case 5:04-cv-04156-jw document 141 filed 01/22/2007 page 1 of...

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APPENDIX OF UNREPORTED CASES CITED IN REPLY BRIEFS MASTER FILE NO. C-04-4156-JW

MELVIN R. GOLDMAN (BAR NO. 34097) [email protected] JORDAN ETH (BAR NO. 121617) [email protected] MIA MAZZA (BAR NO. 184158) [email protected] MARK FOSTER (BAR NO. 223682) [email protected] MORRISON & FOERSTER LLP 425 Market Street San Francisco, California 94105-2482 Telephone: 415.268.7000 Facsimile: 415.268.7522 Attorneys for Defendants INFINEON TECHNOLOGIES AG, INFINEON TECHNOLOGIES NORTH AMERICA CORP., ULRICH SCHUMACHER, PETER J. FISCHL, T. RUDD CORWIN, and HEINRICH FLORIAN

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

In re INFINEON TECHNOLOGIES AG SECURITIES LITIGATION This Document Relates To:

ALL ACTIONS

Master File No. C-04-4156-JW

CLASS ACTION APPENDIX OF UNREPORTED CASES CITED IN DEFENDANTS' REPLY BRIEFS IN SUPPORT OF THEIR MOTIONS TO DISMISS THE SECOND AMENDED COMPLAINT

Hearing: February 26, 2007 Time: 9:00 a.m. Dept.: Courtroom 8, 4th floor Judge: Honorable James Ware

Case 5:04-cv-04156-JW Document 141 Filed 01/22/2007 Page 1 of 3

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sf-2229073

APPENDIX OF UNREPORTED CASES CITED IN REPLY BRIEFS MASTER FILE NO. C-04-4156-JW 1

APPENDIX CASES EXHIBIT In re Apple Computer, Inc. Sec. Litig.,

2005 U.S. App. LEXIS 5511 (9th Cir. Apr. 4, 2005)..................................................................1 In re Buca, Inc. Sec. Litig.,

No. 05-1762, 2006 U.S. Dist. LEXIS 75224 (D. Minn. Oct. 16, 2006)......................................2

In re CV Therapeutics, Inc., Sec. Litig., No. 03-03709-SI, 2004 WL 1753251 (N.D. Cal. Aug. 5, 2004).................................................3

In re DDi Corp. Sec. Litig.,

No. 03-7063-NM, 2005 U.S. Dist. LEXIS 1056 (C.D. Cal. Jan. 7, 2005)..................................4 In re Gilead Sci. Sec. Litig.,

No. C-03-4999-MJJ, 2006 WL 1320466 (N.D. Cal. May 12, 2006) ..........................................5 In re Impax Labs, Inc. Sec. Litig.,

No. C-04-04802-JW, 2007 U.S. Dist. LEXIS 723 (N.D. Cal. Jan. 3, 2007)...............................6 In re Intelligroup Sec. Litig.,

No. 04-4980-GEB, --- Supp. 2d. -- 2006 WL 3782993 (D.N.J. Dec. 20, 2006) ........................7 In re InVision Techs., Inc. Sec. Litig.,

No. C-04-03181-MJJ, 2006 U.S. Dist LEXIS 76458 (N.D. Cal. Aug. 31, 2006).......................8

Kemp v. Universal Am. Fin. Corp., No. 05-Civ-0993-JFK, 2007 WL 86942 (S.D.N.Y. Jan. 10, 2007).............................................9

In re Ligand Pharm., Inc. Sec. Litig.,

No. 04-CV-1620-DMS, 2005 WL 2461151 (S.D. Cal. Sept. 25, 2005) ...................................10

Menkes v. Stolt-Nielsen, S.A., No. 03-CV-409-DJS, 2006 U.S. Dist LEXIS 42644 (D. Conn. June 19, 2006) .......................11

Morgan v. AXT, No C-04-4362-MJJ, 2005 WL 2347125 (N.D. Cal. Sept. 23, 2005) ........................................12

In re Netopia, Inc. Sec. Litig.,

No. C-04-03364-RMW, 2005 WL 3445631 (N.D. Cal. Dec. 15, 2005)...................................13

In re NextCard, Inc. Sec. Litig., No. C-01-21029-JF, 2006 WL 708663 (N.D. Cal. Mar. 20, 2006) ..........................................14

In re Omnivision Techs., Inc., No. C-04-2297-SC, 2005 U.S. Dist. LEXIS 16009 (N.D. Cal. July 29, 2005).........................15

Siemers v. Wells Fargo & Co., No. C 05-04518 WHA, 2006 U.S. Dist. LEXIS 81097 (N.D. Cal. Oct. 24, 2006)...................16

In re Silicon Storage Tech., Inc. Sec. Litig., No. C-05-0295-PJH, 2006 WL 648683 (N.D. Cal. Mar. 10, 2006) ..........................................17


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APPENDIX OF UNREPORTED CASES CITED IN REPLY BRIEFS MASTER FILE NO. C-04-4156-JW 2

In re St. Paul Travelers Sec. Litig. II, No. 04-4697 (JRT/FLN), 2006 U.S. Dist. LEXIS 70261 (D. Minn. Sept. 25, 2006) ...............18

Steiner v. Medquist, Inc., No. 04-5487-JBS, 2006 WL 2827740 (D.N.J. Sept. 29, 2006).................................................19

In re Winstar Commcn’s, No. 01-CV-3014-GBD, 2006 WL 473885 (S.D.N.Y. Feb. 27, 2006) ......................................20

Dated: January 22, 2007

MORRISON & FOERSTER LLP

By: /s/ Mark Foster [e-filing signature] Attorneys for Defendants Infineon Technologies AG, Infineon Technologies North America Corp., Ulrich Schumacher, and Peter J. Fischl, T. Rudd Corwin, and Heinrich Florian


EXHIBIT 1


LEXSEE 127 FED. APPX. 296

Caution As of: Jan 19, 2007

In re: APPLE COMPUTER, INC., HAWAII STRUCTURAL IRON WORKERS PENSION TRUST FUND; et al., Plaintiffs - Appellants v. APPLE COMPUTER,

INC.; et al., Defendants - Appellees

No. 03-16614

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

127 Fed. Appx. 296; 2005 U.S. App. LEXIS 5511; Fed. Sec. L. Rep. (CCH) P93,203

February 17, 2005, Argued and Submitted, San Francisco, California

April 4, 2005, Filed NOTICE: [**1] RULES OF THE NINTH CIRCUIT COURT OF APPEALS MAY LIMIT CITATION TO UNPUBLISHED OPINIONS. PLEASE REFER TO THE RULES OF THE UNITED STATES COURT OF APPEALS FOR THIS CIRCUIT. PRIOR HISTORY: Appeal from the United States Dis-trict Court for the Northern District of California. D.C. No. CV-01-03667-CW. Claudia Wilken, District Judge, Presiding In re Apple Computer, Inc., 243 F. Supp. 2d 1012, 2002 U.S. Dist. LEXIS 26135 (N.D. Cal., 2002) DISPOSITION: AFFIRMED. COUNSEL: For HAWAII STRUCTURAL IRON WORKERS PENSION TRUST FUND, Plaintiff - Ap-pellant: Sanford Svetcov, Esq., Patrick J. Coughlin, Esq., Susan K. Alexander, Esq., Eli Greenstein, Esq., LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS, LLP, San Francisco, CA; William S. Lerach, Esq., Thomas E. Egler, Esq., LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS, LLP, San Diego, CA For IRIS HSU, Plaintiff - Appellant: Sanford Svetcov, Esq., Patrick J. Coughlin, Esq., Susan K. Alexander, Esq., Eli Greenstein, Esq., William S. Lerach, Esq., Thomas E. Egler, Esq., LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS, LLP, San Francisco, CA

For RICHARD YOUNG, Plaintiff - Appellant: Sanford Svetcov, Esq., Patrick J. Coughlin, Esq., Susan K. Alex-ander, Esq., Eli Greenstein, Esq., William S. Lerach, Esq., Thomas E. Egler, Esq., LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS, [**2] LLP, San Francisco, CA For D. OSCAR FUSTER, Plaintiff - Appellant: Sanford Svetcov, Esq., Patrick J. Coughlin, Esq., Susan K. Alex-ander, Esq., Eli Greenstein, Esq., William S. Lerach, Esq., Thomas E. Egler, Esq., LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS, LLP, San Francisco, CA For GARY . THOMPSON, Plaintiff - Appellant: Sanford Svetcov, Esq., Patrick J. Coughlin, Esq., Susan K. Alex-ander, Esq., Eli Greenstein, Esq., William S. Lerach, Esq., Thomas E. Egler, Esq., LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS, LLP, San Francisco, CA For PEGGY THOMPSON, Plaintiff - Appellant: Sanford Svetcov, Esq., Patrick J. Coughlin, Esq., Susan K. Alex-ander, Esq., Eli Greenstein, Esq., William S. Lerach, Esq., Thomas E. Egler, Esq., LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS, LLP, San Francisco, CA For APPLE COMPUTER, INC., Defendant - Appellee: George A. Riley, DCA, Robert C. Vanderet, Esq., Seth


127 Fed. Appx. 296, *; 2005 U.S. App. LEXIS 5511, **;

Fed. Sec. L. Rep. (CCH) P93,203

Alben Aronson, Esq., Gail K. Johnson, Esq., O'MELVENY & MYERS, LLP Embarcadero Center West, San Francisco, CA For STEVEN P. JOBS, Defendant - Appellee: George A. Riley, DCA, Robert C. Vanderet, Esq., Seth Alben Aronson, Esq., Gail K. Johnson, Esq., O'MELVENY & MYERS, LLP [**3] Embarcadero Center West, San Francisco, CA JUDGES: Before: ALARCON, SILVERMAN, and BEA, Circuit Judges. OPINION:

[*298] MEMORANDUM *

* This disposition is not appropriate for pub-lication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3.

Plaintiffs-appellants Hawaii Structural Iron Workers Pension Trust ("plaintiffs") et al. brought this putative class action against defendants-appellees Apple Com-puter, Inc. ("Apple") and Apple's Chief Executive Offi-cer Steven P. Jobs ("Jobs") for violations of securities laws. Plaintiffs allege Jobs is a controlling person at Ap-ple under section 20(a) of the Securities Exchange [*299] Act of 1934, 15 U.S.C. § 78t(a); this defendants do not dispute.

Plaintiffs appeal from the district court's order grant-ing the defendants' motion to dismiss without leave to amend the plaintiffs' First Amended Consolidated Com-plaint (the "Complaint"), based on the district court's finding that plaintiffs failed to allege facts showing [**4] defendants made false statements with the scienter re-quired under the Private Securities Litigation Reform Act (the "PSLRA"). Fed. R. Civ. P. 9(b), 12(b)(6). Plaintiffs' Complaint alleged that defendants violated section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, promulgated there-under. Plaintiffs also appeal the denial of their post-judgment motion to alter the judgment to allow them leave to amend their Complaint. Fed. R. Civ. P. 59(e).

Plaintiffs seek to represent all purchasers of Apple common stock between July 19, 2000 and September 28, 2000 (the "class period"), which was part of Apple's fourth quarter of its fiscal year for 2000 ("4Q00").

The district court properly dismissed plaintiffs' Complaint with prejudice because the allegations therein do not raise a strong inference defendants (1) made their forward looking statements with actual knowledge those

statements were false at the time they made those state-ments as required; and (2) made their non-forward look-ing statements intentionally [**5] false or with deliber-ate recklessness as to the statement's falsity, as required by the heightened pleading requirements of the PSLRA and our decisions. Accordingly, we affirm the district court's order.

I

We review de novo the district court's dismissal for failure to state a claim under Federal Rule of Civil Pro-cedure 12(b)(6). Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th Cir. 2002). We review the district court's denial of plaintiffs' post-judgment motion for leave to amend their Complaint for abuse of discretion. Id. at 898.

II

To plead securities fraud under Section 10(b) of the 1934 Act or Rule 10b-5, plaintiffs must allege: "(1) a misstatement or omission (2) of material fact (3) made with scienter (4) on which [plaintiffs] relied (5) which proximately caused [the plaintiffs'] injury." DSAM Global Value Fund v. Altris Software, Inc. 288 F.3d 385 (9th Cir. 2002).

Under the PSLRA, a plaintiff must "state with par-ticularity facts giving rise to a strong inference that the defendant acted with the required state of mind" with respect to each act or omission. See [**6] 15 U.S.C. § 78u-4(b)(2); In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1084 (9th Cir. 2002). By requiring particularized, detailed allegations showing a strong inference of sci-enter, the PSLRA was intended to "eliminate abusive and opportunistic securities litigation." Gompper, 298 F.3d at 897.

As to forward looking statements made by the de-fendants, such as Anderson's revenue projections and Jobs' projections regarding Cube sales, plaintiffs must allege facts demonstrating a strong inference defendants made those statements with actual knowledge that they were false. 15 U.S.C. § 78u-5(c)(1)(B)(1); In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1085 (9th Cir. 2002). A forward looking statement is any statement regarding "(1) financial projections, (2) plans and objectives of management for future operations, (3) future economic performance, or (4) the assumptions 'underlying or re-lated to' any of these issues." See No. 84 Employer-Teamster [*300] Joint Council Pension Trust Fund v. America West Holding Corp., 320 F.3d 920, 936 (9th Cir. 2003). A forecast is actionably [**7] false if '"there is no reasonable basis for the belief" or '"the speaker is aware of undisclosed facts tending seriously to under-mine the statements' accuracy.'" Provenz v. Miller, 102 F.3d 1478, 1487 (9th Cir. 1996) (citation omitted).




As to non-forward looking statements made by the defendants, such as Oppenheimer's statement that the K-12 sales force transition was "progressing nicely", plain-tiffs must allege facts demonstrating a strong inference defendants made those statements intentionally false or with deliberate recklessness as to the statements' falsity. Id.

Claims that a speaker "could have" or "should have" known that the statements were false are insufficient to satisfy the standard for either forward looking or non-forward looking statements. "Negligence, even gross negligence, does not rise to the level of the nefarious mental state necessary to constitute securities fraud under the PSLRA." DSAM, 288 F.3d at 391.

A complaint will be dismissed under Federal Rule Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted where the plaintiff can prove no [**8] set of facts in support of the claim which would entitle him to relief. See Williamson v. General Dynam-ics Corp., 208 F.3d 1144, 1149 (9th Cir. 2000).

III Anderson's Revenue Projections

In the summer of 2000, Apple held a conference, called Mac World, to tell its investors about its upcoming products. During a conference call held on July 18, 2000, the night before the Mac World Conference and the start of the putative class period, Apple announced results for its third quarter ending June 30, 2000. Apple reported $ 1.83 billion in revenues and $ 163 million in earnings.

During the July 18th call, Apple's Chief Financial Officer, Fred Anderson, stated that Apple was "targeting over 10% sequential growth" for the fourth quarter and "I'm saying over 10%, so I think it will be double digits." This would translate into a projected revenue of about $ 2 billion. Anderson, however, also stated that "margins would decline 2%-3% to 26.8%-27.8%, and operating expenses would increase by $ 15 million with a flat tax rate."

Plaintiffs must show that Apple's problems were so widespread and severe that Anderson knew this revenue target was unattainable when made. 15 U.S.C. § 78u-5 (c)(1)(B)(1) [**9] ; Vantive, 283 F.3d at 1085; Ronconi v. Larkin, 253 F.3d 423, 429. The district court held that plaintiffs failed to plead facts sufficient to show that Anderson made this revenue projection with actual knowledge it was false. The district court is correct. Plaintiffs' only allegation is that because Anderson was Apple's Chief Financial Officer, he had a duty to know Apple's correct financial condition. Plaintiffs' allegations at most allege that Anderson was negligent in the per-formance of his job duties, but negligence is not enough.

DSAM, 288 F.3d at 391. We have held that "the exis-tence of a 'reasonable inference' [as to an officer's knowledge of'facts critical to a business' core operations'] however, does not satisfy the PSLRA's requirement that Plaintiffs allege scienter on the part of Defendants." Nevius v. Read-Rite Corp. (In re Read-Rite Corp. Secs. Litig.), 335 F.3d 843, 848-49 (9th Cir. 2003). K-12 Educational Sales

During the same July 18, 2000 conference call, Ap-ple's Controller, Peter Oppenheimer, stated that Apple had reorganized [*301] its sales force for colleges from non-employee sales agents the year before into [**10] employee sales agents. A similar organizational change of the K-12 sales force was "progressing nicely." Ander-son, who was present, did not correct Oppenheimer's statement.

The district court correctly found that the plaintiffs' Complaint did not sufficiently allege that Oppenheimer knew on July 18th that, due to difficulties with such sales force reorganization, sales would drop in the next three months.

The Tenth Circuit held that similar statements by an officer that a company had "substantial success" integrat-ing its sales force, that a merger was moving "faster than we thought," and that "by moving rapidly to a fully inte-grated sales force, we are leveraging our combined knowledge and expanding scope of network solutions" are "statements of corporate optimism" and are not ac-tionable. Grossman v. Novell, Inc., 120 F.3d 1112, 1121-22 (10th Cir. 1997).

Plaintiffs allege that Oppenheimer should have known his statement was false and that, because he is the Controller, he was under a duty to investigate how the transition was going before issuing any such statement. At most this alleges negligence on Oppenheimer's part, not the required scienter. Mere access to [**11] contra-dictory information is insufficient to allege the deliberate recklessness required. See Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1035-36 (9th Cir. 2002).

Additionally, plaintiffs allege that the sales force transition began during the third quarter of 2000, and that sales during that quarter were quite a bit higher than be-fore. Plaintiffs also allege that most of the education sales historically took place at the end of September. Therefore, from Apple's viewpoint on July 18th, the sales force transition had progressed nicely -- third quarter sales were up.

Plaintiffs fail to allege any specific facts showing that Oppenheimer knew his statement was false when he made it, yet they argue that Oppenheimer must have known at the beginning of July that the sales force reor-




ganization was going poorly because of Jobs' observa-tion, made 10 months later, that the transition was a "train wreck" in large part because the transition began just before the period during which schools historically made most of their purchases -- the start of the school year. We have rejected similar allegations based on post-class-period statements that do not specify when the de-fendant [**12] learned what he or she currently knows. In re Read-Rite Corp., 335 F.3d 843, 847 (9th Cir. 2003); Emplrs. Teamsters Local Nos. 175 & 505 Pen-sion Trust Fund v. Clorox Co., 353 F.3d 1125, 1134-35 (9th Cir. 2004).

As we reasoned in Ronconi, "People have underes-timated the value of salespeople since time immemorial. Alleging in substance that [the defendant] underesti-mated the difficulties it would face if it fired 300 sales-people does not make out a fraud case." 253 F.3d at 433. Jobs' Statements Regarding the Cube

On July 19, 2000, the first day of the Mac World Conference and the putative class period, Jobs intro-duced several new products at the conference: the Cube, the Dual Processor Power Mac, and some new iMac models.

In talking about the Cube, Jobs told the audience "the G4 Cube is ... the most beautiful product [Apple] ever designed." He also said that "all models are avail-able in early August" and the Cube and Power Mac would drive Apple's revenues in the near term and throughout fiscal [*302] years 2001-2002. As promised, the Cube began "volume shipments" in August.

Most importantly, Jobs told the audience that [**13] day that he projected Apple would sell 800,000 Cubes in its first year -- with 150,000 of those sales in 4Q00. The day Jobs made this statement, Apple was 19 days into 4Q00.

Jobs reaffirmed his estimate that Apple would sell 150,000 Cubes in 4Q00 on August 30, 2000 -- more than half-way through 4Q00 -- when he told investors at the Seybold computer conference that Apple was "on track" to meet that target.

On September 13, 2000 -- with only 17 days left in 4Q00 -- Jobs said that he was "extremely happy" with sales of the Cube and that Apple's new products gave it "the strongest product line that Apple has ever had. In an interview on CNBC that same day, he said, "I think we're going to hit our forecasts this quarter, so if [Cubes are] hard to find, I think that's because demand is greater than we thought it would be ...." Just before this statement, Jobs also said, "We don't really predict revenue and earn-ings."

In the end, Apple only sold 107,000 Cubes during 4Q00, not the 150,000 Jobs had predicted. Unlike Jobs' purely subjective statement that the Cube was the "most beautiful product [Apple] ever designed," his projection that Apple would sell 150,000 Cubes in 4Q00 is a con-crete [**14] projection that an investor may have relied upon.

The Cube was marketed, in part, for its looks. It had the micro-processor encased in a clear cube. Hence, its name. But during the manufacture, Apple encountered problems with mold lines and tiny cracks in the casing, which marred its appearance. Additionally, there were problems with an overly-sensitive power switch. When-ever an electrical source passed over the switch, the power turned off on some models, often causing a loss of data.

The district court found plaintiffs had pleaded facts which showed Jobs had access to, and visited, production installations and received production reports. However, there were no facts pleaded to show Jobs observed and knew of the extent of the production problems, or learned of them from a report.

The plaintiffs alleged that according to CW 37, a former Apple materials manager for the G4 production line, Jobs visited the Cube's development laboratory at least once a week from May to August, 2000. CW 37 also told plaintiffs that Trango, Apple's lead manufactur-ing coordinator, told CW 37 that he had discussed the Cube's manufacturing problems with Jobs. Plaintiffs in-sist that the district court overlooked [**15] their allega-tions about CW37 and what Trango told CW 37. To the contrary, the district court's order discussed at length both CW37 and the allegations concerning Trango. The district court correctly determined that scienter could not be inferred from these allegations because plaintiffs failed to allege the contents of "specific memos, mes-sages or meetings" that Trango or anyone else allegedly had with Jobs, nor when these discussions took place. Although plaintiffs attach the witness summaries of sev-eral confidential witnesses that demonstrate the engi-neers at Apple knew there were production problems with the Cube, again these witness statements do not establish exactly what Jobs knew, nor when he knew it, to allege that Jobs knew his predictions were false when he made them.

Plaintiffs also alleged that a "product defect memo" was circulated to employees and unspecified "senior managers and executives" and that CW 37 received a copy. The Complaint fails to provide quotations [*303] or substantive detail from the memo. Instead, it simply claims that the memo itself is detailed. But alleging that a memo is detailed and providing those details, are two different things entirely. The district [**16] court cor-




rectly held that plaintiffs were required to provide these details. Janas v. McCracken (In re Silicon Graphics Sec. Litig.), 183 F.3d 970, 984.

Because design, marketing and manufacturing prob-lems are common to business, a securities fraud claim must do more than allege the existence of such problems; plaintiffs must allege with particularity that a speaker knew that the severity, timing and extent of such prob-lems rendered the statement false when made. Ronconi, 253 F.3d at 433. As the district court found, plaintiffs failed to allege Jobs' knowledge of the Cube's manufac-turing problems when he made his first statements on July 19, 2000. And, although plaintiffs do allege that Jobs learned that Apple was having significant problems in the manufacture of the Cube during 4Q00, they fail to allege with specificity when Jobs learned this informa-tion, exactly what information was conveyed to Jobs, or that Jobs knew the extent of the problems. The Com-plaint refers generally to conversations, memos and re-ports about the Cube, but it does not allege the content of any of these. Such allegations are insufficient. America West, 320 F.3d at 942 n.20.

A corporation is deemed [**17] to have the requi-site scienter for fraud only if the individual corporate officer making the statement has the requisite level of scienter at the time that he or she makes the statement. Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424, 1435-36 (9th Cir. 1995). We have squarely rejected the concept of "collective scienter" in attributing scienter to an officer and, through him, to the corporation. Id.

Plaintiffs' allegations show that Jobs expected Ap-ple's employees to address and fix any problems that arose -- not that he knew Apple would sell fewer Cubes than he expected. See Ronconi, 253 F.3d at 435 ("Prob-lems and difficulties are the daily work of business peo-ple. That they exist does not make a lie out of any of the alleged false statements."). That reasonable inference is further confirmed by Apple's execution of long-term supply contracts for Cube parts, contracts that Apple was forced to cancel at great expense when Apple did not sell as many Cubes as predicted. The Power Mac

At the Mac World conference on July 19, 2000, Jobs said that "because two brains are better than one ... this is going to be the best Power Mac ever. [**18] " Plaintiffs claim that Apple marketed the Power Mac knowing that consumers would not pay the higher price charged for an extra micro-processor when there were few programs that could take advantage of the second micro-processor. But Apple had not raised the price of its new dual micro-processor Power Mac over the previous single micro-processor Power Mac.

Even the analyst quoted by plaintiffs in their Com-plaint said that the relative shift in demand for Power Macs to lower speed and lower priced models was "un-expected." It is reasonable to infer, as did the district court, that defendants believed software developers would release additional products to make use of the dual micro-processor. Adobe had already created applications that could make use of the new dual micro-processor architecture. During the putative class period, Apple also began shipping early versions of Mac OS X, a new oper-ating system that could take advantage of the dual micro-processor.

[*304] As Apple points out, exposing a company to securities fraud liability for failing accurately to predict demand for a radically new product would chill the inno-vation essential to the industry's growth. Indeed, the very nature of [**19] the computer business is one of con-stantly changing technology. It has not been that long since the idea of a personal computer was itself novel and few predicted how wide-spread computers would become nor how many applications there would be for their use.

Additionally, plaintiffs do not allege any factual statement that was false. With a dual micro-processor at the same price, that the new Power Mac was quite possi-bly the "best Power Mac ever" is an opinion, plausibly held. Further, when valuing a corporation, investors do not rely on such vague statements of optimism. In re VeriFone Sec. Litig., 784 F. Supp. 1471, 1481 (N.D. Cal. 1992), aff'd, 11 F.3d 865 (9th Cir. 1993) ("professional investors, and most amateur investors as well, know how to devalue the optimism of corporate executives.").

We have held the following similar statements to be non-actionable puffery: "We're doing well and I think we have a great future"; "business, will be good this year ... We expect the second half of fiscal 1992 to be stronger than the first half, and the latter part of the second half to be stronger than the first"; "Everything is clicking ... New products [**20] are coming in a wave, not a trickle ... Old products are doing very well"; and "I am optimis-tic about [the company's] performance during this dec-ade." Id. at 1095 ("reasonable investors know [state-ments of optimism] do not guarantee future success"). In re Syntex Corp. Sec. Litig, 855 F. Supp. 1086, 1095 (N.D. Cal. 1994), aff'd, 95 F.3d 922 (9th Cir. 1996). Just like these statements, Jobs' statements were optimistic opinions, not guaranteed factual promises. 4Q00 Results

On September 28, 2000, Apple announced that its revenues for 4Q00 would be $ 1.87 billion, not the $ 2 billion it had projected. Nevertheless, Apple had a profit-able fourth quarter: $ 0.30 earnings per share ("EPS").




Compared to 4Q99, the gross revenue was up 40%; the net 17.7%. Revenue increased from 3Q00. The law rec-ognizes that "companies [should] be given leeway" when their forecasts are evaluated because "by their very na-ture, forecasts are imprecise." Syntex, 855 F. Supp. at 1096. We held that projections which are missed by 10% or less are not generally actionable. Indeed, we have held that a revenue estimate that was missed by approxi-mately [**21] 10% was immaterial as a matter of law. In re Convergent Tech. Sec. Litig, 948 F.2d 507, 514 (9th Cir. 1991); see also In re Silicon Graphics, Inc. Sec. Litig, 970 F. Supp. 746 (N.D. Cal. 1997), aff'd, 183 F.3d 970 (9th Cir. 1999). Here, Apple missed its sales target by $ 130 million, or less than 10% of the revenue Ander-son forecasted. Leave to Amend

Plaintiffs failed to proffer any new facts at the July 11, 2003 hearing on the motion to dismiss the Complaint. Instead, plaintiffs stated that they claimed their case was complete as presented in the Complaint, and that they would use leave to amend only to revise legal arguments and perhaps add a few unspecified "things" from Apple's website. Because plaintiffs failed adequately to proffer

new allegations of facts, either at the hearing or in their brief on appeal, they failed either to allege or offer to allege scienter under the PSLRA; the dismissal with prejudice was warranted. DSAM, 288 F.3d at 391 (dis-missal with prejudice proper [*305] where plaintiffs "failed to come forward with additional facts that would meet the scienter pleading requirement"); Vantive, 283 F.3d at 1097-98 [**22] ("Plaintiffs declined to say what additional facts they might plead if given the chance to amend. Such a failure is a strong indication that the plaintiffs have no additional facts to plead."); Silicon Graphics, 183 F.3d at 991.

IV

Because plaintiffs failed to allege facts sufficient to raise a strong inference that any of the declarants knew their revenue and sales projections were false at the time they made those statements, or that the declarants were reckless with regard to the falsity of statements about current conditions at Apple, we affirm the district court's order dismissing the Complaint with prejudice.

AFFIRMED.


EXHIBIT 2


1 of 1 DOCUMENT

In re Buca Inc. Securities Litigation

Civil No. 05-1762 (DWF/AJB)

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA

2006 U.S. Dist. LEXIS 75224

October 16, 2006, Decided COUNSEL: [*1] For West Palm Beach Police Pension Fund, individually and on behalf of all others persons similarly situated, Plaintiff: Avi Garbow, Daniel S Som-mers, Herbert E Milstein, Matthew B Kaplan, Cohen Milstein Hausfeld & Toll, PLLC - DC, Washington, DC.; Bryan L Crawford, Muria J Kruger, Stacey L Mills, Heins Mills & Olson, PLC, Mpls, MN.; Jay W Eng, Mi-chael J Pucillo, Berman DeValerio Pease Tabacco Burt & Pucillo, West Palm Beach, FL.; Steven J Toll, Cohen Milstein Hausfeld & Toll, Washington, DC.; Wendy H Zoberman, Berman DeValerio Pease Tabacco Burt & Pucillo - FL, West Palm Beach, FL. For Buca, Inc., Pete Mihajlov, Defendants: Michael M Krauss, Wendy J Wildung, Faegre & Benson LLP, Min-neapolis, MN. For Joseph Micatrotto, Defendant: Joseph T Dixon, Jr, Wesley T Graham, Henson & Efron, PA, Mpls, MN.; Kenneth J Walsh, McDonald Hopkins Co, LPA, Cleve-land, OH. For Greg A. Gadel, Defendant: Douglas R Peterson, Leonard Street and Deinard, Mankato, MN.; Monica L Davies, Todd A Noteboom, Leonard Street and Deinard, PA, Minneapolis, MN. JUDGES: Donovan W. Frank, Judge of United States District Court. OPINION BY: Donovan W. Frank OPINION:

MEMORANDUM OPINION AND ORDER

Introduction [*2]

This class-action lawsuit is before the Court pursu-ant to Defendants Buca Inc.'s ("Buca" or "the Company") and Pete Mihaljov's, Joseph Micatrotto's, and Greg

Gadel's, (collectively, the "Individual Defendants") Mo-tion to Dismiss the Consolidated Class-Action Com-plaint. In the Amended Complaint (the "Complaint"), Plaintiffs West Palm Beach Police Pension Fund, Steven Jones, Charles Booth, and James and Bert-Mary Brady, individually and on behalf of all other persons similarly situated (collectively, the "Plaintiffs") allege securities fraud against Buca and the Individual Defendants (col-lectively, the "Defendants") in violation of sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (the "Exchange Act"), and Rule 10b-5 promulgated thereunder. For the following reasons, De-fendants' motion is granted, but the Court dismisses the Complaint without prejudice. n1

n1 Plaintiffs request that the Court take judicial notice of 11 documents, all pertaining to separate actions brought by the Securities and Exchange Commission ("SEC") and the United States At-torney's Office against Micatrotto, Gadel, and other individuals. The documents include two civil complaints filed by the SEC, documents re-flecting the settlement of one of the SEC actions, two criminal complaints brought by the U.S. At-torney's Office, and documents reflecting plea agreements in the criminal proceedings. Rule 201 of the Federal Rules of Evidence permits the Court to take judicial notice of a fact that is not subject to reasonable dispute. Fed. R. Evid. 201(b). A court may take judicial notice of SEC filings on a motion to dismiss, where the filings were required by law and were not offered to prove the truth of the documents' contents. Flor-ida State Bd. of Admin, v. Green Tree Fin. Corp., 270 F.3d 645, 663 (8th Cir. 2001). Here, these documents, which are not SEC filings, are being offered to prove the truth of the matters asserted in them and are disputed by Defendants. Accord-


2006 U.S. Dist. LEXIS 75224, *

ingly, the Court finds that it is not appropriate to judicially notice these documents and therefore denies Plaintiffs' request.

[*3]

Background

Buca is a publicly-held company based in Minnea-polis that owns and operates more than 100 "Buca di Beppo" and "Vinny T's of Boston" restaurants. Mica-trotto served as Buca's Chairman and Chief Executive Officer ("CEO") from July 1999 until May 10, 2004. Gadel served as Buca's Chief Financial Officer ("CFO"), Executive Vice President, Secretary and Treasurer from 2001 until December 2004. Mihaljov served as Buca's Executive Chairman and CEO from May 10, 2004, until October 15, 2004. Additionally, Mihaljov has served on Buca's Board of Directors since the Company's inception in 1993. Plaintiffs are investors who purchased Buca securities between February 6, 2001, and March 11, 2005 (the "Class Period").

Central to this case is a restatement that Buca issued on July 25, 2005 ("the July 25, 2005 Restatement"). In the July 25, 2005 Restatement, Buca announced that it would restate its annual financial statements for fiscal years 2000 through 2003 and its quarterly financial re-sults for the first three quarters of 2004. (Id. at P 9.) In the July 25, 2005 Restatement, Buca admitted that it in-correctly overstated its net income by 121.08%, 64.16%, and 47.77% for 2001, [*4] 2002, and 2003, respec-tively. (Id. at P 10.) In pertinent part, the July 25, 2005 Restatement acknowledged that Buca: (1) improperly booked free meals given to employees as sales; (2) im-properly accounted for the Company's real estate leases and leasehold improvements; and (3) improperly capital-ized certain other expenses, all in violation of GAAP. (App. to Mem. in Supp. of Mot. to Dismiss Consolidated Am. Compl. ("Ex. List"), P J, at F-12-15.)

Plaintiffs' securities fraud claim arises from numer-ous alleged material misstatements that Defendants made during the Class Period. The alleged misstatements were made in various press releases and SEC filings in which Defendants announced the Company's financial results. By restating those financial results in the July 25, 2005 Restatement, Buca admitted that certain portions of the press releases and SEC filings were incorrect. And be-cause Buca's reported financial results were incorrect, Plaintiffs claim that Buca's stock price was artificially inflated. Additionally, Plaintiffs claim that the Individual Defendants' certifications of adequate internal controls that were required under the Sarbanes-Oxley Act, 15 U.S.C. § 7241 [*5] , also constituted actionable mis-statements. These certifications accompanied Buca's quarterly earnings statements and averred that the certi-

fying Individual Defendant had disclosed "all significant deficiencies in the design or operation of internal con-trols" and "any fraud, whether or not material, that in-volves management or other employees." (Id. at P 101.)

Plaintiffs allege that when the July 25, 2005 Re-statement was issued, the investing public "began to un-derstand the magnitude of the fraud perpetrated by De-fendants." (Id. at P 10.) Although the July 25, 2005 Re-statement was issued after the end of the Class Period, Plaintiffs contend that the alleged misrepresentations were "gradually disclosed" through a series of partial disclosures beginning in May 2004. (Id. at P 192.) Based on these alleged partial disclosures, Plaintiffs assert that "the prior artificial inflation came out of the Company's common stock price." (Id.) As a result of their purchases of Buca common stock during the Class Period, Plaintiffs allege that they suffered economic loss. (Id. at P 11.)

Plaintiffs contend that Defendants engaged in a fraudulent scheme to inflate revenues, reduce [*6] ex-penses, and conceal a decline in its comparable restau-rant sales growth. (Compl. at P 3.) To carry out these goals, Plaintiffs allege that Defendants engaged in a fraudulent accounting scheme by: (1) improperly ac-counting for free meals served to employees by booking them as sales; (2) improperly accounting for its restau-rant leases; and (3) and improperly capitalizing expenses, all in violation of Generally Accepted Accounting Prin-ciples ("GAAP"). (Id.) Plaintiffs further allege that Buca lacked adequate internal controls in the accounting and finance areas and that Buca falsely represented that its internal controls were adequate and reliable. (Id. at P 6.) Accounting for Employee Meals

Plaintiffs allege that Defendants engaged in a scheme to boost comparable restaurant sales, a key indi-cator of growth, by fraudulently accounting for free em-ployee meals as sales. (Id. at P 31.) Plaintiffs contend that Buca's management used comparable restaurant sales as a performance indicator to trigger executive bo-nuses. (Id.) A former general manager of several Buca di Beppo restaurants from 1998 to 2002 and a confidential source in the case, CS-5, alleges that in [*7] early 2001 Micatrotto and Gadel directed each Buca di Beppo res-taurant to begin booking free employee meals as sales. (Id. at 37.) CS-5 alleges that Micatrotto and Gadel di-rected each restaurant to book employee meals at roughly $ 100 per night, and to record the meals either as a "comped meal" or as having been paid by coupons or promotions. (Id.)

A former senior vice-president of operations from 1999 until April 2005, CS-8, alleges that he overheard conversations between Company executives in 2003 and 2004, including Micatrotto and Gadel, about the need to


2006 U.S. Dist. LEXIS 75224, *

restate the revenue booked from employee meals. (Id. at 43.) Additionally, from April 2001 until April 2002, CS-5 allegedly repeatedly questioned both Micatrotto and Gadel about the booking of employee meals and specifi-cally asked why the recognition of this revenue was not disclosed in the Company's public filings and investor reports. (Id. at 39.) CS-5 allegedly questioned Gadel at least 10 times during this period and was told by Gadel that the failure to disclose this revenue recognition was the result of "an executive decision" and "not to worry about it." (Id.)

Plaintiffs allege that the material impact [*8] of booking the employee meals had the effect of boosting the Company's revenues, rather than impacting the Com-pany's income. (Id. at P 177.) Plaintiffs further allege that the practice allowed each store to appear to have in-creased sales of at least $ 700 per week when compared with same store sales for the same week the prior year. (Id.) Thus, according to Plaintiffs, this accounting prac-tice resulted in the appearance of increased sales of be-tween $ 2 and $ 7.4 million per year between 2000 and 2003 and more than $ 5 million in the first nine months of 2004. (Id.)

Plaintiffs allege that the increased sales had the greatest impact during the first year, from the first quar-ter of 2001 to the first quarter of 2002. (Id. at P 178.) During that period, Plaintiffs contend that same store sales appeared to be increasing. (Id.) Plaintiffs also claim that during that period, Buca's stock price reached more than $ 25 per share. (Id.) Plaintiffs allege that Micatrotto and Mihajlov sold shares of Buca stock in June 2002 at $ 18.25 per share. (Id. at P 53.) In particular, Plaintiffs allege that Micatrotto sold 100,000 shares, exhausting his holdings and earning $ [*9] 1,260,000. (Id.) Plaintiffs then allege that on July 17, 2002, shortly after those al-leged insider sales, Micatrotto and Gadel announced dur-ing Buca's second quarter earnings call that comparable restaurant sales at its Buca di Beppo restaurants actually declined 1.3% in the quarter. (Id. at P 54.) Plaintiffs then allege that in response to this announcement, the Com-pany's stock dropped from $ 13.35 per share on July 16, 2002, to $ 9.26 per share on July 17, 2002. (Id. at P 55.)

In a February 7, 2005 Press Release ("the February 7, 2005 Press Release"), Buca announced that it was dis-continuing its practice of booking free meals given to employees as sales and expenses. (Ex. List, P C.) On February 11, 2005, in a Form 8-K ("the February 11, 2005 Form 8-K"), Buca announced that its prior practice of including revenue from its employee meals violated GAAP and indicated that all such revenue would need to be removed from its consolidated financial statements. (Id. at P 173.) The July 25, 2005 Restatement, in which Buca restated its financial results for 2000 through 2003 and the first three quarters in 2004, reduced Buca's total

sales by approximately 2% for each year [*10] as a re-sult of these accounting violations. (Id. at P 175.) The July 25, 2005 Restatement explained that the practice of booking free employee meals as sales did not affect its net income because sales were always offset by expenses in the same amount. (Id. at P 176.) Accounting for Leases and Leasehold Equipment

Plaintiffs also allege that Buca's accounting treat-ment of its real estate leases and leasehold equipment were part of its alleged fraudulent scheme to inflate Buca's stock. (Id. at P 3.) Buca leases both the land and the building at the majority of its restaurant locations. (Id. at P 44.) Most of Buca's leases contain options to renew for additional periods of time. (Id.) Plaintiffs con-tend that Buca's practice was to amortize its leasehold improvement and other lease expenses over the course of the entire lease, including all renewal option periods, thereby reducing current expenses and increasing net earnings. (Id. at PP 45-46.) A former accounting man-ager for Buca, CS-3, alleges that the Company's policy was to "amortize leasehold improvements over the term of the lease plus two extensions." (Id. at P 49.)

In the February 7, 2005 Press [*11] Release, Buca announced that it was reviewing its accounting treatment of real estate leases and leasehold improvements in light of recent developments in industry accounting practice. (Ex. List, P C.) Buca's accounting treatment violated GAAP standards for lease accounting, which require that in the amortization of leasehold improvements, an oper-ating lease should be amortized by the lessee over the shorter of their economic lives or the lease term. (Id. at P 159.) In the February 11, 2005 Form 8-K, Buca an-nounced that it had incorrectly applied the accounting rules with respect to certain operating lease transactions. (Id. at P 144.) Buca also stated that it would restate its previously filed financial statements for fiscal years 1999 through 2003 and the first three quarters of 2004 to cor-rect the GAAP violations. (Id.) Buca restated the finan-cials in the July 25, 2005 Restatement. (Ex. List, P J at F-12-15.) Capitalization of Certain Expenses

In the February 11, 2005 Form 8-K, Buca also an-nounced that it had determined that its policies regarding capitalization of certain expenditures had not been prop-erly applied and that it was reviewing capitalized amounts [*12] that should have been treated as repair and maintenance expenses. (Ex. List, P F at 3.) Buca's capitalization practice violated GAAP because the ex-penditures lacked a future economic benefit or service potential. (Id. at P 163.) In the July 25, 2005 Restate-ment, Buca announced that it had improperly capitalized expenditures including pre-opening expenses, decor


2006 U.S. Dist. LEXIS 75224, *

warehouse expense and repairs and maintenance ex-penses, certain consulting fees, certain contributions to a conference, construction management expenses and capi-talized interest, and had insufficient documentation to support fixed asset additions and dispositions. (Id. at P 164.) The restatement of these accounting violations re-sulted in a reduction of income of $ 11.9 million from 2000 through 2003 and the first nine months of 2004. (Id.) Alleged Inadequacy of Internal Controls

In addition to the alleged accounting scheme, Plain-tiffs allege that Defendants' lack of adequate internal controls in the accounting and finance areas resulted in the alleged falsification of Buca's financial statements. (Id. at P 6.) Plaintiffs allege that the Company's internal controls were so deficient that Micatrotto [*13] and Gadel, along with other senior Buca managers, fraudu-lently misused Company asserts for personal gain. (Id. at P 7.) Specifically, Plaintiffs assert that in 2002, Mica-trotto authorized Buca's purchase of an Italian villa for $ 279,000. (Id. at P 63.) Plaintiffs further assert that Mica-trotto authorized Buca to spend several hundred thousand dollars to renovate the villa. (Id.) Although Micatrotto authorized Buca to purchase and renovate the villa, Plaintiffs assert that it was later determined that Mica-trotto and his wife were listed as owners on the prop-erty's title. (Id.)

Additionally, a former senior financial manager who worked at Buca's headquarters from July 2000 until Feb-ruary 2005, CS-9, alleges that during the Class Period, Micatrotto and Gadel often requested company checks for large sums of money without providing any support-ing documentation or invoice. (Id. at P 60.) CS-9 further alleges that several times Gadel asked for blank checks and responded to CS-9's protest by indicating that "it was not [CS-9's] concern." (Id.) CS-9 further alleged that Micatrotto requested and obtained Buca checks for non-company transactions, such as personal home [*14] im-provements and family gifts. (Id. at P 61.)

As further evidence that Buca's internal controls were inadequate, Plaintiffs allege that Gadel approved payment of invoices that were fraudulently submitted by a Buca vendor called EDP Computer Systems ("EDP") that provided Buca with computer-related services be-tween 1998 and 2003. (Id. at P 66.) Plaintiffs allege that Gadel had an undisclosed financial interest in EDP and authorized Buca to enter into financially unfavorable contracts and transactions with EDP in exchange for kickbacks to himself. (Id. at P 67.) Further, Plaintiffs allege that Gadel and John Motschenbacher, a former Buca Senior Vice President and Chief Information Offi-cer, started a computer-services company called High Wire Networks ("High Wire") using Buca funds. (Id. at

PP 68-69.) Further, Plaintiffs allege that Gadel and Motschenbacher authorized Buca to pay invoices to EDP that included the salaries of 10 High Wire employees. (Id. at P 70.) According to CS-3, Gadel's response to questioning about Buca's lack of internal controls was to "laugh it off." (Id. at P 59.)

Plaintiffs allege that Micatrotto, Mihajlov, and Gadel all falsely certified [*15] the adequacy and reli-ability of the Company's internal controls. (Id. at PP 19--21.) Plaintiffs allege that Defendants' actions violated Item 308 of Regulation S-K, which requires management to assess the effectiveness of a public company's internal controls, identify material weaknesses, and disclose to the company's auditors any significant internal-control deficiencies. (Id. at P 75.) Additionally, Plaintiffs allege that Defendants violated Item 404 of Regulation S-K, which requires that the company disclose any transac-tions to which it was a party where the amount of the transaction exceeds $ 60,000 and where any company director or executive officer had a direct or indirect mate-rial interest in such transaction. (Id. at PP 76-77.) Subsequent Investigations and Lawsuits

In the second quarter of 2004, Buca's Audit Com-mittee authorized an independent investigation regarding Micatrotto's purchase of the Italian villa. (Id. at P 64.) In a press release dated May 10, 2004 ("the May 10, 2004 Press Release"), Buca accepted Micatrotto's resignation. (Id. at P 139.) In the February 7, 2005 Press Release, Buca announced that the Audit Committee concluded that [*16] Micatrotto used Company funds for personal purposes without authorization. (Ex. List, P D.) In the same release, Buca also announced that the SEC had issued a formal order of investigation to determine whether Buca had violated federal securities laws and that Buca believed the SEC's investigation was initiated by Micatrotto's resignation. (Id.) Additionally, Buca fur-ther stated in that release that it entered into a Separation Agreement with Micatrotto whereby Micatrotto agreed to make certain cash payments to Buca and to waive any rights to receive certain payments under the Buca em-ployee share option plan. (Id.) The Separation Agree-ment was filed with the SEC on August 6, 2004. (Ex. List, P H.) The filing also announced that Buca recouped approximately $ 900,000 from Micatrotto, who trans-ferred title to the Italian villa to Buca. (Id.)

Once it became aware of such actions, Buca also conducted an internal investigation of Gadel and Motschenbacher's actions regarding EDP and High Wire. (Id. at P 72.) On December 2, 2004, Buca issued a press release announcing Gadel's resignation, but the reasons were not disclosed. (Id. at P 73.) On July 25, 2005, Buca filed a [*17] civil lawsuit against Gadel and Motschen-bacher in Hennepin County District Court alleging that


2006 U.S. Dist. LEXIS 75224, *

the former executives had improperly used Buca to fund a computer-related services company that the executives had founded. (Id. at P 74.)

Plaintiffs allege that Buca's stock price declined as the truth was gradually disclosed. In particular, Plaintiffs allege that following the May 10, 2004 Press Release announcing Micatrotto's resignation, Buca's stock price fell from $ 6.38 per share on May 7, 2004 to $ 5.24 per share on May 13, 2004. (Id. at PP 141, 194.) Further, Plaintiffs allege that following the February 7, 2005 Press Release announcing that the SEC had initiated a formal investigation to determine whether Buca had vio-lated federal securities laws, Buca's stock price fell from $ 6.91 per share on February 7, 2005 to $ 6.75 per share on February 8, 2005. (Id. at PP 142-43.)

Finally, Plaintiffs allege that the price of Buca's stock fell after a press release was issued on March 11, 2005 ("the March 11, 2005 Press Release") from $ 7.00 per share on March 11, 2005 to $ 6.50 per share on March 14, 2005. (Id. at P 145.) In the March 11, 2005 Press Release, Buca announced [*18] that it would no-tify the SEC of the Company's need to delay the filing of its 2004 Form 10-K in order to complete work on previ-ously announced restatements for fiscal years 2000 through 2003. (Id.) Buca also announced that Motschen-bacher and Buca's Controller and Interim CFO, Dan Skrypek, had been suspended and were being reviewed for termination. (Id. at P 145.)

On March 14, 2005, after the end of the Class Pe-riod, Buca announced that it would not timely file its 2004 Form 10-K. (Id. at P 147.) Buca explained that the late filing would be due in part to ongoing work on the Company's restatements, review of its financial reporting policies and procedures, internal investigation of matters relating to the Company's recent suspension of two ex-ecutive officers, and review of internal controls. (Id.) Two days later, Buca issued a press release announcing that the Company had terminated the employment of Motschenbacher and Skrypek. (Id. at P 148.) Plaintiffs allege that the Individual Defendants falsely approved the press releases and SEC filings. (Id. at PP 19-21.)

Defendants move to dismiss the Complaint on two primary grounds: (1) failure to sufficiently plead [*19] loss causation and (2) failure to allege with particularity facts giving rise to a strong and reasonable inference that any Defendant acted with scienter. Additionally, with respect to Plaintiffs' claims regarding Defendant's ac-counting treatment of employee meals, Defendants con-tend that the alleged representation is immaterial and that these claims should therefore be dismissed.

Discussion I. Standard of Review

Generally speaking, in deciding a motion to dismiss, the Court must assume all facts in the complaint to be true and construe all reasonable inferences from those facts in the light most favorable to the complainant. Mor-ton v. Becker, 793 F.2d 185, 187 (8th Cir. 1986). How-ever, in the context of a case raising claims of securities fraud on behalf of a class, the Court must also consider the complaint in light of the heightened pleading stan-dard established by the Private Securities Litigation Re-form Act ("the Reform Act"), 15 U.S.C. § § 78u-4 and 78u-5. Under 15 U.S.C. § 78u-4(b)(2), a complaint must "state with particularity facts giving rise to a strong in-ference that [*20] the defendant acted with the required state of mind." As such, the Court must "disregard 'catch-all' or 'blanket' assertions that do not live up to the par-ticularity requirements of the statute." Green Tree, 270 F.3d at 660. And, while a plaintiff is generally entitled, under Fed. R. Civ. P. 12(b)(6), to all reasonable infer-ences that may be drawn from the complaint, a claim of securities fraud can only survive if the allegations "col-lectively add up to a strong inference of the required state of mind." Id. II. Section 10(b) Claim

Plaintiffs allege that Defendants n2 violated section 10(b) of the Exchange Act. Rule 10b-5, promulgated by the SEC under its section 10(b) authority states:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facil-ity of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a mate-rial fact necessary in order to make the statements made, in light of the circum-stances under [*21] which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the pur-chase or sale of any security.

17 C.F.R. § 240.10b-5. In order to bring a successful claim of securities fraud, a plaintiff must establish the following elements: (1) material misrepresentations or omissions; (2) made with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plain-tiff relied; and (5) that proximately caused plaintiff's in-


2006 U.S. Dist. LEXIS 75224, *

juries. Alpern v. UtiliCorp United, Inc., 84 F.3d 1525, 1533-34 (8th Cir. 1996) (citing 17 C.F.R. § 240.10b-5 (2001)). The first (material misrepresentation), second (scienter), and fifth (loss causation) elements are at issue in this case. The Court will address loss causation first because it alone is dispositive of this case.

n2 Plaintiffs' section 10(b) arguments interchange Buca and the Individual Defendants. Therefore, when the Court dismisses claims against Buca, it also dismisses the same claims against the Indi-vidual Defendants and vice versa.

[*22]

A. Loss Causation

The Defendants first contend that the Complaint should be dismissed because Plaintiffs have failed to sufficiently plead loss causation. As stated above, a secu-rities fraud complaint must allege loss causation, which means "a causal connection between the material misrep-resentation and the loss." Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342, 125 S. Ct. 1627, 161 L. Ed. 2d 577 (2005). In Dura, the Supreme Court held that a plaintiff cannot satisfy section 10(b)'s loss causation requirement by alleging that the purchase price was inflated because of the claimed misrepresentations. Id. at 345. Instead, a plaintiff must allege that the share price fell significantly after the truth became known. Id. at 347. Plaintiffs need not plead loss causation with particularity; rather, a short and plain statement in accordance with Federal Rule of Civil Procedure 8(a)(2) is sufficient. See id. at 346.

In the Complaint, Plaintiffs allege that when the al-leged "misrepresentations and omissions were gradually disclosed through a series of partial disclosures begin-ning with Micatrotto's resignation, [*23] Buca's com-mon stock declined as the prior artificial inflation came out of the Company's common stock price." (Compl. at P 192.) Plaintiffs point to four alleged partial disclosures during the Class Period that they claim demonstrate loss causation: (1) the May 10, 2004 Press Release announc-ing Defendant Micatrotto's resignation; (2) the February 7, 2005 Press Release concerning the SEC investigation of Buca; (3) the February 11, 2005 Form 8-K disclosing the internal review of accounting policies and prelimi-nary determination of GAAP violations; and (4) the March 11, 2005 Press Release concerning the need to delay filing the 2004 10-K. Additionally, Plaintiffs con-tend that in response to these four alleged partial disclo-sures, the Complaint identifies three separate declines in Buca's stock value.

Specifically, the Complaint alleges that Buca's stock price declined 17.8% from its May 7, 2004 closing price of $ 6.38 per share to $ 5.24 per share on May 13, 2004, following the May 10, 2004 Press Release announcing Micatrotto's resignation as Chairman and CEO. (Compl. at P 141.) The Complaint also specifies that Buca's stock price declined 2.3% from its February 7, 2005 closing price [*24] of $ 6.91 per share to a closing price of $ 6.75 per share on February 8, 2005, following the Febru-ary 7, 2005 Press Release announcing that the SEC had issued a formal order of investigation to determine whether or not Buca had violated federal securities laws. (Id. at P 143.) Finally, the Complaint specifies that Buca's stock price declined 7.1% from its March 11, 2005 closing price of $ 7.00 per share to a closing price of $ 6.50 per share on March 14, 2005. (Id. at P 146.) Plaintiffs allege that this last decline in Buca's stock price followed two alleged partial disclosures--the February 11, 2005 Form 8-K stating that Buca had incorrectly ap-plied the accounting rules with respect to certain operat-ing lease transactions and that Buca would restate its previously filed financial statements for the fiscal years 1999 through 2004 and the March 11, 2005 Press Re-lease announcing that Buca would file a notification with the SEC regarding the Company's need to delay the filing of it annual report for the year ended December 26, 2004.

In response, Defendants contend that Plaintiffs have not identified any disclosure of the alleged fraud that is connected to a significant drop [*25] in share price. De-fendants note that the Complaint alleges "[w]hen the truth about BUCA's financial statements was revealed in July 2005, the investing public began to understand the magnitude of the fraud perpetrated by Defendants." (Id. at P 10.) But Defendants further note that the Class Pe-riod ended more than four months earlier, in March 2005, before Buca issued the restatement that gave rise to this suit. Thus, according to Defendants, because the Class Period ended before the disclosures that Plaintiffs identify as unveiling the "truth," they have not properly alleged loss causation. Defendants suggest that Plaintiffs decided not to extend the Class Period to July 25, 2005, when the restatement disclosing the financial amounts was issued, because on July 26, 2005, Buca's share price actually increased from $ 5.34 to $ 6.25 per share.

Additionally, Defendants contend that Plaintiffs' as-sertion that the alleged misrepresentations were gradu-ally disclosed beginning with Micatrotto's resignation in May 2004, also fails to sufficiently plead loss causation. At the outset of this argument, Defendants explain that Buca's share price was mostly declining throughout the Class [*26] Period. Although Buca stock traded at a high of $ 25.15 during the Class Period on May 30, 2001, by May 7, 2004--three days before Micatrotto's


2006 U.S. Dist. LEXIS 75224, *

resignation was announced and the gradual disclosures allegedly began, Buca's share price was already down to $ 6.38 per share. Specifically, Defendants contend that each of the four alleged partial disclosures of fraud that Plaintiffs cite either did not disclose the alleged fraud or did not lead to a drop in Buca's share price.

The Court finds that Plaintiffs have not sufficiently pleaded loss causation under Dura. Here, the May 10, 2004 Press Release announcing Micatrotto's resignation mentioned no investigation or accounting issues and thus disclosed nothing of the alleged fraud. Indeed, the Com-plaint notes that "[t]he Company did not elaborate on the reason(s) for the resignation except to state that the Board and Defendant Micatrotto agreed that it was time for a management change." (Compl. at P 139.) Thus, even though the May 19 Press Release was followed by a drop in stock price, the press release did not disclose the alleged fraud. Next, although February 11, 2005 Form 8-K constituted a partial disclosure of the alleged fraud, [*27] Plaintiffs failed to identify a significant price drop in share price following this partial corrective disclosure. Rather, Buca's share price increased from $ 6.91 on Feb-ruary 7, 2005, to $ 6.96 on February 14, 2005. (Ex. List, P K.) Finally, although Buca's share price dropped on March 14, 1005, following the March 11, 2005 Press Release, that press release did not constitute a corrective disclosure. Rather, the March 11, 2005 Press Release stated only that Buca's 2004 Form 10-K would be de-layed to complete the previously-announced restatements and that two officers had been suspended. Thus, the March 11, 2005 Press Release did not disclose the al-leged fraud.

That leaves the Court with the February 7, 2005 Press Release announcing the SEC investigation. Al-though Plaintiffs identify a drop in Buca's stock price from $ 6.91 per share on February 7, 2005, to $ 6.75 per share on February 8, 2005, the Court does not find that this one drop sufficiently pleads loss causation. This sin-gle identification of a drop in Buca's stock price follow-ing a partial corrective disclosure negates Plaintiffs' alle-gation that the fraud was gradually disclosed through a series of partial disclosures. [*28] Further, the Court does not find that this decline establishes loss causation where the share price was trending downward throughout the Class Period and was already down to $ 6.38 per share three days before Micatrotto's resignation was an-nounced and the alleged fraud was allegedly gradually revealed. The fact that Buca's stock price was already down to $ 6.38 by the time the fraud was allegedly re-vealed and the artificial inflation allegedly came out of the stock reveals that other factors had caused the de-cline. Thus, even applying a notice pleading standard, Plaintiffs' allegations will not suffice. Drawing all favor-able inferences in Plaintiffs' favor, the Court cannot find

sufficient allegations of loss causation required by Dura. Although the Complaint should be dismissed on the basis that Plaintiffs have failed to sufficiently plead loss causa-tion, the Court nevertheless addresses the remaining dis-puted elements.

B. Material Misrepresentation

Next, Defendants contend that, as a matter of law, Plaintiffs have failed to allege the materiality of the mis-representations regarding Buca's accounting treatment of employee meals. Therefore, Defendants contend that Plaintiffs' [*29] claims based on Buca's accounting treatment of employee meals should be dismissed. A misrepresentation or omission is material if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of informa-tion made available." Parnes v. Gateway 2000, Inc., 122 F.3d 539, 546 (8th Cir. 1997) (quoting Basic Inc. v. Lev-inson, 485 U.S. 224, 231-32, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988)). In many cases, the question of materiality is a factual question for a jury to decide. Id. In those cases where the alleged misrepresentation could not have swayed a reasonable investor, a court may determine, as a matter of law, that the alleged misrepresentation is im-material. Id. (citation omitted).

Defendants contend that the fact that the treatment of employee meals represented only about 2% of Buca's total sales for fiscal years 2000 through 2003 and for the first nine months of 2004 renders this claim immaterial as a matter of law. In particular, Defendants contend that because Buca reported a 43% increase in sales for the first quarter of 2002 as compared to the first quarter in 2001, [*30] when the practice allegedly had the greatest impact, the 2% increase attributable to employee meals was negligible. Defendants also contend that the alleged negligible impact is evident when considering Buca's year-end total sales. For example, Defendants note that Buca reported a 38% sales increase in fiscal 2001 com-pared to fiscal 2000 and a 37% increase in fiscal 2002 compared to the prior year. (Compl. at PP 90, 103.) In response, Plaintiffs assert that the increases Defendants cite represent total sales, not same store sales. According to Plaintiffs, when only same store sales are considered, a 2% increase over the prior year has a material effect on revenues.

The Court does not find that a 2% increase in total sales is immaterial as a matter of law. The Court cannot tell whether a representation was immaterial as a matter of law solely by considering the amount of the revenue overstatement. See Gebhardt v. ConAgra Foods, Inc., 335 F.3d 824, 830 (8th Cir. 2003) ("In our view, the quantity of a revenue overstatement, in and of itself, is not sufficient to be dispositive of this issue. Instead, we


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look at the total mix of data available to investors, and place [*31] the misrepresented data in context.") Thus, reading the allegation in the light most favorable to the Plaintiffs, a reasonable factfinder could determine that a 2% increase in total sales is material. Therefore, the Court denies Defendants' motion with respect to this is-sue.

C. Scienter

Finally, Defendants contend that the Court should dismiss the Complaint because the Plaintiffs have failed to plead facts giving rise to a strong inference that De-fendants acted with scienter. Scienter is "the intent to deceive, manipulate, or defraud." Green Tree, 270 F.3d at 653 (citations omitted). Plaintiffs must plead facts giving rise to both a reasonable and strong inference of scienter. Kushner v. Beverly Enters., Inc., 317 F.3d 820, 827 (8th Cir. 2003). There are three ways in which Plain-tiffs can satisfy the scienter requirement: (1) by pleading specific facts demonstrating "the intent to deceive, ma-nipulate, or defraud"; (2) by pleading specific facts giv-ing rise to the level of "severe recklessness"; or (3) by pleading allegations of "unusual or heightened" motive or opportunity. In re K-Tel Int'l, Sec. Litig., 300 F.3d 881, 893-94 (8th Cir. 2002). [*32]

Plaintiffs allege that they have satisfied all three ways of establishing a strong and reasonable inference of scienter. Additionally, Plaintiffs allege that they have satisfied the scienter requirement with regard to their inadequate internal-controls claim. The Court will ad-dress each argument in turn.

1. Intent

Plaintiffs assert that they have pleaded facts that show Defendants knew that their earnings statements were materially false and misleading when made because they knew that their accounting methods violated GAAP. The Court will address Plaintiffs' argument with respect to each of the three accounting violations. The Claims Based On Buca's Accounting Treatment of Employee Meals

Defendants contend that Plaintiffs have failed to plead facts that show Defendants knew they were im-properly accounting for employee meals during the Class Period. Plaintiffs point to the statements of several confi-dential sources to support their allegations of scienter. First, Plaintiffs note that the Complaint alleges that from April 2001 to April 2002 CS-5 "repeatedly questioned" Micatrotto and Gadel "about the booking of the '[Employee] Meals' and why the recognition of [*33] this revenue was not disclosed in the Company's public filings and investor reports." (Compl. at P 39.) Further, Plaintiffs point out that the Complaint alleges that CS-5

questioned Gadel about this at least 10 times and was told that the failure to disclose this revenue recognition was a result of an "executive decision" and that he "should not worry about it." (Id.)

Additionally, Plaintiffs note that the Complaint al-leges that CS-4 stated that in the first quarter of 2004, CS-4 and other general managers received a voice-mail message from Micatrotto and Gadel instructing them that they were no longer allowed to book the employee meals as sales. Further, Plaintiffs point out that CS-4 alleges that the Company continued to book employee meals as revenue through the third quarter of 2004, and, when the practice stopped, Buca did not timely disclose this ac-counting change. Finally, Plaintiffs note that the Com-plaint alleges that CS-8 recalled conversations between Buca executives in 2003 and 2004, including between Micatrotto and Gadel, regarding the need to restate the revenue booked from employee meals. In response, De-fendants contend that the Complaint's only allegations of contemporaneous [*34] knowledge of wrongdoing are the vague generalizations of confidential sources in no position to discern the Defendants' motives.

The Court finds that Plaintiffs have failed to plead facts giving rise to a reasonable and strong inference of scienter. Allegations of GAAP violations do not, by themselves, raise an inference of scienter. Ferris, Baker Watts, Inc. v. Ernst & Young, LLP, 395 F.3d 851, 855 (8th Cir. 2005). Instead, such allegations may only be sufficient when coupled with evidence of corresponding fraudulent intent. Id. Thus, plaintiffs must allege "facts or further particularities that, if true, demonstrate that the defendants had access to, or knowledge of, information contradicting their public statements when they were made." Navarre, 299 F.3d at 742. Although Defendants practice of booking free employee meals violated GAAP, Plaintiffs have failed to establish the requisite fraudulent intent.

Here, the confidential sources are silent regarding whether the Individual Defendants knew or believed that the practice of booking employee meals as sales violated GAAP. Although the Complaint alleges that CS-5 re-peatedly questioned Gadel [*35] about Buca's decision not to publicly disclose its practice of booking employee meals as sales, CS-5 does not allege that Gadel knew or believed the practice violated GAAP. Further, although CS-4 alleges that Micatrotto and Gadel instructed general managers to stop booking employee meals as sales, CS-4 does not allege that Micatrotto or Gadel knew that the practice violated GAAP. Likewise, although CS-8 al-leges that in 2003 and 2004 executives discussed the need to restate the revenue booked as employee meals, CS-8 does not allege that any executive actually con-cluded that the restatement was required or that Buca or any of the Individual Defendants adopted this view be-


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fore 2005. In conclusion, the Court finds that the confi-dential sources' allegations do not establish the requisite fraudulent intent that would establish scienter. Accord-ingly, these claims are dismissed on this basis. The Claims Based on Buca's Accounting for Leases and Leasehold Equipment

Defendants contend that Plaintiffs' claims based on Buca's accounting for leases and leasehold improvements should be dismissed because Plaintiffs have failed to satisfy the scienter requirement. Defendants contend that [*36] Buca employed an accounting treatment that had been widely used in the restaurant business until the SEC clarified its interpretation of the governing rules in early 2005. Defendants contend that Plaintiffs have failed to raise a strong inference of scienter because the Com-plaint alleges only that the original accounting treatment of leases and leasehold improvements violated GAAP and required restatement. Defendants contend that Plain-tiffs fail to allege that anyone at Buca knew or believed that the accounting treatment was improper at the time the original financial results were posted.

In response, Plaintiffs refute Defendants' assertion that Buca employed an accounting treatment that had been widely used in the restaurant business until the SEC clarified its interpretation of the governing rules in early 2005. Plaintiffs' response fails to address the relevant inquiry. Specifically, Plaintiffs fail to allege the requisite fraudulent intent coupled with the GAAP violation. Here, there is no allegation that anyone at Buca knew or be-lieved that the lease accounting method violated GAAP at the time of the original filings. Because Plaintiffs have failed to plead such facts, Plaintiffs [*37] have failed to meet the scienter requirement with regard to their claims based on Buca's accounting for leases and leasehold equipment. Accordingly, these claims are dismissed on this basis. The Claims Based on Buca's Capitalization of Other Expenses

Defendants also assert that Plaintiffs' claims based on Buca's alleged improper capitalization of other ex-penses should be dismissed because Plaintiffs have failed to satisfy the scienter requirement. Defendants contend that the Complaint generally alleges that Buca improp-erly capitalized various expenses that provide the Com-pany with no future economic benefit or service poten-tial. As a result, Defendants allege that Plaintiffs have failed to plead the circumstances of the alleged fraud with particularity. In particular, Defendants contend that the Complaint pleads no facts demonstrating that anyone at Buca knew or believed that the capitalization of the expenses at issue was improper at the time the original financial results were posted. Finally, Defendants con-

tend that Plaintiffs have abandoned their claims based on Buca's alleged improper capitalization of other expenses because in their opposition brief Plaintiffs failed [*38] to respond to Defendants' arguments.

The Court does not find that Plaintiffs have aban-doned these claims because Plaintiffs mention them in their opposition brief's "statement of facts" and because Plaintiffs denied abandoning them at oral argument. The Court, however, finds that Plaintiffs have failed to estab-lish scienter with regard to these claims. Plaintiffs fail to plead any fact demonstrating that Buca knew or believed the capitalization was improper at the time the original financial results were announced.

2. Unusual or Heightened Motive

Next, Defendants assert that Plaintiffs have failed to establish a strong and reasonable inference of scienter based on an unusual or heightened motive to commit fraud. Plaintiffs contend that Defendants were motivated to allegedly artificially inflate Buca's stock price in order to: (1) sell stock and exercise their stock options at a substantial profit and (2) increase their compensation and bonuses.

a. Stock Sales and Options

Plaintiffs allege that the Individual Defendants were motivated to inflate Buca's stock price in order to sell their shares at inflated prices and to exercise their options using inflated stock as [*39] currency. Plaintiffs contend that following a May 15, 2002 press release in which Buca reported positive comparable restaurant sales for the Buca di Beppo restaurants, Micatrotto sold 100,000 Buca shares for approximately $ 1,260,000 on June 12, 2002. Plaintiffs contend that this sale constituted 100% of Micatrotto's holdings in Buca. n3 Plaintiffs also con-tend that Mihajlov also sold 10,000 Buca shares for $ 180,000 on June 4, 2002. Plaintiffs contend that Mica-trotto's and Mihajlov's sales occurred just prior to the Company's public announcement on July 17, 2002, that comparable restaurant sales had declined for the second quarter and thus constituted an insider stock sale. Plain-tiffs contend that this announcement resulted in the Company's stock price dropping from $ 13.35 per share on July 16, 2002, to $ 9.26 per share on July 17, 2002. In addition to Micatrotto's and Mihajlov's July 2002 sales, Plaintiffs cite various stock sales made by Micatrotto, Mihajlov, and Gadel between 2000 and 2002, in which the Individual Defendants earned between $ 85,000 and $ 1,168,247 for the various sales. Because these sales occurred during the Class Period, when Defendants were allegedly reporting [*40] false operating results, Plain-tiffs assert that Defendants had a personal stake in sus-taining the perception of the viability of Buca's rapid-growth plans.


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n3 Micatrotto refutes the assertion that his June 12, 2002 sale of 100,000 Buca shares exhausted his holdings. Micatrotto contends that this allega-tion is not supported by any pleading, confiden-tial source, or exhibit. Micatrotto requests that the Court take judicial notice under Rule 201 of the Federal Rules of Evidence of Buca's 2002 Sched-ule 14A Proxy Statement, filed with the SEC on April 25, 2002, and Buca's 2003 Schedule 14A Proxy Statement, filed with the SEC on April 4, 2003. These documents show that as of April 9, 2002, Micatrotto was the beneficial owner of 301,663 Buca shares. (Reply Mem. of Def. Jo-seph P. Micatrotto in Supp. of Mot. to Dismiss Pls.' Consolidated Am. Compl., Ex. B. at 7.) Thus, according to Micatrotto, by selling 100,000 shares, he only divested himself of 33% of his holdings in Buca. Micatrotto also asserts that these documents show that by March 31, 2002, Micatrotto was the owner of 332,867 Buca shares. (Id. at Ex. A. at 8.) Micatrotto asserts that he offers these documents not to prove the truth of the documents' contents, but rather to empha-size that Plaintiffs' allegations against Micatrotto are disingenuous and lack a factual or legal basis.

In response, Plaintiffs request that the Court take judicial notice of the Form 4 that Buca filed with the SEC on June 12, 2002. That Form, shows "0" securities beneficially owned by Mica-trotto following his sale of 100,000 shares of common stock. Additionally, Plaintiffs request that the Court take judicial notice of note 9 on page 8 of the 2002 Schedule 14A that Micatrotto requests judicial notice of, which shows that the "shares" beneficially owned by Micatrotto actu-ally consisted of options to purchase 301,663 shares, not actual shares. Finally, Plaintiffs re-quest that the Court take judicial notice of note 11 on page 9 of the 2003 Schedule 14A submitted by Micatrotto, which states that the 332,867 shares beneficially owned by Micatrotto as of March 31, 2003 consisted of options to purchase 324,997 shares of common stock and 570 shares owned by his wife. Thus, Plaintiffs do not object to Micatrotto's request for judicial notice. The Court grants Micatrotto's and Plaintiffs' requests to take judicial notice of the documents, finding that the Court may appropriately consider these SEC fil-ings on this motion to dismiss and that they do not go to the truth of the matter asserted. See Green Tree, 270 F.3d at 663.

[*41]

Defendants, on the other hand, assert that the stock sales do not show the requisite motive because the Com-plaint does not indicate that Gadel's and Mihaljov's sales were out of line with their prior trading practices. Defen-dants also contend that Micatrotto's June 2002 sale of 100,000 shares occurred early in the Class Period, before the price drops of which Plaintiffs complain, and there-fore do not establish motive to commit fraud. The Court agrees.

The Court finds that Plaintiffs have not sufficiently pled that the Individual Defendants had an unusual or heightened motive to commit the alleged fraud. "Unusual insider trading activity during the class period may per-mit an inference of bad faith and scienter." K-Tel Int'l, 300 F.3d at 895 (citation omitted). But "[i]nsider stock sales are not inherently suspicious; they become so only when the level of trading is 'dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside informa-tion.'" Navarre, 299 F.3d at 747 (quoting In re Vantive Corp. Sec. Litig., 283 F.3d at 1079, 1092 (9th Cir. 2002)).

Here, with respect [*42] to Gadel and Mihaljov, Plaintiffs' Complaint only alleges the number of shares each defendant sold and the gross profit realized for each stock sale during the Class Period. Because the Com-plaint does not indicate how these sales relate to the De-fendant's prior sales histories, the Court cannot determine whether the sales were "unusual in timing and amount." Id. (finding no showing of unusual trade activity where "[t]he Class failed to allege the prior history of sales for the defendants or even the number of shares held by each"). With respect to Micatrotto's June 2002 sale of 100,000 shares, although noteworthy because this sale exhausted his holdings, this sale occurred early in the Class Period, before the price drops of which Plaintiffs complain. Moreover, Gadel, who allegedly directed the accounting scheme with Micatrotto, did not sell any of his shares in June 2002. Additionally, Plaintiffs cite no authority for the proposition that a single sale by one executive supports a strong inference of scienter. Thus, the Court finds that Plaintiffs failed to plead unusual or heightened motive that would give rise to a reasonable and strong inference of scienter.

b. Compensation [*43] and Bonuses

Plaintiffs next allege that the Individual Defendants were motivated to inflate their stock price to increase their compensation, which was directly tied to certain performance targets. Plaintiffs contend that, pursuant to their Employment Agreements, Micatrotto and Gadel were eligible for bonuses ranging from 35% to over 60% of their base salary, depending on the number of new


2006 U.S. Dist. LEXIS 75224, *

restaurant openings, total sales, comparable restaurant sales, and general and administrative expenses. Plaintiffs further allege that Gadel's agreement used a 2% increase in comparable restaurant sales as a performance bench-mark. Thus, according to Plaintiffs, it is not coincidental that Defendants' alleged fraudulent booking of employee meals as revenue allegedly increased same store sales by more than 2% annually.

In response, Defendants assert that the Complaint only vaguely alleges that Micatrotto and Gadel were eli-gible for bonuses that were dependent on achieving cer-tain performance targets, which is nothing unusual for an executive. The Court agrees and finds that such allega-tions do not establish unusual or heightened motive to commit the alleged fraud. "[U]nsupported allegations [*44] with regard to motives generally possessed by all corporate directors and officers are insufficient as a mat-ter of law." K-Tel Int'l, 300 F.3d at 894. Such motives include the desire to maintain a high corporate credit rating or the appearance of corporate profitability, and the desire to maintain a high stock price in order to in-crease executive compensation. Id. (quoting Kalnit v. Eichler, 264 F.3d 131, 139 (2d. Cir. 2001)).

Plaintiffs' allegations are unremarkable. Plaintiffs have not pleaded any motive beyond what could be at-tributed to any corporate officer. The Complaint is silent as to the amount of the bonuses that Micatrotto and Gadel received th

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