the part of the defendants, noting that "the complaint contains no assertion of any fact that makes it reasonable to believe that the defendants knew that any of their statements were materially false or misleading when made.
We thus upheld a Rule 9 b dismissal on the pleadings for failure to adequately plead scienter. In Melder v. Morris, 27 F. The Melder plaintiffs attempted to establish scienter by alleging that the corporation's officers, directors, accountants, and underwriters entered into a conspiracy to inflate the price of the corporation's stock.
We found these allegations insufficient to indicate the defendants' motive to commit securities fraud, and we also found them insufficient to identify circumstances that indicate conscious behavior by the defendants. In so holding, we noted that rote conclusory allegations that the defendants "knowingly did this" or "recklessly did that" fail to meet the heightened pleading requirements of Rule 9 b. In the present case, Plaintiffs' first allegation claims that Defendants knew, but did not disclose, that Software Spectrum's earnings were materially affected by financial incentives from its suppliers based on product sales goals.
Both of these documents contain a paragraph, under the general heading "Risk Factors," titled "Reliance on Rebates, Marketing Funds and Volume Discounts. Thus, Defendants did disclose that Software Spectrum's earnings were materially affected by substantial incentives from suppliers in the form of rebates.
In light of the language in Software Spectrum's prospectuses, Plaintiffs' allegation is reduced to the claim that although Defendants disclosed reliance on rebates generally, Defendants did not specifically disclose reliance on rebates based on sales goals. At most, Plaintiffs' first allegation indicates that Defendants' disclosure was incomplete; however, such an allegation falls far short of identifying conscious behavior on the part of Defendants.
See Tuchman, 14 F. Plaintiffs next allege that, according to industry custom, rebates paid by a supplier in one quarter are based on a company's sales of the supplier's products in the previous quarter. Accordingly, Plaintiffs allege, Defendants must have known, but did not disclose, that Software Spectrum's earnings for the fiscal quarter beginning October 1, , would suffer because Defendants must have known that Software Spectrum failed to meet product sales goals in the previous quarter.
However, Plaintiffs do not plead specifically what Software Spectrum's rebate arrangements with its suppliers actually were, and consequently do not allege who at Software Spectrum would have had knowledge about the award of future rebates or when such a person would have obtained such knowledge. In fact, Plaintiffs' bare allegation about industry custom is precisely the type of conclusory allegation that motivated the heightened pleading standards of Rule 9 b in the first place. Therefore, we find that this allegation also fails to set forth specific facts that indicate conscious behavior on the part of Defendants.
Lastly, Plaintiffs allege that Defendants published Software Spectrum's earnings for the first nine months of in a manner inconsistent with generally accepted accounting principles, 6 and that Defendants changed auditors because their former auditors insisted that credits be removed and earnings restated. As we have stated previously, "[T]he mere publication of inaccurate accounting figures, or a failure to follow GAAP, without more, does not establish scienter.
The following table sets forth information regarding the grant of stock options during the fiscal year ended April 30, to the Named Officers.
Each of the grants to the Named Officers was made on the condition that the stock options granted to the Named Officers on June 14, be surrendered and cancelled. Each of the Named Officers has agreed to surrender such options in exchange for the following number of replacement options: Judy O. Sims - 25,; Keith R. Coogan - 20,; Roger J. King - 13,; Deborah A. Nugent - 13,; and Richard G.
Sims - 13, The following table sets forth information regarding the exercise of stock options during the fiscal year ended April 30, by the Named Officers and the estimated values of unexercised options held by such individuals at fiscal year-end. The Management Continuity Agreements specify terms of employment, including provision for severance benefits, for a covered executive following a change of control.
The purpose of the Management Continuity Agreements is to serve the best interests of the Company and its shareholders by providing incentives for a covered executive, to both render impartial advice and services during the pendency of a takeover proposal and to be available and render services during at least a crucial four-month transition period following a change of control. Although, the agreement is entered into before a change of control, the term of the Management Continuity Agreements do not begin, and the Management Continuity Agreements do not become effective, until a change of control occurs.
The agreement provides continued employment for a two year term commencing upon a change of control on terms equivalent to the terms of employment existing immediately before the change of control.
The terms of employment covered include position, responsibilities, compensation and benefits. And the principal reason is Software Spectrum Inc. When Egghead officials announced the deal, which cut Egghead and its Spokane employment in half, they said the sales agreement required Software Spectrum to operate here for three years.
Judy O. She said the company would stay in Spokane because it wanted to, not because it had to. Like Egghead, Software Spectrum started out as a tiny software storefront operation in Richard and Judy Sims and their neighbors, Frank and Janet Tendle, were all accountants who yearned to go into business for themselves. Someone told them software was going to be hot, so despite the lack of any computer industry background, they opened their store.
They decided to shift from retailing to direct sales to some of their old corporate accounting customers. Despite their similar roots, the differences between Software Spectrum and Egghead are stark.
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