stock. (Am.Compl. ¶¶ 74, 75.) Plaintiffs allege that CA's reliance
on the Asian financial crisis and the Y2K problem as the source
of its own financial troubles was mere "windowdressing," designed
to conceal the fact that CA's problems stemmed from its efforts
to artificially inflate CA's sales prior to and during the Class
period. To support this contention, plaintiffs rely on reports
from such analysts as Weslet Golby, who essentially accused CA,
among others, of "over-inflating their current revenues at the
expense of future revenues." (Am.Compl.77.)
On July 23, 1998, plaintiffs commenced this action, asserting
two claims under the Securities Exchange Act of 1934,
15 U.S.C. § 78a et seq.: a claim against all defendants under section
10(b), and Rule 10b-5 promulgated thereunder, as well as a claim
against the individual defendants under section 20(a). Plaintiffs
also contend that CA employed improper revenue recognition
practices that caused CA's reported revenue and earnings per
share to be materially overstated.
A. Standard of Review Under Rule 12(b)(6)
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure,
dismissal is warranted where "it appears beyond doubt that the
plaintiff can prove no set of facts in support of his claim which
would entitle him to relief." Ricciuti v. N.Y.C. Transit
Authority, 941 F.2d 119, 123 (2d Cir. 1991) (quoting Conley v.
Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80, (1957)).
The Court must accept the facts alleged in the complaint as true
and draw all reasonable inferences from those allegations in
favor of plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236, 94
S.Ct. 1683, 40 L.Ed.2d 90 (1974). The complaint, however, must
"give defendants fair notice of what the plaintiffs' claim is and
the grounds upon which it rests." Conley, 355 U.S. at 47, 78
B. Standard of Review under Rule 9(b) and Section 10(b)
When a complaint alleges fraud, Rule 9(b) of the Federal Rules
of Civil procedure requires that the circumstances be pled with
particularity. Acito v. IMCERA Group, Inc., 47 F.3d 47, 51 (2d
Cir. 1995). The complaint must: (1) specify the statements that
the plaintiff contends were fraudulent, (2) identify the speaker,
(3) state where and when the statements were made, and (4)
explain why the statements were fraudulent. Id. However, Rule
9(b) states that "malice, intent, knowledge, and other condition
of mind of a person may be averred generally." Id. at 52.
Under Section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b), and SEC Rule 10b-5, a plaintiff must prove that
the defendant, in effectuating an allegedly fraudulent sale,
acted with scienter. Press v. Chemical Investment Services
Corp., 166 F.3d 529, 537 (2d Cir. 1999). "The Private Securities
Litigation Reform Act of 1995 heightened the requirement for
pleading scienter to the level used by the Second Circuit:
Plaintiffs must state with particularity facts giving rise to a
strong inference that the defendant acted with the required state
of mind. 15 U.S.C. § 78u-4(b)(2)." Id. at 537-538. However,
this requirement may be satisfied either: (a) by alleging facts
to show that defendants had both motive and opportunity to commit
fraud, or (b) by alleging facts that constitute strong
circumstantial evidence of conscious misbehavior or recklessness.
Acito, 47 F.3d at 52.
A. Section 10(b) Liability is Adequately Pled
Plaintiffs adequately plead fraud with the required
particularity. They allege a number of statements made by
defendants, detailing the who, what, where, when, and how of the
fraudulent statements as discussed supra, p. 70-72. See
also Am. Complaint, ¶¶ 49-68. Plaintiffs supply "as much detail
of the alleged fraud as can be expected before discovery
commences." In re AnnTaylor Stores Securities Litigation,
807 F. Supp. 990, 1004 (S.D.N.Y. 1992).
Plaintiffs allege, among other things, that CA's Class Period
earning announcements and SEC-filed financial statements for the
third quarter ending December 31, 1997 and for the quarter and
fiscal year ending March 31, 1998 were knowingly and
intentionally inflated. Plaintiffs point specifically to the
premature recognition of income on Unicenter deals, long-term
installment sales, and on customer support fees. Plaintiffs
detail how defendants used specific accounting practices in
violation of the Generally Accepted Accounting Principles,
("GAAP"), to prematurely recognize revenue. See Am. Complaint,
¶¶ 82-90. These allegations render defendants' earning statements
and other positive statements as materially false at the time
they were made, not merely optimistic statements. See In re
Northern Telecom Ltd. Securities Litigation, 1994 WL 455534 at
1-2 (S.D.N.Y. Aug. 22, 1994); Shapiro v. UJB Financial Corp.,
964 F.2d 272, 282 (3d Cir. 1992); In re AnnTaylor, 807 F. Supp.
at 998. Similarly, these alleged statements are also not mere
statements of historical performance or protected by the "safe
harbor". See Bausch & Lomb, Inc. Securities Litigation,
941 F. Supp. 1352, 1363 (W.D.N.Y. 1996).
Moreover, statements such as ones specifically attributed to
defendants Wang and Kumar in CA's own April 22 and May 21 press
releases, stating that CA's "business is stronger than ever,"
that there was "strong worldwide demand" for CA software, that
"[CA's] business fundamentals are strong" and that CA was
"solidly positioned for growth", were alleged to be false and
misleading for failure to disclose materially adverse business
trends and accounting practices. Am.Comp. ¶¶ 57, 63. Thus, this
statement, as well as the others concerning the supposed health
of the company, are all actionable when considered as a whole and
in light of the alleged improper accounting and revenue inflating
practices. See In re Northern Telecom Ltd. Securities
Litigation, 1994 WL 455534 at 5-6; AnnTaylor, 807 F. Supp. at
Defendants' citation of San Leandro Emergency Med. Group
Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 804 (2d
Cir. 1996) is unavailing. San Leandro is easily
distinguishable, involving whether "a company had a duty to
disclose its consideration of an alternative business plan in
order to prevent its prior statements from becoming misleading,"
not allegations of glowing press releases and the like,
concerning the state of the company in the face of massive,
intentionally inflated earning statements at issue here.
Defendants only assert that CA's class period press releases
and financial statements include meaningful cautionary language
consisting of the following: (1) that "there can be no assurances
that future results will be achieved," and (2) that there were
"important factors that could cause actual results to differ
materially." These are general boilerplate disclaimers that do
not alter that fact that plaintiffs allege that defendants
knowingly made particular factual representations that they knew
to be false, especially as to level of consumer demand and CA's
past performance, revenues, sales, and earnings. See Bausch &
Lomb, 941 F. Supp. at 1363.
Unknown specifics, such as the exact amount the earnings have
been overstated, are not fatal in this case. Plaintiffs allege
such a widespread fraudulent practice, that if true, would have a
huge net effect in error as to the company's overall figures and
is the type of information peculiarly within the defendants'
control. See Bausch & Lomb, 941 F. Supp. at 1361 ("Since many of
these facts lie particularly within defendants' knowledge,
plaintiffs cannot reasonably be expected to be able to state at
this stage exactly when and how defendants learned that B & L's
sales figures were being overstated."); In re
Craftmatic Securities Litigation, 890 F.2d 628, 645 (3d Cir.
1989) ("Particularly in cases of corporate fraud, plaintiffs
cannot be expected to have personal knowledge of the details of
corporate internal affairs"). Plaintiffs have not simply alleged
mere accounting improprieties or mismanagement; rather,
plaintiffs describe a pervasive fraudulent scheme, including
intentionally violative accounting practices and inflated
revenues, which is materially misleading.
B. Scienter is Adequately Pled
i. Motive and Opportunity
The plaintiffs have sufficiently alleged the Individual
Defendants' motive and opportunity — the receipt of outright
stock grants worth over $1 billion if the price of CA's common
stock traded at or above the Vesting Price for 60 days in any 12
month period prior to March 2000. See e.g. Am. Complaint, ¶ 43.
The combination of the timing of this vesting, the subsequent
large and unexpected drop in value of the stock, and the mammoth
grant incentive, strongly supports Individual Defendants' motive.
In addition, plaintiffs have alleged insider trading, which
supports an inference of scienter. See Goldman v. Belden,
754 F.2d 1059, 1070 (2d Cir. 1985).
Plaintiffs also adequately allege opportunity, as defendants
Wang, Kumar, and Artzt were the three most senior officers, who
participated in the drafting, preparation, and/or approval of the
financial reports, press releases, shareholder communications,
and SEC filings at issue.
ii. Reckless or Conscious Misbehavior
The plaintiffs have also adequately alleged facts sufficient to
demonstrate reckless or conscious misbehavior. Plaintiffs detail,
among other things, defendants' alleged fraudulent scheme
involving intentional and knowing improper recognition and
inflation of earnings, revenue, and sales. These allegations, in
combination with other statements made by Individual Defendants,
and the enormous scope and scale of this alleged fraud, if true,
rises to the level of conscious misbehavior or recklessness. See
In re MTC Electronic Technologies Shareholders Litigation,
898 F. Supp. 974, 989 (E.D.N.Y. 1995) vacated in part, 993 F. Supp. 160,
162 (E.D.N.Y. 1997). In all, plaintiffs alleged sufficient
facts to give rise to a strong inference of fraudulent intent.
For the foregoing reasons, defendants' Motion to Dismiss must
be and the same is hereby denied.