1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GLANCY BINKOW & GOLDBERG LLP LIONEL Z. GLANCY (134180) PETER A. BINKOW (173848) MICHAEL GOLDBERG (188669) EX KANO S. SAMS II (192936) ROBERT V. PRONGAY (270796) 1925 Century Park East, Suite 2100 Los Angeles, CA 90067 Telephone: 310/201-9150 310/201-9160 (fax) [email protected]
Lead Counsel for Plaintiffs
[Additional counsel appear on signature page.]
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
OAKLAND DIVISION
ROBERT CURRY, et al., Individually and on Behalf of All Others Similarly Situated,
Plaintiffs,
vs.
HANSEN MEDICAL, INC., et al.,
Defendants.
This Document Relates To:
ALL ACTIONS.
) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )
Lead Case No. 4:09-cv-05094-CW
CLASS ACTION
PLAINTIFFS’ OPPOSITION TO DEFENDANT CHRISTOPHER SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT
DATE: April 19, 2012 TIME: 2:00 p.m. COURTROOM: The Honorable
Claudia Wilken
TABLE OF CONTENTS
Page
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW
- i -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
I. INTRODUCTION ...............................................................................................................1
II. STATEMENT OF FACTS ..................................................................................................3
A. Background..............................................................................................................3
B. Overview of Hansen’s Domestic and International Sales’ Channels ......................4
C. Hansen’s Revenue Recognition Policy....................................................................5
D. Hansen’s Improper Revenue Recognition on Domestic Sales ................................5
E. Hansen’s Improper Revenue Recognition on Sales to “Independent” International Distributors .........................................................................................6
F. Defendants’ Explicit Denials of Unused Systems and Rationalization for Perceived Low Utilization .......................................................................................7
G. The Truth Emerges Within a Matter of Months ......................................................7
III. DEFENDANT SELLS IS LIABLE UNDER §10(b)...........................................................8
A. Under Rule 10b-5(b), SVP Sells Is Liable for Making False and Misleading Statements .............................................................................................8
B. SVP Sells Is Primarily Liable Under Rule 10b-5(a) and (c) for the Deceptive Conduct Alleged ...................................................................................11
IV. PLAINTIFFS ALLEGE THE FRAUD WITH PARTICULARITY .................................14
V. PLAINTIFFS PLEAD A STRONG INFERENCE OF SCIENTER .................................16
VI. PLAINTIFFS ADEQUATELY PLEAD LOSS CAUSATION ........................................24
VII. PLAINTIFFS SUFFICIENTLY PLEAD CONTROL PERSON LIABILITY .................25
VIII. CONCLUSION..................................................................................................................25
TABLE OF AUTHORITIES
Page
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW
- ii -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
CASES
Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937 (2009)......................................................................................10
Asher v. Baxter Int’l, Inc., No. 02 C 5608, 2005 U.S. Dist. LEXIS 2131 (N.D. Ill. Feb. 3, 2005).............................................................................................................20
Atlas v. Accredited Home Lenders Holding Co., 556 F. Supp. 2d 1142 (S.D. Cal. 2008)....................................................................................19
Backe v. Novatel Wireless, Inc., 607 F. Supp. 2d 1145 (S.D. Cal. 2009)....................................................................................18
Basic Inc. v. Levinson, 485 U.S. 224 (1988).................................................................................................................10
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)...................................................................................................................3
Broudo v. Dura Pharm., Inc., 339 F.3d 933 (9th Cir. 2003), rev’d on other grounds, 554 U.S. 336 (2005).................................................................................................................20
Cent. Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994).........................................................................................................1, 8, 11
Chiarella v. United States, 445 U.S. 222 (1980).................................................................................................................10
Dreiling v. Am. Online, Inc., 578 F.3d 995 (9th Cir. 2009) .....................................................................................................8
Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005)...................................................................................................................3
Eminence Capital, L.L.C. v. Aspeon, Inc., 316 F.3d 1048 (9th Cir. 2003) .................................................................................................25
Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999)....................................................................................................20
Gross v. Medaphis Corp., 977 F. Supp. 1463 (N.D. Ga. 1997) .........................................................................................21
Page
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW
- iii -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Howard v. Everex Sys., Inc., 228 F.3d 1057 (9th Cir. 2000) .................................................................................................25
In re Adaptive Broadband Sec. Litig., No. C 01-1092 SC, 2002 U.S. Dist. LEXIS 5887 (N.D. Cal. Apr. 2, 2002) ..........................................................................................................19
In re Accuray Sec. Litig., 757 F. Supp. 2d 936 (N.D. Cal. 2010) .....................................................................................22
In re Allstate Life Ins. Co. Litig., No. CV-09-8162-PCT-GMS, 2012 U.S. Dist. LEXIS 7678 (D. Ariz. Jan. 23, 2012)..............................................................................................................9
In re Alstom SA Sec. Litig., 406 F. Supp. 2d 433 (S.D.N.Y. 2005)......................................................................................13
In re Apollo Grp., Inc. Sec. Litig., No. CV-10-1735-PHX-JAT, 2011 U.S. Dist. LEXIS 124781 (D. Ariz. Oct. 27, 2011) ...........................................................................................................22
In re Apple Computer, Inc., 243 F. Supp. 2d 1012 (N.D. Cal. 2002) ...................................................................................23
In re Bank of Am. Corp. Auction Rate Sec. (ARS) Mktg. Litig., No. 09-md-02014 JSW, 2011 U.S. Dist. LEXIS 18208 (N.D. Cal. Feb. 24, 2011).........................................................................................................17
In re Cadence Design Sys., Inc. Sec. Litig., 692 F. Supp. 2d 1181 (N.D. Cal. 2010) .............................................................................22, 24
In re Cadence Design Sys., Inc. Sec. Litig., 654 F. Supp. 2d 1037 (N.D. Cal. 2009) ...................................................................................22
In re Constellation Energy Grp., Inc., 738 F. Supp. 2d 614 (D. Md. 2010) .........................................................................................25
In re Daou Sys., Inc., 411 F.3d 1006 (9th Cir. 2005) .......................................................................................3, 18, 23
In re Hansen Natural Corp. Sec. Litig., 527 F. Supp. 2d 1142 (C.D. Cal. 2007) ...................................................................................25
In re Interlink Elecs., Inc. Sec. Litig., No. SACV 05-8133-AG(SHx), 2008 WL 4531967 (C.D. Cal. Oct. 6, 2008) ...........................................................................................................24
Page
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW
- iv -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
In re John P. Flannery, Admin. Proceeding No. 3-14081, 2011 WL 5130058 (SEC Release No. 438, Oct. 28, 2011) ....................................................................................14
In re LDK Solar Sec. Litig., No. C 07-05182 WHA, 2008 U.S. Dist. LEXIS 80717 (N.D. Cal. Sept. 24, 2008) .......................................................................................................16
In re Medicis Pharm. Corp. Sec. Litig., 689 F. Supp. 2d 1192 (D. Ariz. 2009) .....................................................................................19
In re Medicis Pharm. Corp. Sec. Litig., No. CV-08-1821-PHX-GMS, 2010 U.S. Dist. LEXIS 81410 (D. Ariz. Aug. 9, 2010) ............................................................................................................19
In re Metawave Commc’ns. Corp. Sec. Litig., No. C02-625RSM, 2009 U.S. Dist. LEXIS 25331 (W.D. Wash. Mar. 27, 2009) ...................................................................................................21
In re MicroStrategy, Inc. Sec. Litig., 115 F. Supp. 2d 620 (E.D. Va. 2000) ................................................................................19, 20
In re New Century, 588 F. Supp. 2d 1206 (C.D. Cal. 2008) ...................................................................................24
In re Northpoint Commc’ns Grp., Inc. Sec. Litig., 221 F. Supp. 2d 1090 (N.D. Cal. 2002) ...................................................................................21
In re Redback Networks, Inc. Sec. Litig., No. C 03-5642 JF (HRL), 2007 U.S. Dist. LEXIS 27389 (N.D. Cal. Mar. 30, 2007)........................................................................................................24
In re Sipex Corp. Sec. Litig., No. C 05-00392 WHA, 2005 U.S. Dist. LEXIS 30854 (N.D. Cal. Nov. 17, 2005)........................................................................................................23
In re UBS Auction Rate Sec. Litig., No. 08 Civ. 2967 (LMM), 2010 U.S. Dist. LEXIS 59024 (S.D.N.Y. June 10, 2010).........................................................................................................17
Janus Capital Grp., Inc. v. First Derivative Traders, __ U.S. __, 131 S. Ct. 2296 (2011).................................................................................. passim
Lormand v. US Unwired, Inc., 565 F.3d 228 (5th Cir. 2009) ...................................................................................................24
Page
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW
- v -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Matrixx Initiatives, Inc. v. Siracusano, __ U.S. __, 131 S. Ct. 1309 (2011)............................................................................................2
MB Fin. Grp., Inc. v. U.S. Postal Serv., 545 F.3d 814 (9th Cir. 2008) ...................................................................................................13
Middlesex Ret. Sys. v. Quest Software, Inc., No. CV 06-6863 DOC (RNBx), 2008 U.S. Dist. LEXIS 68419 (C.D. Cal. July 10, 2008) .............................................................................................17, 19, 21
Munoz v. China Expert Tech., Inc., No. 07 Civ. 10531 (AKH), 2011 U.S. Dist. LEXIS 128539 (S.D.N.Y. Nov. 4, 2011) ..........................................................................................................11
Nguyen v. Radient Pharm. Corp., No. SA CV 11-0406 DOC (MLGx), 2011 U.S. Dist. LEXIS 124631 (C.D. Cal. Oct. 26, 2011) ...................................................................................................17, 20
N.Y. City Empls. Ret. Sys. v. Berry, 616 F. Supp. 2d 987 (N.D. Cal. 2009) ...............................................................................12, 19
Provenz v. Miller, 102 F.3d 1478 (9th Cir. 1996) ...........................................................................................17, 19
Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001) ...................................................................................................10
S. Ferry LP v. Killinger, 542 F.3d 776 (9th Cir. 2008) .........................................................................................2, 17, 24
Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977).................................................................................................................13
SEC v. Berry, 580 F. Supp. 2d 911 (N.D. Cal. 2008) .....................................................................................15
SEC v. Boock, No. 09 Civ. 8261 (DLC), 2011 U.S. Dist. LEXIS 129673 (S.D.N.Y. Nov. 9, 2011) ..........................................................................................................12
SEC v. Collins & Aikman Corp., 524 F. Supp. 2d 477 (S.D.N.Y. 2007)......................................................................................13
SEC v. Daifotis, No. C 11-00137 WHA, 2011 U.S. Dist. LEXIS 116631 (N.D. Cal. Oct. 7, 2011).......................................................................................................2, 11
Page
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW
- vi -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
SEC v. Kelly, No. 08 Civ. 4612(CM), 2011 WL 4431161 (S.D.N.Y. Sept. 22, 2011)........................................................................................................14
SEC v. Mercury Interactive, LLC, No. 5:07-cv-02822-WHA, 2011 WL 5871020 (N.D. Cal. Nov. 22, 2011)........................................................................................................13
SEC v. Pentagon Capital Mgmt. PLC, No. 08 Civ. 3324, 2012 U.S. Dist. LEXIS 18504 (S.D.N.Y. Feb. 14, 2012) ...........................................................................................................1
SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968).....................................................................................................12
Simpson v. AOL Time Warner Inc., 452 F.3d 1040 (9th Cir. 2006), vacated on other grounds, 552 U.S. 1162 (2008).........................................................................................................12, 16
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008)......................................................................................................... passim
Swartz v. KPMG LLP, 476 F.3d 756 (9th Cir. 2007) ...................................................................................................15
Teamsters Local 617 Pension & Funds v. Apollo Grp., Inc., 633 F. Supp. 2d 763 (D. Ariz. 2009) .......................................................................................23
Teamsters Local 617 Pension & Welfare Funds v. Apollo Grp., Inc., 690 F. Supp. 2d 959 (D. Ariz. 2010) ...............................................................................3, 4, 22
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)...........................................................................................................17, 20
United States SEC v. Carter, No. 10 C 6145, 2011 U.S. Dist. LEXIS 136599 (N.D. Ill. Nov. 28, 2011)......................................................................................................2, 10
United States SEC v. Geswein, No. 5:10CV1235, 2011 U.S. Dist. LEXIS 111904 (N.D. Ohio Aug. 2, 2011) ........................................................................................................14
United States SEC v. Geswein, No. 5:10CV1235, 2011 U.S. Dist. LEXIS 111893 (N.D. Ohio Sept. 29, 2011) ......................................................................................................14
Page
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW
- vii -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
United States v. O’Hagan, 521 U.S. 642 (1997).................................................................................................................13
Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003) .................................................................................................15
WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir. 2011) .....................................................................................13, 14, 20
Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) .............................................................................................21, 22
STATUTES, RULES AND REGULATIONS
15 U.S.C. §78..............................................................................................................................................9 §78j(b).............................................................................................................................. passim §78p............................................................................................................................................9 §78t(a) ..................................................................................................................................3, 25
Federal Rules of Civil Procedure Rule 8 .........................................................................................................................................3
17 C.F.R. §200............................................................................................................................................9 §240.10b-5 .................................................................................................................8, 9, 11, 13 §240.10b-5(a).................................................................................................................1, 11, 12 §240.10b-5(b).................................................................................................................8, 12, 13 §240.10b-5(c).................................................................................................................1, 11, 12
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 1 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
I. INTRODUCTION
The Third Consolidated Amended Complaint for Violations of the Federal Securities Laws
(“TAC”) states a claim with the requisite particularity for securities fraud against defendant
Christopher Sells.1 By way of his motion, Sells asks this Court to hold at the pleading stage that a
corporate officer – in charge of sales and who participates in obviously improper “sales” transactions
and later, the illicit revenue recognition of them – is not liable as a matter of law for the admittedly
materially false financial results in press releases and Securities and Exchange Commission (“SEC”)
filings that he reviewed and authorized as a member of Hansen Medical, Inc.’s (“Hansen” or the
“Company”) disclosure committee, or for his deceptive conduct that led to those false financials.
Yet, Sells is no innocent cog in Hansen’s fraud and his motion should be denied.
Despite Sells’ best efforts to rewrite it, under the guise of Janus Capital Grp., Inc. v. First
Derivative Traders, __ U.S. __, 131 S. Ct. 2296 (2011), the law for fraudulent acts remains. Janus
did not eliminate claims under Rule 10b-5(a) & (c). A fact one court recently noted: “Defendants
have put forth no persuasive reason why Janus should be read to reach . . . claims alleging scheme
liability pursuant to Rule 10b-5(a) & (c), and the Court can identify none.” SEC v. Pentagon Capital
Mgmt. PLC, No. 08 Civ. 3324, 2012 U.S. Dist. LEXIS 18504, at *117 (S.D.N.Y. Feb. 14, 2012).
Sells is liable under §10(b) as a primary violator for his deceptive conduct. See Cent. Bank,
N.A. v. First Interstate Bank, N.A., 511 U.S. 164, 167, 177, 179 (1994); Stoneridge Inv. Partners,
LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 158 (2008). This conduct cannot be brushed aside as
“aggressive salesmanship.” It does not take an accounting degree or training for the Senior Vice
President (“SVP”) of Commercial Operations, one of only six Hansen officers to know that, for
example, a side agreement in contravention of the Company’s stated revenue recognition policy is
improper. Particularly where that SVP regularly participates in meetings with Hansen’s CFO to
reach a consensus as to which sales could be recognized as revenue. ¶52.
1 References to “¶__” are to the TAC, all internal citations and footnotes are omitted and all emphasis is added unless otherwise noted.
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 2 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Further, as a member of the disclosure committee and a Company officer, it was “‘necessary
or inevitable’” that the false and misleading statements Sells reviewed regarding Hansen’s financial
condition would be communicated to investors. See Janus, 131 S. Ct. at 2303; ¶¶23-24. He had the
ultimate authority for the Company’s false and misleading press releases and SEC filings and thus
“made” the false statements under Janus. United States SEC v. Carter, No. 10 C 6145, 2011 U.S.
Dist. LEXIS 136599, at *6-*8 (N.D. Ill. Nov. 28, 2011) (allegations that the CEO approved releases
before they were publicly available sufficient under Janus). Factual disputes regarding who “made”
the statements at issue should be decided after plaintiffs are afforded discovery. SEC v. Daifotis, No.
C 11-00137 WHA, 2011 U.S. Dist. LEXIS 116631, at *10-*11 (N.D. Cal. Oct. 7, 2011).
SVP Sells’ attempts to disclaim his scienter equally fall flat. He played a key role in the
fraud perpetrated on Hansen’s investors and, as a result is the target of the SEC fraud action related
to the instant securities case. Specifically, he manipulated Hansen’s operational and financial results
while knowing fully well that those results would be included in the Company’s reported financial
statements. E.g., ¶¶5-6, 8, 23-24, 26, 48, 50-52, 90-91, 95-96, 98-113, 122-123, 125-127, 133-136,
142-160, 178, 182, 192, 285-287, 375, 379-389. Sells participated in the fraud by inter alia: (1)
directing the installation of unwanted Sensei Robotic Catheter Systems (“Sensei Systems” or
“Systems”) for the purpose of recognizing revenue and then de-installing them; (2) directing the
forgery of a doctor’s signature to make it falsely appear that all the necessary steps had been taken to
recognize revenue; and (3) entering into a side agreement to circumvent Hansen’s revenue
recognition policy. Id. At this stage, plaintiffs’ allegations must be accepted as true. See Matrixx
Initiatives, Inc. v. Siracusano, __ U.S. __, 131 S. Ct. 1309, 1314 (2011).
It defies common sense for SVP Sells to pretend he was unwittingly duped into participating
into the other officer defendants’ fraudulent scheme to falsely report Hansen’s revenue when a
quarter of the Systems reported as revenue during his tenure at the Company were improperly
recognized. See ¶194; see also S. Ferry LP v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008) (A
complaint’s allegations should be “viewed with a practical and common-sense perspective.”). While
plaintiffs need only allege deliberate recklessness, SVP Sells’ conduct overwhelmingly points to
intent. Viewed holistically, the TAC more than sufficiently alleges scienter. Matrixx, 131 S. Ct. at
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 3 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
1324. Perhaps most telling is that Hansen’s other officers point to SVP Sells as the impetus for
Hansen’s falsely reported revenue.2
SVP Sells also cannot at this stage limit his damages under the pretense that loss causation is
not sufficiently alleged as to certain partial disclosures. The TAC sets forth the causal connection
between the alleged fraud and the partial disclosures. Dura Pharm., Inc. v. Broudo, 544 U.S. 336,
347 (2005); In re Daou Sys., Inc., 411 F.3d 1006, 1026 (9th Cir. 2005) (loss causation is adequately
pled where the plaintiff gives “some indication” that the drop in stock price was “causally related” to
the defendants’ fraud). No more is required at the pleading stage.
Likewise, the TAC adequately alleges under Rule 8 that SVP Sells is a control person for
purposes of §20(a) of the Securities Exchange Act of 1934 (“Exchange Act”). He had direct or
indirect power or control over Hansen and its employees, including his “right-hand man,” VP of
Sales Timothy Murawski, who, inter alia, directed forged documents in order to improperly book
uncompleted “sales” as revenue. ¶¶386-388. Teamsters Local 617 Pension & Welfare Funds v.
Apollo Grp., Inc., 690 F. Supp. 2d 959, 965-73 (D. Ariz. 2010) (citing Bell Atl. Corp. v. Twombly,
550 U.S. 544, 555, 570 (2007)).
For all of the reasons set forth above and herein, Sells’ motion to dismiss should be denied.
II. STATEMENT OF FACTS
A. Background
Hansen is a medical equipment company that has been publicly traded since its November
2006 IPO. ¶¶2, 28. In Q207, Hansen recognized its first revenues after the U.S. Food and Drug
Administration (“FDA”) approved its first and primary product – Sensei System – for sale to
hospitals for use in cardiac surgical procedures. Id. The purchase of this $650,000 to $750,000
device also necessitated hospitals to use and further purchase Hansen’s $1,600 disposable Artisan
2 See Defendants Hansen Medical, Inc., Frederic H. Moll, Steven M. Van Dick and Gary C. Restani’s Notice of Motion and Motion to Dismiss the Third Consolidated Amended Complaint; Memorandum of Points and Authorities in Support Thereof (Dkt. No. 82) (“Hansen Mem.”) at 6. Herein, Moll, Van Dick and Restani are referred to collectively as the “Hansen Defendants.”
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 4 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Control Catheters (“Catheters”) for each procedure. Id. System sales were responsible for nearly all
of Hansen’s revenues, with Catheter sales largely responsible for the rest. ¶2.
From the time Hansen commenced selling its System in Q207, the appearance that System
sales were increasing was crucial to the Company’s future success. ¶¶28-29. With its “razor/razor
blade” business model and promise to generate a high-margin recurring revenue stream from
Catheter sales, the primary metric Hansen reported/touted to the public was its “Installed Base,” or
the total number of Systems sold and recognized as revenue since the first sale in Q207. ¶¶28-30.
Thus, investors were also focused on “utilization,” or how actively hospitals were using the System
to conduct procedures and purchase Catheters. ¶30.
In a series of disclosures commencing on October 19, 2009, Hansen revealed that it had
improperly recognized revenue on at least 24 of the 59 System sales the Company had reported
during its past seven quarters (Q407 to Q209) – an astounding 40% – requiring Hansen to issue
restated financial statements for those periods (the “Restatement”). ¶¶5, 10. The impact of the
Restatement was massive. ¶¶194-195. For example, Hansen’s originally reported FY08 revenue
and gross profit had been overstated by nearly 30% and 103.34%, respectively. ¶10.
B. Overview of Hansen’s Domestic and International Sales’ Channels
Domestically, Hansen sells its products directly through its own sales force of regional sales
executives who are supported by clinical account managers that provide ongoing clinical
training/support to customers. ¶31. For domestic sales, contracts typically required Hansen to
install the System at the customer site and to train at least one physician (intended to use the System)
in either California or Ohio. ¶32. Hansen referred to this initial training as “Level 2” training. Id.
After installation and Level 2 training, Hansen would provide ongoing clinical support until the
customer/physician was able to independently use the System. ¶34.
Internationally, Hansen mostly relied on distributors to market, sell and support its products.
See ¶35. Hansen had “Tier 1” (or “T1”) distributors that were those that provided technical and
clinical support, as well as “Tier 2” (or “T2”) distributors that elected to forego providing either the
technical or clinical support. ¶37. According to Confidential Witness 2 (“CW2”), even though sales
went through a distributor, Hansen still provided the Level 2 training to the ultimate customer/end-
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 5 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
user. ¶36. Requirements in Hansen’s standard T1 distribution agreement about updating Hansen on
the distributors’ sales efforts, provided Hansen visibility and knowledge of the T1 distributors’
actual and potential sales, forecasts, customer identities, and for each transaction, whether the T1
distributor had a customer (end-user) identified to purchase the System. ¶73. The T1 distribution
agreements set forth the respective obligations of the parties with respect to installation, training, and
clinical support. ¶¶78, 84, 87. CFO Van Dick confirmed during a July 2009 conference call that
Hansen’s obligations were “spelled out pretty specifically in the distributor arrangements.” ¶46.
C. Hansen’s Revenue Recognition Policy
Hansen’s revenue recognition policy was based on American Institute of Certified Public
Accountants Statement of Position 97-2, “Software Revenue Recognition,” because software was
more than incidental to the functioning of its System. ¶42. Because most domestic sales contracts
or purchase orders included installation and training, to recognize revenue under Hansen’s own
policy, the System had to be delivered, installed, and Hansen had to train a physician. ¶¶42-46.
Hansen’s sales to its T1 distributors were evidenced by (1) a distribution agreement
governing the relationship together with (2) purchase orders governing each transaction.3 See, e.g.,
¶71. Hansen’s obligations under the individual purchase orders with the distributors impacted when
Hansen could record revenue on the transaction. ¶¶46, 74-76. However, due to the extra contractual
layer (i.e., a distribution agreement governing the relationship), Hansen also had to complete any/all
of its obligations to its distributor under the distribution agreement (e.g., to train the distributor’s
personnel) prior to recognizing revenue on any sales to that distributor. ¶46. To recognize revenue
upon shipment, the distributor needed to be independent from Hansen and able to independently
provide services to its customers (i.e., the end-users). ¶76.
D. Hansen’s Improper Revenue Recognition on Domestic Sales
Hansen’s 2009 Restatement acknowledged that the Company improperly recognized Class
Period (February 19, 2008 to October 18, 2009, inclusive) revenue on domestic sales prior to
3 Purchase orders are governed by the terms and conditions of the distribution agreements. ¶73.
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 6 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
completing all of the requirements under its revenue recognition policy due to, among others,
unwanted temporary installations, unfulfilled training obligations, and side arrangements. ¶117. For
example, Hansen improperly recognized revenue on at least three Systems “sales” in Q208,
temporary installations designed to feign compliance with the Company’s revenue recognition policy
and Generally Accepted Accounting Principles (“GAAP”). ¶120. To that end, between Q308 and
Q109, defendant Sells: (1) directed the installation of Systems to improperly recognize revenue –
only to have them immediately dismantled and placed into storage; (2) directed the forgery of a
doctor’s signature on a training form to make it falsely appear that all the necessary steps had been
taken to recognize revenue; and (3) entered into a separate, undisclosed “side agreement” to offer
different terms to a purchaser to circumvent the Company’s revenue recognition policy. ¶¶122-155.
E. Hansen’s Improper Revenue Recognition on Sales to “Independent” International Distributors
Hansen also had improperly recognized revenue on international distributor sales upon
shipment because the “distributors were not independently capable of installing systems and/or
clinically training end users” and the “revenue . . . should have been deferred until installation and
training had occurred at the distributor’s end user.” ¶57. All told, Hansen improperly recognized
revenue upon shipment for at least 12 separate transactions involving at least five different
distributors between Q407 through Q209, including 5 to its Italian distributor. See ¶¶90-113.
For example, Hansen had post-shipment installation obligations arising from its distributors’
inability to conduct installations. ¶¶57, 60-61. Hansen’s personnel received two weeks of initial
installation training, and then had to spend three to six months under the supervision of a senior
employee before being allowed to independently conduct installations. See ¶¶59-63, 90-108. The
two days of installation “training” received by distributors compared to the minimum of
approximately 70 business days to Hansen employees was thus facially inadequate. ¶59. As to
Hansen’s Russian distributor Rosslyn, it flatly refused to be trained to support end-users. ¶104.
Further, under the T1 distribution agreements, Hansen possessed the obligation to train the T1
distributors’ end-users. ¶37. Yet, Hansen recognized revenue on at least seven Systems sold to three
different distributors between Q108 and Q209, when there were no end-users to train as the
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 7 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
distributor had not found a customer to purchase said Systems.4 ¶¶87-89, 94-95, 98. Hansen
ultimately revealed that many of the Systems that had been “sold” to distributors were still in the
distributors’ possession, including at least three Systems being held by AB Medica, its Italian
distributor. ¶¶5, 91.
F. Defendants’ Explicit Denials of Unused Systems and Rationalization for Perceived Low Utilization
As the Class Period progressed, the illicit revenue recognition practices resulted in unused
Systems. See, e.g., ¶¶234, 238, 245. The market perceived the disconnect between prior systems
that had been “sold” and low utilization when there was an incongruous and precipitous drop in
Catheter sales in Q208. ¶¶320-322. The next quarter, Q308, responding to analysts’ questions, CEO
Moll effectively denied that there were idle or “sleeping” Systems, and instead falsely defended the
relatively low utilization rates as slow uptake among new users. ¶233. However, of Hansen’s
originally reported Installed Base of 45 Systems (as of Q308), 11 to 13 Systems were effectively
inactive. ¶234. As the Class Period – and the market’s skepticism5 – progressed, defendants
continued to mask Hansen’s inactive Systems and the lack of Catheter sales to conceal their fraud.
Hansen cannibalized future Catheter sales to create an appearance of increasing quarterly sales –
while denying doing so. ¶¶236-246.
G. The Truth Emerges Within a Matter of Months
Soon after Hansen conducted a public stock offering to raise more than $35 million in April
2009, its financial condition began to decline. ¶¶290, 338. Less than a month after a June 10, 2009
presentation during which Moll essentially affirmed FY09 guidance of sales of 53-60 Systems and
suggested that the economic environment had eased slightly since the end of FY08, on July 6, 2009,
the Company warned of disastrous preliminary financial results for Q209 and withdrew its FY09
4 The agreement clearly states that it is Hansen’s obligation to provide the physician training to the end-user. ¶87 (“END-USER PEER TRAINING – TO BE PROVIDED BY HANSEN MEDICAL” and requires an evaluation and certificate of training by Hansen).
5 See, e.g., ¶¶330-332 (price decline following analyst report that its survey of 50 hospitals revealed only one was considering a System purchase); ¶¶347-350 (analysts note lack of credibility after defendants sharply reverse course just weeks after bullish presentation).
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 8 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
guidance. ¶342. While Hansen had shipped six Systems that quarter, it only expected to recognize
revenue on three (albeit improperly, as to at least two). ¶194. Two months later, when defendants
finally announced on October 19, 2009 that Hansen would restate seven quarters of financial results,
investors were damaged yet again. ¶¶356-358. Hansen’s stock dropped over 9% on unusually
heavy volume. ¶358. Subsequently, the SEC initiated an enforcement proceeding against defendant
Sells and Hansen’s former VP of Sales Murawski, for the fraudulent conduct alleged in the TAC,
and the Company entered into a cease-and-desist order with the SEC. ¶¶1, 8.
III. DEFENDANT SELLS IS LIABLE UNDER §10(b)
A. Under Rule 10b-5(b), SVP Sells Is Liable for Making False and Misleading Statements
SVP Sells misconstrues Janus. Mot. at 4.6 Janus merely holds that a secondary actor cannot
be held primarily liable for statements made by the corporate entity at issue absent attribution to that
secondary actor or control over the statements released. 131 S. Ct. at 2301-04. Janus is, thus,
distinguishable from the situation here where defendants – including SVP Sells – are not secondary
actors but primary, corporate officers.7 Regardless, even if Sells was not considered to be a primary
actor, plaintiffs’ allegations concerning SVP Sells’ actions in making the alleged false statements
satisfy the test used in Janus to determine the “maker” of a statement. Id.
The plaintiff in Janus brought alleged violations of §10(b) of the Exchange Act and SEC
Rule 10b-5 promulgated thereunder against (1) Janus Capital Group, Inc. (“JCG”), a publicly traded
company that created the Janus family of mutual funds; and (2) Janus Capital Management LLC
(“JCM”), a mutual fund investment advisor for the Janus family of mutual funds. Id. at 2299-2301.
The putative class consisted of investors in JCG. Id. at 2300-01. The plaintiff alleged that JCG and
6 “Mot.” refers to Defendant Christopher Sells’s Notice of Motion and Motion to Dismiss Third Consolidated Amended Complaint for Violations of the Federal Securities Laws and Memorandum of Points and Authorities in Support Thereof (Dkt. No. 81).
7 The Supreme Court defined “secondary actors” in Stoneridge as an issuing firm’s customers and suppliers, 552 U.S. at 166, and in Central Bank as “lawyer[s], accountant[s], or bank[s].” 511 U.S. at 191. The Ninth Circuit has expanded “secondary actors” to include an issuing firm’s Internet service provider. Dreiling v. Am. Online, Inc., 578 F.3d 995, 1003 (9th Cir. 2009).
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 9 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
JCM made false and misleading statements in prospectuses filed with the SEC by JCG’s wholly
owned subsidiary, Janus Investment Fund. Id. at 2299-2301.
The Supreme Court determined that JCM could not be held liable because it did not “make”
the alleged false statements and held that “[f]or purposes of Rule 10b-5, the maker of a statement is
the person or entity with ultimate authority over the statement, including its content and whether and
how to communicate it.” Id. at 2301-02. Since JCM was a “legally separate entit[y],” the Court
found that it had no authority over the content of the false statements. Id. at 2304.
The Janus Court determined that nothing about JCM’s involvement in drafting the
prospectuses made it “‘necessary or inevitable’” for the false information to be included there
because JCM did not have authority over the content of those documents. Id. at 2303. This was the
same rationale employed by the Supreme Court in Stoneridge – “It was Charter, not respondents,
that misled its auditor and filed fraudulent financial statements; nothing respondents did made it
necessary or inevitable for Charter to record the transactions as it did.” 552 U.S. at 161.
SVP Sells’ actions in this case – as an officer of the Company and a member of Hansen’s
disclosure committee – made it “‘necessary or inevitable’” that false and misleading statements
regarding the Company’s financial condition would be communicated to investors. ¶¶23-24. He
was one of only six individuals prominently listed in the “EXECUTIVE OFFICERS AND KEY
EMPLOYEES” section of Hansen’s April 2009 Proxy, which informed investors of his central role
in the Company’s operations and resulting reported financials. Id.8 As an officer, Sells was subject
to the disclosure requirements of §16 of the Exchange Act.9 These allegations are adequate to show
that Sells made statements because such attribution, even if in part, “‘is strong evidence that a
statement was made by . . . the party to whom it is attributed.’” In re Allstate Life Ins. Co. Litig., No.
8 Sells’ Forms 4 filed with the SEC reflect that he held himself out as an officer of Hansen. See Declaration of Ex Kano S. Sams II in Support of Plaintiffs’ Oppositions to Defendants’ Motions to Dismiss the Third Consolidated Amended Complaint, Exs. 1-2.
9 See 15 U.S.C. §78 (requiring disclosure of financial results each quarter); Regulation S-X (17 C.F.R. §200) (requiring certain information – including net revenue, net income or loss from continuing operations – in Forms 10-Q and 10-K).
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 10 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
CV-09-8162-PCT-GMS, 2012 U.S. Dist. LEXIS 7678, at *19 (D. Ariz. Jan. 23, 2012) (prominent
position of defendants’ names on company statements sufficient for attribution under Janus).
As a corporate insider, Sells also had fiduciary responsibilities to Hansen’s shareholders
and thus had a duty to disclose material non-public information to afford investors a true and
accurate picture of Hansen’s financial results. Chiarella v. United States, 445 U.S. 222, 227-29 &
n.9 (1980). The overriding purpose of the federal securities laws is to promote an honest
marketplace and protect investors from “‘[m]anipulation and dishonest practices.’” Basic Inc. v.
Levinson, 485 U.S. 224, 230 (1988). Corporate insiders are thus required to disseminate truthful
corporate information. Id. at 230, 235 n.12.
Further, to the extent that Janus provides that the “maker” of a statement has the ultimate
authority over the statement’s content, and whether and how to communicate it, the allegations here
are sufficient. 131 S. Ct. at 2302-03. As a member of Hansen’s disclosure committee, SVP Sells
had responsibility for the accurate and fair presentation of Hansen’s press releases and SEC
filings each quarter. ¶¶23-24.10 And at the time he was an SVP in charge of key operations –
including the sales organization, clinical training, installations and customer service. ¶23. He also
participated in meetings with other officers to reach a consensus as to which “sales” transactions
could be recorded as revenue. ¶52. Since the federal disclosure laws dictated “whether and how”
the Hansen’s financial results Sells was responsible for were communicated, he was ultimately
responsible for how the Systems were accounted for and disclosed – the very subject of Hansen’s
admitted accounting manipulations. Janus, 131 S. Ct. at 2302; see ¶¶5, 8, 23-24, 52, 122-157, 374-
376; see also Carter, 2011 U.S. Dist. LEXIS 136599, at *6-*8 (allegations that CEO approved press
releases sufficient for Janus). The financial results he manipulated, the decisions he made and the
actions he took made it ‘“necessary or inevitable’” that Hansen would issue false financial results to
10 Since plaintiffs have pled with particularity facts evidencing “ultimate authority,” and not just the “bare elements” of their claim under §10(b), Sells’ reliance on Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1954 (2009), and Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001), is misguided. See Mot. at 4-5.
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 11 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
investors. Janus, 131 S. Ct. at 2303; Stoneridge, 552 U.S. at 161. These allegations are sufficient to
allege that Sells had “ultimate authority” over Hansen’s publicly disseminated financial results.
And to the extent that questions of fact exist as to which statements were “made” by SVP
Sells under Janus, “it is not necessary at this time to parse through which statements meet the Janus
standard and which do not.” Daifotis, 2011 U.S. Dist. LEXIS 116631, at *10-*11. “Come summary
judgment time, it will be determined which statements raise issues of fact under the Janus standard.”
Id. at *11; see also Munoz v. China Expert Tech., Inc., No. 07 Civ. 10531 (AKH), 2011 U.S. Dist.
LEXIS 128539, at *4-*5 (S.D.N.Y. Nov. 4, 2011) (factual disputes can be raised after discovery).
B. SVP Sells Is Primarily Liable Under Rule 10b-5(a) and (c) for the Deceptive Conduct Alleged
Under Rule 10b-5:
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 facility 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 material fact necessary in order to make the statements made, in the light of the circumstances under 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 purchase or sale of any security.
17 C.F.R. §240.10b-5.
In Central Bank, the Supreme Court held that §10(b) imposes liability for a defendant’s
manipulative or deceptive acts, provided that a plaintiff can prove the other elements of the claim.
Cent. Bank, 511 U.S. at 167, 177. Later, in Stoneridge, the Court rejected the notion that §10(b)
liability a defendant to “make” a statement, holding that “[i]f this conclusion were read to suggest
there must be a specific oral or written statement before there could be liability under §10(b) or
Rule 10b-5, it would be erroneous.” 552 U.S. at 158. “Conduct itself can be deceptive” under
§10(b). Id. Deceptive acts of secondary actors are thus actionable, as long as reliance upon such
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 12 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
acts can be established. Id. at 159.11 Following Stoneridge, courts have held that “‘[w]hile Rule
10b-5(b) addresses liability for material misstatements or omissions, “Rules 10b-5(a) and (c)
encompass conduct beyond disclosure violations.”’” N.Y. City Empls. Ret. Sys. v. Berry, 616 F.
Supp. 2d 987, 995 (N.D. Cal. 2009) (scheme liability where defendant devised an option backdating
practice and then hid it by falsifying corporate records). Janus is “of no moment” where a defendant
is “a primary actor in ‘employ[ing a] device, scheme, or artifice to defraud.’” SEC v. Boock, No. 09
Civ. 8261 (DLC), 2011 U.S. Dist. LEXIS 129673, at *5-*6 (S.D.N.Y. Nov. 9, 2011).12
In Simpson v. AOL Time Warner Inc., the Ninth Circuit explained that to plead “scheme”
liability, the plaintiff must allege that the defendant “engaged in conduct that had the principal
purpose and effect of creating a false appearance of fact in furtherance of the scheme. . . . [T]he
defendant’s own conduct contributing to the transaction or overall scheme must have had a
deceptive purpose and effect.” 452 F.3d 1040, 1048 (9th Cir. 2006), vacated on other grounds, 552
U.S. 1162 (2008) (emphasis in original).
Rule 10b-5(c) “make[s] it unlawful for any person . . . ‘to engage in any act, practice, or
course of business which operates or would operate as a fraud or deceit upon any person.’” Id. at
1046. Here, Sells personally participated in many acts and courses of business that operated as a
fraud or deceit. See, e.g., ¶¶5-6, 8, 23, 26, 48, 50-52, 105, 111, 122-123, 125-127, 133-136, 142-
160, 178, 182, 192, 285-287, 375, 379-389. Plaintiffs need not allege that Sells specifically intended
his misconduct to defraud plaintiffs. SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833, 854-55, 861-62 &
n.27 (2d Cir. 1968) (“proof of a specific intent to defraud is unnecessary”). “‘[A] fraud or deceit can
11 In Stoneridge, the Supreme Court determined that no liability could lie only because the plaintiffs could not show that investors relied on the contracts between Charter and its third party vendors in making investment decisions. 552 U.S. at 166-67. Investors’ reliance on Hansen’s reported financial results is not an issue here.
12 In dicta, Janus notes that the deceptive conduct of the third party in Stoneridge would not have satisfied Janus’ test for liability under Rule 10b-5(b) (if that party had been alleged to have “made” a statement) because the decision to make the false statement at issue in Stoneridge, as in Janus, rested with “an independent entity.” 131 S. Ct. at 2304.
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 13 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
be practiced on one person, with resultant harm to another person or group of persons.’” United
States v. O’Hagan, 521 U.S. 642, 656 (1997).
Deceptive conduct has been found to include such activities as “wash sales, matched orders,
or rigged prices.” See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476-77 (1977). Additionally, “if
one person were to create a false prospectus knowing that it would be transmitted to investors, and
another were to then transmit that prospectus to investors knowing it to be false, each individual
would have contravened the text of section 10(b) by employing a fraudulent device in connection
with the sale of securities.” SEC v. Collins & Aikman Corp., 524 F. Supp. 2d 477, 486-87 (S.D.N.Y.
2007). This reasoning applies here where, for example, Sells created “sales” for the purposes of
recognizing revenue, full well knowing that the “sales” were not legitimate, but being recorded as
revenue on Hansen’s financials and allowing it to raise funding. ¶¶8, 149-155, 283-290.
WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir. 2011),
does not preclude the scheme liability claims here.13 The case involved allegations of omissions by
Spot Runner executives of sales of their shares while soliciting WPP to buy shares in the same
company. Id. at 1044-45. Having found a valid omissions claim under Rule 10b-5(b), the court
addressed whether Rule 10b-5(b) omission claims may be recast as scheme liability claims. Id. at
1057. In doing so, it held that when alleging scheme liability, “the scheme [must] encompass[ ]
conduct beyond . . . misrepresentations or omissions” and no such allegations were alleged. Id.
Conduct beyond the alleged misrepresentations is alleged here.
Judge Fogel’s recent decision in SEC v. Mercury Interactive, LLC, is instructive. No. 5:07-
cv-02822-WHA, 2011 WL 5871020 (N.D. Cal. Nov. 22, 2011). He rejected the very argument
raised here – that plaintiffs’ scheme claims are recast misstatements claims. Id. at *2. Defendant
Sells’ attempts to distinguish it are futile. The deceit plaintiffs allege here encompasses far more
13 “[I]t is possible for liability to arise under both subsection (b) and subsections (a) and (c) of Rule 10b-5 out of the same set of facts.” In re Alstom SA Sec. Litig., 406 F. Supp. 2d 433, 475 (S.D.N.Y. 2005) (cited by WPP, 655 F.3d at 1058); see also MB Fin. Grp., Inc. v. U.S. Postal Serv., 545 F.3d 814, 819 (9th Cir. 2008) (“a plaintiff is generally entitled to plead alternative or multiple theories of recovery on the basis of the same conduct on the part of the defendant”).
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 14 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
than just misstating Hansen’s financials – plaintiffs allege that from the time he arrived at Hansen to
his forced resignation, Sells acted deceptively by engaging in widespread conduct that was
“wrongful in and of itself” (id.) – side agreements and forgeries to name two. Such acts are
deceptive.14
Neither SEC v. Kelly, No. 08 Civ. 4612(CM), 2011 WL 4431161 (S.D.N.Y. Sept. 22, 2011),
nor In re John P. Flannery, Admin. Proceeding No. 3-14081, 2011 WL 5130058 (SEC Release No.
438, Oct. 28, 2011), compels the result defendants urge. In Kelly, the court decided whether the
defendants’ conduct in structuring legitimate transactions was deceptive when the SEC conceded
that it was “‘typical in business and a matter of common sense.’” 2011 WL 4431161, at *4. In
contrast, Sells’ actions here were facially deceptive and defy common sense. For example, he
knowingly directed the installation of unwanted Systems that were then immediately dismantled and
placed in storage, directed the forgery of a doctor’s signature on a training form and entered into a
secret side agreement against Company policy. ¶¶5-6, 8, 23, 26, 48, 50-52, 105, 111, 122-123, 125-
127, 133-136, 142-160, 178, 182, 192, 285-287, 375, 379-389. Similarly, Flannery is inapposite as
the SEC Administrative Law Judge, with the benefit of an 11-day hearing, 500 exhibits and the
testimony of multiple witnesses, simply concluded that the case solely involved misstatements and
omissions. 2011 WL 5130058, at *35, *37. Here, Sells engaged in a pervasive fraudulent scheme.
IV. PLAINTIFFS ALLEGE THE FRAUD WITH PARTICULARITY
Sells avers that plaintiffs have not pled with particularity what he did that Hansen’s
accountants and auditors relied upon to prematurely recognize revenue. Mot. at 16-18. Not so. The
TAC alleges with particularity the who – SVP Sells (e.g., ¶¶5-6, 8, 23), the what – improper revenue
recognition on Systems that were purportedly installed or sold to hospitals while knowing the “sales”
were not complete and participating in outright deceit (e.g., ¶¶5-6, 8, 52), the when and where –
14 See, e.g., United States SEC v. Geswein, No. 5:10CV1235, 2011 U.S. Dist. LEXIS 111904, at *56-*57 (N.D. Ohio Aug. 2, 2011) (recommendation that allegations of improper use of bill-and-hold, fraudulent manipulation of reserves, used equipment write-ups, and improper capitalizing of expenses were sufficient for scheme liability) (relevant portion adopted by United States SEC v. Geswein, No. 5:10CV1235, 2011 U.S. Dist. LEXIS 111893 (N.D. Ohio Sept. 29, 2011)).
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 15 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
between Q208 and Q109 (¶119), Hansen issued press releases and SEC filings containing false and
misleading financial information premised on illicit sales transactions (e.g., ¶¶192-197), and the how
– revenue was improperly recognized on Systems which were installed and then immediately
dismantled, a System for which the documentation required for revenue recognition was forged, a
System for which a side agreement was entered into which circumvented Hansen’s revenue
recognition policy, and Systems where contingencies such as training and installation remained (e.g.,
¶¶95, 98-113, 120-155). Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (for
particularity plaintiffs must allege the “‘who, what, when, where, and how’ of the misconduct
charged”).15 Despite his knowledge of phony System installations and lack of required training,
Sells reached a consensus with CFO Van Dick and other officers to recognize revenue on those
transactions and allowed the overstated revenue to be disseminated in press releases and SEC filings
each quarter as a member of Hansen’s disclosure committee after the secret illicit transactions had
been reviewed by Hansen’s accountants and auditors. ¶¶23, 52.
Sells’ complaint that there lacks particularized allegations against him is belied by the alleged
facts. Only 45 systems were “sold” during Sells’ tenure and 11 or nearly 25% were admittedly
improperly recognized as revenue based on facts known at the time the original financials were
recorded. ¶194. Moreover, Sells was directly involved in the overstatement of Hansen’s revenue in
Q208 (49.51% overstatement), Q308 (13.49% overstatement), Q408 (36.37% overstatement), and
Q209 (12.11% overstatement). ¶195. The complaint abounds with detail, including that:
(i) Sells participated in calls with the V.A. Hospital of Cincinnati’s (Hospital A), and reprimanded an employee for documenting the agreement in an e-mail that the System “installed” by those under his direction at the hospital would immediately be taken apart, stored and reinstalled in a later quarter when the construction of the hospital’s laboratory was complete. ¶¶125, 127;
15 Sells’ case law does not compel a different standard. Mot. at 17. First, the Court’s analysis of the pleading standard in SEC v. Berry concerned the allegations regarding a defendant’s involvement in the company’s SEC filings themselves, not in the fraudulent transactions that gave rise to the false financials in the SEC filings. 580 F. Supp. 2d 911, 922 (N.D. Cal. 2008). And in Swartz v. KPMG LLP, the Court was concerned about differentiating the allegations of different defendants, not of a defendant and his direct report. 476 F.3d 756, 764-65 (9th Cir. 2007).
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 16 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
(ii) Sells directed a Hansen employee to obtain the signatures required to recognize revenue from a System “sold” to Yale (Hospital B) even though he knew that it would be impossible for the required physician training to be completed in Ohio or California before the end of the quarter. ¶¶134-136;
(iii) Sells entered into a side agreement which violated the Company’s stated accounting policies because he agreed to make the leasing company whole if St. Joseph’s (Hospital C) returned the System by helping the leasing company find another buyer or by Hansen taking the System back. ¶¶142-148;16
(iv) After emphasizing the importance of selling ten Systems in Q109 to Hansen’s sales staff due to its prospects for raising capital, SVP Sells helped arrange for the installation and then immediate dismantling and storage of a System sold to St. Barnabas Medical Center (Hospital D) which allowed Hansen to record approximately $550,000 in revenue for the quarter. ¶¶149-154; and
(v) Sells was involved in at least nine other transactions that were improperly recognized because of, for example, known training contingencies. ¶¶5-6, 23, 48, 50-52, 90-91, 95-96, 98-113, 172, 194, 285-287.17
The TAC does not lack for particularized allegations as to Sells.
V. PLAINTIFFS PLEAD A STRONG INFERENCE OF SCIENTER
Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), plaintiffs need only
plead facts giving rise to a strong inference that Sells “knew or w[as] deliberately reckless to the
falsity of [his] statements.” In re LDK Solar Sec. Litig., No. C 07-05182 WHA, 2008 U.S. Dist.
LEXIS 80717, at *29 (N.D. Cal. Sept. 24, 2008). In the context of scheme liability, plaintiffs are
only required to demonstrate that Sells engaged in deceptive conduct with scienter. Simpson, 452
F.3d at 1047. Throughout his motion, Sells isolates individual allegations of scienter and attempts to
16 Sells disingenuously characterized plaintiffs’ allegations regarding Hospital C as vague. Mot. at 17. Plaintiffs specifically lay out the terms of the side agreement – Sells agreed to make the leasing company whole if the hospital returned the System by taking the System back or by finding another buyer for the System – which violated Hansen’s stated policies for revenue recognition because not all the risks of ownership passed to the leasing company. ¶¶144-147.
17 Moreover, Sells is wrong that he is not implicated in the fraudulent scheme with respect to Catheter sales. By manipulating “sales” transactions of unwanted Systems and where training contingencies remained, Sells knew of the “sleeping Sensei” but concealed that information and permitted Hansen to report quarterly increases in Catheter sales. E.g., ¶¶7, 232-234, 238-239. Indeed Sells (who was in charge of sales) was “cannibalizing future Catheter sales by offering discounts” or in other words, stuffing the channel and masking the unused systems. ¶¶217, 238-239. To that end, he discussed and monitored utilization as well as Catheter sales data which demonstrated that certain Systems were purportedly “installed” but not actually used. ¶¶7, 48, 164.
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 17 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
attack each one as insufficient standing alone. Mot. at 9-15.18 But in considering scienter
allegations, “courts must . . . consider the complaint in its entirety.” Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 322-23 (2007). “[A] court should look to the complaint as a whole, not
to each individual scienter allegation.” S. Ferry, 542 F.3d at 784. “[T]he court’s job is not to
scrutinize each allegation in isolation but to assess all the allegations holistically.” Tellabs, 551 U.S.
at 326.
Moreover, “the ‘inference that the defendant acted with scienter need not be irrefutable, i.e.,
of the “smoking-gun” genre, or even the “most plausible of competing inferences.””’ Middlesex Ret.
Sys. v. Quest Software, Inc., No. CV 06-6863 DOC (RNBx), 2008 U.S. Dist. LEXIS 68419, at *10-
*11 (C.D. Cal. July 10, 2008) (quoting Tellabs, 551 U.S. at 324). Such an inference can be met
through circumstantial evidence. See Provenz v. Miller, 102 F.3d 1478, 1490 (9th Cir. 1996);
Nguyen v. Radient Pharm. Corp., No. SA CV 11-0406 DOC (MLGx), 2011 U.S. Dist. LEXIS
124631, at *22 (C.D. Cal. Oct. 26, 2011). Viewed holistically, plaintiffs have satisfied their burden.
Sells was one of only six executives in the Company, and as the SVP of Commercial
Operations, he was specifically responsible for key operations, including sales, training, installation
and customer service. ¶23. He participated in weekly meetings with the other defendants regarding
the status of System sales and installations, received System sales and installation reports, monitored
utilization and Catheter sales data, and directed or oversaw the improper revenue recognition of
Systems shipped to “independent” distributors who were not capable of independently conducting
installations and supporting end-users as well as Systems in which the revenue recognition
requirements for documentation and training were not satisfied. See, e.g., ¶¶5, 7-8, 25-26, 48, 50-52,
18 SVP Sells’ claim that plaintiffs fail to satisfy the PSLRA pleading standards simply because their allegations have some similarity to those in the SEC’s complaint is baseless. See Mot. at 8-9, 15. The case law that he relies upon is inapposite because plaintiffs do not solely rely on the existence of the SEC complaint. See In re UBS Auction Rate Sec. Litig., No. 08 Civ. 2967 (LMM), 2010 U.S. Dist. LEXIS 59024, at *58 n.11 (S.D.N.Y. June 10, 2010) (plaintiffs referenced the existence of an SEC lawsuit and Settlement Order as evidence of inadequate disclosures); In re Bank of Am. Corp. Auction Rate Sec. (ARS) Mktg. Litig., No. 09-md-02014 JSW, 2011 U.S. Dist. LEXIS 18208, at *36 n.5 (N.D. Cal. Feb. 24, 2011) (plaintiffs alleged the existence of regulatory settlements as evidence of scienter). Rather, plaintiffs simply rely on facts alleged in the SEC complaint and a myriad of other facts as evidence of scienter.
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 18 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
55-57, 59-95, 98-99, 105, 108, 111, 115, 119, 122-155, 161, 164, 166, 172-173, 176, 178, 183-189,
192, 285-289. Critically, he was involved in reaching a consensus with Hansen’s CFO on
recognizing revenue on “sales” while knowing that Hansen’s Systems had not been installed and/or
that end-users had not yet received training on these “sales.” ¶52. Sells also knew that Hansen’s
stated revenue policy was to “defer all [S]ystem revenues until training and installation are
completed.” ¶42. It was a policy Sells was informed of and understood. TAC, Ex. 1, ¶24.
Further, Hansen only had 68 System sales during the entire Class Period (45 sales during
Sells’ tenure) and they constituted the majority of Hansen’s revenues. ¶¶194-195, 281. And the
violations of GAAP and Company-stated revenue recognition policies – policies which SVP Sells
was instructed on when he joined the Company – were basic, significant and widespread. See, e.g.,
¶¶55, 57, 108, 120-121, 128, 139, 141, 147, 153; TAC, Ex. 1, ¶24. During Sells’ tenure, more than
$5.5 million or over 20% of recorded revenue was improper. ¶195. In addition to artificially
inflating Hansen’s stock price, defendants wanted the appearance of stair-step sales growth in order
to raise operating capital. ¶¶283-88. To that end, Sells chastised his sales force in a December 19,
2008 e-mail for weak sales, noting “this is a very important quarter [Q408] with additional funding
on the line for Hansen” and that “finish[ing] below 12 [s]ystem [sales]” would jeopardize funding.
¶286. Hansen recorded ten sales in Q408, but 40% would later be restated as improper, including
the sale to Yale (Hospital B).19 In that “sale,” providing training in three days was impossible and
thus a forged signature was obtained to verify said training. ¶¶132-141, 194. Sells was ultimately
forced to resign after an audit committee investigation uncovered his wrongful conduct. ¶23.
Taking all these allegations together, plaintiffs have easily established scienter.
Reporting revenue before it is earned violates such simplistic accounting principles that
“[d]efendants’ GAAP violations just as likely support an inference of scienter as an inference of
innocent and unknowing behavior.” See Backe v. Novatel Wireless, Inc., 607 F. Supp. 2d 1145,
1162-63 (S.D. Cal. 2009); Daou, 411 F.3d at 1016 (““‘revenue must be earned before it can be
19 The SEC identified the names of the hospitals in its opposition to defendant Sells’ motion to dismiss filed on January 13, 2012 (Dkt. No. 36). The names of the hospitals are referred to herein.
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 19 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
recognized’””).20 Sells’ manipulation of Hansen’s sales transaction also supports scienter because
they contravene Hansen’s revenue recognition policy – a policy which Sells concedes he understood.
See Provenz, 102 F.3d at 1490 (revenue recognition that violates GAAP and the company’s internal
policy for recognizing revenue establishes scienter at summary judgment).21 Where there are
significant obligations and/or contingencies related to contracts, such as, for example, the side
agreement Sells entered into with St. Joseph’s Hospital (Hospital C), recognition of revenue on such
a contract violates such simple GAAP rules and company accounting policies that they “contribute
probative weight to an inference of scienter.” In re MicroStrategy, Inc. Sec. Litig., 115 F. Supp. 2d
620, 637-38 (E.D. Va. 2000); see also ¶147. The basic, widespread accounting violations that ran
afoul of Hansen’s own revenue recognition policies provide overwhelming support of scienter. See,
e.g., ¶¶55, 57, 108, 120-121, 128, 139, 141, 147, 153.22
Plaintiffs do not just rely on the egregious nature of the accounting violations, but on Sells’
actual knowledge and participation in the illicit sales transactions and eventual improper revenue
recognition. Sells fraudulently manipulated Hansen’s sales and installation processes and
documentation to knowingly work around the applicable accounting principles which he reviewed as
a member of Hansen’s disclosure committee. ¶¶5-6, 8, 23, 52-53, 90-91, 95-96, 98-113, 122-123,
125-127, 133-136, 142-155, 178, 192, 285-287, 381-382, 388. The intent underlying his actions was
undoubtedly sinister – to artificially inflate Hansen’s stock price by creating the false appearance of
20 See also N.Y. City, 616 F. Supp. 2d at 1000 (where “revenues were overstated by a considerable amount, . . . it is possible to infer that those revenues were overstated intentionally so as to have an impact on the [stock] price”); Middlesex, 2008 U.S. Dist. LEXIS 68419, at *15 (“Significant GAAP violations, when described with particularity, may provide powerful indirect evidence of scienter.”).
21 See also Atlas v. Accredited Home Lenders Holding Co., 556 F. Supp. 2d 1142, 1156 (S.D. Cal. 2008) (deviation from defendant’s internal underwriting standards is evidence of scienter); In re Adaptive Broadband Sec. Litig., No. C 01-1092 SC, 2002 U.S. Dist. LEXIS 5887, at *39 (N.D. Cal. Apr. 2, 2002) (violation of internal accounting policies supports an inference of scienter).
22 SVP Sells’ reliance on In re Medicis Pharm. Corp. Sec. Litig., 689 F. Supp. 2d 1192 (D. Ariz. 2009), is highly misplaced. Mot. at 9-10. The court itself later recognized that the “relative simplicity and obviousness” of defendants’ accounting manipulations, such as the ones alleged in the TAC here, weighed in favor of scienter. In re Medicis Pharm. Corp. Sec. Litig., No. CV-08-1821-PHX-GMS, 2010 U.S. Dist. LEXIS 81410, at *15-*23 (D. Ariz. Aug. 9, 2010).
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 20 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
stair-step growth, and to raise funding by falsely portraying strong System sales. Id.; see WPP, 655
F.3d at 1052 (“continued infusion of investment capital” consideration in fraudulent intent inquiry).
It is preposterous for an officer of Sells’ level to seriously contend that round-trip
installations (install, recognize revenue and then de-install), side agreements, forgeries and system
“sales” with known contingencies do not confer scienter of deceptive conduct or the falsity of
Hansen’s financials. Asher v. Baxter Int’l, Inc., No. 02 C 5608, 2005 U.S. Dist. LEXIS 2131, at
*18-*19 (N.D. Ill. Feb. 3, 2005) (“‘[H]igh-level [] managers . . . may be presumed to have been
aware of [] problems’ at their company” especially where they would be “‘readily recognized by an
outsider.’”) (alterations in original).
Further, while motive is not required, Tellabs, 551 U.S. at 325, Sells had motive and
opportunity to manipulate the System “sales.” See Mot. at 10-11. And his protests that he did know
(1) the re-installation of the System at the V.A. Hospital of Cincinnati (Hospital A) “would take
place after the end of the fiscal quarter,” (2) the signature for the installation at Yale (“Hospital B”)
would be forged because training would not be completed in three business days during the last
week of December several states away,23 or (3) the installation at St. Joseph’s (“Hospital C”) would
not have occurred but for his oral promises, ring hollow and ignore that at best he acted with
deliberate recklessness. Sells reached a consensus regarding revenue recognition on these
transactions, was aware of which Systems had been installed and the requirements for training and
thus would have had every reason to question the accuracy of these transactions when he reviewed
the Company’s press releases and SEC filings before they were issued. See id. at 10-12; ¶¶23-24.
Further, he himself tied sales (which Hansen has admitted were improper) to the motivation to raise
funding for Hansen. ¶¶286-287. This direct and circumstantial evidence of motive and opportunity
is “sufficient to establish the requisite level of scienter.” See Nguyen, 2011 U.S. Dist. LEXIS
23 SVP Sells’ authorities, Greebel v. FTP Software, Inc. and Broudo v. Dura Pharm., Inc., undermine his position because (1) “inflating income through improper revenue recognition,” such as forging a document in order to record a sale, does support a strong inference of scienter and (2) there is no legitimate reason for forging a document “to achieve sales earlier.” 194 F.3d 185, 202-03 (1st Cir. 1999); 339 F.3d 933, 940 (9th Cir. 2003), rev’d on other grounds, 554 U.S. 336 (2005).
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 21 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
124631, at *22 (finding a strong inference of scienter where there were “red flags” of the company’s
financial condition and defendant was possibly motivated by the company’s need to raise capital).24
Moreover, “[i]t is far too convenient for [SVP Sells] to now argue that [he] did not
understand the accounting implications” of revenue recognition. Middlesex, 2008 U.S. Dist. LEXIS
68419, at *15-*18; see also In re Northpoint Commc’ns Grp., Inc. Sec. Litig., 221 F. Supp. 2d 1090,
1104 (N.D. Cal. 2002) (“it strains credulity” to believe that executives of such a large corporation
would not have been aware of the improper accounting of a product line). It in fact belies what Sells
told the SEC – he understood Hansen’s revenue policy. TAC, Ex. 1 at ¶24. Accordingly, when the
scienter allegations are viewed holistically, the inference that he knew, or was deliberately reckless
in not knowing, that Hansen’s press releases and SEC filings were false and misleading is at least as
compelling as any opposing inference. Middlesex, 2008 U.S. Dist. LEXIS 68419, at *14-*26.25
While not necessary, adding to the mix of scienter is the additional confidential witness
accounts who demonstrate Sells’ knowledge or deliberate disregard of the improper recognition of
nine systems “sold” through foreign distributors as part of the overall scheme to inflate Hansen’s
reported revenue and raise funding. Sells knew these “sales” had required contingencies that had not
been met. As to Rosslyn, Sells – as the person in charge of sales and training – would have known
that one of only a handful of the Company’s distributors flatly refused to be trained to support its
end-users despite repeated requests. ¶¶104-107. Similarly, Sells knew that Hansen performed the
installation for Amayeza’s customer ending on July 12, 2009 because of his responsibilities for
installations and receipt of installation reports – a date after Q209 where revenue had been
24 See also In re Metawave Commc’ns. Corp. Sec. Litig., No. C02-625RSM, 2009 U.S. Dist. LEXIS 25331 (W.D. Wash. Mar. 27, 2009) (scienter sufficiently alleged against a defendant who, inter alia, signed letters that created consignment sales and directed shipments of defective equipment); Gross v. Medaphis Corp., 977 F. Supp. 1463, 1472 (N.D. Ga. 1997) (GAAP allegations coupled with allegation that defendants provided customers with secret side agreements sufficient).
25 Unlike here, in Zucco Partners, LLC v. Digimarc Corp., “there was no specific intent to fabricate the accounting misstatements” and the information at issue was “largely definitional” and not “especially prominent” within the company. 552 F.3d 981, 1001, 1007 (9th Cir. 2009). In further contrast to the TAC, in Zucco, “[n]othing in the complaint suggest[ed] that [defendants] had access to the underlying information from which the accounting numbers were derived.” Id. at 1001.
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 22 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
improperly recognized. ¶¶109-112. Additionally, not only was Sells in charge of Hansen’s sales
organization, clinical training, and installations, but he participated in Monday calls where according
to CW2 (Hansen’s Sales Director for Central and Eastern Europe from 2007 to 2011), each System
was discussed in detail. ¶¶23-24, 26, 48; Mot. at 13.26 CW1 (Hansen’s Director of Customer
Support from April 2006 to November 2009) elaborated that at the weekly installation meetings,
SVP Sells and defendants Moll, Van Dick and Restani would reach a “consensus” as to which
Systems could be recognized as revenue after reviewing the purchase orders and installation reports
which showed, inter alia, whether the purchase order was acceptable, whether the System was
installed, and whether the physician had been trained. ¶¶50-52; Mot. at 13.27 CW3 (Hansen’s Sales
Director of the SE Region reporting directly to Sells) personally observed his actions and provided
him status updates on System sales. See ¶¶27, 158.28 CW3’s descriptions of SVP Sells’ unethical
sales tactics and lies to customers are properly alleged based on CW3’s personal conversations with
his supervisor. See ¶160.29 And the other witnesses provide corroborating evidence of Sells’ sales
26 SVP Sells misconstrues In re Accuray Sec. Litig. as requiring plaintiffs to plead facts specific to him and only him for every transaction because the Court there merely found a complaint deficient where it “continually group[ed] all Defendants together” and did not “identify[] what each Defendant purportedly knew.” See Mot. at 13: 757 F. Supp. 2d 936, 949 (N.D. Cal. 2010). The TAC identifies knowledge specific to Sells.
27 Unlike in the cases relied upon by SVP Sells, plaintiffs provide detailed allegations of how he participated in and had knowledge of the System installation and revenue recognition processes at Hansen. See Mot. at 13; In re Cadence Design Sys., Inc. Sec. Litig. (“Cadence I”), 654 F. Supp. 2d 1037, 1047 (N.D. Cal. 2009); In re Apollo Grp., Inc. Sec. Litig., No. CV-10-1735-PHX-JAT, 2011 U.S. Dist. LEXIS 124781, at *49 (D. Ariz. Oct. 27, 2011).
28 SVP Sells’ reliance on Zucco and Apollo is misplaced because “generalized claims about corporate knowledge” fail to create a strong inference of scienter only where “they fail to establish that the witness reporting them has reliable personal knowledge of the defendants’ mental state.” See Mot. at 14; 552 F.3d at 998. In this case, the allegations in the TAC do show that – as his direct report – CW3 has reliable personal knowledge of Sells’ scienter.
29 In re Cadence Design Sys., Inc. Sec. Litig. (“Cadence II”), 692 F. Supp. 2d 1181, 1188 (N.D. Cal. 2010) (finding a confidential source’s statements based on hearsay – discussions with others – was supportive of scienter).
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 23 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
tactics. E.g., ¶158 (“Sells was obsessed to make his numbers.”) and (“Sells was evil.”); ¶159 (Sells
“would manipulate the rules and would do things that were downright wrong.”).30
The sudden exodus of its VP of Global Sales, Jed Palmacci, as well as its General Counsel
adds to the already strong inference of scienter. Palmacci repeatedly warned defendant Moll about
Sells’ unethical sales practices leading up to his departure. ¶¶157, 160. Palmacci departed shortly
after the end of Q408 when Sells put into motion a flurry of fraudulent activity – including directing
forged documentation indicating that the physicians had received the necessary training – that led to
the improper revenue recognition of a System sold to Yale even though the physicians had not been
trained. ¶¶132-141. So did Hansen’s General Counsel. ¶180. The most plausible inference based
on the TAC’s allegations that high-ranking officers were aware of Sells’ illicit conduct and
suspicious activity is that these executives left to avoid individual culpability for the known fraud.
Importantly, SVP Sells’ own resignation in October 2009, shortly after the Audit
Committee’s investigation concluded and around the same time that Hansen publicly revealed it
would restate its financials, supports his scienter. ¶¶1, 23; see, e.g., Teamsters Local 617 Pension &
Funds v. Apollo Grp., Inc., 633 F. Supp. 2d 763, 799 (D. Ariz. 2009) (defendant’s resignation lent
“credence to a finding of scienter” where the complaint contained additional allegations of his
‘“wrongdoing’”); In re Sipex Corp. Sec. Litig., No. C 05-00392 WHA, 2005 U.S. Dist. LEXIS
30854, at *3 (N.D. Cal. Nov. 17, 2005) (“house-cleaning and reforms do not follow innocent
mistakes”).
In addition to Sells’ direct participation and knowledge of the accounting trickery at issue
here, the core business alone would support scienter as explained in detail in §III.A.2.D. of
Plaintiffs’ Opposition to the Motion to Dismiss Filed by Defendants Hansen Medical, Inc., Frederic
H. Moll, Steven M. Van Dick, and Gary Restani (“Pltfs’ Mem.”), filed concurrently herewith.
30 “Where plaintiffs rely on both confidential witnesses and on other facts, ‘they need not name their sources as long as the latter facts provide an adequate basis for believing that the defendants’ statements were false.’” Daou, 411 F.3d at 1015. Moreover, Sells quotes In re Apple Computer, Inc. out of context. See Mot. at 14. The Apple Court actually declared that “[u]nless other details about the identity of the CW are necessary to establish the CW’s reliability, a job title will usually be an adequate description of a CW.” 243 F. Supp. 2d 1012, 1027 (N.D. Cal. 2002).
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 24 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
System sales comprise nearly all of the Company’s revenues every quarter and hence are “of such
prominence that it would be ‘absurd’ to suggest that management was without knowledge of the
matter.” S. Ferry, 542 F.3d at 786. Moreover, the fact that SVP Sells was one of only six executives
at Hansen also supports the inference that defendants informed each other “of the facts that rendered
the accounting treatment of the [System sales] incorrect.” See Cadence II, 692 F. Supp. 2d at 1192.
Viewed holistically, scienter is more than sufficiently alleged as to defendant Sells.
VI. PLAINTIFFS ADEQUATELY PLEAD LOSS CAUSATION
SVP Sells does not dispute that plaintiffs adequately plead loss causation with respect to
Hansen’s October 19, 2009 disclosure that it planned to restate its prior financial results. Mot. at 18.
Where loss causation as to a single disclosure is adequately alleged, no further inquiry is conducted
with respect to other alleged partial disclosures. See In re Interlink Elecs., Inc. Sec. Litig., No.
SACV 05-8133-AG(SHx), 2008 WL 4531967, at *4 (C.D. Cal. Oct. 6, 2008) (so holding). Indeed,
once a plaintiff has met the pleading standard, whether additional allegations of loss are sufficient
goes to the amount of damages, not whether a claim is stated. See Lormand v. US Unwired, Inc.,
565 F.3d 228, 266 n.33 (5th Cir. 2009). Nevertheless, plaintiffs will briefly address SVP Sells’
improper effort to limit damages at this stage and incorporate by reference plaintiffs’ opposition to
the Hansen Defendants’ motion which addresses the issue in detail. See Pltfs’ Mem., §II.B.
The partial disclosures on July 28, 2008, July 31, 2008, January 8, 2009, July 6, 2009 and
August 4, 2009 involve Company-specific financial information which was triggered by the
accounting manipulations alleged and resulted in Hansen’s stock plummeting – 17.12% (¶¶313-315),
21.71% (¶¶318-323), 34.27% (¶¶333-337) and 8% (¶¶352-354), respectively. Unlike in In re
Redback Networks, Inc. Sec. Litig., “the sales in question, and the resulting revenues” from the
Systems were not “real.” No. C 03-5642 JF (HRL), 2007 U.S. Dist. LEXIS 27389, at *15 (N.D.
Cal. Mar. 30, 2007) (emphasis in original).31 The partial disclosures were each a materialization of
31 Sells misleadingly quotes the Court in In re New Century. The disclosure the Court was referring to concerned financial statements for which the auditor did not provide an audit opinion. 588 F. Supp. 2d 1206, 1237 (C.D. Cal. 2008). Here, Sells had ultimate authority over all the partial disclosures alleged by plaintiffs. ¶23.
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 25 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
the risks concealed by defendants – risks created by their fraudulent revenue accounting which is
logically intertwined with Hansen’s falsely inflated sales, utilization, demand, earnings, projections
and controls – and caused Hansen’s stock price to decline precipitously. ¶¶313-315, 318-323, 333-
337, 352-354.
VII. PLAINTIFFS SUFFICIENTLY PLEAD CONTROL PERSON LIABILITY
To plead a §20(a) claim, “it is not necessary to show actual participation or the exercise of
actual power” – rather, a plaintiff need only show that defendants were in a position of control.
Howard v. Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000). Here, plaintiffs have sufficiently
alleged a primary violation under §10(b) and that Sells was in a position of control. ¶23; see also In
re Constellation Energy Grp., Inc., 738 F. Supp. 2d 614, 640 (D. Md. 2010) (declining to dismiss
control person claims of a subsidiary president). For example, Sells had direct control over
Murawski who solicited a forged training form in connection with the improperly recognized sale to
Yale and engaged in other deceits. E.g., ¶¶8, 136, 149; see also ¶156 (Sells brought over Murawski
and others to employ “highly-aggressive and pressure-based sales tactics.”). In contrast to In re
Hansen Natural Corp. Sec. Litig., 527 F. Supp. 2d 1142, 1163 (C.D. Cal. 2007), plaintiffs allege not
only Sells’ position, but his active participation and awareness of the accounting manipulations and
false statements in the TAC. See IV.-V., supra.
VIII. CONCLUSION
For all the reasons set forth above, Sells’ motion to dismiss should be denied. If the Court
grants any part of Sells’ motion, plaintiffs request leave to amend. Eminence Capital, L.L.C. v.
Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003). This is the first time any court has considered the
substance of plaintiffs’ allegations as to defendant Sells.
DATED: February 27, 2012 Respectfully submitted, ROBBINS GELLER RUDMAN & DOWD LLP WILLOW E. RADCLIFFE
/s/ Willow E. Radcliffe WILLOW E. RADCLIFFE
PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW - 26 -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Post Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: 415/288-4545 415/288-4534 (fax)
ROBBINS GELLER RUDMAN & DOWD LLP IVY T. NGO 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax)
Additional Counsel for Plaintiffs
GLANCY BINKOW & GOLDBERG LLP LIONEL Z. GLANCY PETER A. BINKOW MICHAEL GOLDBERG EX KANO S. SAMS II ROBERT V. PRONGAY 1925 Century Park East, Suite 2100 Los Angeles, CA 90067 Telephone: 310/201-9150 310/201-9160 (fax)
Lead Counsel for Plaintiffs
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
CERTIFICATE OF SERVICE
I hereby certify that on February 27, 2012, I authorized the electronic filing of the foregoing
with the Clerk of the Court using the CM/ECF system which will send notification of such filing to
the e-mail addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I
caused to be mailed the foregoing document or paper via the United States Postal Service to the non-
CM/ECF participants indicated on the attached Manual Notice List.
I further certify that I caused this document to be forwarded to the following Designated
Internet Site at: http://securities.stanford.edu.
I certify under penalty of perjury under the laws of the United States of America that the
foregoing is true and correct. Executed on February 27, 2012.
s/ Willow E. Radcliffe WILLOW E. RADCLIFFE
ROBBINS GELLER RUDMAN & DOWD LLP Post Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: 415/288-4545 415/288-4534 (fax) E-mail: [email protected]