Case 4:19-cv-02033-YGR Document 110 Filed 06/02/20 Page 1 of 46
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`UNITED STATES DISTRICT COURT
`NORTHERN DISTRICT OF CALIFORNIA
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`IN RE APPLE INC. SECURITIES LITIGATION
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`CASE NO. 19-cv-02033-YGR
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`ORDER GRANTING IN PART AND DENYING
`IN PART DEFENDANT’S MOTION TO
`DISMISS
`Re: Dkt. No. 91
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`Lead plaintiff Employees’ Retirement System of the State of Rhode Island brings this
`securities class action litigation alleging false and misleading statements and omissions between
`August 2, 2017 and January 2, 2019 (the “Class Period”), against defendants Apple Inc. (“Apple”
`or the “Company”), Timothy D. Cook (Chief Executive Officer, or “CEO,” of Apple), and Luca
`Maestri (Chief Financial Officer, or “CFO,” of Apple). Specifically, plaintiff raises two causes of
`action: (1) violation of Section 10(b) of the Securities Exchange Act (“Exchange Act”) and Rule
`10b-5 promulgated thereunder by all defendants, and (2) violation of Section 20(a) of the
`Exchange Act by the individual defendants.
`Defendants move to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) and the
`Private Securities Litigation Reform Act of 1995 (“PSLRA”). Defendants challenge plaintiff’s
`Section 10(b) and Rule 10b-5 claims on four grounds: (1) the complaint presents impermissible
`puzzle pleading that fails to conform to the requirements of Federal Rule of Civil Procedure 8; (2)
`none of the challenged statements are false or misleading, or otherwise actionable; (3) plaintiff
`fails to establish a strong inference of scienter, and (4) plaintiff fails to establish “loss causation”
`for certain statements. Defendants further move to dismiss plaintiff’s Section 20(a) claim on the
`ground that plaintiff fail to plead a primary violation of Section 10(b).
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`Case 4:19-cv-02033-YGR Document 110 Filed 06/02/20 Page 2 of 46
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`Having considered the papers submitted and the pleadings in this action, the hearing held
`on March 10, 2020, and for the reasons below, the Court hereby GRANTS IN PART and DENIES IN
`PART the motion to dismiss WITH LEAVE TO AMEND.
`I.
`BACKGROUND
`The following facts are alleged in the Corrected Consolidated and Amended Class Action
`Complaint for Violation of the Federal Securities Laws (“CCAC”).
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`A.
`Apple’s iPhone Business
`Apple is a multinational technology company that designs, develops, and sells consumer
`electronics, computer software, and online services. (CCAC ¶ 2.) Apple is the world’s largest
`information technology by revenue and enjoys significant reach in emerging markets, including
`China. (Id. ¶¶ 2, 4.) The Company’s flagship product is the Apple iPhone, which generated more
`than 60% of Apple’s revenue in 2018. (Id. ¶ 3.) To profit from the iPhone, Apple relies
`significantly on “upgrading”—that is, the practice where consumers replace their older iPhones
`with a newer model. (Id. ¶ 65.) Apple has released on average one new iPhone model per year
`between 2007 and 2015 to encourage upgrading. (Id. ¶ 47.)
`Greater China (a region that includes mainland China, Hong Kong, and Taiwan) represents
`an important market for Apple’s iPhone business. (Id. ¶ 4.) In addition to being the third-largest
`market after the United States and Europe, Greater China is also Apple’s highest growth market
`and represented nearly 20% of Apple’s total annual sales for fiscal year 2018. (Id.) The Chinese
`market experiences significant competition from lower-cost smartphone makers, including
`Huawei, Xiaomi, and Oppo. (Id. ¶ 5.)
`After nearly a decade of uninterrupted growth, the smartphone market began to stagnate in
`2016. (Id. ¶¶ 6, 81.) Among other factors contributing to the decline, consumers were reportedly
`waiting longer to upgrade their phones. (Id. ¶¶ 58-60.) As sales of iPhones in the United States
`and Europe plateaued, Apple began relying increasingly more on China to sustain its rate of
`growth. (Id. ¶ 52.) However, competition from lower-cost smartphone makers—in addition to
`slowing economic growth and the U.S.-China trade war—have threatened Apple’s ability to
`maintain sales in China. (Id. ¶¶ 55, 93-97.)
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`Case 4:19-cv-02033-YGR Document 110 Filed 06/02/20 Page 3 of 46
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`B.
`Apple’s Throttling of Older iPhones
`In 2016, reports surfaced that older iPhones were unexpectedly shutting down. (Id. ¶¶ 8,
`109.) Apple initially responded by offering “battery replacement, free of charge” to a small range
`of devices. (Id. ¶ 111.) However, as reports showed that a greater number of phones were
`affected, Apple released a software update, iOS 10.2.1, that purportedly addressed the issue and
`that had the effect of “throttling,” or slowing down, iPhone models 6 and later. (Id. ¶¶ 8, 114.)
`Apple did not disclose that the software update throttled old phones, but only claimed that it
`addressed the shutdown issue. (Id. ¶ 116.)
`Following the release of the “throttling” update in January 2017, consumers grew
`increasingly frustrated with their older phones. (Id. ¶ 119.) Sales of newer iPhones surged as
`consumers began buying new phones to replace their slowed-down older iPhones. (Id.) The
`premature upgrading was a boon to Apple. (Id. ¶ 124.) Beginning in August 2017, Apple
`reported record upgrade rates, strong demand, and all-time record revenue for the iPhone. (Id. ¶¶
`124-25.) Defendants Cook and Maestri touted these results to investors. (Id. ¶¶ 268-395.) For
`example, Cook told investors that the iPhone experienced “strong demand at the high end of our
`lineup” and “our highest ever” upgrades in 2017, with the newest iPhone being “our most popular
`iPhone.” (Id. ¶ 124.) He did not mention the existence of throttling or the possibility that
`throttling may artificially inflate demand for newer iPhones. (Id. ¶ 13.) The market responded by
`driving up Apple’s stock price. (Id. ¶¶ 277, 284.)
`In December 2017, an independent report revealed that Apple’s software updates were
`causing the slowdown of older iPhones. (Id. ¶ 10.) The report also revealed that the unexpected
`shutdowns were caused by aging batteries and could be remedied by replacing the batteries (at the
`low cost of $79 per battery). (Id.) Shortly after, Apple admitted that it had deliberately throttled
`older model iPhones to save on battery life and avoid unexpected shutdowns. (Id. ¶ 11.)
`Consumers responded with outrage. (Id. ¶ 132.) Congress sent Apple a letter demanding answers
`about throttling, and Apple responded, in part, by assuring that “hardware updates” in newer
`iPhones would address the shutdown issues instead. (Id. ¶¶ 163-64.)
`///
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`Case 4:19-cv-02033-YGR Document 110 Filed 06/02/20 Page 4 of 46
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`To contain the public fallout from the throttling revelations, Apple offered to replace
`iPhone batteries at the discounted price of $29 throughout 2018. (Id. ¶ 138.) Customers took
`advantage of the program: 11 million batteries were reportedly replaced under the program. (Id. ¶
`147.) Apple also offered battery replacements at 60% discount in China. (Id. ¶ 150.) According
`to Apple employees, the Company was tracking the rate of battery replacement. (Id. ¶¶ 251, 254.)
`Apple was also aware that battery replacements may hurt sales, as consumers were replacing
`batteries instead of upgrading their iPhones. (Id. ¶ 250.) For example, one employee reports that
`the gap between battery replacement numbers and missed sales was “practically one-to-one.” (Id.)
`The throttling revelations resulted in significant negative publicity for Apple, as well as
`multiple government investigations, consumer lawsuits, and regulatory fines. (Id. ¶¶ 156-59, 173-
`90.) However, the market did not immediately react to the revelations. (Id. ¶ 192.) Although
`Apple’s stock price decreased, Apple again reported record profitability for the first fiscal quarter
`of 2018, while providing lower revenue guidance for the next quarter. (Id. ¶ 21.) Defendants
`continued to talk up financial results—which were in line with increasingly weakened guidance—
`until January 2, 2019, when Cook sent a letter to investors informing them that revenue for the
`first quarter of 2019 was expected to fall below guidance. (Id. ¶¶ 22-23, 25-28.) The letter cited
`the battery replacement program, as well as emerging market issues in Greater China, as reasons
`for the poor showing. (Id. ¶ 28.) Until that point, Cook claimed that Apple did not track battery
`replacement or even consider the program’s effect on iPhone demand. (Id. ¶ 21.) The letter
`caused Apple’s stock market to decrease by approximately 10%. (Id.)
`Apple continued to throttle iPhones throughout 2017 and into 2019. (Id. ¶¶ 120, 168-81.)
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`C.
`Declining iPhone Sales in China
`The throttling revelations came amid worsening business outlook in China. Multiple
`factors dampened demand for Apple iPhones beginning in 2016, driving Apple into fifth place for
`market share of China’s smartphone market. (Id. ¶ 88.) These factors included increased
`competition from low-cost smartphone makers, worsening economic growth in 2018, the U.S.-
`China trade war, and reduced consumer confidence. (Id. ¶¶ 193, 201.) The throttling revelations
`accelerated these negative trends. (Id. ¶¶ 148-155.) Apple was aware that its sales were declining
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`Case 4:19-cv-02033-YGR Document 110 Filed 06/02/20 Page 5 of 46
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`or expected to decline in China,1 based on at least the following facts:
`(1) News publications broadly reported on the factors leading to decline in high-end
`smartphone demand throughout the Class Period (id. ¶¶ 194-200);
`(2) Apple tracked “unbricking” of new iPhones (i.e., turning them on for the first time) on
`a daily basis (id. ¶¶ 216-17);
`(3) Employees who worked in Apple’s Asian offices report widespread negativity and
`anxiety, as well as general knowledge of declining sales, in 2017 and 2018 (id. ¶¶ 218-
`20);
`(4) Employees who worked in Apple’s Asian offices report that sales were tracked,
`analyzed, and discussed at meetings and that they showed declining sales and other
`negative economic outlook data in 2017 and 2018 (id. ¶¶ 223-32, 235-36, 256-67);
`(5) Foxconn, an assembler of Apple iPhones, shut down iPhone production lines and
`decreased the number of workers involved in iPhone manufacturing between 2017 and
`2018, according to two Foxconn employees (Id. ¶¶ 237, 240-42);
`(6) Apple reportedly instructed two of its smartphone assemblers to halt plans for further
`production lines in November 2018 (id. ¶ 27);
`Nevertheless, throughout the Class Period, defendants claimed that business was going
`well in China. For example, in May 2018, Cook assured investors that the iPhone was “the most
`popular smartphone in all of China.” (Id. ¶ 201.) In November 2018, Cook stated that while
`macroeconomic uncertainty in emerging markets was affecting business outlook, China was not
`part of that trend because Apple experienced double-digit growth there in the last quarter. (Id. ¶
`26.) Apple’s risk disclosures (which were certified by Cook and Maestri) identified generic risks,
`such as macroeconomic uncertainty, but did not identify China-specific risks. (Id. ¶¶ 278-79.)
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`1 Plaintiff relies on confidential witnesses to provide a timeline for when iPhone sales
`began to decline in China. (CCAC ¶¶ 220, 235, 240.) However, those timelines are conflicting.
`One witness claims that sales began to decline “since at least the end of 2017,” while another
`states that Apple iPhone sales decreased “starting in 2018,” and a third contends that iPhone sales
`began decreasing after “early 2016.” (Id.) At the hearing for this motion, plaintiff clarified that it
`intended to argue that sales started to decline in late 2017. (Dkt. No. 108 (“Tr.”) at 6:9-13.)
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`Case 4:19-cv-02033-YGR Document 110 Filed 06/02/20 Page 6 of 46
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`Cook’s letter to investors on January 2, 2019 was therefore the first time that defendants
`identified emerging markets issues in Greater China as a cause for weak results. (Id. ¶ 28.)
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`D.
`Additional Scienter Allegations
`Plaintiff alleges that defendants operated with the intent to deceive, manipulate, or
`defraud—or at least with deliberate recklessness—based on the following additional facts. (Id. ¶
`444.) First, Cook’s and Maestri’s trading patterns were suspicious and unusual during the time:
`Cook disposed of approximately 30.3% of his total shares from August 2, 2017 to January 2, 2019
`(the “Class Period”), which resulted in proceeds of over $100 million—a 24% increase over the
`proceeds he received during the equal sized time period immediately preceding (the “Control
`Period”). (Id. ¶¶ 450, 454.) Similarly, Maestri disposed of 92.3% of his total shares during the
`Class Period for proceeds equaling to $30.6 million—130% more than his proceeds of the Control
`Period. (Id. ¶¶ 451, 454.)
` Second, the Greater China region was highly important to Apple’s business and strategy.
`(Id. 444(b).) As described previously, Greater China made up almost 20% of Apple’s sales in
`2018 and presented an important growth market for the Company. (Id. ¶¶ 461-62.) Apple’s senior
`management, including Cook and Maestri, were considering iPhone sales in China and frequently
`travelled to China to monitor the market. (Id. ¶ 444(c), 465.)
`Third, plaintiff alleges that the individual defendants knew, or at least recklessly
`disregarded, that Apple iOS software updates were being used by the Company to throttle its
`iPhones and were aware of the public’s negative reaction to throttling, especially in Greater China.
`(Id. ¶ 444(d).) News reports at the time show that Apple was increasingly dependent on its
`revenue from Services, which relied on the iOS operating system, and that revenue was threatened
`by the throttling revelations. (Id. ¶¶ 467-69, 472.) Fourth, defendants possessed motive and
`opportunity to accelerate the iPhone upgrade cycle artificially because growth in the iPhone
`industry stagnated in 2016 and throttling reversed that decline by forcing premature upgrades. (Id.
`¶¶ 444(e), 473-76.)
`Fifth, statements by former Apple employees and employees of Apple’s competitors and
`suppliers show that defendants tracked iPhone sales and had information that iPhone demand was
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`stalling, as well as that the battery replacement program would further hurt demand. (Id. ¶ 444(f).)
`Confidential Apple employees report that Apple’s China sales were carefully tracked and
`discussed at meetings. (Id. ¶¶ 223-236.) Additionally, Apple’s suppliers shut down production
`lines in 2017 and 2018 in response to declining sales. (Id. ¶¶ 237-244.) Finally, plaintiff claims
`that Apple attempted to obscure declining sales by no longer reporting unit sales. (Id. ¶ 444(g).)
`II.
`LEGAL STANDARD
`The standards here are basic and not in dispute. A motion to dismiss under Rule 12(b)(6)
`tests the legal sufficiency of the claims alleged in the complaint. Ileto v. Glock, Inc., 349 F.3d
`1191, 1199 (9th Cir. 2003). “Dismissal can be based on the lack of a cognizable legal theory or
`the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica
`Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). All allegations of material fact are taken as true
`and construed in the light most favorable to the plaintiff. Johnson v. Lucent Techs., Inc., 653 F.3d
`1000, 1010 (9th Cir. 2011). To survive a motion to dismiss, “a complaint must contain sufficient
`factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v.
`Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007)).
`That requirement is met “when the plaintiff pleads factual content that allows the court to draw the
`reasonable inferences that the defendant is liable for the misconduct alleged.” Id.
`Furthermore, claims for fraud must meet the particularity requirements of Federal Rule of
`Civil Procedure 9(b), which requires that “[i]n alleging fraud or mistake, a party must state with
`particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). Rule 9(b)
`“requires . . . an account of the time, place, and specific content of the false representations as well
`as the identities of the parties to the misrepresentations.” Swartz v. KPMG LLP, 476 F.3d 756,
`764 (9th Cir. 2007) (internal quotation marks omitted). Further, plaintiffs are required to state
`with particularity the facts giving rise to a strong inference of defendants’ scienter. See 15 U.S.C.
`§ 78u–4(b)(2). “[T]he inference of scienter must be more than merely ‘reasonable’ or
`‘permissible’—it must be cogent and compelling, thus strong in light of other explanations” and a
`court “must consider plausible nonculpable explanations for the defendant’s conduct.” See
`Tellabs, Inv. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007).
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`III. REQUEST FOR JUDICIAL NOTICE
`Defendants request judicial notice of 64 documents in support of their motion to dismiss.
`(Dkt. No. 92 (“RJN”).) For each document, defendants rely on either incorporation by reference
`or judicial notice pursuant to Federal Rule of Evidence 201. Specifically, defendants claim that
`Exhibits 3-44 are incorporated by reference through the CCAC, while the remaining Exhibits are
`subject to judicial notice. Plaintiff does not oppose defendants’ request.
`Incorporation by reference is a judicial doctrine that prevents plaintiffs from “selecting
`only portions of documents that support their claims, while omitting portions of those very
`documents that weaken—or doom—their claims.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d
`988, 1002 (9th Cir 2018) (citing Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir. 1998)). The
`mere mention of a document in a complaint is insufficient to incorporate by reference. Id. (citing
`Ritchie Coto Settlement v. Eisenberg, 593 F.3d 1031, 1038 (9th Cir. 2010)). Instead, plaintiff
`must “extensively” refer to the document, or else the document must “form[] the basis of
`plaintiff’s claim.” Id. Even so, incorporation by reference does not mean that the court assumes
`the truth of the document contents. Id. at 1003. It is improper to assume the truth of an
`incorporated document only “to dispute facts stated in a well-pleaded complaint.” Id.
` Here, Exhibit 3 is Cook’s letter to investors informing them of missed earning guidance.
`The document is cited extensively in the CCAC. (CCAC ¶¶ 28, 410, 489, 493.) The document
`also forms a basis for plaintiff’s claims: plaintiff claims that the letter “disclosed the true state” of
`Apple’s sales concealed by defendants’ earlier statements and represents materialization of the risk
`that led to stock price decline. (Id. ¶¶ 410-13.) Exhibits 4-21 and 23-44 are related to SEC filings:
`Exhibits 4-9 are Form 8-Ks; Exhibits 10-15 are transcripts of shareholder/analyst calls; Exhibits
`16-21 are Form 10-Ks; and Exhibits 23-44 are Form 4s. Plaintiff claims that Apple’s SEC filings
`contained misleading statements, and they therefore form the basis of plaintiff’s claims. (See, e.g.,
`id. ¶¶ 281, 286.) Plaintiff also uses individual defendants’ Form 4s to show suspicious trading
`patterns that demonstrate scienter, which makes them also integral to plaintiff’s claims. (See id. ¶
`446-56.) Finally, Exhibit 22 is Apple’s letter to Congress regarding throttling. Plaintiff claims
`that this letter contained misleading statements, and it therefore forms the basis of plaintiff’s
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`claims. (Id. ¶¶ 317-18.) Accordingly, the Court finds incorporation by reference proper for these
`documents.2
`Turning to judicial notice, a court may take judicial notice of “adjudicative fact[s]” that are
`“not subject to reasonable dispute.” Fed. R. Evid. 201. As with incorporation by reference, “a
`court cannot take judicial notice of disputed facts contained in” judicially noticed documents.
`Khoja, 899 F.3d at 999 (emphasis added). Here, defendants seek judicial notice of Exhibits 45-53,
`which are additional SEC filings that were not cited in the CCAC. Courts routinely take judicial
`notice of SEC filings in securities cases where authenticity is not disputed because their accuracy
`cannot reasonably be questioned. See Dreiling v. Am. Exp. Co., 458 F.3d 942, 946 n.2 (9th Cir.
`2006); In re Extreme Networks, Inc. S’holder Derivative Litif., 573 F. Supp. 2d 1228, 1231 n.2
`(N.D. Cal. 2008) (citing cases). Because plaintiff does not dispute the authenticity of the SEC
`filings, the Court finds judicial notice of the existence of statements in these filings proper.
`Defendants also seek judicial notice of Exhibits 1-2 and 54-64. Exhibit 1 is a Reddit post
`cited in the CCAC, while Exhibits 2 and 54-64 are news articles discussing Apple’s throttling, the
`battery replacement program, and the program’s potential effect on iPhone demand. The Court
`will take judicial notice of these documents not for the truth of the matter asserted, but “for the
`purpose of showing that particular information was available to the stock market.” See Helitrope
`Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 981 n.18 (9th Cir. 1999) (taking judicial notice “that
`the market was aware of the information contained in news articles submitted by the defendants”);
`see also In re Kalobios Pharm., Inc. Sec. Litig., 258 F. Supp. 3d 999, (N.D. Cal. 2017) (same); In
`re American Apparel, Inc. Shareholder Litig., 855 F. Supp. 2d 1043, 1062 (C.D. Cal. 2012)
`(same). Exhibit 48 is a UBS analyst report discussing the potential effect of the batter replacement
`program on demand. As with the news articles, the Court takes judicial notice of the contents of
`the report to determine “whether and when certain information was provided to the market,” but
`not for the truth of the matter. In re Amgen Inc. Sec. Litig., 544 F. Supp. 2d 1009, 1023-24 (C.D.
`
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`2 Specifically, the Court considers the cautionary statements that preceded Apple’s
`earnings calls, the risk disclosures in its SEC filings, the context provided in Apple’s and Cook’s
`letters, and the facts of Cook and Maestri’s trading patterns in determining defendants’ motion.
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`Cal. 2008); see In re Century Aluminum Co. Sec. Litig., No. C 09-10001 SI, 2011 WL 830174, at
`*9 (N.D. Cal. Mar. 3, 2011) (noting that “courts routinely take judicial notice of analyst reports”).
`Finally, Exhibit 49 is a Yahoo Finance report showing Apple’s historical stock prices for
`the Class Period. “[C]losing stock price is public information ‘capable of accurate and ready
`determination by resort to sources whose accuracy cannot reasonably be questioned.’” In re
`Finisar Corp. Derivative Litig., 542 F. Supp. 2d 980, 989 n.4 (N.D. Cal. 2008) (citing Fed. R.
`Evid. 201). Because plaintiff does not dispute the authenticity of the Yahoo report, the Court
`takes judicial notice of Apple’s historical stock prices.
`IV. COUNT 1: SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10-B5
`Plaintiff contends that defendants violated Section 10(b) of the Exchange Act and Rule 10-
`B5 by making false and misleading statements about Apple’s financial outlook in China and
`elsewhere. Plaintiff advances four theories of “falsehood.” First, plaintiff claims that defendants
`touted positive iPhone revenues, sales, and upgrades during the Class Period, without revealing
`that the positive results were driven by artificially inflated upgrading due to defendants’ throttling
`of old iPhones. (Id. ¶ 313(a).) Second, plaintiff claims defendants touted their growth in Greater
`China without revealing that low-cost competition, economic decline, and other factors were
`causing iPhone sales to decline in the region. (Id. ¶ 313(d).) Third, plaintiff contends that
`defendants falsely stated that they were not tracking or considering the effect of the battery
`replacement program when, in fact, they were tracking battery replacements rates. (Id. ¶ 313(b).)
`Fourth, plaintiff claims that defendants failed to disclose that the battery replacement program was
`hurting iPhone sales and demand. (Id. ¶ 313(c).)
`Defendants move to dismiss these claims on the grounds that none of the challenged
`statements are false or misleading, that plaintiff failed to plead facts showing that defendants acted
`with scienter, and that even if the statements were false or misleading, the stock price did not
`decline as a result. The Court considers each argument below.
`
`A.
`Legal Framework
`Section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b), makes it unlawful
`for any person to “use or employ, in connection with the purchase or sale of any security . . . any
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`manipulative or deceptive device or contrivance in contravention of such rules and regulations as
`the Commission may prescribe as necessary or appropriate in the public interest or for the
`protection of investors.” 15 U.S.C. § 78j(b). SEC Rule 10b–5 implements this provision by
`making it unlawful 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.” 17 C.F.R. § 240.10b–5(b). Similarly, under the Exchange Act,
`any person who “directly or indirectly, controls any person liable under any provision of [the
`Exchange Act] or any rule or regulation thereunder shall also be liable jointly and severally with
`and to the same extent as such controlled person to any person to whom such controlled person is
`liable . . . .” 15 U.S.C. § 78t(a).
`In 1995, Congress enacted the PSLRA, which includes “exacting pleading requirements,”
`as a check against abusive litigation by private parties.3 Tellabs, Inc., 551 U.S. at 313. To state a
`claim under Section 10(b), a plaintiff “must show that the defendant made a statement which was
`‘misleading as to a material fact.’” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38 (2011)
`(quoting Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988)) (emphases in original). Under the
`PSLRA’s heightened pleading requirement, plaintiffs must also allege facts sufficient to establish:
`(i) that the defendant made a material misrepresentation or omission of fact; (ii) that the
`misrepresentation was made with scienter; (iii) a connection between the misrepresentation or
`omission and the purchase or sale of a security; (iv) reliance on the misrepresentation or omission;
`(v) loss causation; and (vi) economic loss. Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540
`F.3d 1049, 1061 (9th Cir. 2008).
`Here, defendants challenge the sufficiency of the first, second, and fifth elements: material
`misrepresentation or omission, scienter, and loss causation. The Court examines each element.
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`3 Members of the House and Senate “observed that plaintiffs routinely were filing lawsuits
`‘against issuers of securities and others whenever there [was] a significant change in an issuer’s
`stock price, without regard to any underlying culpability of the issuer, and with only faint hope
`that the discovery process might lead eventually to some plausible cause of action[.]’”
`In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 978 (9th Cir. 1999) (alterations in original)
`(citation omitted).
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`B. Material Misrepresentation or Omission
`1.
`Legal Standard
` “Materially misleading statements or omissions by a defendant constitute the primary
`element of a section 10(b) and rule 10b-5 cause of action.” In re Immune Response Sec. Litig.,
`375 F. Supp. 2d 983, 1017 (S.D. Cal. 2005) (quoting Marksman P’ners, L.P. v. Chantal Pharma.
`Corp., 927 F. Supp. 1297, 1305 (C.D. Cal. 1996)). To plead this element, a complaint must
`“identify[ ] the statements at issue and set[ ] forth what is false or misleading about the statement
`and why the statements were false or misleading at the time they were made.” In re Rigel
`Pharma., Inc. Sec. Litig., 697 F.3d 869, 876 (9th Cir. 2012); see also 15 U.S.C. § 78u-4(b)(1)(B)
`(pleading falsity under the PSLRA requires a plaintiff to “specify each statement alleged to have
`been misleading” and the “reasons why the statement is misleading”).
`A statement is misleading “if it would give a reasonable investor the impression of a state
`of affairs that differs in a material way from the one that actually exists.” Retail Wholesale &
`Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268, 1275 (9th Cir.
`2017) (internal quotation marks omitted). To be misleading, a statement must be “capable of
`objective verification.” Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 606 (9th Cir.
`2014). For example, “puffing”—expressing an opinion rather than a knowing false statement of
`fact—is not misleading. Id.; see also Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1206–07 (9th Cir.
`2016); In re Cutera Sec. Litig., 610 F.3d 1103, 1111 (9th Cir. 2010). Qualitative buzzwords such
`as “good,” “well-regarded,” or other “vague statements of optimism” cannot form the basis of a
`false or misleading statement. Apollo, 774 F.3d at 606 (citing Cutera, 610 F.3d at 1111 (“When
`valuing corporations, . . . investors do not rely on vague statements of optimism like ‘good,’ ‘well-
`regarded,’ or other feel good monikers. This mildly optimistic, subjective assessment hardly
`amounts to a securities violation.”)). Indeed, “professional investors, and most amateur investors
`as well, know how to devalue the optimism of corporate executives[.]” In re VeriFone Sec. Litig.,
`784 F. Supp. 1471, 1481 (N.D. Cal. 1992), aff’d sub nom., 11 F.3d 865 (9th Cir. 1993).
`Even if a statement is not false, it may be misleading if it omits material information.
`Khoja, 899 F.3d at 1008–09 (citing In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1054 (9th Cir.
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`2014)). “[A]n omission is material ‘when there is a substantial likel