Norfolk County Retirement System v. Solazyme, Inc. et al

Northern District of California, cand-4:2015-cv-02938

ORDER by Judge Haywood S. Gilliam, Jr. GRANTING {{93}} MOTION TO DISMISS AND GRANTING REQUEST FOR JUDICIAL NOTICE. Amended Pleadings due by 7/24/2018.

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7 1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 NORFOLK COUNTY RETIREMENT Case No. 15-cv-02938-HSG SYSTEM, et al., 8 ORDER GRANTING MOTION TO Plaintiffs, DISMISS AND GRANTING REQUEST 9 FOR JUDICIAL NOTICE v. 10 Re: Dkt. Nos. 93, 95 SOLAZYME, INC., et al., 11 Defendants. 12 Northern District of California United States District Court 13 This is a consolidated putative securities class action brought against Defendant Solazyme, 14 Inc. ("Solazyme"), Jonathan S. Wolfson, Solazyme's Chief Executive Officer during the class 15 period, and Tyler W. Painter, Solazyme's Chief Financial Officer (collectively, "Defendants"), 16 pursuant to §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"). 17 On December 29, 2016, the Court granted motions to dismiss brought by Defendants and 18 by Goldman, Sachs & Company and Morgan Stanley & Company, LLC. Dkt. No. 88. Plaintiffs 19 filed an Amended Consolidated Complaint on February 15, 2017. Dkt. No. 91 ("SAC"). Pending 20 before the Court is Defendants' motion to dismiss the SAC.1 Dkt. No. 93. For the following 21 reasons, the Court GRANTS Defendants' motion to dismiss. 2 22 1 23 This action was stayed between August 7, 2017 and January 26, 2018 due to a bankruptcy proceeding involving TerraVia Holdings, Inc., Solazyme Brazil LLC, and Solazyme 24 Manufacturing 1, LLC. See Dkt. Nos. 102, 107. 2 Defendants have requested that the Court consider documents incorporated by reference in the 25 Complaint and take judicial notice of certain documents attached as exhibits to the Declaration of Mark R.S. Foster. Dkt. No. 95. The Court GRANTS the request for consideration of documents 26 incorporated by reference in the Complaint. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) ("[C]ourts must consider the complaint in its entirety, as well as other 27 sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take 28 judicial notice.") The Court also GRANTS the request for judicial notice of SEC filings, see Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1064 n.7 (9th Cir. 2008) (SEC 7 1 I. LEGAL STANDARD 2 A. Rule 12(b)(6) Standard 3 4 Federal Rule of Civil Procedure 8(a) requires that a complaint contain "a short and plain 5 statement of the claim showing that the pleader is entitled to relief[.]" Fed. R. Civ. P. 8(a)(2). A 6 defendant may move to dismiss a complaint for failing to state a claim upon which relief can be 7 granted under Federal Rule of Civil Procedure 12(b)(6). "Dismissal under Rule 12(b)(6) is 8 appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support 9 a cognizable legal theory." Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th 10 Cir. 2008). To survive a Rule 12(b)(6) motion, a plaintiff must plead "enough facts to state a 11 claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). 12 A claim is facially plausible when a plaintiff pleads "factual content that allows the court to draw Northern District of California United States District Court 13 the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 14 556 U.S. 662, 678 (2009). 15 In reviewing the plausibility of a complaint, courts "accept factual allegations in the 16 complaint as true and construe the pleadings in the light most favorable to the nonmoving party." 17 Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). Nonetheless, 18 Courts do not "accept as true allegations that are merely conclusory, unwarranted deductions of 19 fact, or unreasonable inferences." In re Gilead Scis. Secs. Litig., 536 F.3d 1049, 1055 (9th Cir. 20 2008). 21 B. Heightened Pleading Standards 22 Section 10(b) of the Securities Exchange Act of 1934 provides that it is unlawful "[t]o use 23 24 filings subject to judicial notice); Dreiling v. Am. Exp. Co., 458 F.3d 942, 946 n.2 (9th Cir. 2006) 25 (same), and of press releases and other investor communications showing that the "market was aware of information[,]" see Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 980-81 & 26 n.18 (9th Cir. 1999); see also Brodsky v. Yahoo! Inc., 630 F. Supp. 2d 1104, 1111 (N.D. Cal. 2009) (taking judicial notice of press releases); In re Century Aluminum Co. Sec. Litig., 749 F. 27 Supp. 2d 964, 979-80 (N.D. Cal. 2010) (taking judicial notice of slide presentations to analysts). Defendants request that the judicially-noticeable materials containing their representations be 28 considered to the extent they "show what information was disclosed to the market," Dkt. No. 99 at 5, and the Court agrees these materials are appropriately considered for that purpose. 2 7 1 or employ, in connection with the purchase or sale of any security registered on a national 2 securities exchange or any security not so registered. . . any manipulative or deceptive device or 3 contrivance. . . . " 15 U.S.C. § 78j(b). Under this section, the Securities and Exchange 4 Commission promulgated Rule 10b-5, which makes it unlawful, among other things, "[t]o make 5 any untrue statement of a material fact or to omit to state a material fact necessary in order to 6 make the statements made, in the light of the circumstances under which they were made, not 7 misleading." 17 C.F.R. § 240.10b-5(b). "To prevail on a claim for violations of either Section 8 10(b) or Rule 10b-5, a plaintiff must prove six elements: "(1) a material misrepresentation or 9 omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or 10 omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or 11 omission; (5) economic loss; and (6) loss causation." Stoneridge Inv. Partners, LLC v. Scientific– 12 Atlanta, Inc., 552 U.S. 148, 157 (2008). Northern District of California United States District Court 13 At the pleading stage, a complaint alleging claims under section 10(b) and Rule 10b-5 14 must not only meet the requirements of Rule 8, but must satisfy the heightened pleading 15 requirements of both Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation 16 Reform Act ("PSLRA"). In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 876 (9th Cir. 2012). 17 Under Rule 9(b), claims alleging fraud are subject to a heightened pleading requirement, which 18 requires that a party "state with particularity the circumstances constituting fraud or mistake." 19 Fed. R. Civ. P. 9(b). Additionally, all private securities fraud complaints are subject to the "more 20 exacting pleading requirements" of the PSLRA, which require that the complaint plead with 21 particularity both falsity and scienter. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 22 (9th Cir. 2009). With respect to forward-looking statements, "a defendant will not be liable for a 23 false or misleading statement if it is forward-looking and either is accompanied by cautionary 24 language or is made without actual knowledge that it is false or misleading. In re Quality Sys., 25 Inc. Sec. Litig., 865 F.3d 1130, 1141 (9th Cir. 2017) (quoting Cutera, In re Cutera Sec. Litig., 610 26 F.3d 1103, 1112–13 (9th Cir. 2010)). 27 The Court considers each pleading requirement in turn. 28 3 7 II. FALSITY 1 A. February 26, 2014 Statements 2 On February 26, 2014, Solazyme issued a press release and hosted a conference call for 3 investors and analysts. SAC ¶ 42. During that call, Wolfson noted that Solazyme had "neared 4 completion of the 100,000 metric ton Moema plant," that Solazyme was "making strong and 5 steady progress at Moema," and was "deep into the commissioning process," that "[i]nfrastructure 6 and upstream which together comprise a substantial percentage of the plant, [were] both currently 7 online and everything [was] functioning as expected," and that "[a]t Moema, commissioning [was] 8 well underway, a significant [portion] of the plant [was] already online," and that Solazyme was 9 "getting close to producing our first commercially salable product." SAC ¶ 43. The press release 10 also stated that Solazyme was "deep into commissioning in Brazil as we complete the first-of-its- 11 kind 100,000 MT Solazyme Bunge Renewable Oils (SB Oils) facility at Moema." SAC ¶ 44. 12 Northern District of California Wolfson also made several forward-looking statements on the February 26 conference call, United States District Court 13 including that Solazyme planned a "12 to 18-month time line to reach nameplate capacity at both 14 Clinton and Moema," and that the "clock [would] start soon at Moema with initial fermentation 15 operations just getting under way." SAC ¶ 43. Wolfson stated his belief that "the progress at 16 Moema and its current schedule leaves us in good shape to bring full production online" in the 17 spring, and that Solazyme was "on track to reach full nameplate capacity in the back half of 18 2015." Id. 19 The complaint alleges that the Moema plant "was not close to achieving commercial 20 viability at any point during 2014," and that "commercial oil production never truly got underway 21 at the Moema Facility during any point in the Class Period." SAC ¶ 46, 54. The complaint further 22 alleges that "there was no reasonable basis to conclude that the Moema Facility would achieve 23 nameplate capacity of 100,000 MT in 12 to 18 months." SAC ¶ 46. 24 Plaintiffs have failed to adequately allege any misrepresentation as to any of these 25 statements.3 Taking these allegations in the light most favorable to Plaintiffs, the SAC does not 26 27 3 Plaintiffs do not address several of Solazyme's statements, including those regarding the "12 to 28 18-month time line," in their opposition brief, thereby abandoning those statements as possible bases for their claim. See Ramirez v. Ghilotti Bros. Inc., 941 F. Supp. 2d 1197, 1210 and n.7 4 7 1 sufficiently plead falsity at the time the statements were made. A plant that was not close to 2 achieving commercial viability in 2014 could still be "near completion." See SAC ¶ 43. 3 Likewise, Solazyme could still have made "strong and steady progress," been "deep into the 4 commissioning process," and infrastructure and upstream could still have been "online" and 5 "functioning as expected" without being "close to achieving commercial viability" at Moema. 6 SAC ¶¶ 43–44; see Retail Wholesale & Dep't Store Union Local 338 Ret. Fund v. Hewlett- 7 Packard Co., 845 F.3d 1268, 1276 (9th Cir. 2017) (holding that statements must be "capable of 8 objective verification" to be misleading). 9 The forward-looking statements that Moema was "in good shape to bring full production 10 online" in the spring, and was "on track to reach full nameplate capacity in the back half of 2015" 11 are also not contradicted by the allegation that Moema was not close to achieving commercial 12 viability in 2014. With respect to Solazyme's plans to achieve nameplate capacity within 12 to 18 Northern District of California United States District Court 13 months, the assertion that there was no "reasonable basis" to conclude that such a timeline was 14 possible does not allege that the plan to do so did not exist at the time. See SAC ¶¶ 43, 46. 15 Moreover, Plaintiffs fail to allege actual knowledge that Wolfson knew these forward-looking 16 statements to be false at the time they were made. See SAC ¶¶ 104–109; see also Employers 17 Teamsters Local Nos. 175 & 505 Pension Tr. Fund v. Clorox Co., 353 F.3d 1125, 1134 (9th Cir. 18 2004) ("[I]f the challenged statement is forward-looking, the plaintiffs must have alleged facts that 19 would create a strong inference that the defendants made the forecasts with actual knowledge. . . 20 that the statement[s were] false or misleading at the time made.") (quoting In re Vantive Corp. 21 Sec. Litig., 283 F.3d 1079, 1091 (9th Cir. 2002)) (internal quotation marks omitted). 22 B. March 14, 2014 Statements 23 i. Alleged Misstatements 24 On March 14, 2014, Solazyme filed its 2013 Form 10-K with the SEC. SAC ¶ 51. In it, 25 Defendants stated that their "process is compatible with commercial-scale, widely-available 26 27 (N.D. Cal. 2013) (finding failure to respond to arguments in opposition brief constituted waiver, 28 and collecting cases finding same). 5 7 1 fermentation and oil recovery equipment," that the "commercial scale achieved at ADM's Clinton 2 Facility is comparable to the fermentation equipment at the Solazyme Bunge Renewable Oils 3 facility in Brazil," that "the commissioning of the facility at Moema [was] underway," and that 4 Solazyme was "now expanding into large-scale, high-volume commercial production." Id. 5 Solazyme also made the forward-looking statements that they were "targeting the 6 production of commercially salable product by the end of the first quarter of 2014," and that the 7 "production facility [was] expected to have a name plate capacity of 100,000 [metric tons] of oil 8 per year." Id. 9 Plaintiffs again rely on the allegations that Moema was "not close to achieving commercial 10 viability at any point during 2014," and that there was "no reasonable basis to conclude that the 11 Moema Facility would achieve nameplate capacity of 100,000 metric tons in 12 to 18 months" to 12 show falsity of the March 14 statements. SAC ¶ 53. Northern District of California United States District Court 13 Plaintiffs again have failed to adequately allege any misrepresentation. The Solazyme 14 statements are not contradicted by the allegations of Plaintiffs' confidential witnesses ("CW"). 15 Several of these statements are similar or identical in substance to those provided during the 16 February 26 call, and falsity is insufficiently pled for the reasons described above. Additionally, 17 that Moema was "not close to achieving commercial viability" does not contradict statements 18 about the compatibility of its process with "fermentation and oil recovery equipment," or about 19 comparisons with other oil facilities. See SAC ¶¶ 51, 53. 20 Plaintiffs likewise do not allege that the forward-looking statement that Solazyme was 21 "targeting the production of commercially salable product by the end of the first quarter of 2014" 22 is false, as the SAC does not address Solazyme's plans or target dates at all. 23 ii. Alleged Omissions 24 Plaintiffs contend that Defendants omitted material facts in their February 26 and March 25 14 statements, which created a false impression of the state of the Moema facility. Dkt. No. 96 at 26 8. Plaintiffs contend that the specific issues at Moema manifested in poor oil quality and oil 27 byproducts that were "constantly clogging the press that was used to extract the oil," and that by 28 omitting these details, Defendants affirmatively created a false impression. Id.; SAC ¶ 65; see 6 7 1 Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002) ("To be actionable under 2 the securities laws, an omission must be misleading; in other words it must affirmatively create an 3 impression of a state of affairs that differs in a material way from the one that actually exists."). 4 This allegation simply is not presented in the complaint. Defendants' alleged omissions 5 are only discussed with reference to the May 5, 2014 statements (addressed below). See SAC ¶ 65 6 (containing only a nonspecific reference to conditions "throughout the Class Period," in a section 7 discussing only the May 5 statements). Thus, Plaintiffs have failed to "identify[] the statements at 8 issue and set[] forth what is false or misleading about the statement and why the statements were 9 false or misleading at the time they were made." In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 10 869, 876 (9th Cir. 2012). 11 C. May 5, 2014 Statements 12 i. Alleged Misstatements Northern District of California United States District Court 13 On May 5, 2014, Solazyme hosted another conference call for investors. SAC ¶ 57–58. 14 During the call, Wolfson attributed delays at the Moema facility to "intermittent power and steam 15 availability resulting from the start up of a new cogen facility at the adjoining Moema sugar mill," 16 and stated that, "[s]team and power aside, we are progressing closer to completion of the plant." 17 SAC ¶ 58. When pressed about the cause of the delays, Wolfson stated that "[i]t hasn't been 18 anything other than construction to commissioning," and that the "delays have nothing to do with 19 the process," and were not related to Solazyme's technology. SAC ¶ 59. Wolfson continued to 20 state his belief that the only reason for the delays was the interruption of steam and power to the 21 facility. SAC ¶ 60. Wolfson also noted that he didn't "have concerns about the reliability of 22 steam and power in the longer term." SAC ¶ 62. Regarding the extraction and refinement 23 process, Wolfson stated that he wouldn't say that the process itself was "more complicated" than 24 he originally thought, and that the parts involved in the unit operations were "all operable and 25 really have been operable since later March." SAC ¶ 61. He noted that the "part that just happens 26 to be taking longer and to be specific. . . it has to do with just getting some conveyance equipment 27 installed, is the final oil extraction units. I wouldn't say it has anything to do with complexity." 28 SAC ¶ 61. 7 7 1 Wolfson additionally made several forward-looking statements in connection with the May 2 5 press release and conference call. Wolfson stated that Solazyme expected "to manufacture 3 commercial product at the Moema facility in the second quarter," and that he did not "see reliable 4 availability of power and steam as a long-term issue," and that he envisioned the production of 5 commercial products at Moema would happen that quarter. SAC ¶¶ 57, 63. 6 Plaintiffs allege that these statements were misleading because, according to a confidential 7 witness, even "if the power and steam issues had not occurred, the Moema Facility still would not 8 have been on schedule with its ramp up to commercial production levels by May 5, 2014 because 9 the Company was so far behind its production targets at that time, and plagued by so many other 10 problems," which included the "poor quality of the oil being produced." SAC ¶ 65. Plaintiffs also 11 allege another confidential witness's opinion that "these utility problems did not have a significant 12 effect on the oil production output because commercial production was not ongoing at any point Northern District of California United States District Court 13 during the Class Period." SAC ¶ 66. Plaintiffs allege that at the time of the May 5, 2014 14 statements, a confidential witness "and other colleagues at Solazyme believed. . . that the steam 15 and power issues were intentionally being exaggerated, and that the main issue was rather to do 16 with the consistent manufacturing problems that existed in conjunction with the power and steam 17 issues." SAC ¶ 67. 18 Again, Plaintiffs fail to plead facts sufficient to allege that Wolfson's statements were 19 inaccurate at the time he made them. Plaintiffs rely on the opinions of their confidential witnesses, 20 who believed that the power and steam issues "did not have a significant effect on the oil 21 production output," and were "intentionally being exaggerated." SAC ¶¶ 66–67. These opinions, 22 formed with the benefit of hindsight, do not establish that Wolfson, or anyone making statements 23 on behalf of Solazyme, shared the confidential witnesses' opinions on May 5, 2014. See In re 24 Atossa Genetics Inc Sec. Litig., 868 F.3d 784, 801–02 (9th Cir. 2017) (noting that, with respect to 25 opinion statements, "when a plaintiff relies on a theory of material misrepresentation, the plaintiff 26 must allege both that 'the speaker did not hold the belief she professed' and that the belief is 27 objectively untrue."). 28 8 7 ii. Alleged Omissions 1 Plaintiffs contend that, by omitting the problems unrelated to the power and steam issues, 2 Wolfson affirmatively created a false impression of the state of the Moema facility. See Dkt. No. 3 96 at 9–10. "No matter how detailed and accurate disclosure statements are, there are likely to be 4 additional details that could have been disclosed but were not." Brody, 280 F.3d at 1006. 5 Wolfson's statements taken as a whole, including his acknowledgment that "back end separation 6 at Moema was taking a little bit longer than expected," do not present an affirmatively-created 7 false impression. SAC ¶ 61. None of the hypothetically-alleged omissions contradict the 8 statements regarding the Moema facility, nor would their addition have materially altered the 9 impression created by the statement that "the commissioning of the facility at Moema [was] 10 underway." SAC ¶ 51; see Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 11 1061 (9th Cir. 2014) (noting no "rule of completeness for securities disclosures"). And finally, 12 Northern District of California Plaintiffs have not sufficiently alleged that Wolfson had actual knowledge of the allegedly omitted United States District Court 13 facts prior to the May 5 statements. See SAC ¶¶ 64–68, 104–109. 14 D. May 29, 2014, July, and August Statements 15 On May 29, 2014, Solazyme issued a special press release, stating that it had "successfully 16 produced its first commercially salable products on full-scale production lines" at Moema, and that 17 "production [was] underway." SAC ¶ 72. On July 30, 2014, Solazyme hosted a conference call to 18 discuss company operations in the second quarter of 2014. SAC ¶ 78. During a question and 19 answer session following the call, Wolfson stated that Solazyme had "produced both oil and 20 Encapso using full-scale production lines and [] shipped initial volumes of commercial products" 21 from Moema. SAC ¶ 81. On August 11 or 12, 2014, Solazyme's Senior Vice President ("SVP") 22 of Corporate Development stated during an investor conference that Solazyme "just began 23 commercial production out of [Moema]." SAC ¶ 82–83. 24 On the July 30 call, Wolfson referred to Moema as a "large-scale manufacturing facilit[y]," 25 and a "100,000 metric ton. . . facility." SAC ¶ 78. He noted that commissioning of Moema was 26 "in the final stages," and that all "equipment through the finishing process [was] now installed." 27 SAC ¶ 79. Painter stated that Solazyme continued "to expect the ramp to nameplate at both 28 9 7 1 facilities to be a 12- to 18-month process that starts slowly and accelerates in the later stages." 2 SAC ¶ 80. 3 Plaintiffs allege, based on the statements of three confidential witnesses, that Solazyme 4 "was never able to produce commercially salable oil at the Moema Facility at any point during 5 2014," and that "commercial oil production never truly got underway at the Moema Facility at any 6 time during the Class Period." SAC ¶¶ 73–74, 86. 7 Plaintiffs again allege that, because Moema was "not close to achieving commercial 8 viability," and because there was no "reasonable basis to conclude that the Moema Facility would 9 achieve nameplate capacity of 100,000 metric tons in 12 to 18 months," these statements were 10 false when made. SAC ¶ 85. For the same reasons discussed with respect to the February 26 and 11 March 14 statements, these allegations do not sufficiently plead falsity. 12 However, making all reasonable inferences in Plaintiffs' favor, the statements that Northern District of California United States District Court 13 Solazyme "successfully produced its first commercially salable products," "produced. . . oil," and 14 "just began commercial production" at Moema on or before August 12, 2014 are inconsistent with 15 the allegation that Solazyme "was never able to produce commercially salable oil" during 2014. 16 SAC ¶¶ 72–73, 81, 83. Defendants do not argue otherwise. See Dkt. No. 93 at 14–15. Rather, 17 Defendants contend that the underlying allegations of Plaintiffs' confidential witnesses are 18 unreliable because CW1 did not have personal knowledge of the salable oil produced by Solazyme 19 in 2014, and because CW1's job description implies that salable oil was produced in 2014 because 20 CW1 was tasked with "maintaining an inventory of oil produced a the Moema Facility." See id.; 21 SAC ¶ 39. 22 A few cases, including two cited by Defendants, appear to address the adequacy of 23 allegations regarding a confidential witness's basis for knowing certain facts under the falsity 24 prong. See Lomingkit v. Apollo Educ. Grp. Inc., No. CV-16-00689-PHX-JAT, 2017 WL 633148 25 at *12 (D. Ariz. Feb. 16, 2017), and Brodsky v. Yahoo! Inc., 630 F. Supp. 2d 1104, 1114 (N.D. 26 Cal. 2009). However, most cases address this issue when considering the second prong regarding 27 the adequacy of scienter allegations. See Zucco Partners, 552 F.3d at 995 (discussing PSLRA 28 pleading requirements where "confidential witnesses[' statements]. . . are introduced to establish 10 7 1 scienter"); In re Quality Sys., 865 F.3d at 1144–45 (analyzing basis for confidential witnesses' 2 knowledge under scienter prong, citing In re Daou Sys. Inc., 411 F.3d 1006, 1015 (9th Cir. 2005) 3 and Zucco Partners, 552 F.3d at 995); Browning v. Amyris, Inc., No. 13-CV-02209-WHO, 2014 4 WL 1285175, at *17–18 (N.D. Cal. Mar. 24, 2014) (same, citing Zucco Partners). 5 The Court will follow the approach of the majority of cases. Accordingly, for present 6 purposes, the Court will consider whether, even assuming it were to find falsity adequately pled as 7 to these three statements regarding the production of commercially salable oil at Moema, the 8 Plaintiffs have met their further burden of pleading scienter as to those statements. See Glazer 9 Capital Management, LP v. Magistri, 549 F.3d 736, 742–49 (9th Cir. 2008) (declining to decide 10 "close[] question" regarding adequacy of falsity allegations, because scienter was inadequately 11 pled). 12 III. SCIENTER Northern District of California United States District Court 13 A complaint adequately pleads scienter "only if a reasonable person would deem the 14 inference of scienter cogent and at least as compelling as any opposing inference one could draw 15 from the facts alleged." Zucco Partners, 552 F.3d at 991 (quoting Tellabs, Inc. v. Makor Issues & 16 Rights, Ltd., 551 U.S. 308, 309 (2007)) (internal quotation marks omitted; emphasis in original). 17 The Court must consider the complaint in its entirety, as well as other sources courts ordinarily 18 examine when ruling on Rule 12(b)(6) motions. Tellabs, 551 U.S. at 322. The inquiry is 19 "whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not 20 whether any individual allegation, scrutinized in isolation, meets that standard." Id. at 322-23. 21 "To adequately demonstrate that the defendant acted with the required state of mind, a complaint 22 must allege that the defendants made false or misleading statements either intentionally or with 23 deliberate recklessness." Zucco Partners, 552 F.3d at 991 (quoting In re Daou Sys., Inc., 411 F.3d 24 1006, 1014–1015 (9th Cir. 2005)) (internal quotation marks omitted). 25 A. Confidential Witness Statements 26 Because Plaintiffs' complaint relies on statements from confidential witnesses, it must 27 "pass two hurdles to satisfy the PSLRA pleading requirements. First, the confidential witnesses 28 whose statements are introduced to establish scienter must be described with sufficient 11 7 1 particularity to establish their reliability and personal knowledge. Second, those statements which 2 are reported by confidential witnesses with sufficient reliability and personal knowledge must 3 themselves be indicative of scienter." Zucco Partners, 552 F.3d at 995 (internal citations and 4 quotation marks omitted). 5 Plaintiffs have not adequately pled scienter in the SAC. CW1, a "controller for Solazyme- 6 Bunge in Sao Paolo, Brazil for the entire duration of 2014," is described as having responsibilities 7 that included "maintaining an inventory of oil produced at the Moema Facility and overseeing the 8 accounting records concerning the value of that inventory." SAC ¶ 39. CW2, "a Senior 9 Administrator working in the Sao Paolo office during the entire Class Period," is described as 10 being "responsible for all financial and administrative reporting systems with respect to the 11 Moema Facility," including "all information stored in Solazyme-Bunge's systems concerning 12 product inventory (i.e. oil production), customer orders, sales of oil, and vendor relations." SAC ¶ Northern District of California United States District Court 13 40. 14 CW2 alleges that "Solazyme's management, including the Individual Defendants Wolfson 15 and Painter, were kept fully apprised of the status of the Moema Facility and its inability to 16 produce commercial-grade oil." SAC ¶ 107. CW2 states "that Wolfson visited the Moema 17 Facility approximately three times per year during the relevant period, and that the Solazyme- 18 Bunge's CEO Hildo Henz. . . and CFO Lopes travelled to the United States to meet with the 19 Individual Defendants in order to provide them with updates concerning the progress of the 20 Moema Facility." Id. CW2 additionally states that "Henz and Lopes had frequent conference 21 calls with Solazyme's management to discuss the problems at the Moema Facility." Id. 22 Further, CW1 alleges that "Solazyme's management team in the United States, including 23 CEO Wolfson and CFO Painter, were kept regularly apprised of the state of the progress at the 24 Moema Facility throughout the entire Class Period, including with respect to the nature and extent 25 of the problems with the manufacturing process, the power and steam issues, the oil quality and 26 the production capacity." SAC ¶ 106. CW1 also states "that such updates were provided during 27 weekly conference calls between the corporate U.S. headquarters and the Sao Paolo office that 28 oversaw the Moema operations in which CW1 often participated, and which also included CFO 12 7 1 Painter and sometimes CEO Wolfson," and that "these weekly updates began in February of 2014 2 and continued all through the rest of the year and beyond." Id. 3 The SAC does not "provide an adequate basis for determining that the witnesses in 4 question have personal knowledge of the events they report." Zucco Partners, 552 F.3d at 995. 5 The SAC lacks supporting facts sufficient to establish the basis for CW1's central assertion that 6 "the Company was never able to produce commercially salable oil at the Moema Facility at any 7 point during 2014." SAC ¶ 73. General allegations regarding CW1's receipt of unspecified 8 hearsay "updates" regarding "production process issues at the Moema Facility during the Class 9 Period," SAC ¶ 39, are not sufficient without further factual detail. See Amyris, 2014 WL 10 1285175 at *17–18 (scienter inadequately pled where complaint failed to provide an adequate 11 basis for CW's beliefs, which were "otherwise conclusory," and where allegations were 12 unaccompanied by detailed facts of a "corroborative nature"). Northern District of California United States District Court 13 In addition, neither CW1 nor CW2 identifies a time when Wolfson or the SVP of 14 Corporate Development was informed that the Moema facility was unable to begin commercial oil 15 production before they made the challenged statements. The confidential witnesses refer generally 16 to "conference calls" and "updates" given to senior management, but fail to identify any call, 17 meeting or other type of communication (1) participated in by both the confidential witness and 18 Wolfson or the SVP of Corporate Development, (2) prior to the May 29, 2014, July, and/or 19 August statements, and (3) disclosing information contradicted by those statements. See Police 20 Ret. Sys., 759 F.3d at 1063 (confidential witness statements lacked foundation because they did 21 not "detail the actual contents of the reports the executives purportedly referenced or had access 22 to," and witnesses "lack[ed] firsthand knowledge regarding what the individual defendants knew 23 or did not know about Intuitive's financial health"); In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 24 1085 (9th Cir. 2002) (complaint failed to allege "contemporaneous facts in sufficient detail and in 25 a manner that would create a strong inference that the alleged adverse facts were known at the 26 time of the challenged statements"); In re Rackable Sys., Inc. Sec. Litig., No. C 09-0222 CW, 2010 27 WL 3447857, at *9 (N.D. Cal. Aug. 27, 2010) (citing In re Vantive Corp. in rejecting confidential 28 witnesses' "vague assertions" about financial conditions as inadequate to support an inference of 13 7 1 scienter). 2 Nor does the SAC allege that the confidential witnesses shared the purportedly 3 contradictory information with the Defendants before they made the challenged statements. See 4 City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 620 5 (9th Cir. 2017) (allegation of access to disputed information was inadequately particularized 6 where plaintiff failed to allege that defendants personally accessed information, or that witnesses 7 disclosed the purportedly contradictory information to defendants); Metzler Inv. GMBH v. 8 Corinthian Colleges, Inc., 540 F.3d 1049, 1068 (9th Cir. 2008) (explaining that "corporate 9 management's general awareness of the day-to-day workings of the company's business does not 10 establish scienter—at least absent some additional allegation of specific information conveyed to 11 management and related to the fraud"). 12 B. Defendants' Admissions Northern District of California United States District Court 13 Plaintiffs also contend that later statements made by Wolfson indicate his knowledge in 14 May, July, and August that Solazyme had not produced commercial oil at Moema. Dkt. No. 96 at 15 20–21. Wolfson stated on February 26, 2015 that "in December [2014], we made significant 16 progress at [Moema] and some of the highlights from that include periods of fully integrated plant 17 operations from sugar input all the way to final crude oil. This validated the plant's capability for 18 integrated operations and was a major technical milestone for the Moema facility." SAC ¶ 88. He 19 went on to state that a "big goal on getting Moema to operate on a fully integrated basis in 20 December [2014] was to give us the opportunity to see the plant in action." Id. 21 "A later statement may suggest that a defendant had contemporaneous knowledge of the 22 falsity of his statement, if the later statement directly contradicts or is inconsistent with the earlier 23 statement." In re Read-Rite Corp., 335 F.3d 843, 846 (9th Cir. 2003). These statements neither 24 directly contradict nor are inconsistent with Wolfson's earlier statement that Solazyme had 25 "produced both oil and Encapso using full-scale production lines and [] shipped initial volumes of 26 commercial products" from Moema, and are thus insufficient to allege scienter. SAC ¶ 81. The 27 production of crude oil at Moema in December does not foreclose oil production prior to 28 December. 14 7 C. Core Operations and Small Size 1 Plaintiffs contend that the allegations of misrepresentation relate to the "core operations" 2 of Solazyme, and that, taken together with Solazyme's small size, this factor raises a strong 3 inference of scienter. Dkt. No. 96 at 22–25. 4 "The core operations theory of scienter relies on the principle that corporate officers have 5 knowledge of the critical core operation of their companies." Police Ret. Sys., 759 F.3d at 1062 6 (internal quotation marks omitted). "Proof under this theory is not easy. A plaintiff must produce 7 either specific admissions by one or more corporate executives of detailed involvement in the 8 minutia of a company's operations, such as data monitoring. . . or witness accounts demonstrating 9 that executives had actual involvement in creating false reports." Id. 10 Plaintiffs allege that Moema was "the central cornerstone" of Solazyme's market strategy, 11 and as a result, Defendants were kept apprised of facts related to its operations. Dkt. No. 96 at 22– 12 Northern District of California 23. Plaintiff also alleges that because Solazyme had 266 full-time employees at the end of 2014, it United States District Court 13 is more likely that its officers were aware of the alleged misrepresentations. SAC ¶ 22; Dkt. No. 14 96 at 24–25. 15 Plaintiffs have not sufficiently alleged that the misrepresentations regarding operations at 16 Moema related to the core operations of Solazyme such that "it would be absurd to suggest that 17 management was without knowledge of the matter." Police Ret. Sys., 759 F.3d at 1062. As 18 discussed above with respect to the confidential witness statements, Plaintiffs have not alleged 19 specific involvement of the Defendants in the details of the purported misrepresentations, and 20 claims regarding the size of the company do not remedy this defect. As a result, Plaintiffs' core 21 operations theory does not raise a strong inference of scienter. 22 D. Stock Sales 23 Plaintiffs contend that the sale of Solazyme stock by Wolfson and Painter during the class 24 period is also indicative of scienter. "Suspicious" stock sales "only give rise to an inference of 25 scienter when they are dramatically out of line with prior trading practices at times calculated to 26 maximize the personal benefit from undisclosed inside information. . . Three factors are relevant 27 to this inquiry: (1) the amount and percentage of the shares sold; (2) the timing of the sales; and 28 15 7 1 (3) whether the sales were consistent with the insider's trading history." Metzler, 540 F.3d at 2 1066–67 (internal citations and quotation marks omitted). "For individual defendants' stock sales 3 to raise an inference of scienter, plaintiffs must provide a meaningful trading history for purposes 4 of comparison to the stock sales within the class period." Zucco Partners, 552 F.3d at 1005 5 (internal quotation marks omitted). 6 Plaintiffs allege that Wolfson and Painter sold over 423,000 and over 97,000 shares of 7 Solazyme stock during the class period, respectively. SAC ¶ 109. The SAC contains no 8 allegations regarding the trading history or the timing of the sales. Plaintiffs have therefore failed 9 to adequately plead scienter based on these sales. 10 E. Management Departures 11 Plaintiffs additionally note that "several sudden and largely unexplained high-level 12 departures" took place at Solazyme near the end of the class period. SAC. ¶ 109. These Northern District of California United States District Court 13 departures included President and Director David Cole and the Chair of Solazyme's Audit 14 Committee, Ann Mather. Id. 15 The Ninth Circuit has recognized that "resignations, terminations, and other allegations of 16 corporate reshuffling may in some circumstances be indicative of scienter." Zucco Partners, 552 17 F.3d at 1002. However, "a plaintiff must allege sufficient information to differentiate between a 18 suspicious change in personnel and a benign one. Mere conclusory allegations that a financial 19 manager resigns or retires during the class period. . . without more, cannot support a strong 20 inference of scienter." Id. 21 Here, Plaintiff alleges nothing beyond the fact of the departures of David Cole and Ann 22 Mather on October 9, 2014. These departures, without further context, do not support a strong 23 inference of scienter. 24 F. SOX Certifications 25 Plaintiffs contend that the certifications in Solazyme's SEC filings that the filings did "not 26 contain any untrue statement of material fact" support a strong inference of scienter. Dkt. No. 96 27 at 23–24; SAC ¶¶ 52, 57 n.5. The SAC does not allege that the May 29, 2014, July, and August 28 statements for which falsity has been adequately pled were accompanied by any such 16 7 1 certifications, and so the certifications alleged do not support an inference of scienter as to those 2 statements. Moreover, the Ninth Circuit has recognized that "[b]oilerplate language in. . . 3 required certifications under Sarbanes-Oxley section 302(a) . . . add[s] nothing substantial to the 4 scienter calculus." Zucco Partners, 552 F.3d at 1003-04. 5 G. Holistic Evaluation 6 Finding that none of these factors individually supports a strong inference of scienter, the 7 Court next conducts a holistic review of the allegations to determine whether the combination of 8 allegations raises such an inference. See id. at 992. Here, as many of the allegations do not 9 support a finding of scienter at all, the combination of the above allegations also fails to raise a 10 strong inference of scienter. As a result, the Court finds that Plaintiffs have failed to adequately 11 plead scienter with respect to the May 29, July, and August, 2014 statements regarding the 12 production of commercially salable oil at Moema. Northern District of California United States District Court 13 IV. CONTROL-PERSON LIABILITY 14 Plaintiffs also allege Section 20(a) claims against the Individual Defendants and Solazyme 15 on a "control person" theory of liability. SAC ¶¶ 127–130, 136–137. Because the Court finds that 16 Plaintiffs have not adequately pled a primary violation of Section 10(b) and Rule 10b-5, 17 Defendants' motion to dismiss Plaintiffs' Section 20(a) claims is GRANTED. 18 V. CONCLUSION 19 For the foregoing reasons, the Court GRANTS Defendants' motion to dismiss WITH 20 LEAVE TO AMEND only as to the May 29, 2014, July, and August statements. The motion is 21 granted WITHOUT LEAVE TO AMEND as to all other statements, based on Plaintiffs' failure 22 to adequately plead those claims following the Court's prior grant of leave to amend, and their 23 abandonment of several statements not addressed in their opposition brief. Any amended 24 complaint must be filed within 28 days of the date of this order. 25 IT IS SO ORDERED. 26 Dated: 6/26/2018 27 ______________________________________ HAYWOOD S. GILLIAM, JR. 28 United States District Judge 17