In re Silicon Graphics Inc. Securities Litigation

IN RE SILICON GRAPHICS, INC. SECURITIES LITIGATION No. C 96-0393 FMS United States District Court Northern District of California Filed September 25, 1996 ORDER GRANTING MOTIONS TO DISMISS CLASS ACTION AND DERIVATIVE COMPLAINTS
INTRODUCTION         Pending before the Court are motions to dismiss brought by individual defendants and defendant Silicon Graphics, Inc. ("SGI") (collectively "defendants"). Defendants have moved to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). These motions require the Court to consider whether plaintiffs' allegations against these defendants are insufficient as a matter of law.
        There are two complaints before the Court. In the class action, plaintiff alleges that SGI and the individual defendants have violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. sections 78j(b) and 78t(a). In the derivative action, plaintiff alleges breach of fiduciary duty and gross negligence by all defendants, and violation of section 25402 of the California Corporate Securities Act of 1968, Cal. Corp. Code § 25402, by those defendants who sold SGI stock.
        Plaintiff brings the class action on behalf of herself and all persons who purchased SGI stock between October 19, 1995 and December 29, 1995, except defendants, members of their immediate families, and any entity in which a defendant has a controlling interest. Plaintiff brings the derivative action pursuant to Federal Rule of Civil Procedure 23.1 on behalf of the corporation.

BACKGROUND         Silicon Graphics, Inc. is a Delaware corporation that designs and sells desktop graphics work stations, multi-processor servers, advanced computing platforms, and application software. The company's stock is traded on the New York Stock Exchange. The complaints arise out of fluctuations in SGI's stock price during the fall of 1995. ¹
        On August 21, 1995, SGI stock reached an all-time high of $44-7/8, before declining into the high $20s, due to market concern that SGI would be unable to maintain its historic forty percent growth rates given increased competition. On October 19, 1995, SGI announced the results for the first quarter of fiscal year 1996. These results, while showing thirty-three percent growth in revenue, were viewed by the market as disappointing.
        SGI reassured analysts and investors that it still expected to meet its growth targets. In a press release and conference call with analysts, SGI provided explanations for the shortfall, and suggested reasons why the second quarter results would be better. SGI issued periodic updates throughout the fall reasserting its confidence about second quarter results.
                In December 1995, on rumors that the second quarter results might also be lower than anticipated, the stock fell again, this time dipping into the mid-$20 range. When SGI confirmed the rumors in early January 1996, the stock fell to a low of $22 per share. In response, plaintiff filed her class action complaint on January 29, 1996. The derivative action was filed on March 22, 1996. Both complaints relate to the December/January 1995 drop in SGI's stock price.
        In the class action, plaintiff alleges that SGI and the individual defendants ² violated federal securities law by issuing false and misleading information about the company after the disappointing first quarter, in an effort to inflate the price of SGI stock for the purpose of selling their own stock at a substantial profit.
        In the derivative action, plaintiff alleges that SGI and the individual defendants ³ behaved with gross negligence and breached their fiduciary duty to the corporation in issuing false and misleading information about the company as described above, and that the selling defendants violated California securities law by engaging in insider trading to the corporation's detriment.

I.        Plaintiff's Allegations         Plaintiff alleges that after the price of SGI stock fell to $28-3/8 in early October 1995, defendants became concerned about protecting their own investments, the reputation of their Chairman and CEO, and SGI's ability to use its stock to acquire other companies. Aware that second quarter results would be lower than anticipated, defendants devised a scheme to boost stock prices to protect these interests.
        As a part of their scheme, defendants made material misrepresentations about SGI's growth prospects and general financial condition, and failed to disclose adverse facts about SGI's products, management, and competitors. For example, defendants asserted a high sales volume when in fact sales were materially below SGI's internal plan. SGI also failed to disclose that it had insufficient component parts to produce enough Indigo2 IMPACT Workstations to meet demand. Defendants disseminated this false and misleading information to the market through SGI's report to shareholders, numerous press reports, and meetings with securities analysts.
        Defendants' efforts to boost stock prices to protect their own interests were a success. As a result of the misrepresentations, SGI's stock rose to a new peak of $38-3/4. Meanwhile, aided by an SGI one million share stock repurchase plan, defendants sold over 400,000 shares of SGI stock. Defendants reaped combined profits of over $14 million.
                The scheme concluded with SGI's January 2, 1996 revelation of "disastrous" second quarter results, which sent the stock plummeting to $21-1/8. Plaintiff, class members, and the corporation suffered financial damages as a result.
        Plaintiff seeks to impose direct liability on Defendants in the class action for their individual misrepresentations, participation in the fraudulent scheme, insider trading, and under a theory of control person liability. Plaintiff seeks to impose direct liability on defendants in the derivative action for gross negligence, breach of fiduciary duty, and insider trading.

II.        Defendant's Rebuttal         Defendants contend that SGI has experienced rapid growth in recent years, and continued to grow even during the class period. During the fall of 1995, defendants conducted business as usual, making normal statements to shareholders, the press, and industry analysts about the company's performance and anticipated performance. In hindsight, SGI's forecasts may have been optimistic, but there was no fraud involved.
        Defendants argue that the class action claim is not alleged with enough specificity to meet the requirements of Federal Rule of Civil Procedure 9(b). Further, plaintiff does not adequately plead scienter under the Private Securities Litigation Reform Act, which requires a strong inference of actual knowledge of wrongdoing. Defendants are also immunized under the Private Securities Litigation Reform Act "safe harbor" provision and the "bespeaks caution" doctrine, because their SEC filings warned of the risks at issue in this case.
        Defendants also argue that the derivative claim must be dismissed because plaintiff failed to make a demand on SGI that the corporation enforce its own rights against defendants. Further, plaintiff has not pleaded particularized facts alleging breach of fiduciary duty. Finally, the gross negligence claims in the derivative action are barred by the controlling Delaware law.

DISCUSSION
I.        Legal Standards

        A.        Federal Rule of Civil Procedure 12(b)(6)
        A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of the complaint. North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). Dismissal of an action pursuant to Rule 12(b)(6) is appropriate only where it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1482 (9th Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).
        In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court must assume all factual allegations to be true and must construe them in the light most favorable to the nonmoving party. North Star, 720 F.2d at 580. Legal conclusions need not be taken as true merely because they are cast in the form of factual allegations, however. Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir.), cert. denied, 454 U.S. 1031 (1981). Further, the Court need not accept as true allegations that contradict facts that have been judicially noticed. Employers Ins. v. Musick, Peeler, & Garrett, 871 F. Supp. 381 (S.D. Cal. 1994).
        The Court may consider documents outside of the pleadings in support of a Rule 12(b)(6) motion to dismiss if the document is referenced in plaintiff's complaint and the document is "central" to plaintiff's claim. See Venture Assoc. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (9th Cir. 1993); Glenbrook Homeowners Ass'n v. Scottsdale Ins. Co., 858 F. Supp. 986 (N.D. Cal. 1994); see also Mack v. South Bay Beer Distrib., Inc., 798 F.2d 1279 (9th Cir. 1986). The Court may also take judicial notice of public records outside the pleadings. MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986).

        B.        Federal Rule of Civil Procedure 9(b)
        Allegations of fraud must satisfy the requirements of Rule 9(b) to survive a motion to dismiss. Rule 9(b) provides: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." The intent of Rule 9(b) is to prevent the filing of a complaint as a pretext for the discovery of unknown wrongs. Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985).
        To satisfy Rule 9(b), securities class action plaintiffs must allege fraud with enough particularity to give defendants notice of the specific charges against them so that defendants may respond to the charges. Kaplan v. Rose, 49 F.3d 1363, 1369 (9th Cir. 1994), cert. denied, 116 S. Ct. 58 (1995); Neubronner v. Milken, 6 F.3d 666, 671-72 (9th Cir. 1993). A complaint satisfies this standard if it "state[s] precisely the time, place, and nature of the misleading statements, misrepresentations, and specific acts of fraud." Kaplan, 49 F.3d at 1370; see also Neubronner, 6 F.3d at 672.
        Rule 9(b) also requires that plaintiff plead with sufficient particularity attribution of the alleged misrepresentations or omissions to each defendant; the plaintiff is obligated to "distinguish among those they sue and enlighten each defendant as to his or her part in the alleged fraud." Erickson v. Kiddie, 1986 WL 544, *7 (N.D. Cal. 1986) (quoting Bruns v. Ledbetter, 583 F. Supp. 1050, 1052 (S.D. Cal. 1984)); see also Lubin v. Sybedon Corp., 688 F. Supp. 1425, 1443 (N.D. Cal. 1988) (Rule 9(b) violated by plaintiff's "'dragnet' tactic of indiscriminately grouping all of the individual defendants into one wrongdoing monolith.").
        The requirements of Rule 9(b) may be "relaxed as to matters peculiarly within the opposing party's knowledge," if the plaintiffs cannot be expected to have personal knowledge of the facts prior to discovery. Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987) (citations omitted).

II.        The Class Action

        A.        Section 10(b)
        Section 10(b) makes it unlawful for any person "[t]o 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 [SEC] may prescribe." 15 U.S.C. §§ 78j(b). One such rule is Rule 10b-5, which makes 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 (1995). To successfully allege securities fraud under Rule 10b-5, plaintiffs must allege reliance on a material misstatement and scienter. See Hanon v. Dataproducts Corp., 976 F.2d 497, 506-07 (9th Cir. 1992).
        Plaintiffs may allege reliance using the "fraud on the market" theory. "In the usual claim under Section 10(b), the plaintiff must show individual reliance on a material misstatement. Under the fraud on the market theory, the plaintiff has the benefit of a presumption that he has indirectly relied on the alleged misstatement, by relying on the integrity of the stock price established by the market." In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113-14 (9th Cir. 1989), cert. denied, 496 U.S. 943 (1990). Defendants may respond to a claim of fraud on the market by asserting that the information allegedly withheld from the market had in fact entered the market. Id. at 1114.
        In Central Bank v. First Interstate Bank, 114 S.Ct. 1439 (1994), the Supreme Court held that "§ 10(b) . . . prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act. . . . The proscription does not include giving aid to a person who commits a manipulative or deceptive act." Id. at 1448. The Supreme Court found that section 10(b) did not create liability for aiding and abetting the securities violations of others; such secondary participation is beyond the scope of the statute.

        1.        Pleading Standard Under the Private Securities Litigation Reform Act of 1995
        Congress recently enacted the Private Securities Litigation Reform Act of 1995 ("SRA"), Pub. L. No. 104-67, which amends the Securities Exchange Act of 1934, 15 U.S.C. § 78a. The SRA applies to private class actions, such as this one, brought pursuant to the Federal Rules of Civil Procedure. § 27(a)(1).
        Prior to enactment of the SRA, the pleading standard for private securities cases was well-established in this Circuit. Plaintiffs were required to plead the allegedly false or misleading statements and why they were false or misleading. See, e.g., In re Glenfed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994), cert. denied 116 S. Ct. 1020 (1996); In re Wells Fargo Sec. Litig., 12 F.3d 922 (9th Cir. 1993). Plaintiffs were permitted to aver scienter generally. See, e.g., id.
        In enacting the SRA, Congress adopted a more stringent pleading standard. In addition to requiring plaintiffs to specify the allegedly false or misleading statements and describe how they are false or misleading, § 21D(b)(1)(B), the SRA now requires plaintiffs to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." § 21D(b)(2).
        According to the Conference Committee Report accompanying the SRA, the "strong inference" pleading standard was adapted from the Second Circuit approach to private securities cases. H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. 41 (1995) ("Conf. Rep."). In the Second Circuit, a plaintiff is required to allege specific facts that either (1) "constitut[e] circumstantial evidence of either reckless or conscious behavior," or (2) "establish a motive to commit fraud and an opportunity to do so." In re Time Warner, Inc. Sec. Litig., 9 F.3d 259, 269 (2d Cir. 1993), cert. denied, 114 S.Ct. 1397 (1994).
        Congress did not simply codify the Second Circuit standard, however. Indeed, the Conference Committee Report indicates that Congress intended to strengthen it:

Because the Conference Committee intends to strengthen existing pleading requirements, it does not intend to codify the Second Circuit's case law interpreting this pleading standard. FN 23.

        FN 23. For this reason, the Conference Report chose not to include in the pleading standard certain language relating to motive, opportunity, or recklessness.

Conf. Rep. at 41 & n.23. In fact, the Senate bill under consideration by the Conference Committee included an amendment that would have codified the Second Circuit's standard, and would have allowed a plaintiff to use allegations of recklessness or motive and opportunity to establish fraudulent intent. Amend. 1485, S. 240, 104th Cong., 1st Sess. (1995). The Conference Committee eliminated this amendment from its version of the bill.
        In his veto message to Congress, President Clinton informed Congress that he would be prepared to support the high pleading standard of the Second Circuit, but expressed concern that Congress had "ma[d]e crystal clear in the Statement of Managers their intent to raise the standard even beyond that level." H.R. Doc. No. 104-150, 104th Cong., 1st. Sess. 240 (1995). The President wrote that he therefore felt compelled to veto the bill. Further emphasizing its "crystal clear" intent to heighten the pleading standard, Congress overrode the veto.
        Based on this legislative history, the Court finds that Congress did not intend to codify the Second Circuit standard under the SRA. Because Congress chose not to include that language from the Second Circuit standard relating to motive, opportunity, and recklessness, Congress must have adopted the Conference Committee view and intended that a narrower first prong apply. The Court therefore holds that plaintiff must allege specific facts that constitute circumstantial evidence of conscious behavior by defendants. ⁴
        Plaintiff raises other legislative history and statutory interpretation arguments that she claims compel the conclusion that Congress adopted the Second Circuit standard. The Court disagrees. The Conference Committee's deletion of the Second Circuit standard from the final bill "strongly militates against a judgment that Congress intended a result that it expressly declined to enact." See Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186, 200 (1974); see also People for Environmental Progress v. Leisz, 373 F. Supp. 589, 592 (C.D. Cal. 1974) (conference committee's deletion of proposed amendment from bill is "significant" and "persuasive" evidence of Congressional intent).
        The legislative history cited by plaintiff is unpersuasive. Statements by Representative Bliley, 141 Cong. Rec. H14,040 (Dec. 6, 1995), and Senator Moseley-Braun, 141 Cong. Rec. S17,983 (Dec. 5, 1995), that the SRA does not abolish liability for reckless conduct are irrelevant. They were made prior to the President's veto message and the subsequent override of that veto. Statements by Representatives Moran, 141 Cong. Rec. H15,218 (Dec. 20, 1995), Lofgren, 141 Cong. Rec. 15,219 (Dec. 20, 1995), and Deutsch, 141 Cong. Rec. 15,220 (Dec. 20, 1995), and Senators Domenici, 141 Cong. Rec. S19,044-45, 19,150-151 (Dec. 21, 1995), Dodd, 141 Cong. Rec. S19,068 (Dec. 22, 1995), and Bradley, 141 Cong. Rec. S19,149 (Dec. 22, 1995), made after the veto but before adoption of the bill generally support the Court's interpretation. They merely admonish the President for quibbling with the language of the bill, and assert that it adopts the Second Circuit standard at least in part. E.g., 141 Cong. Rec. H15,219 (Dec. 20, 1995) (statement of Rep. Lofgren) ("These are very technical issues, and I think the sounder course is to override this veto."); 141 Cong. Rec. S19,149 (Dec. 22, 1995) (statement of Sen. Bradley) ("In fact, the language of the bill does codify the second circuit standard in part--and the statement of managers says so.").
        Further, these are the statements of only a few individual members of a Congress that ultimately adopted the Conference Report and passed the bill as formulated by the Conference Committee. As the Supreme Court has noted, "the authoritative source for finding the Legislature's intent lies in the Committee Reports on the bill, which 'represen[t] the considered and collective understanding of those Congressmen involved in drafting and studying proposed legislation.'" Garcia v. United States, 469 U.S. 70, 76 (1984) (quoting Zuber v. Allen, 396 U.S. 168, 186 (1969)); see also RTC v. Gallagher, 10 F.3d 416, 421 (7th Cir. 1993) (Conference Report "is the most persuasive evidence of congressional intent besides the statute itself"). Committee reports, not "[s]tray comments by individual legislators," provide the best expression of legislative intent. In re Kelly, 841 F.2d 908, 912 n.3 (9th Cir. 1988).
        Plaintiff also refers to the proportionate liability provisions of the SRA, § 201(g), to support her position that liability for recklessness still exists under the new law. Specifically, she points to section 201(g)(2)(A), which states, "Any covered person against whom a final judgment is entered in a private action shall be liable for damages jointly and severally only if the trier of fact specifically determines that such covered person knowingly committed a violation of the securities laws." (emphasis added).
        Plaintiff argues that Congress would not have made the distinction between knowing and non-knowing persons unless liability for recklessness was possible under the SRA. This provision, however, applies generally to the Securities Exchange Act of 1934, and not just the SRA amendments. See § 201(a) (section 201 amends 21D); § 27(b) (section 21D amends "Title I of the Securities Exchange Act of 1934 (78a et seq.)"). Thus, Congress was making the distinction between knowing violators under section 21D of the SRA, and non-knowing control persons under section 78t of the original Act, for example.
        In making her counter-arguments, plaintiff attempts to resist the political reality underlying the SRA. In adopting the SRA, Congress sought to "protect investors, issuers, and all who are associated with our capital markets from abusive securities litigation." Conf. Rep. at 32. It therefore implemented "needed procedural protections to discourage frivolous litigation." Id. As the Ninth Circuit recently affirmed, courts should be mindful of such policy considerations in construing federal securities law. McGann v. Ernst & Young, 1996 WL 506908, *6 (9th Cir. 1996) (applying Congress's "broad remedial goals" for Depression-era securities law in finding liability of accountants under section 10(b)). The Court's interpretation is most consistent with Congress's policy concerns and legislative intent.
        With respect to forward-looking statements, Congress expressly adopted a similarly strong pleading standard. The SRA provides that defendants are not liable for forward looking statements accompanied by cautionary language unless the plaintiff proves that the statement "was made with actual knowledge" that it was false or misleading. § 21E(c)(1)(B).
        Under the SRA, forward-looking statements are defined broadly to include statements of: financial projections, plans and objectives, future economic performance, assumptions underlying any of these, reports containing any of these, and SEC filings containing these or other projections or estimates. § 21E(I)(1)(A-F).
        Thus, in order to state a private securities claim, plaintiff must now allege false or misleading statements, describe how the statements are false or misleading, and create a strong inference of knowing misrepresentation on the part of the defendants. This standard applies whether the statements in question are forward-looking or not.

        2.        Individual Defendants

                a.        False and Misleading Statements
        Under Central Bank, only primary participants in a section 10(b) violation may be held liable. Thus, with regard to allegedly false and misleading statements, only speakers may properly be held liable. 114 S. Ct. at 1448. The only defendants identified as speakers in plaintiff's complaint are SGI, McCracken, Sekimoto, and Oswald. Additionally, the statements attributed to Sekimoto (July 13, 1995) and Oswald (July 25, 1995), as well as certain statements attributed to McCracken (July 10, and July 25, 1995), were made before the alleged fraud began in September 1995, ¶ 7, and thus are not actionable. The complaint therefore may state a claim for allegedly false or misleading statements in violation of section 10(b) only against defendants SGI and McCracken, and only as to those statements allegedly made on or after October 19, 1995. Claims against other defendants for allegedly false or misleading statements in violation of section 10(b) are dismissed.
        In addition to the foregoing, plaintiff may state a claim against all defendants except Shapiro with regard to false and misleading statements in the November 1995 Report to Shareholders. In the Ninth Circuit, allegations of securities fraud based on claims of allegedly false and misleading statements in "prospectuses, registration statements, annual reports, press releases, or other 'group-published information,'" may rely on a presumption that these statements are the collective work of those individuals with direct involvement in the day-to-day affairs of the company. In re Glenfed, Inc., 60 F.3d 591 (9th Cir. 1995); Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1440 (9th Cir. 1987). ⁵ Under the group pleading presumption, plaintiffs may satisfy the specificity requirement of Rule 9(b) by pleading the alleged misrepresentations with particularity and indicating the roles of individual defendants in the alleged misrepresentations where possible. Id.
        Plaintiff alleges false and misleading statements in one document subject to the group pleading doctrine--the November 1995 Report to Shareholders. ¶ 49. According to plaintiff, the report included a letter signed by McCracken that stated, "we introduced a number of important products in the first quarter. These included the Indigo2 IMPACT digital workstation . . . . Announced in July, Indigo2 IMPACT began shipping in volume in September." ¶ 49.
        Plaintiff alleges that this statement was false and misleading because SGI was, in reality, unable to ship volume because of problems with the Toshiba component parts. ¶ 52 (b)-(d). Plaintiff further alleges that defendants McCracken, Baskett, Burgess, Goggiano, Ramsey, Sekimoto, Kelly, and Oswald, have day-to-day involvement in the company by virtue of their senior management positions. ⁶ These allegations meet the requirements of the group pleading doctrine; therefore, plaintiff may state a claim against these defendants with respect to this document.

                b.        Fraudulent Scheme
        Plaintiff argues that all defendants can be held liable under section 10(b) for their "scheme to defraud." Complaint For Violation of the Securities Exchange Act of 1934 and the Cal. Corp. Code at 27-29. She alleges that all defendants "participated in drafting, reviewing, and/or approving the misleading statements, releases, reports, and other public representations of and about SGI." ¶ 58.
        It is true that section 10(b) and rule 10b-5 prohibit more than just false or misleading statements. The text of section 10(b) prohibits the use of "any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 78j. Rule 10b-5 uses similar terms, prohibiting the employment of "any device, scheme, or artifice to defraud." 17 C.F.R. § 240.10b-5.
        Plaintiff pleads no facts creating an inference that any scheme existed. She does not state any facts in support of her allegation that all defendants participated. Moreover, merely alleging that all the defendants had access to negative information and that all sold stock does not create an inference that they were employed in a scheme to devise and disseminate false statements to the public.

                c.        Insider Trading
        Plaintiff also alleges that, as insiders, defendants had a duty to disclose material negative information prior to selling their stock. In failing to do so, plaintiff alleges defendants violated rule 10b-5. The Supreme Court acknowledged this type of claim in Chiarella v. United States, 445 U.S. 222, 227-230 (1979).
        In order to state a claim, however, plaintiff must plead with specificity that she traded contemporaneously with defendants. Neubronner v. Milken, 6 F.3d 666, 670 (9th Cir. 1993). This rule assures that only parties who have traded with someone who had an unfair advantage will be able to maintain insider trading claims; those who did not trade contemporaneously could not have suffered a disadvantage from the insider's failure to disclose. Courts agree that a plaintiff's trade must have occurred after the wrongful insider transaction. Alfus v. Pyramid Technology Corp., 745 F. Supp. 1511, 1522 (N.D. Cal. 1990).
        The exact contours of contemporaneous trading have not been defined. See Neubronner, 6 F.3d at 670. In establishing the rule, however, the Ninth Circuit adopted the Second Circuit's reasoning in a case holding that trades occurring approximately a month apart were not contemporaneous. Id. at 669-70. Since Neubronner, at least one court in this District has held that plaintiffs must show trades within fourteen days of each other to plead contemporaneousness. In re Verifone Sec. Litig., 784 F. Supp. 1471, 1489 (N.D. Cal. 1992).
        This Court interprets the requirement even more strictly. Given that stock trades settle within three days, and allowing for the possibility of an intervening three-day weekend, only purchases within six days of insider sales are truly contemporaneous. Once an insider's sale settles, other traders are no longer in the market with that insider and risk no relative disadvantage from that insider's failure to disclose.
        Simply pleading the dates of the parties' sales is not sufficient. Plaintiff must compare the dates, and explain why the transactions are contemporaneous. Because the complaint fails to do so, plaintiff's claims of insider trading are dismissed.

        3.        Analysis of Remaining Claims ⁷

                        a.        False and Misleading Statements ⁸
        Plaintiff alleges sixteen false or misleading statements by defendants between July 10, 1995 and December 19, 1995. ¶¶ 40-51. The content of these statements includes (1) projections of SGI's growth rates, ¶¶ 41, 42, 45, 46, 48, 50; (2) optimism and assurances about demand for and supply of the Indigo2 IMPACT workstation, ¶¶ 40, 41, 42, 44, 45, 48, 49; and (3) explanations and assurances about SGI's performance, ¶¶ 45, 48. To meet the requirements of Rule 9(b), the complaint must "state precisely the time, place, and nature of the misleading statements, misrepresentation, and specific acts of fraud." Kaplan v. Rose, 49 F.3d 1363, 1370 (9th Cir. 1994), cert. denied, 116 S. Ct. 58 (1995).
        The complaint meets this burden with regard to McCracken's statements of October 19, 1995 and November 2, 1995 because it identifies the speaker, the content, the audience, and the date of the misleading statements. The complaint also meets this burden with respect to statements by SGI in its October 19, 1995 press release, with respect to statements by SGI "executives" in the October 19, 1995 conference call and the November 2, 1995 analysts's conference, and with respect to statements in the November 1995 Report to Shareholders, because the complaint gives the defendants sufficient notice. Based on the information pled regarding the time, location, and content of these statements, SGI and its executives can identify who is being charged and with what. For example, plaintiff's allegations regarding statements by SGI executives at the analysts conference arise out of presentations given by "a dozen officers." ¶48. Defendants can identify which executives participated in the conference, gave presentations, and what those presentations covered.
        Plaintiff's claims with respect to statements by SGI executives to Dean Witter on December 15, 1995, ¶ 50, and Smith Barney "in the few days prior to December 19, 1995," ¶ 51, do not meet this burden. Plaintiff does not allege with sufficient particularity the speaker, time, or place of these conversations. Because these statements were not given in an official capacity or in a formal context, they are not as identifiable as the unattributed statements discussed above. For this reason, plaintiff's allegations relating to statements by SGI executives in December 1995 are dismissed.
        In addition to alleging the time, place, and nature of the allegedly false and misleading statements, plaintiff must also explain why the statements were false or misleading when made. Glenfed, 70 F.3d at 1549. Plaintiff alleges nine reasons why defendants' statements were false and misleading:

        SGI's North American sales reorganization had been unsuccessful, resulting in diminished sales, below SGI's targets;

        SGI was unable to produce sufficient Indigo2 IMPACT workstations to meet consumer demand or internal growth targets because it was not receiving sufficient components from Toshiba;

        The components received from Toshiba were submitted without necessary design verification tests, resulting in a low yield of usable parts;

        SGI failed to qualify Toshiba to provide a sufficient quantity of component parts, resulting in low volume production; ⁹

        SGI sales in Germany and the United Kingdom were materially below expectations;

        SGI sales in France were much worse than expected;

        SGI's OEM sales were trending downward; ¹⁰

        SGI was at a competitive disadvantage with Hewlett Packard because it could not ship Indigo2 IMPACT workstations; and

        SGI was at a competitive disadvantage with Sun Microsystems because Sun products were better than SGI's.

¶ 52. Plaintiff further alleges that defendants were aware of these problems during the class period because of negative internal reports comparing SGI's actual results to those budgeted or forecasted. ¶ 30. Plaintiff thus meets her burden of demonstrating why the statements were allegedly false and misleading. See Glenfed, 42 F.3d at 1548-1549 (contemporary condition contrary to defendant's optimistic statements adequately pleads falsity); Fecht v. Price Co., 70 F.3d 1078, 1083 (9th Cir. 1995), cert. denied, 116 S. Ct. 1422 (1996) (allegations of specific problems undermining defendant's claims suffice to explain how they are false).
        Defendant argues that plaintiff fails to establish that any of the alleged omissions are material. The materiality of an omission is a fact-specific determination that should ordinarily be assessed by a jury. Fecht, 70 F.3d at 1080-81. Only if the immateriality of the statement is so obvious that reasonable minds could not differ should the court resolve this question as a matter of law. Id. at 1081.
        Defendants' statements, as pled in the complaint, suggest that the omissions are material. For example, in its July 1995 conference call with analysts, SGI stated that the Indigo2 IMPACT would play a major part in meeting the forty percent growth target. ¶ 41. In its October 1995 conference call, SGI assured analysts that it would achieve forty percent growth because, among other things, its European business was strong, its sales force reorganization was successful, and the Indigo2 IMPACT was selling well. ¶ 45. The Court finds that such allegations of internal, production, or market conditions resulting in diminished sales or sales under target are not immaterial as a matter of law; the claims, therefore, cannot be dismissed.
        Plaintiff's allegation that defendants withheld information that their products were not competitive with Sun Microsystems' is not actionable. Federal securities laws "do not ordain that the issuer of a security compare itself in myriad ways to its competitors, whether favorably or unfavorably." In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1419 (9th Cir. 1994) (quoting In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 375 (3d Cir. 1993)). Claims relating to this allegation therefore are dismissed with prejudice.

                b.        Scienter
        In establishing circumstantial evidence of conscious behavior or actual knowledge, as required by the SRA, plaintiff must do more than speculate as to defendants' motives or make conclusory allegations of scienter; plaintiff must allege specific facts. See Wexner v. First Manhattan Co., 902 F.2d 169, 172-73 (2d Cir. 1990); Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978). Although plaintiff does not, as defendants assert, simply hold predictions up against the backdrop of what actually happened, her allegations nonetheless fall short of pleading a strong inference of fraud.
        Plaintiff seeks to couple allegations of defendants' awareness of negative internal reports with their false and misleading statements and stock sales to create a strong inference of fraud. Plaintiff claims that:

Each of the Individual Defendants was aware of Silicon Graphics' fiscal 1996 forecast and budget and of internal reports, comparing Silicon Graphics' actual results to those budgeted and/or forecasted. Based on the negative internal reports of the Company's actual performance compared to that budgeted and forecasted, the Individual Defendants each knew Silicon Graphics was plagued by an inability to sell, i.e., ship, as many Indigo2 IMPACT Workstations as planned . . . .

¶ 30. The Court finds that plaintiff's allegations are not specific enough to raise a strong inference of fraud. Every sophisticated corporation uses some kind of internal reporting system reflecting earlier forecasts; allowing plaintiff to go forward with a case based on general allegations of "negative internal reports" would expose all those companies to securities litigation whenever their stock prices dropped. ¹¹
        Recognizing this problem, the Second Circuit has held that unsupported general claims of the existence of internal reports are insufficient to survive a motion to dismiss. Second Circuit courts require plaintiffs to specifically identify alleged internal reports, providing names and dates. San Leandro Emergency Med. Plan v. Philip Morris, 75 F.3d 801, 812-13 (2d Cir. 1996). Having found that the pleading standard under the SRA is at least as strict as the Second Circuit's, the Court cannot require anything less of plaintiff in this case.
        Even if plaintiff could properly allege negative internal reports, defendants argue, their stock trading does not support an inference of fraud because the sales are not "unusual or suspicious." Memorandum of Points and Authorities in Support of Defendants' Motion to Dismiss the Securities Class Action ("Defs.' Mem") at 24-27 (citing Acito v. Icemera Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995) and In re Apple Computer Sec. Litig., 886 F.2d 1109, 1117 (9th Cir. 1989), cert. denied, 496 U.S. 943 (1990)). In evaluating this argument, the Court takes judicial notice of defendants' filings with the SEC, which are public documents.
        According to defendants' Forms 3 and 4 and SGI's 1995 proxy statement, defendants sold only a small fraction of their total SGI holdings. Defendants collectively had available millions of options that could have been exercised and sold during the class period. ¹² Considered in that context, defendants' actual sales were relatively small, and do not give rise to a strong inference of fraud. See Worlds of Wonder, 35 F.3d at 1425; Duncan v. Pencer, [1995-1996 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,043, at 94,208 (S.D.N.Y. 1996). Furthermore, the sales at issue were generally consistent in amount with sales made in previous quarters, suggesting they were not motivated by an intent to defraud. See Apple, 886 F.2d at 1117. Given these facts, defendants's sales do not support an inference of fraud.
        Because plaintiff fails to adequately plead scienter, her claims against all defendants are dismissed.

        B.        Defenses to the 10b-5 Allegations
        Because plaintiff's case has been dismissed for other reasons, these defenses are moot at this time. In order to eliminate them as issues with regard to any amended complaint, however, the Court addresses them below.

        1.        The Safe Harbor Provision
        Section 21E of the SRA creates a "safe harbor," protecting forward-looking statements, written or oral, identified as forward-looking and accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those predicted. § 21E(c)(1)(A). ¹³ Defendants argue that their statements fall within this safe harbor provision.
        In considering a motion to dismiss based on the safe harbor provision of the SRA, Congress mandated that courts restrict their review to "any statement cited in the complaint and cautionary statement accompanying the forward-looking statement, which are not subject to material dispute, cited by the defendant." § 21E(e). The Court must evaluate whether the cautionary statements cited by defendants as protecting them against liability are subject to material dispute before considering the application of the provision.
        Defendants argue that SGI began to give safe harbor warnings as early as July 25, 1995, and that it again gave a warning during its October 19, 1995 conference call. In support of this argument, SGI submits the declaration of Stanley J. Meresman, SGI's Chief Financial Officer, who avers that he read the written warnings attached to his declaration at the outset of the July 25, 1995 and October 19, 1995 conference calls.
        Under Federal Rule of Civil Procedure 12(b)(6), such extrinsic evidence may not be considered on a motion to dismiss, because it is not referenced in plaintiff's complaint nor subject to judicial notice as a public record. Further, as a factual claim by an interested party, this evidence may be subject to material dispute and is therefore improper in a motion to dismiss pursuant to § 21E(e).
        Although defendants may appropriately argue the safe harbor provision on a motion for summary judgment, it is not grounds for dismissal at this stage.
        
        2.        The Bespeaks Caution Doctrine
        Defendants claim that their statements may alternatively be immunized under the "bespeaks caution" doctrine. The bespeaks caution doctrine is essentially a judicially-created safe harbor, comparable to the one enacted by Congress. It "provides a mechanism by which a court can rule as a matter of law . . . that defendants' forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud." Worlds of Wonder, 35 F.3d at 1413 (citation omitted). Simply stated, under the doctrine, projections and other optimistic statements must be understood in context. In re Gupta Corp. Sec. Litig., 900 F. Supp. 1217, 1238 (N.D. Cal. 1994) (citation omitted).
        The doctrine is typically applied in a motion to dismiss or a motion for summary judgment. Worlds of Wonder, 35 F.3d at 1413 (citation omitted). As such, it only immunizes defendants when defendants have invoked enough cautionary language or risk disclosure that reasonable minds could not disagree that the challenged statements were not misleading. Fecht, 70 F.3d at 1082.
        The cases that have invoked the bespeaks caution doctrine in dismissing a complaint have involved allegedly false or misleading statements in documents that also contained substantial cautionary language. See, e.g., San Leandro Emergency Med. Plan v. Philip Morris, 75 F.3d 801, 811 (2d. Cir. 1996); In re Worlds of Wonder Sec. Litig., 35 F.3d 1497 (9th Cir. 1994), cert. denied, 116 S. Ct. 277 (1995); Raab v. General Physics Corp., 4 F.3d 286 (3d Cir. 1993); In re Donald Trump Casino Sec. Litig., 7 F.3d 357 (3d Cir. 1993), cert. denied, 114 S. Ct. 1219 (1994); Romani v. Shearson Lehman Hutton, 929 F.2d 875 (1st Cir. 1991).
        This case is distinguishable, however, because defendants seek to use cautionary statements in various documents to counteract allegedly false and misleading oral statements. The Court is unaware of any case applying the bespeaks caution doctrine under these circumstances. Moreover, there is no evidence associated with the complaint or in public records that defendants even invoked any cautionary statements in connection with the allegedly false or misleading statements. As discussed above, the declaration of an interested party cannot resolve such a factual dispute in a motion to dismiss.
        Defendants may appropriately argue the bespeaks caution doctrine on a motion for summary judgment; however, under the facts alleged, it is not grounds for dismissal at this stage.

        C.        Control Persons' Liability
        Section 20(a) of the 1934 Act imposes joint and several liability on any "person who, directly or indirectly, controls any person liable" for securities fraud under the Act, "unless the controlling person acted in good faith and did not directly or indirectly induce" the violations. The SEC defines "control" as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through ownership of voting securities, by contract, or otherwise." 17 C.F.R. § 230.405 (1995).
        Plaintiffs need not show day-to-day control of the defendant company in order to establish control person liability. O'Sullivan v. Trident Microsystems, [1994-1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,116, 98,917 (N.D. Cal. 1994); In re XOMA Corp. Sec. Litig., [1991-1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 96,491, 92,163 (N.D. Cal. 1991). Plaintiffs must, however, demonstrate "actual power or influence over" the company. Gray v. First Winthrop Corp., 776 F. Supp. 504, 510 (N.D. Cal. 1991). Following these principles, plaintiff must assert that the individual defendants had the power to control or influence SGI in order to state a cognizable claim under Section 20(a).
        Plaintiff alleges control person liability against defendants McCracken and SGI. Defendants do not dispute this allegation. Plaintiff therefore may state a claim against McCracken and SGI for control persons' liability to the extent that she states a claim for violation of section 10(b) and rule 10b-5 by any other defendant as discussed above.

III.        The Derivative Action
        In a derivative action brought by one or more shareholders to enforce the rights of a corporation, Federal Rule of Civil Procedure 23.1 imposes several procedural requirements. The only one in dispute in this motion is the requirement that plaintiff "allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority, and if necessary, from the shareholders or members, and the reasons for the plaintiff's failure to obtain the action or for not making the effort." Fed. R. Civ. P. 23.1.
        This requirement is not merely a technical pleading hurdle; it is based on a fundamental tenet of corporate law that places the responsibility for making decisions in the hands of the board of directors. Johnson v. Hui, 752 F. Supp. 909, 911 (N.D. Cal. 1990). The requirement will be excused only if plaintiff shareholders show that demand would be futile. Id. at 912. To determine whether demand may be excused, the Court looks to the law of the state in which SGI is incorporated--Delaware. Kamen v. Kemper Fin. Serv., Inc., 500 U.S. 90, 108-09 (1991).
        Under Delaware law, demand may be excused where, "under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).

        A.        Directors' Disinterest and Independence
        Plaintiff first challenges the SGI Board of Directors' approval of the stock repurchase plan because, he alleges, defendants acted with the primary purpose of self-enrichment. ¶ 31. Under Delaware law, directors are interested if they are on both sides of a transaction, or if they benefit financially from a transaction. Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 362 (Del. 1993). One director's interest in a challenged transaction is insufficient, without more, to deprive the board of protection under the business judgment rule. Id. at 363. Here, although plaintiff alleges that two members of the Board of Directors profited from sales contemporaneous with the repurchase, he alleges no particularized facts showing why those sales create a reasonable doubt as to the Board's disinterest as a whole. ¹⁴
        The general claim that "if demand were to be made, the Director defendants would be asked to bring an action against themselves," ¶ 56, does not meet the first prong of the Aronson test. In Aronson, the court held that "a bare claim of this sort raises no legally cognizable issue under Delaware corporate law." 634 A.2d at 818. Such claims have been rejected in this district as well. E.g., Johnson v. Hui, 752 F. Supp. 909, 912 (N.D. Cal. 1990).
        Plaintiff's second challenge relates to allegations of federal securities law violations and insider trading. Again, plaintiff fails to allege any facts creating a reasonable doubt that SGI's directors are unable to properly evaluate a demand relating to these claims.

        B.        Directors' Business Judgment
        Plaintiff also challenges the Board's approval of the repurchase plan because, he alleges, the Board did not exercise due care in approving the action. Plaintiff attempts to shift the burden to defendants to show that the approval of the stock repurchase plan was proper. Plaintiff's Opposition to Nominal Defendant Silicon Graphics, Inc.'s Motion to Dismiss Verified Derivative Complaint at 11-12 ("Pl.'s Opp.). Plaintiff has not met his burden of pleading particularized facts creating reasonable doubt about the repurchase plan's propriety, however.
        Plaintiff fails to allege any defect in the Board's approval process, the terms of the plan, or the implementation of the plan. In fact, SGI approved the plan pursuant to its authority under Delaware law to repurchase its own shares. Del. Code Ann. tit. 8, § 160 (1996). Further, SGI explained that the repurchased shares would be used for employee stock option plans. Reply Memorandum of Points and Authorities in Support of Nominal Defendant Silicon Graphics, Inc.'s Motion to Dismiss Verified Derivative Complaint at 7. None of these facts suggest the kind of impropriety required by Aronson.
        Because demand is not excused, plaintiff's claims are dismissed with prejudice.

CONCLUSION         For the foregoing reasons, with respect to the class action, the Court orders that plaintiff's allegations are hereby DISMISSED. Plaintiff may amend the complaint once with respect to these allegations and in accord with this order within twenty days.
        The Court further orders that:

        1.        Plaintiff's allegations concerning the quality of SGI's products as compared to Hewlett-Packard's are DISMISSED WITH PREJUDICE.
        
        2. Plaintiff's allegations with respect to statements by Sekimoto, Oswald, and McCracken prior to the fraud are DISMISSED WITH PREJUDICE.

        For the foregoing reasons, with respect to the derivative action, the Court orders that plaintiff's allegations are hereby DISMISSED.
                
        Discovery in both actions will remain stayed.

SO ORDERED.

United States District Judge


¹ 1. The facts set forth in this section are based on plaintiffs' allegations and are assumed true for purposes of these motions.
         ² . In addition to SGI, plaintiff names nine SGI officers and directors as defendants: Edward R. McCracken, Chairman of the Board and Chief Executive Officer; Forest Baskett, Senior Vice President; Robert K. Burgess, Senior Vice President; Lucille Shapiro, Director; Stephen Goggiano, Senior Vice President; Michael Ramsey, Senior Vice President; Teruyasu Sekimoto, Senior Vice President; William M. Kelly, General Counsel and Secretary; and Thomas J. Oswald, Vice President and Treasurer.
         ³ . In addition to the defendants named in footnote two, plaintiff names: Thomas A. Jermoluk, President and Chief Operating Officer of SGI and Director; Robert R. Bishop, Chairman of Silicon Graphics World Trade Corporation and Director; Allen F. Jacobson, Director; C. Richard Kramlich, Director; James A. McDivitt, Director; Mark W. Perry, Director, and James G. Treybig, Director.
         ⁴ . The Court respectfully disagrees with the opinions in Zeid v. Kimberly, 1996 WL 310124 (N.D. Cal. 1996) and Marksman Partners, L.P. v. Chantal Pharmaceutical Corp., 1996 U.S. Dist. Lexis 7179 (C.D. Cal. 1996), which interpret the SRA as adopting the Second Circuit standard. The Court finds that the legislative history, the most definitive part of which is the Conference Committee Report, establishes the SRA standard as stricter than the Second Circuit standard.
         ⁵ . Central Bank does not prohibit group pleading, it merely prohibits a private right of action for aiding and abetting liability. McDaid v. Sanders, 1996 WL 241605 (N.D. Cal. 1996).
         ⁶ . Plaintiff alleges the same boilerplate day-to-day involvement by defendant Shapiro. While the allegations are plausible with respect to company executives, they are not sufficiently particular to state a claim regarding an outside director. The claim arising out of the November 1995 Report to Shareholders against Shapiro is therefore dismissed.
         ⁷ . This analysis also applies to the insider trading claims to the extent that plaintiff can amend her complaint to satisfy the contemporaneousness requirement.
         ⁸ . The SRA does not change the requirements for pleading false and misleading statements, it only changes the standard for pleading scienter. The Court therefore applies current Ninth Circuit law to this aspect of plaintiff's case.
         ⁹ . Contrary to defendants' contention, the Toshiba allegations are distinguishable from the allegations dismissed by the Ninth Circuit in In re Syntex Corp. Sec. Litig., 1996 WL 518066 (9th Cir. 1996). The inadequate testing claim in Syntex was dismissed because Syntex was making its prediction two years in advance, leaving ample time for the company to remedy any problems. Syntex, 1996 WL 518066, *7-8.
         ¹⁰ . These claims are also distinguishable from the ones dismissed in Syntex. Syntex was merely making optimistic statements about the potential success of new products, Syntex, 1996 WL 518066 at *9, whereas SGI is alleged to have withheld information about continuing operations in the United States and abroad.
         ¹¹ . Other complaints recently filed by plaintiff's counsel illustrate this problem. The Court takes judicial notice of five securities class action complaints filed in U.S. District Courts that contain the same boilerplate allegations of "negative internal reports" found in paragraph thirty of the complaint in this case. These cases are: Hockey v. Medhekar (Alliance Semiconductor), No. 96-0815-MHP, at ¶ 31 (N.D. Cal. 1996); Zeid v. Kimberly (Firefox Communications), No. 96-20136-SW, at ¶ 29 (N.D. Cal. 1996); Wills v. Blum (Pinnacle Micro), No. SA-SC-96-261-GLT, at ¶ 29 (C.D. Cal. 1996); Novak v. Kasaks (Ann Taylor), No. 96-Civ.-3073, at ¶ 40 (S.D.N.Y. 1996); Greebel v. FTP Software, No. 96-10544-JLT, at ¶¶ 41-45 (D. Mass. 1996).
         ¹² . Plaintiff argues that the Forms 3 and 4 are misleading, because they do not reflect whether options are vested and exercisable. Even by plaintiff's calculations, however, defendants would have had millions of exercisable options available at the time of the alleged insider trading.
         ¹³ . The safe harbor provision also provides that a defendant is not liable for a forward looking statement if the plaintiff fails to prove that the statement "was made with actual knowledge" that the statement was false or misleading. § 21E(c)(1)(B). This aspect of the "safe harbor" is discussed above.
         ¹⁴ . Plaintiff's allegation that "the directors of Silicon Graphics are more interested in protecting themselves and their CEO than they are in protecting the company," ¶ 56, is conclusory and therefore insufficient to support the allegation that the Board is controlled by defendant McCracken. Without more, it does not raise a reasonable doubt about the Board's independence.
                Similarly, plaintiff's claim that demand is futile because defendant McCracken views this lawsuit as frivolous is insufficient. ¶ 56. Plaintiff fails to allege facts suggesting that one director's opinion of securities class actions will dictate the Board's response to a demand.


10 Daily Appellate Report