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Ellis v. The Spectranetics Corp.

United States District Court, D. Colorado

March 31, 2018

MICHAEL ELLIS, ALLEN J. WIESENFELD, and PETER TUCKER, individually and on behalf of all others similarly situated, Plaintiffs,
v.
THE SPECTRANETICS CORPORATION, SCOTT DRAKE, and GUY A. CHILDS, Defendants.

          ORDER

          Kristen L. Mix United States Magistrate Judge.

         This matter is before the Court on Defendants' Motion to Dismiss First Amended Class Action Complaint for Violations of Federal Securities Laws and Memorandum in Support Thereof [#33][1] (the “Motion”). Plaintiffs filed a Memorandum of Law in Opposition to Defendants' Motion to Dismiss First Amended Class Action Complaint for Violations of Federal Securities Laws [#36] (the “Response”) in response to the Motion. Defendants filed a Reply Memorandum in Further Support of Motion to Dismiss First Amended Class Action Complaint for Violation of Federal Securities Laws [#41] (the “Reply”). Plaintiffs also filed a Notice of Recent Authority in Support of Plaintiffs' Opposition to Defendants' Motion to Dismiss First Amended Class Action Complaint for Violations of Federal Securities Laws [#43]. This case has been referred to the undersigned for all purposes pursuant to D.C.COLO.LCivR 40.1(c) and 28 U.S.C. § 636(c), on consent of the parties. See [#22]. The Court has reviewed the pleadings, [2] the entire case file, and the applicable law, and is sufficiently advised in the premises. As explained in detail below, the Motion is GRANTED.

         I. Summary of the Case[3]

         Defendant The Spectranetics Corporation (“Defendant, ” the “Company” or “Spectranetics”) manufactures and sells medical devices “to treat arterial blockages in the legs and heart” and “to remove pacemaker and defibrillator cardiac leads.” First Amended Complaint (“FAC”) at ¶ 2. During the alleged Class Period (from February 27, 2014 to July 23, 2015), Defendant Scott Drake (“Drake”) was the Chief Executive Officer of Spectranetics and Defendant Guy A. Childs (“Childs”) was the Company's Chief Financial officer. FAC at ¶¶ 21, 22. The Plaintiffs are investors who purchased Spectranetics stock during the Class Period. FAC at ¶¶ 17-19. In short, Plaintiffs assert that during the Class Period, Defendants filed false and misleading financial documents and made false and misleading statements to investors regarding the Company's product sales and growth, which in turn “pushed the Company's stock price to levels never before reached since the Company went public in 1992.” FAC at ¶ 3. Plaintiffs further assert that Defendants engaged in channel-stuffing[4] to “create the facade of a strongly growing business” and that the Company recognized sales and revenue in violation of GAAP and its own policies. FAC at ¶ 4. According to Plaintiffs, Defendants ignored stiff new competition for some of the Company's products and “knew or recklessly disregarded that their quarter-end bulk sales of products on heavy discount were ultimately unsustainable, ” thus making the Company “particularly vulnerable to missing its aggressive earnings and growth forecasts in 2015.” When the risks created by Defendants' alleged conduct materialized, the Company's stock price ultimately declined more than 55%. FAC at ¶¶ 9-12. As further explained below, Plaintiffs assert a claim for violation of §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and a claim for violation of § 20(a) of the Act. FAC at ¶¶ 340-354.

         II. Standard of Review

         A. Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6)

         The purpose of a motion to dismiss pursuant to Rule 12(b)(1) is to test whether the Court has jurisdiction to properly hear the case before it. Because “federal courts are courts of limited jurisdiction, ” the Court must have a statutory basis to exercise its jurisdiction. Montoya v. Chao, 296 F.3d 952, 955 (10th Cir. 2002); see Fed. R. Civ. P. 12(b)(1). Statutes conferring subject-matter jurisdiction on federal courts are to be strictly construed. F & S Const. Co. v. Jensen, 337 F.2d 160, 161 (10th Cir. 1964). “The burden of establishing subject-matter jurisdiction is on the party asserting jurisdiction.” Id. (citing Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994)).

         A motion to dismiss pursuant to Rule 12(b)(1) may take two forms: facial attack or factual attack. Holt v. United States, 46 F.3d 1000, 1002 (10th Cir. 1995). When reviewing a facial attack on a complaint, the Court accepts the allegations of the complaint as true. Id. By contrast, when reviewing a factual attack on a complaint, the Court “may not presume the truthfulness of the complaint's factual allegations.” Id. at 1003. With a factual attack, the moving party challenges the facts upon which subject-matter jurisdiction depends. Id. The Court therefore must make its own findings of fact. Id. In order to make its findings regarding disputed jurisdictional facts, the Court “has wide discretion to allow affidavits, other documents, and a limited evidentiary hearing.” Id. (citing Ohio Nat'l Life Ins. Co. v. United States, 922 F.2d 320, 325 (6th Cir. 1990); Wheeler v. Hurdman, 825 F.2d 257, 259 n.5 (10th Cir.), cert. denied, 484 U.S. 986 (1987)). The Court's reliance on “evidence outside the pleadings” to make findings concerning purely jurisdictional facts does not convert a motion to dismiss pursuant to Rule12(b)(1) into a motion for summary judgment pursuant to Rule 56. Id.

         The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test “the sufficiency of the allegations within the four corners of the complaint after taking those allegations as true.” Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir. 1994); Fed R. Civ. P. 12(b)(6) (A complaint may be dismissed for “failure to state a claim upon which relief can be granted.”). To withstand a motion to dismiss pursuant to Rule 12(b)(6), “a complaint must contain enough allegations of fact ‘to state a claim to relief that is plausible on its face.'” Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also Shero v. City of Grove, Okla., 510 F.3d 1196, 1200 (10th Cir. 2007) (“The complaint must plead sufficient facts, taken as true, to provide ‘plausible grounds' that discovery will reveal evidence to support the plaintiff's allegations.” (quoting Twombly, 550 U.S. at 570)). “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.” Ashcroft v. Iqbal, 556 U.S., 129 S.Ct. 1937, 1949 (2009). “A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertions devoid of further factual enhancement.” Id. (internal quotation marks omitted). “The court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff's complaint alone is legally sufficient to state a claim for which relief may be granted.” Sutton v. Utah State Sch. for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 1999) (citation omitted).

         B. Private Securities Litigation Reform Act of 1995 (“PSLRA”)

         Because the PSLRA governs this case, the court notes and applies guidance from the Tenth Circuit Court of Appeals regarding interpretation of the Act's “stringent” pleading requirements. Novell, 339 F.3d at 1186.

“Under the Reform Act, a private complaint that alleges a violation of section 10(b) of the 1934 Act and Rule 10b-5 thereunder must first ‘specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, . . . [must] state with particularity all facts on which that belief is formed.' 15 U.S.C. § 78u-4(b)(1). Second, in order to show that the defendant acted with the requisite state of mind for securities fraud cases, i.e., scienter, the complaint must also, ‘with respect to each act or omission alleged to violate the [the 1934 Act], state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'” § 78u-4(b)(2).

Id. (citation omitted).

         When a complaint refers to an investigation of counsel as the basis for a plaintiff's allegations, as is the case here, the court “treats [the allegations of the complaint] as having been made on information and belief.” Kinder-Morgan, 340 F.3d at 1098; FAC at p. 1. As indicated above, Plaintiffs must “state with particularity all facts upon which their belief is formed.” Id. (citation omitted). The Tenth Circuit has interpreted the statutory language about stating “all” facts to mean that Plaintiffs must plead sufficient facts “to determine whether, taken as a whole, they support a reasonable belief that the defendant's statements . . . were false or misleading.” Id. at 1099.

“In deciding whether the factual allegations support a reasonable belief that fraud occurred, courts should evaluate the facts alleged as a whole, evaluating the level of detail, number, and coherence and plausibility of the allegations; whether the allegations are specific enough to be verified or refuted by a defendant without requiring the complaint to disclose how the plaintiff learned of such facts or experts to prove such facts at trial; whether the sources of the facts are disclosed and the reliability of those sources; and any other factors that might affect how strongly the facts alleged support a reasonable belief that the defendant's statements were false or misleading. To meet the standard, plaintiffs are not required to disclose the documentary or personal sources from which they learned the facts alleged in an information and belief complaint.”

Id. at 1102-03.

         In Novell, the court first analyzed the complaint's alleged false statements “to determine whether plaintiffs specifi[ed] each statement alleged to have been misleading, the reason or reasons why the statement [was] misleading, and, if an allegation regarding the statement or omission [was] made on information and belief, . . . [whether the complaint] state[d] with particularity all facts on which that belief [was] formed.” Id. at 1189 (internal quotations omitted). Second, the court “proceed[ed] to examine whether plaintiffs met the scienter requirement, ” but only as to those statements which the court found met the above particularity requirements. Id. at 1190-91.

         Regardless of the order in which the court addresses the PSLRA's pleading requirements, the court must decline a defendant's invitation to conclude that facts alleged by plaintiffs are simply false, regardless of whether a plaintiff's claims “seem far-fetched.” Novell, 339 F.3d at 1193-94. Moreover, the court must accept the truth of the confidential witnesses' accounts as pled in the First Amended Complaint and decline to assess those witnesses' credibility. Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229, 1239 (10th Cir. 2016), citing Tellabs Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).

         C. Scienter

         The pleading requirements for scienter under the PSLRA have attracted special attention from the courts. “In a securities fraud case, the appropriate level of scienter is a mental state embracing intent to deceive, manipulate or defraud, or recklessness.” Kinder-Morgan, 340 F.3d at 1105. The Tenth Circuit has made clear that adequately pleading scienter requires a plaintiff to plead “facts with particularity giving rise to a strong inference that defendants acted with the requisite [state of mind], ” and the trial court is instructed to “look to the totality of the pleadings” to determine whether a plaintiff's allegations permit such an inference. Novell, 339 F.3d at 1190. In addition, “an inference is a logical conclusion drawn from the facts.” Kinder-Morgan, 340 F.3d at 1105. “A strong inference of scienter” means “a conclusion logically based upon particular facts that would convince a reasonable person that the defendant knew a statement was false or misleading.” Id.

“[T]o establish scienter in a securities fraud case alleging non-disclosure of potentially material facts, the plaintiff must demonstrate:(1) the defendant knew of the potentially material fact, and (2) the defendant knew that failure to reveal the potentially material fact would likely mislead investors.” Claims of accounting irregularities or violations of Generally Accepted Accounting Principles (“GAAP”) support a claim of scienter only when ‘coupled with evidence that the violations or irregularities were the result of the defendant's fraudulent intent to mislead investors.' We also take into account evidence of ‘motive and opportunity, ' for, while these factors are typically insufficient in themselves to show scienter, they may be important to the ‘totality' of the pleadings.”

Novell, 339 F.3d at 1191, citing City of Philadelphia v. Fleming Cos., Inc., 264 F.3d 1245, 1261-62 (10th Cir. 2001). Moreover,

“[t]he strength of an inference cannot be decided in a vacuum. The inquiry is inherently comparative: How likely is it that one conclusion, as compared to others, follows from the underlying facts? To determine whether the plaintiff has alleged facts that give rise to the requisite ‘strong inference' of scienter, a court must consider plausible, nonculpable ...

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