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Following its 1999 decision in In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, the Ninth Circuit U.S. Court of Appeals was generally thought to have adopted one of the strictest standards in the country for pleading securities fraud. Plaintiffs were required to provide “specific facts indicating no less than a degree of recklessness that strongly suggests actual intent.” This standard, held the court in Silicon Graphics, was adopted to effectuate Congress’ intent in passing the Private Securities Litigation Reform Act to “deter opportunistic private plaintiffs from filing abusive securities fraud claims . . . by raising the pleading standards for private securities fraud plaintiffs.” As a result, an increasingly higher percentage of securities lawsuits over the last few years were dismissed and ultimately fewer cases were filed in the Ninth Circuit. But a recent trilogy of Ninth Circuit decisions suggests that it may be weakening Silicon Graphics. The Ninth Circuit’s decisions in these three cases � Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048 (Jan. 21, 2003); Broudo v. Dura Pharmaceuticals, Inc., 339 F.3d 933 (Aug. 5, 2003); and McMullen v. Fluor Corp., 2003 WL 22700954 (Dec. 14, 2003) � each grant plaintiffs further leave to amend complaints to meet the Silicon Graphics standard. In each instance plaintiffs had filed at least three complaints and had at least one substantive opportunity to amend. Nonetheless, the Ninth Circuit stated in its Eminence ruling that “[i]n this technical and demanding corner of the law, the drafting of a cognizable complaint can be a matter of trial and error,” while concluding in Bruodo that “[w]here the plaintiff offers to provide �additional evidence’ that would add �necessary details’ to an amended complaint and such offer is made in good faith, leave to amend should be granted.” Although the three decisions do not directly alter Silicon Graphics, they weaken the effect of that opinion, primarily by permitting plaintiffs to use abusive tactics and delay to leverage favorable settlements. How so? What has caused this change? And is it a trend? Eminence is a typical financial restatement case. Aspeon, a technology company, announced on Oct. 10, 2000, that it was restating its financials to report quarterly losses previously announced as profits. Complaints were filed the next day against Aspeon and some of its officers. After Eminence was appointed lead plaintiff, a second, consolidated complaint was filed, which was dismissed without prejudice. A third complaint was filed in May 2001. This complaint was dismissed with prejudice for failure to meet Silicon Graphics. On appeal, the Ninth Circuit “d[id] not quarrel with the district judge’s assessment that the First Amended Consolidated Complaint was deficient.” The court, however, found that “the district court did not appropriately exercise its discretion by denying leave to amend where, as here, plaintiffs’ allegations were not frivolous, plaintiffs were endeavoring in good faith to meet the heightened pleading requirements and to comply with court guidance, and, most importantly, it appears that plaintiffs had a reasonable chance of successfully stating a claim if given another opportunity.” The court did not further explain why the plaintiffs had a reasonable chance of properly pleading, noting only that plaintiffs’ claim that “additional evidence was forthcoming” in a special committee report, which was discounted by the district court, was not “false or made in bad faith or for an improper purpose.” The Broudo case involved alleged misrepresentations about an antibiotic drug by Dura, a pharmaceutical company, and eight of its officers and directors. During the class period, Dura issued press releases indicating satisfactory drug sales. But on Feb. 24, 1998, Dura announced lower-than-forecast revenues and earnings due to poor sales of the drug. Dura’s stock dropped 47 percent on the announcement. Several class action complaints followed. After Broudo was chosen as lead plaintiff, a second complaint was filed, but it was dismissed without prejudice. The plaintiff filed a third complaint, which was dismissed in July 2000, this time with prejudice. On appeal, the Ninth Circuit reversed. Relying on its Eminence ruling, the court held that leave to amend should have been granted where the plaintiff sought to add “statements by a confidential witness who has direct knowledge that at least two of the defendants discussed how they could make stock analysts �perceive’ that Dura was doing better than it actually was and that one of the defendant’s oft-stated catch phrase to employees who questioned his tactics was �let’em catch us.’ “ McMullen involved alleged misrepresentations concerning a project by Fluor Corp. and seven officers and directors. The first complaints were filed in 1997. In 2000, the district court dismissed plaintiffs’ second amended complaint without prejudice. Two years later, the court dismissed the plaintiffs’ third amended complaint (which was actually either their fourth or fifth complaint) with prejudice. The trial court found that after four-plus years, “nothing before the court suggests that plaintiffs can amend their complaint to state a claim.” The Ninth Circuit reversed the lower court in an unpublished decision. Relying on Broudo, the court found that “[b]ecause the district court identified the complaint’s defects to include failure to allege the contents of the financial documents identified in the complaint or to allege corroborating details . . . and since plaintiffs sought to cure this problem through the presentation of additional evidence . . . leave to amend should have been granted.” While the three decisions do not modify the holding in Silicon Graphics, they significantly weaken both that opinion and Reform Act policies. Specifically, as stated in Silicon Graphics, the Reform Act was designed to remedy the situation where plaintiffs would “target �deep pocket defendants’ ” and impose upon them “ costs so burdensome that it [was] often economical for the victimized party to settle[.]” In addition, the point of the Reform Act’s discovery stay and Silicon Graphics’ pleading standards is that plaintiffs are supposed to have specific facts sufficient to plead a securities fraud case before they file suit. But the Eminence, Broudo and McMullen rulings now allow plaintiffs to spend many years after filing their suits in attempts to marshal facts sufficient to support the litigation. In McMullen, for instance, plaintiffs had more than four years to plead a proper case, did not do so, but were still given another opportunity. Further, the three cases can be read to permit amendment if a plaintiff can offer any new facts rather than just those facts that would result in a proper pleading. Eminence, for example, holds that amendment should be allowed whenever a plaintiff “offers to provide �additional evidence’ that would add �necessary details’ to an amended complaint.” This situation can be extremely burdensome on companies and their officers and directors, notwithstanding the Reform Act’s discovery stay. For example, a company facing a pending securities lawsuit may be a much less attractive merger partner. It may have difficulties in obtaining financing, and its officers and directors may have trouble arranging for mortgages or finding other jobs. Also, the costs of briefing repeated motions to dismiss labyrinthine securities complaints can cost hundreds of thousands of dollars. What caused this apparent shift? The most likely and obvious answer is that corporate scandals such as Enron and WorldCom have caused some judges to rethink whether investors are better protected from or by securities litigation. In addition, these decisions may also represent the byproduct of the composition of the panels involved, along with the fact that, in enacting the Reform Act, Congress did not adjust the general “liberal amendment” standard cited in each case. Are we witnessing a trend in the Ninth Circuit in which future decisions will further erode Silicon Graphics? Probably not. It’s worth noting that another recent Ninth Circuit decision, Gommper v. VISX, Inc., 298 F.3d 893 (2002), strengthened Silicon Graphics by holding that a court must consider both favorable and unfavorable inferences in measuring a securities fraud complaint. And before the cases examined in this article were handed down, the Ninth Circuit, in In re The Vantive Corp., 283 F.3d 1079 (2002), upheld a court’s denial of leave to amend. As a result, the three new decisions may best be understood as a slight change in the past regime rather than a call to revolution. Peter M. Stone and Jay C. Gandhi are members of Paul, Hastings, Janofsky & Walker’s national securities litigation practice in the firm’s Orange County office. Mary T. Huser is the managing partner of Bingham McCutchen’s Silicon Valley office, where she specializes in intellectual property and securities litigation. Geoff S. Beckham is a Silicon Valley-based associate in the firm’s litigation group.

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