1 2 3 4 5 6 7 8 9 UNITED STATES DISTRICT COURT 10 SOUTHERN DISTRICT OF CALIFORNIA 11 12 CAREY LOWE, individually and on Case No.: 3:23-cv-01657-H-BLM behalf of all others similarly situated, 13 ORDER: Plaintiff, 14 v. GRANTING DEFENDANTS’ 15 MOTION TO DISMISS WITH TANDEM DIABETES CARE INC., 16 LEAVE TO AMEND JOHN F. SHERIDAN, AND LEIGH A.
17 VOSSELLER,
18 Defendants. [Doc. No. 21.] 19 20 On February 1, 2024, Co-Lead Plaintiffs Mason Raines, Thomas O. Martel, and 21 Linna Rae Martel (“Plaintiffs”), filed an amended complaint (“AC”) alleging that 22 Defendants Tandem Diabetes Care Inc., John F. Sheridan, and Leigh A. Vosseller 23 (collectively, “Defendants”) violated federal securities laws. (Doc. No. 16, AC.) On 24 March 11, 2024, Defendants filed a motion to dismiss Plaintiffs’ AC for failure to state a 25 claim. (Doc. No. 21.) On March 27, 2024, Plaintiffs filed a response in opposition to 26 Defendants’ motion to dismiss. (Doc. No. 22.) On April 10, 2024, Defendants filed their 27 reply. (Doc. No. 23.) The Court, pursuant to its discretion under Local Rule 7.1(d)(1), 28 submitted the motion on the parties’ papers. (Doc. No. 24.) On April 24, 2024, Plaintiffs 1 filed a notice of supplemental authority in support of their opposition to Defendants’ 2 motion to dismiss. (Doc. No. 25.) On April 25, 2024, Defendants filed a notice of 3 supplemental authority in support of their motion to dismiss. (Doc. No. 26.) For the 4 reasons below, the Court grants Defendants’ motion to dismiss with leave to amend. 5 BACKGROUND 6 The following factual background is taken from the allegations in Plaintiffs’ AC. 7 This is a securities class action against Tandem Diabetes Care, Inc. (“Tandem” or the 8 “Company”) and two of its officers – John F. Sheridan and Leigh A. Vosseller (together, 9 the “Individual Defendants”) – under Sections 10(b) and 20(a) of the Securities Exchange 10 Act of 1934 (the “Exchange Act”) and Rule 10b-5, promulgated thereunder. (AC ¶¶ 97– 11 112.) Defendant John F. Sheridan (“Sheridan”) was Tandem’s President, Chief Executive 12 Officer, and Director of Tandem. (Id. ¶ 17.) Defendant Leigh A. Vosseller (“Vosseller”) 13 served as Tandem’s Executive Vice President, Chief Financial Officer, and Treasurer. (Id. 14 ¶ 18.) Plaintiffs bring this action on behalf of all persons and entities who purchased 15 Tandem common stock between August 3, 2022 and November 2, 2022, inclusive (the 16 “Class Period”). (Id. ¶ 1.) 17 Tandem is a medical device company based in San Diego, California, that focuses 18 on diabetes management. (Id. ¶¶ 16, 23.) Tandem primarily manufactures and sells insulin 19 pumps for diabetic patients. (Id. ¶ 2.) Approximately 75% of its sales occur in the United 20 States. (Id. ¶ 24.) Tandem originates its sales from first-time customers and renewals (i.e., 21 customers renewing the pumps they already own). (Id.) For Tandem’s U.S. customers, 22 health insurance plans will reimburse customers for Tandem pumps once customers satisfy 23 their yearly deductibles. (Id. ¶ 65.) This means that demand for Tandem’s pump is lowest 24 at the beginning of the year when deductibles reset and then sales generally increase in the 25 third and fourth quarters when more potential customers meet their insurance deductibles 26 towards the end of the year. (Id. ¶¶ 62, 65.) Defendants refer to this purchasing cycle as 27 “seasonality.” (See id. ¶ 51.) 28 In the first quarter of 2022, the Company reported its 2021 earnings and issued its 1 sales guidance for 2022. (Id. ¶ 25.) Tandem projected sales in the range of $845 million 2 to $860 million, including U.S. sales of $630 million to $640 million, and adjusted 3 EBITDA of 14-15% of sales. (Id. ¶¶ 25–26, 31.) Plaintiffs allege the Company’s estimates 4 for 2022 were above analysts’ revenue estimates of $827 million, and analysts generally 5 reacted positively to Tandem’s year-end earnings and 2022 forecast announcements. (Id. 6 ¶¶ 26–27.) 7 During the second quarter of 2022, Tandem reported its financial earnings for the 8 first quarter of 2022. (Id. ¶ 29.) Tandem’s revenue for the quarter was $175.9 million, 9 beating analyst expectations of $168.2 million. (Id.) Tandem identified pandemic-related 10 conditions, such as labor shortages in physicians’ offices, as a negative headwind that the 11 Company expected to continue into the second quarter of 2022. (Id. ¶ 30.) The Company 12 also revised in financial guidance for the year and increased estimated sales to $850 million 13 to $865 million. (Id. ¶ 31.) 14 Plaintiffs allege three significant adverse market conditions (“Three Headwinds”) 15 existed during the second quarter of 2022, worsened through the third quarter and the 16 remainder of the Class Period, of which Defendants were aware, but did not disclose to 17 investors or the public. (Id. ¶ 34.) The Three Headwinds were (1) pandemic-related 18 conditions, (2) macroeconomic factors, and (3) competition. (Id.) Regarding the 19 pandemic, COVID-19 had caused, among other things, absenteeism and staffing shortages 20 in physician offices. (Id.) Macroeconomic factors referred to unemployment, inflation, 21 and potential customers’ lack of disposable income to spend on new pumps. (Id.) And 22 competition existed from new insulin pumps entering the market from Tandem’s 23 competitors, specifically Insulet and Medtronic. (Id.) In particular, Plaintiffs allege 24 Defendants concealed and materially downplayed the negative market conditions Tandem 25 faced with respect to competition. (Id. ¶¶ 60–61, 63, 68.) 26 Plaintiffs’ allegations regarding the adverse market conditions rely on statements 27 from two former employees: (1) former employee 1 (“FE1”), a territory manager at 28 Tandem from January 2020 to July 2023 who oversaw salespeople in the northwestern 1 region of the U.S.; and (2) former employee 2 (“FE2”), a Tandem sales representative who 2 sold Tandem’s insulin pumps to customers in Canada. (Id. ¶¶ 35, 38.) FE1 allegedly 3 communicated his or her concerns to senior management about the negative and 4 intensifying impact that the Three Headwinds were having on pump sales, but management 5 ignored FE1’s warnings. (Id. ¶¶ 36–37.) Plaintiffs allege FE2 corroborated FE1’s account 6 of the adverse market conditions. (Id. ¶ 39.) 7 On August 3, 2022, at the start of the Class Period, the Company announced its 8 second quarter financial earnings and revised its sales forecast. (Id. ¶ 41.) Tandem 9 reported second quarter earnings of $200.3 million, which was below analysts’ 10 expectations. (Id.) Plaintiffs allege that the Company noted the Three Headwinds 11 negatively impacted revenue, but the Individual Defendants claimed the Headwinds were 12 not unexpected. (Id.) Tandem also lowered its 2022 Financial Guidance, decreasing 13 estimated sales to the range of $835 million to $845 million, representing a decrease in 14 U.S. sales to $620 million to $625 million, and lowered adjusted EBITDA to 11% of sales. 15 (Id. ¶ 42.) At this news, Tandem’s stock price fell from $68.97 per share on August 3, 16 2022, to $58.60 per share on August 4, 2022, a total decline of $10.37 per share. (Id. ¶¶ 17 42, 45.) 18 In September 2022, Tandem participated in two analyst conferences – the 2022 19 Wells Fargo Healthcare Conference on September 8, 2022, and the Baird 2022 Global 20 Healthcare Conference on September 13, 2022. (Id. ¶ 46.) Plaintiffs allege that during the 21 Wells Fargo Conference, Defendants Sheridan and Vossler represented that the Headwinds 22 the Company experienced during the second quarter had been accounted for in its revised 23 guidance and allegedly stated that August sales had fallen back in line with normal 24 seasonality. (Id. ¶ 47.) In response to this news, between September 7, 2022 and 25 September 13, 2022, Tandem’s stock price increased from $45.65 per share to $56.85 per 26 share. (Id. ¶ 49.) 27 On November 2, 2022, the last day of the Class Period, Tandem reported its third 28 quarter revenue and revised its sales guidance. (Id. ¶ 50.) Tandem reported revenue of 1 $205.1 million, which fell below analysts’ estimates of $207.6 million. (Id.) The Company 2 also decreased its estimated sales to $800 million to $805 million, reflecting a decrease in 3 estimated sales from both inside and outside the United States, and lowered adjusted 4 EBITDA to 7-8% of sales. (Id.) On a conference call to discuss its earnings for the third 5 quarter, Defendant Sheridan identified and discussed the impact of the Three Headwinds 6 on revenue and sales. (Id. ¶¶ 51–52.) Defendant Sheridan explained that the impact from 7 competition is what the Company expected, but revenues fell below estimates because the 8 “momentum build” of typical purchasing seasonality identified in August did not continue 9 into September. (Id. ¶ 51.) Plaintiffs allege analysts reported negatively in response to 10 Tandem’s earnings and sales announcement. (Id. ¶ 53.) In light of this news, Tandem’s 11 stock price declined from $51.34 per share on November 2, 2022 to $36.77 per share on 12 November 3, 2022, a total decline of $14.57 per share. (Id. ¶ 56.) 13 On September 8, 2023, Plaintiff Carey Lowe filed a class action complaint against 14 Defendants. 1 (Doc. No. 1.) On December 5, 2023, the Court appointed Movants Mason 15 Raines, Thomas O. Martel, and Linna Rae Martel as Co-Lead Plaintiffs and approved their 16 selection of Co-Lead Counsel. (Doc. No. 8.) On February 1, 2024, pursuant to the Court’s 17 amended scheduling order, (Doc. No. 13), Plaintiffs filed the operative amended complaint. 18 (Doc. No. 16.) Plaintiffs allege that during the Class Period, Defendants concealed the true 19 nature and severity of the Three Headwinds, which caused Tandem to miss its third quarter 20 sales targets and reduce its 2022 sales guidance. (Id. ¶¶ 2–5.) Plaintiffs allege that 21 Defendants made false and materially misleading statements about the market conditions 22 during the Class Period that caused significant losses to investors. (Id. ¶ 8.) The AC alleges 23 that Defendants violated Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b) 24 and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. (Id. ¶ 10.) By 25 26 27 1 The original class action complaint also named Brian B. Hansen (“Hansen”) as a Defendant. (Doc. No. 1.) However, the AC did not name Hansen and he was terminated 28 1 the present motion, Defendants move to dismiss Plaintiffs’ AC for failure to state a claim 2 upon which relief can be granted. (Doc. No. 21.) 3 DISCUSSION 4 I. Legal Standards 5 A. Federal Rule of Civil Procedure 12(b)(6) 6 “To survive a motion to dismiss, a complaint must contain sufficient factual matter, 7 accepted as true, to ‘state a claim to relief that is plausible on its face.’” In re Alphabet, 8 Inc. Sec. Litig., 1 F.4th 687, 698 (9th Cir. 2021) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 9 678 (2009)). “A complaint is plausible on its face ‘when the plaintiff pleads factual content 10 that allows the court to draw the reasonable inference that the defendant is liable for the 11 misconduct alleged.’” Id. (quoting Iqbal, 556 U.S. at 678). Courts need not accept legal 12 conclusions as true. Iqbal, 556 U.S. at 678. It is also improper for the court to assume “the 13 [plaintiff] can prove facts that [he or she] has not alleged.” Associated Gen. Contractors 14 of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983). On the other 15 hand, “[w]hen there are well-pleaded factual allegations, a court should assume their 16 veracity and then determine whether they plausibly give rise to an entitlement to relief.” 17 Iqbal, 556 U.S. at 679; see Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 18 (2007). 19 The court only reviews the contents of the complaint, accepting all factual 20 allegations as true, and drawing all reasonable inferences in favor of the nonmoving party. 21 Thompson v. Davis, 295 F.3d 890, 895 (9th Cir. 2002). However, a court may consider 22 documents incorporated into the complaint by reference and items that are proper subjects 23 of judicial notice. See Coto Settlement v. Eisenberg, 593 F.3d 1031, 1038 (9th Cir. 2010). 24 If the court dismisses a complaint for failure to state a claim, it must then determine whether 25 to grant leave to amend. See Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995). “A 26 district court should grant leave to amend . . . unless it determines that the pleading could 27 not possibly be cured by the allegation of other facts.” Id. 28 /// 1 B. Heightened Pleading Standard 2 A complaint alleging fraud must also comply with Federal Rule of Civil Procedure 3 9(b). Rule 9(b) requires a plaintiff to “state with particularity the circumstances 4 constituting fraud.” Fed. R. Civ. P. 9(b). “In other words, the complaint must set forth 5 what is false or misleading about a statement, and why it is false.” Rubke v. Capitol 6 Bancorp Ltd., 551 F.3d 1156, 1161 (9th Cir. 2009). Put differently, “[a]verments of fraud 7 must be accompanied by the who, what, when, where, and how of the misconduct charged.” 8 Prodanova v. H.C. Wainwright & Co., LLC, 993 F.3d 1097, 1106 (9th Cir. 2021) (quoting 9 Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009)). 10 Additionally, a complaint stating claims under Section 10(b) and 20(a) of the 11 Exchange Act and Rule 10b-5 must also satisfy the heightened pleading requirements of 12 the Private Securities Litigation Reform Act (“PSLRA”). Id. (citing Zucco Partners, LLC 13 v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009), as amended (Feb. 10, 2009)). Under 14 the PSLRA, “the complaint shall specify each statement alleged to have been misleading, 15 the reason or reasons why the statement is misleading, and, if an allegation regarding the 16 statement or omission is made on information and belief, the complaint shall state with 17 particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1)(B). While 18 Rule 9(b) allows intent and “other conditions of a person’s mind” to be averred generally, 19 “[t]he PSLRA significantly altered pleading requirements in private securities fraud 20 litigation by requiring that a complaint ‘plead with particularity both falsity and scienter.’” 21 Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th Cir. 2002) (quoting Ronconi v. Larkin, 253 22 F.3d 423, 429 (9th Cir. 2001)). The “PSLRA’s heightened pleading requirements are 23 meaningful ones, requiring courts carefully to evaluate securities fraud complaints to 24 ensure compliance with the statute’s elevated pleading standards.” Nguyen v. Endologix, 25 Inc., 962 F.3d 405, 413 (9th Cir. 2020). 26 II. Judicial Notice and Incorporation by Reference 27 Defendants request the Court take judicial notice and consider under the 28 incorporation by reference doctrine the following documents: (1) SEC filings, (Doc. Nos. 1 21-4, 21-6, 21-8–21-9, 21-14, 21-18); (2) investor/analyst conference call transcripts, (Doc. 2 Nos. 21-5, 21-7, 21-10, 21-12–21-13, 21-15); (3) press releases (Doc. Nos. 21-8, 21-11, 3 21-18); and (4) analyst reports (Doc. Nos. 21-11, 21-16–21-17). (Doc. No. 21-19.) 4 Plaintiffs do not oppose Defendants’ request. 5 Judicial notice and incorporation by reference are “exceptions” to the general rule 6 that courts may not consider “matters outside the pleadings” when reviewing a motion to 7 dismiss for failure to state a claim. Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 8 998 (9th Cir. 2018). Under Federal Rule of Evidence 201, courts can take judicial notice 9 of facts that are not subject to reasonable dispute because they are either generally known 10 or can be readily determined by reference to sources whose accuracy cannot reasonably be 11 questioned. Courts addressing motions to dismiss securities claims routinely take notice 12 of SEC filings, conference call transcripts, analyst reports, and press releases to establish 13 what information was in the public realm, but not for the truth of their contents. Weston 14 v. DocuSign, Inc., 669 F. Supp. 3d 849, 870–72 (N.D. Cal. 2023) (taking judicial notice of 15 earnings call transcripts, SEC filings, analyst reports, and investor conference transcripts); 16 see also Brodsky v. Yahoo! Inc., 630 F. Supp. 2d 1104, 1111 (N.D. Cal. 2009) (“The Court 17 also grants Defendants’ request [for judicial notice] as to . . . press releases, news articles, 18 analyst reports, and third party press releases to which the SAC refers, but not for the truth 19 of their contents.”). 20 Additionally, courts can consider documents under the “incorporation by reference” 21 doctrine when a plaintiff “refers extensively to the document or the document forms the 22 basis of the plaintiff’s claim.” Khoja, 899 F.3d at 1002 (quoting United States v. Ritchie, 23 342 F.3d 903, 907 (9th Cir. 2003)). The incorporation by reference doctrine “generally 24 permits courts to accept the truth of matters asserted in incorporated documents,” however 25 it does not allow courts “to do so only to resolve factual disputes against the plaintiff’s 26 well-pled allegations in the complaint.” Id. at 1014. 27 The Court takes judicial notice of the SEC filings, (Doc. Nos. 21-4, 21-6, 21-8–21- 28 9, 21-14, 21-18), and press releases (Doc. Nos. 21-8, 21-11, 21-18). “SEC filings are a 1 matter of public record and therefore are the proper subject of judicial notice.” Cullen v. 2 RYVYL Inc., No. 3:23-CV-0185-GPC-SBC, 2024 WL 898206, at *4 (S.D. Cal. Mar. 1, 3 2024). The press releases were each filed with the SEC as attachments to a Current Report 4 on Form 8-K such that the press releases are also matters of public record not subject to 5 reasonable dispute. In re Aqua Metals, Inc. Sec. Litig., No. 17-CV-07142-HSG, 2019 WL 6 3817849, at *5 (N.D. Cal. Aug. 14, 2019) (taking judicial notice of press releases). 7 The Court also takes judicial notice of the analyst reports, (Doc. Nos. 21-11, 21-16– 8 21-17), to consider what information was available to the market at the time of the 9 challenged statements. Reckstin Fam. Tr. v. C3.ai, Inc., No. 22-CV-01413-HSG, 2024 WL 10 734497, at *5 (N.D. Cal. Feb. 22, 2024) (taking judicial notice of analyst reports “to 11 determine what may or may not have been publicly disclosed”). Moreover, Plaintiffs cite 12 to these reports by name and rely on them to support their claims that Defendants made 13 false or materially misleading statements regarding the Three Headwinds. (AC ¶¶ 44, 53, 14 55.) Finally, the Court incorporates by reference the investor/analyst conference call 15 transcripts, (Doc. Nos. 21-5, 21-7, 21-10, 21-12–21-13, 21-15). In the AC, Plaintiffs quote 16 from these conference calls extensively and many of Defendants’ allegedly false or 17 misleading statements upon which Plaintiffs base their claims occurred during these calls. 18 (AC ¶¶ 5, 46–47, 51–52, 58–68, 75, 78, 82–83.); Felipe v. Playstudios Inc., No. 19 222CV01159RFBNJK, 2024 WL 1380802, at * 6 (D. Nev. Mar. 31, 2024) (incorporating 20 by reference conference call transcripts). 21 III. Analysis 22 A. Section 10(b) and Rule 10b-5 23 “To plead a claim under [Section] 10(b) and Rule 10b-5, a plaintiff must allege ‘(1) 24 a material misrepresentation or omission; (2) scienter; (3) a connection between the 25 misrepresentation or omission and the purchase or sale of a security; (4) reliance; (5) 26 economic loss; and (6) loss causation.’” Endologix, 962 F.3d at 413 (quoting Or. Pub. 27 Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 603 (9th Cir. 2014)). “Controlling 28 persons liability under Section 20(a) of the Exchange Act is derivative, such that there is 1 no individual liability where there is no primary violation of securities law.” In re Genius 2 Brands Int’l, Inc. Sec. Litig., 97 F.4th 1171, 1180 (9th Cir. 2024); 15 U.S.C. § 77o. 3 As an initial matter, Defendants argue that the Court should not credit the statements 4 of FE1 and FE2 because the statements are neither reliable nor particularized and do not 5 support falsity or any inference of scienter. (Doc. No. 21-1 at 23–25, 30–31.) Defendants 6 contend that even if the Court credits FE1 and FE2’s allegations, Plaintiffs failed to allege 7 falsity, scienter, and loss causation with sufficient particularity to satisfy the PSLRA’s 8 heightened pleading standards. (Id. at 9–10.) Finally, Defendants assert that Plaintiffs’ 9 Section 20(a) claim against the Individual Defendants must be dismissed because Plaintiffs 10 failed to establish a primary securities law violation under Section 10(b) or Rule 10b-5. 11 (Id. at 32.) 12 1. Former Employee Statements 13 To establish falsity and scienter, Plaintiffs rely heavily on the statements of FE1 and 14 FE2. (AC ¶¶ 35–40, 60, 63, 68.) According to Plaintiffs, FE1 and FE2’s statements 15 demonstrate that Defendants knew the Company’s sales targets for the second and third 16 quarters of 2022 were “not realistic because they did not account for negative sales 17 information being provided [to Defendants] by the Company’s sales team,” and 18 Defendants’ false statements downplayed the impact and intensifying nature of the Three 19 Headwinds to investors. (Id. ¶ 37.) Defendants argue that the Court should disregard FE1 20 and FE2’s statements because they are neither reliable nor particularized and do not support 21 falsity or an inference of scienter. (Doc. No. 21-1 at 23–25, 30–31.) 22 “[A] complaint relying on statements from confidential witnesses must pass two 23 hurdles to satisfy the PSLRA pleading requirements.” Zucco Partners, 552 F.3d at 995. 24 “First, the confidential witnesses whose statements are introduced to establish scienter 25 must be described with sufficient particularity to establish their reliability and personal 26 knowledge.” Id. “Second, those statements which are reported by confidential witnesses 27 with sufficient reliability and personal knowledge must themselves be indicative of 28 scienter.” Id. In assessing allegations based on confidential witness statements, courts 1 look to “the level of detail provided by the confidential sources, the corroborative nature 2 of the other facts alleged (including from other sources), the coherence and plausibility of 3 the allegations, the number of sources, the reliability of the sources, and similar indicia.” 4 Id. 5 FE1 “worked on Tandem’s sales team as a territory manager between January 2020 6 and July 2023” and “supervised a team of salespeople in the northeastern region of the 7 United States.” (AC ¶ 35.) FE1 allegedly spoke with Tandem’s Sales Operation Analyst, 8 Dawin Guan (“Guan”) in the summer of 2022 and explained to Guan that certain adverse 9 market conditions, including inflation, competition, unemployment, and pandemic-related 10 factors had caused a “market pause” (i.e., potential customers were holding off on their 11 purchase of pumps), requiring Tandem to lower its sales targets. (Id. ¶ 36.) Plaintiffs 12 allege that FE1 regularly communicated to senior members of management prior to and 13 during the third quarter of 2022 that these adverse market conditions were intensifying and 14 impacting the Company’s sales goals, but Tandem did not revise its sales goals in response 15 to FE1’s warnings. (Id. ¶ 37.) 16 Plaintiffs’ allegations regarding FE1 are not sufficiently pled to establish FE1’s 17 reliability or personal knowledge. The Court disagrees with Plaintiffs’ argument that FE1’s 18 “day-to-day role[] at the Company” gives him or her the requisite personal knowledge to 19 support his or her allegations about general market conditions. (Doc. No. 22 at 17.) As a 20 “territory manager” responsible for only one region in the United States, it is not clear how 21 FE1 would have personal knowledge regarding sales in other regions or the general market 22 conditions across the United States. There are no allegations suggesting that FE1 knew or 23 was able to know or access Tandem’s financial reports, forecasting techniques, or other 24 financial data that would implicate how the Company evaluated or discounted the Three 25 Headwinds in creating its sales forecasts and estimates. See McGovney v. Aerohive 26 Networks, Inc., No. 18-CV-00435-LHK, 2019 WL 8137143, at *10 (N.D. Cal. Aug. 7, 27 2019) ( “[T]he [complaint] simply does not allege that the [confidential witnesses] had 28 personal knowledge of what matters most in this case––Company-wide financials, the 1 forecasting process, 4Q17 guidance and events, and the state of mind of [the defendants] 2 at the time the challenged statements were issued.”). Accordingly, the AC fails to 3 adequately allege that FE1 was in a position to have the requisite personal knowledge 4 regarding the impact of the Three Headwinds at a company-wide level. 5 In addition to lacking reliability and personal knowledge, FE1’s alleged disclosures 6 regarding his or her concerns about the Three Headwinds to Guan, “senior members of 7 management,” a “senior area sales director,” and “management and leadership” are too 8 vague and conclusory to support an inference of falsity or scienter. Veal v. LendingClub 9 Corp., 423 F. Supp. 3d 785, 811 (N.D. Cal. 2019) (“[G]enerally implicating ‘senior 10 management’ is not enough to establish falsity under PSLRA.”). No allegations in the AC 11 plausibly connect FE1’s alleged disclosures to Guan or other “senior members of 12 management” to the Individual Defendants. Id. at 814 (“None of the [confidential 13 witnesses] had any direct (or indirect) contact with any of the Individual Defendants and 14 therefore cannot provide reliable insight into the Defendants’ state of mind.”) There are 15 no allegations that connect Guan to the Individual Defendants such as an allegation that 16 Guan relayed FE1’s concerns to the Individual Defendants. Accordingly, FE1’s alleged 17 disclosures to Guan and other unnamed “senior members of management” do not provide 18 enough insight into the Individual Defendants’ states of mind, which is what is needed to 19 suggest a strong inference of scienter. See id. 20 FE2 was a Tandem “sales representative within a Canadian region” who sold 21 Tandem’s insulin pumps to customers. (AC ¶ 38.) Plaintiffs allege FE2 corroborated 22 FE1’s account of the adverse market conditions leading up to and continuing during the 23 third quarter of 2022. (Id. ¶ 39.) FE2 “explained that Tandem created sales targets without 24 regard for information from the sales team concerning market conditions. Instead, 25 management set sales targets by devising a number of pumps for each team and salesperson 26 to sell that was greater than the number of pumps sold during the previous quarter.” (Id. ¶ 27 40.) FE2 claims “[t]his method of generating sales targets did not account for the adverse 28 market conditions” in the third quarter of 2022. (Id.) 1 Like FE1, FE2’s statements regarding management’s disregard for the adverse 2 market conditions and Tandem’s method for setting sales targets are not pled with 3 sufficient particularity to establish FE2’s reliability or personal knowledge. Plaintiffs do 4 not plead FE2’s dates of employment. Without FE2’s dates of employment it is impossible 5 for the Court to determine whether FE2 can report on the events that allegedly occurred 6 during the Class Period with any reliability or personal knowledge. Rudolph v. 7 UTStarcom, 560 F. Supp. 2d 880, 890 (N.D. Cal. 2008) (“At the very least, plaintiff must 8 describe the witnesses’ period of employment, what the witnesses’ job duties were, their 9 expertise, and how they had access to the information being provided.”); Limantour v. Cray 10 Inc., 432 F. Supp. 2d 1129, 1143 (W.D. Wash. 2006) (“The Complaint does not provide 11 the dates of [the confidential witness’] employment. This is a fatal flaw.”).2 Further, the 12 AC does not contain any allegations that establish how FE2 – a sales representative in 13 Canada – would have any personal knowledge of Tandem’s sales forecasting within the 14 United States. McGovney, 2019 WL 8137143, at *10. 15 Finally, FE2’s allegations alone do not support falsity or an inference of scienter. 16 FE2’s statements do not establish that FE2 would have “reliable personal knowledge of the 17 [Individual Defendants’] mental state.” Zucco Partners, 552 F.3d at 998. Plaintiffs do not 18 allege that FE2 had any direct or indirect contact with the Individual Defendants. Veal, 19 423 F. Supp. 3d at 814. Plaintiffs’ conclusory allegations that “FE2 repeatedly warned [the 20 Company] that the [sales] targets were unrealistic in light of then-existing market 21 conditions” may be indicative of a salesperson who felt that their sales goals were difficult 22 to reach, but FE2’s statements do not support a strong inference that the Individual 23 Defendants knew or recklessly disregarded the Three Headwinds in setting Tandem’s 24
25 2 Plaintiffs’ opposition includes FE2’s dates of employment, but Plaintiffs cannot amend 26 their complaint in an opposition brief. Schneider v. California Dep’t of Corr., 151 F.3d 27 1194, 1197 n. 1 (9th Cir. 1998) (“In determining the propriety of a Rule 12(b)(6) dismissal, a court may not look beyond the complaint to a plaintiff’s moving papers, such as a 28 1 company-wide sales estimates for the second and third quarters of 2022. See Zucco 2 Partners, 552 F.3d at 998 (finding “generalized claims about corporate knowledge” such 3 as “[defendant] had to have known” or “project managers knew” are not sufficient to create 4 a strong inference of scienter, because “they fail to establish that the witness reporting them 5 has reliable personal knowledge of the defendants’ mental state.”). Moreover, FE2’s 6 “negative opinions” of Tandem’s method for setting sales targets, are “not statements 7 which are ‘themselves . . . indicative of scienter.’” Espy v. J2 Glob., Inc., No. 22-55829, 8 2024 WL 1689091, at *5 (9th Cir. Apr. 19, 2024) (internal citations omitted). Accordingly, 9 the Court affords FE1 and FE2’s allegations little weight in evaluating whether Plaintiffs 10 have sufficiently pled falsity or scienter. 11 2. Materially False or Misleading Statements 12 To allege an actionable false or misleading statement under the PSLRA, a plaintiff 13 must “specify each statement alleged to have been misleading, the reason or reasons why 14 the statement is misleading and, if an allegation regarding the statement or omission is 15 made on information and belief . . . state with particularity all facts on which that belief is 16 formed.” 15 U.S.C. § 78u–4(b)(1). This is a demanding standard, requiring a plaintiff to 17 allege with specificity “contemporaneous statements or conditions,” Ronconi, 253 F.3d at 18 432, that demonstrate both “how and why the statements were false” when made, Metzler 19 Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1071–72 (9th Cir. 2008). 20 “Falsity” is any “untrue statement of a material fact.” 15 U.S.C. § 78u–4(b)(1). It 21 also occurs when a defendant “omitted to state a material fact necessary in order to make 22 the statements made, in light of the circumstances in which they were made, not 23 misleading.” Id. A complaint must allege both that the statement or omission is misleading 24 and that it is material. In re Alphabet, 1 F.4th at 699. 25 Courts apply the “objective standard of a ‘reasonable investor’ to determine whether 26 a statement is misleading.” Id. (citing In re VeriFone Sec. Litig., 11 F.3d 865, 869 (9th 27 Cir. 1993)). Section 10(b) and Rule 10b-5 “do not create an affirmative duty to disclose 28 any and all material information” and instead require disclosure “only when necessary ‘to 1 make . . . statements made, in light of the circumstances under which they were made, not 2 misleading.’” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011) (quoting 17 3 C.F.R. § 240.10b-5(b)). To be misleading, a statement or omission “must affirmatively 4 create an impression of a state of affairs that differs in a material way from the one that 5 actually exists.” Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002) 6 (citing McCormick v. The Fund American Cos., 26 F.3d 869, 880 (9th Cir. 1994)). “The 7 materiality of the misrepresentation or an omission depends upon whether there is ‘a 8 substantial likelihood that [it] would have been viewed by the reasonable investor as having 9 significantly altered the “total mix” of information made available’ for the purpose of 10 decisionmaking by stockholders concerning their investments.” Retail Wholesale & Dep’t 11 Store Union Loc. 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268, 1274 (9th Cir. 12 2017) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988)). 13 a. Plaintiffs’ Challenged Statements 14 Here, Plaintiffs allege Defendants made false and misleading statements on three 15 occasions: (1) August 3, 2022, when Defendants adjusted their financial projections for 16 2022; (2) September 8, 2022, at the Wells Fargo Healthcare Conference; and (3) September 17 13, 2022, at the Baird Global Healthcare Conference. (AC ¶¶ 57–68.) Defendants assert 18 the challenged statements are not actionable because they are protected forward-looking 19 statements, opinions, or generalized statements of corporate optimism (i.e., puffery).3 20 (Doc. No. 21-1 at 16.) Defendants argue that Plaintiffs failed to plead falsity and claim 21 that none of challenged statements were materially false or misleading when made. (Id. at 22 20–26.) The Court first reviews the challenged statements. 23 On August 3, 2022, Tandem issued a press release updating its financial guidance. 24 (AC ¶ 57; Doc. No. 21-8.) In the press release, Tandem decreased its estimated sales 25 26 27 3 At this time, the Court need not determine whether such statements are forward-looking, opinion, or puffery, given that the AC does not adequately allege that the challenged 28 1 forecast range from $850 million to $865 million to a range of $835 million to $845 million. 2 (Id.) That same day, Tandem held a conference call where the Individual Defendants 3 discussed the Company’s second quarter earnings and outlook for the remainder of 2022. 4 (AC ¶¶ 58, 59; Doc. No. 21-10.) Plaintiffs allege the updated financial guidance and the 5 Individual Defendants’ statements during the call “concealed and materially downplayed 6 the negative market conditions faced by Tandem relating to competition.” (AC ¶¶ 60–61.) 7 Plaintiffs allege the Individual Defendants “represented to investors that the ‘headwinds’ 8 related to competition were dissipating and the market conditions were returning to normal, 9 which was not true.” (Id. ¶ 60.) Plaintiffs allege the following statements by the Individual 10 Defendants during the August 3 call were false or materially misleading: “competition in 11 the United States . . . is in line with our expectations,” “our data suggests that [the evolving 12 economic environment] began impacting new customers’ decisions to purchase a pump,” 13 “as these challenges dissipate, we look forward to returning to more normalized growth 14 patterns,” the “noise around the competitive launch, particularly right now is more 15 temporary in nature,” “we don’t see these economic headwinds as anything that would shift 16 people’s mindset to a different product just because it has a different reimbursement 17 structure,” “we don’t think that this has anything to do with competitive dynamics,” and 18 “[i]t’s really not the competitive issues.” (Id. ¶¶ 58–59.) 19 On September 8, 2022, the Individual Defendants presented at the 2022 Wells Fargo 20 Healthcare Conference and discussed the Three Headwinds affecting the Company’s sales. 21 (AC ¶ 62; Doc. No. 21-12.) Plaintiffs allege the following statements that the Individual 22 Defendants made during the conference were false or materially misleading: “now that 23 we’ve exited August, we’ve seen a positive shift in the beginning of a momentum build 24 that really confirms our assumptions in the guidance for the second half of the year,” “we 25 factored COVID in . . . [w]e factored the competitive challenges in . . . [t]hese things pretty 26 much occurred as we had anticipated they would. There was no real surprise,” and “So we 27 estimate that over the next few quarters that we’ll start to see [competitive noise] dissipate. 28 There will still be pressure through the end of the year, but it will start to wane as we get 1 closer to the end of the year.” (AC ¶ 62.) Again, Plaintiffs allege Defendants “created the 2 false impression that Tandem had overcome the negative headwinds” and Tandem was 3 “back on track towards meeting its financial guidance for the year.” (Id. ¶ 63.) Plaintiffs 4 allege that FE1, FE2, and analyst commentary corroborates Plaintiffs’ allegations that the 5 challenged statements were false and materially misleading. (Id. ¶¶ 63–65.) Plaintiffs 6 allege that “[i]nvestors . . . understood Defendants’ [false] statements during the September 7 8 presentation to mean the competitive ‘headwinds’ were in line with expectations, 8 dissipating, and would not materially impact the Company’s financial earnings going 9 forward.” (Id. ¶ 66.) 10 On September 13, 2022, the Individual Defendants participated in the Baird 2022 11 Global Healthcare Conference. (Id. ¶ 67; Doc. No. 21-13.) Plaintiffs challenge specific 12 statements made by Defendant Sheridan, including his comments that the Company 13 experienced a “positive shift” in August that represented the “beginning of the momentum 14 build that lines up with the guidance we gave during the call” and his statement that “we 15 think that pretty much lines us up to what we had said in the call regarding guidance for 16 the rest of the year.” (AC ¶ 67.) Plaintiffs also challenge Defendant Sheridan’s statement 17 that the “level of competition and the effect we’re seeing [from competition]” is “what we 18 expected” and “in line with what we expected” and “we think that [competition] will settle 19 down in a quarter or two.” (Id.) As allegedly corroborated by FE1 and FE2, Plaintiffs 20 claim that Defendant Sheridan’s statements created the “false impression” that the Three 21 Headwinds “were dissipating and that market conditions were returning to normal, which 22 was not true.” (Id. ¶ 68.) 23 Put simply, Plaintiffs argue that the statements from August 3, September 8, and 24 September 13 were false or materially misleading because Defendants falsely reassured 25 investors that the impact from competition was no worse than they had anticipated when 26 issuing their guidance at the beginning of the year. (Doc. No. 22 at 9.) Plaintiffs argue 27 that Defendants ignored members of the sales forces – including FE1 and FE2 – who 28 believed that the Company’s 2022 financial goals were unattainable, which shows that 1 Defendants’ statements were false or misleading. (Id.) For their part, Defendants argue 2 that when the Court reads the challenged statements in context, Defendants consistently 3 warned investors about the Three Headwinds, rendering Plaintiffs’ theory of falsity 4 implausible. (Doc. No. 21-1 at 20.) Additionally, Defendants contend that the AC does 5 not contain contemporaneous facts that establish the falsity of Defendants’ statements at 6 the time they were made. (Id.) The Court agrees with Defendants. For the reasons below, 7 Plaintiffs failed to adequately plead that the challenged statements were false or materially 8 misleading when made. 9 The Court reads the challenged statements in the context of the earnings calls. Bodri 10 v. GoPro, Inc., 252 F. Supp. 3d 912, 924 (N.D. Cal. 2017) (“A statement is misleading only 11 if a reasonable investor, reading the statement fairly and in context, would be misled.”). 12 For example, Plaintiffs assert that Defendants’ statements that “competition in the United 13 States” was “in line with [the Company’s] expectations,” (AC ¶¶ 58, 67), competition “was 14 no real surprise,” (id. ¶ 62), and “we think that [competition] will settle down in a quarter 15 or two,” (id. ¶ 67), were false or materially misleading. However, reading these statements 16 and others in context, Defendants repeatedly acknowledged the challenges they expected 17 the Company to face from competition, including an expected “pause” in the market that 18 may occur when a competitor releases a new product. (Doc. No. 21-13 at 7 (“[E]very time 19 a new product comes to market . . . [t]here is pausing.”).) Defendants disclosed and warned 20 investors about the Three Headwinds in the earnings calls and numerous SEC filings. (See 21 e.g., Doc. No. 21-4 at 14, 23, 28 (explaining the impact and effects of competition, COVID- 22 19, and macroeconomic conditions in Tandem’s Form-10K); Doc. No. 21-13 at 6 (“COVID 23 . . . competition and the macro factors . . . those still exist.”).) In their SEC filings, 24 Defendants warned investors about the specific products and competitors Defendants 25 allegedly failed to take into consideration. (Doc. No. 21-4 at 14 (“We compete in markets 26 worldwide with . . . Medtronic . . . and Insulet . . ..”); (Doc. No. 21-9 at 22 (identifying 27 Insulet’s “tubeless delivery system” and Medtronic’s “connected insulin pen delivery 28 device” as competitive products that include features Tandem does not).) Indeed, 1 Defendants specifically warned investors of the very thing – market pausing – that FE1 2 and FE2 claim Defendants ignored. (Doc. No. 21-13 at 7; AC ¶ 36.) 3 At the beginning of the Class Period, Defendants fully disclosed the Three 4 Headwinds to investors and made clear these would “persist through the end of the year.” 5 (Doc. No 21-10 at 11.) During the September conferences, Defendants identified a 6 “momentum build” and “positive shift” in August sales, but Defendants did not attribute 7 that to a dissolving or dissipating of any of the Three Headwinds as Plaintiffs claim, but 8 rather attributed the uptick in sales to typical seasonality. (AC ¶ 67; Doc. No. 21-13 at 5 9 (“[W]e’ve seen a positive shift. And we think it’s the beginning of the momentum build . . 10 ..”); Doc. No. 21-12 at 7 (“It’s difficult to say if any 1 of the 3 factors that we’re taking 11 about is beginning to settle down . . . But I would assume it’s just the beginning of the 12 seasonality for the fourth quarter.”).) When Defendants announced in November 2022 that 13 anticipated sales from seasonality did not materialize (“[D]ifferent from years past, the 14 same level of momentum did not continue across September,” AC ¶ 51), Defendants again 15 identified the same three market dynamics – COVID-19, macroeconomic factors, and 16 competition – as playing a role in the depressed sales. (Id. ¶ 52.) Plaintiffs allege that 17 Defendants finally “came clean” about the impact of competition, but the revelation that 18 the usual uptick in year-end sales failed to materialize does not make the challenged 19 statements from August or September materially false or misleading. M & M Hart Living 20 Tr. v. Glob. Eagle Ent., Inc., No. CV 17-1479 PA (MRWX), 2017 WL 5635424, at *7 21 (C.D. Cal. Aug. 20, 2017) (“[I]t is clearly insufficient for plaintiffs to say that a later, 22 sobering revelation makes an earlier, cheerier statement a falsehood.”). 23 Plaintiffs repeatedly allege that Defendants represented to investors that the 24 competitive headwinds “were dissipating” and “returning to normal.” (AC ¶¶ 60, 63, 68.) 25 However, the challenged statements do not support Plaintiffs’ allegations. For example, 26 Defendants’ statements in September 2022 that “we estimate that over the next few quarters 27 that we’ll start to see [competitive noise] dissipate” and “we think that things will settle 28 down in a quarter or two” does not mean that the competitive challenges were, in fact, 1 dissipating or settling down. (Id. ¶¶ 62, 67.) Given the Company’s repeated disclosures of 2 the Three Headwinds before, during, and after the Class Period, it is not plausible that a 3 “reasonable investor” would conclude that the challenged statements were false or 4 misleading. See Bodri, 252 F. Supp. 3d at 924. 5 Moreover, the Court agrees with Defendants that no contemporaneous facts in the 6 AC show that the challenged statements were materially false or misleading when made. 7 In re Vantive Corp. Sec. Litig., 110 F. Supp. 2d 1209, 1217 n. 14 (N.D. Cal. 2000), aff’d, 8 283 F.3d 1079 (9th Cir. 2002) (“[P]laintiffs must point to particular contemporaneous facts 9 that establish the falsity of the statement at the time it was made”.) Plaintiffs rely heavily 10 on FE1 and FE2’s statements for their theory that Defendants “downplayed or concealed” 11 the impact of competitive pressures. (AC ¶¶ 60–61, 63, 68.) However, the AC does not 12 contain sufficient allegations that FE1 or FE2 possessed the requisite reliability or personal 13 knowledge to support falsity. Furthermore, Plaintiffs’ allegation that an analyst report 14 published after the third quarter earnings call in which the analyst opined that competition 15 “is more impactful than [Tandem is] letting on” does not support an inference of falsity 16 either. (Id. ¶ 54.) A single analyst’s speculative opinion does not provide insight into 17 whether Defendants’ statements were false or misleading when made. City of Sunrise 18 Firefighters’ Pension Fund v. Oracle Corp., No. 18-CV-04844-BLF, 2019 WL 6877195, 19 at *15 (N.D. Cal. Dec. 17, 2019) (finding insufficient to support falsity an analyst’s 20 conclusory and speculative statements). In sum, Plaintiffs have failed to sufficiently plead 21 that the alleged misstatements were false or misleading when made. 22 3. Scienter 23 Next, Defendants challenge the sufficiency of Plaintiffs’ allegations with respect to 24 scienter. (Doc. No. 21-1 at 27–31.) To adequately plead scienter under the PSLRA, the 25 complaint must “state with particularity facts giving rise to a strong inference that the 26 defendant acted with the required state of mind.” 15 U.S.C. § 78u–4(b)(2). To allege the 27 requisite scienter, a complaint must “allege that the defendants made false or misleading 28 statements either intentionally or with deliberate recklessness.” Endologix, 962 F.3d at 1 414 (quoting Zucco Partners, 552 F.3d at 991). “[D]eliberate recklessness” is more than 2 “mere recklessness or a motive to commit fraud.” Schueneman v. Arena Pharms., Inc., 3 840 F.3d 698, 705 (9th Cir. 2016) (quoting Zucco Partners, 552 F.3d at 991). It exists 4 when a statement represents “an extreme departure from the standards of ordinary care,” 5 which “presents a danger of misleading buyers or sellers that is either known to the 6 defendant or is so obvious that the actor must have been aware of it.” Id. (quoting Zucco 7 Partners, 552 F.3d at 991). Plaintiffs alleging deliberate recklessness need not prove that 8 a defendant “actually knew” their statements were false or misleading, just that they 9 “recklessly turn[ed] a blind eye” to the falsity. In re VeriFone Holdings, Inc. Sec. Litig., 10 704 F.3d 694, 708 (9th Cir. 2012). 11 The “strong inference” standard “present[s] no small hurdle for the securities fraud 12 plaintiff.” Schueneman, 840 F.3d at 705. The Court must “engage in a comparative 13 evaluation [and] . . . consider, not only inferences urged by the plaintiff . . . but also 14 competing inferences rationally drawn from the facts alleged.” Tellabs, 551 U.S. at 314. 15 A complaint will survive a motion to dismiss “only if a reasonable person would deem the 16 inference of scienter cogent and at least as compelling as any opposing inference one could 17 draw from the facts alleged.” Id. at 324. For the reasons that follow, the AC fails to meet 18 this high burden. 19 Defendants argue that Plaintiffs have failed to allege a plausible motive, which 20 undermines any inference of scienter. (Doc. No. 21-1 at 27.) The Court agrees. The “lack 21 of plausible motive . . . certainly makes it much less likely that a plaintiff can show a strong 22 inference of scienter.” Prodanova, 993 F.3d at 1108. According to Plaintiffs, Defendants 23 were motivated to withhold material information regarding the true impact of the Three 24 Headwinds “to prevent the Company’s stock from declining” and “in hopes of being able 25 to rely on future positive earnings results to offset bad news if and when it was ultimately 26 disclosed.” (AC ¶ 72.) Plaintiffs further allege that if Defendants had “accurately disclosed 27 the existence and effects of [the Three Headwinds], Tandem’s stock price would have 28 declined significantly more over a shorter period of time.” (Id. ¶ 73.) However, simply 1 wanting to avoid a stock decline is “far to common to support an inference of scienter.” In 2 re Peregrine Sys., Inc. Sec. Litig., No. 02CV870-BEN (RBB), 2005 WL 8158825, at *64 3 (S.D. Cal. Mar. 30, 2005) (collecting cases). This is especially true when, as here, the AC 4 does not allege the Individual Defendants “sold shares” during the class period or otherwise 5 financially profited from the allegedly deceptive behavior. Mallen v. Alphatec Holdings, 6 Inc., 861 F. Supp. 2d 1111, 1137 (S.D. Cal. 2012), aff’d sub nom. Fresno Cnty. Employees’ 7 Ret. Ass’n v. Alphatec Holdings, Inc., 607 F. App’x 694 (9th Cir. 2015) (“Plaintiffs do not 8 allege that any of the individual Defendants sold shares in the offering or during the Class 9 Period. This lack of stock sales is inconsistent with scienter.”). 10 The AC lacks specific facts as to each Individual Defendant’s improper state of mind 11 to support a strong inference of scienter. See Metzler, 540 F.3d at 1066. The AC’s 12 conclusory allegations that Defendants “were [] aware of and closely monitoring the 13 ‘headwinds’” due to “their positions at the Company” as “senior managers and/or 14 directors” of Tandem are not sufficient to support an inference of scienter. (AC ¶¶ 77, 15 101–02.) “[C]orporate management’s general awareness of the day-to-day workings of the 16 company’s business does not establish scienter—at least absent some additional allegation 17 of specific information conveyed to management and related to the fraud.” Metzler, 540 18 F.3d at 1068. For the reasons above, the Court does not rely on FE1 or FE2’s allegations 19 as they are not indicative of scienter. (Supra Section III.A.1.) Neither FE1 nor FE1 had 20 “reliable personal knowledge of the [Individual Defendants’] mental state” to support 21 scienter. Zucco Partners, 552 F.3d at 998; see, e.g., City of Royal Oak Ret. Sys. v. Juniper 22 Networks, Inc., 2013 WL 2156358, at *9 (N.D. Cal. May 17, 2013) (finding confidential 23 witness with no contact with defendants provided “little, if any, reliable basis from which 24 to infer scienter”). Stripping away FE1 and FE2’s allegations, the AC lacks specific 25 allegations that Defendants were aware of or reckless in not knowing any negative 26 information that competition was not “in line” with their prior expectations. 27 In their opposition, Plaintiffs invoke the core operations theory to support an 28 inference of scienter. (Doc. No. 22 at 26–28.) The core operations theory presumes that 1 “corporate officers have knowledge of the critical core operation of their companies.” 2 Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1062 (9th Cir. 2014) 3 (internal citation omitted). Core operations may support a strong inference of scienter 4 under three circumstances: 5 First, the allegations may be used in any form along with other allegations that, when read together, raise an inference of scienter that is cogent and compelling, thus strong 6 in light of other explanations . . .. Second, such allegations may independently satisfy 7 the PSLRA where they are particular and suggest that defendants had actual access to the disputed information . . .. Finally, such allegations may conceivably satisfy 8 the PSLRA standard in a more bare form, without accompanying particularized 9 allegations, in rare circumstances where the nature of the relevant fact is of such prominence that it would be absurd to suggest that management was without 10 knowledge of the matter. 11 12 Id. (quoting S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 785–86 (9th Cir. 2008) (internal 13 quotation marks omitted)). “Proof under this theory is not easy.” Id. 14 Plaintiffs point to Defendant Sheridan’s statement that the Company’s “[S]ales force 15 really have active communication dialogue to people who are in the front. And this is what 16 they’re hearing. It’s really not the competitive issues” as evidence that the Company knew 17 or was reckless in not knowing the negative information allegedly being reported by the 18 sales team. (AC ¶ 59; Doc. No. 22 at 27.) Plaintiffs’ argument that “Defendants cannot 19 point to the sales force as a basis for knowing that competition is not impacting results and 20 then deny knowing that the sales force was saying the exact opposite” rests on the 21 assumption that the allegations of FE1 and FE2 are reliable, particularized, and indicative 22 of falsity. (Doc. No. 22 at 28.) For the reasons discussed above, the Court declines to 23 credit the statements of FE1 and FE2. Taking away FE1 and FE2’s allegations, the AC 24 does not contain sufficient factual allegations to suggest that Defendants either knew or 25 were reckless in reporting to investors what the sales force was allegedly hearing with 26 27 28 1 respect to competition. 2 Plaintiffs argue that Defendants’ reliance on positive information related to 3 Tandem’s renewal sales supports a strong inference of scienter. (AC ¶¶ 74–76.) Plaintiffs 4 cite to Defendants’ statements throughout 2022 regarding Tandem’s renewal prospects as 5 evidence of Defendants’ “hope[] of lessening or possibly even avoiding the fallout that 6 ultimately ensued.” (Id.) However, Plaintiffs have not challenged Defendants’ renewal 7 statements as false or misleading. (See id. ¶¶ 57–68.) Accordingly, these allegations 8 cannot support an inference, let alone a strong inference, of scienter. Short v. Dondanville, 9 No. EDCV1100615JAKPLAX, 2013 WL 12131544, at *6 (C.D. Cal. June 25, 2013) 10 (“[A]n allegedly true statement . . . does not establish scienter.”). 11 Plaintiffs also argue that Tandem’s underperformance relative to its main 12 competitors further supports Plaintiffs’ theory of scienter “as it undermines Defendants’ 13 claim that ‘macroeconomic factors’ were responsible for the Company’s poor 14 performance.” (AC ¶ 78; Doc. No. 22 at 28–29.) In the AC, Plaintiffs include a chart 15 showing Tandem’s stock price declining relative to its three main competitors and allege 16 that if “macroeconomic factors [had] truly been impacting the insulin pump market, the 17 three companies would have reported earnings results largely in line with one another and, 18 as a result, exhibited similar gains or losses in the stock market.” (AC ¶ 79.) The Court is 19 not convinced by Plaintiffs’ argument that “macroeconomic factors generally impact 20 members of an industry similarly,” (Doc. No. 22 at 28), especially considering that 21 members of the same industry have unique products and there are numerous other factors 22 impacting sales even when companies operate in a similar macroeconomic environment. 23 See Endologix, 962 F.3d at 415 (“[T]he PSLRA neither allows nor requires us to check our 24 disbelief at the door.”). 25
26 4 Plaintiffs’ reliance on S. Ferry LP #2 v. Killinger, 687 F. Supp. 2d 1248, 1258 (W.D. 27 Wash. 2009), is not persuasive. Unlike here, the court in Killinger determined that “plaintiffs have adequately pleaded [defendants] actual knowledge” to support its reliance 28 1 In their opposition, Plaintiffs argue that the Court can infer scienter based on the 2 temporal proximity between Tandem’s September 2022 conferences where the Individual 3 Defendants reported a “positive shift” in August sales and the November 2022 downward 4 revision of the Company’s 2022 financial forecast. (Doc. No. 22 at 29–30.) It is true that 5 the time between the challenged positive statements and the revelation of truth can be 6 circumstantial evidence of scienter. Fecht v. Price Co., 70 F.3d 1078, 1083 (9th Cir. 1995) 7 (“This shortness of time is circumstantial evidence that the optimistic statements were false 8 when made.”). However, without additional particularized allegations supporting 9 fraudulent intent, the Court declines to infer scienter from temporal proximity alone. 10 Yourish v. California Amplifier, 191 F.3d 983, 997 (9th Cir. 1999) (“We have allowed the 11 temporal proximity of an allegedly fraudulent statement or omission and a later disclosure 12 to bolster a complaint . . . but we have never allowed the temporal proximity between the 13 two, without more, to satisfy the requirements of Rule 9(b).” (emphasis in original)). 14 Finally, the Court reviews all allegations in support of scienter holistically. 15 Prodanova, 993 F.3d at 1112. In assessing whether Plaintiffs have sufficiently pled 16 scienter, the Court must also consider “whether the total of plaintiffs’ allegations, even 17 though individually lacking, are sufficient to create a strong inference that defendants acted 18 with deliberate or conscious recklessness.” No. 84 Employer-Teamster Joint Council 19 Pension Tr. Fund v. Am. W. Holding Corp., 320 F.3d 920, 938 (9th Cir. 2003) (internal 20 citation omitted). Based on the foregoing analysis, the AC does not allege a strong 21 inference of scienter. Plaintiffs have not established an inference of intentional or 22 deliberately reckless conduct that is at least as compelling as an inference of nonculpable 23 conduct. The AC’s factual allegations, taken as a whole, do not defeat Defendants’ 24 competing inference that Defendants reasonably believed in the presence and persistence 25 of the Three Headwinds, but that the Company would achieve its financial goals due to the 26 usual, seasonal uptick in sales that typically begins in the third and fourth quarters. 27 Accordingly, Plaintiffs have failed to adequately plead scienter. 28 /// 1 4. Loss Causation 2 Defendants argue that Plaintiffs have failed to adequately plead loss causation. 3 ||(Doc. No. 21-1 at 31-32.) Because Plaintiffs failed to plead falsity and scienter, the Court 4 ||does not address the parties’ arguments regarding loss causation. In re Acadia Pharms. 5 ||Inc. Sec. Litig., No. 18-CV-01647-AJB-BGS, 2022 WL 36493, at *11 (S.D. Cal. Jan. 3, 6 || 2022) (declining to address scienter or loss causation when plaintiffs failed to plead falsity); 7 ||see also Collins v. Winex Invs., LLC, No. CIV. 08CV51-L (CAB), 2009 WL 861738, at 8 (S.D. Cal. Mar. 27, 2009) (“Because the court finds that Plaintiffs failed to adequately 9 || plead scienter, it does not reach the issue . . . of loss causation .. ..”). 10 B. Section 20(a) Claims 11 Because the Court dismisses Plaintiffs’ underlying Section 10(b) and Rule 10(b)-5 12 |/claims, Plaintiffs’ Section 20(a) claim also fails. See Zucco Partners, 552 F.3d at 990 13 (‘Section 20(a) claims may be dismissed summarily . . . if a plaintiff fails to adequately 14 plead a primary violation of section 10(b).”’). 15 CONCLUSION 16 For the reasons above, the Court grants Defendants’ motion to dismiss with leave to 17 |}amend. See Doe, 58 F.3d at 497 (“A district court should grant leave to amend . . . unless 18 determines that the pleading could not possibly be cured by the allegation of other 19 || facts.’’). Plaintiffs may file a second amended complaint curing the deficiencies noted 20 || herein within thirty (30) days of the date of this Order. 21 IT IS SO ORDERED. 22 || DATED: April 29, 2024 | | | ul. | | | 23 MARILYN W. HUFF, Distric e 24 UNITED STATES DISTRICT COURT 25 26 27 28