Thursday, August 11, 2005

Dura a Toothless Tiger in OmniVision Understatement Action

For those of you wondering what language Plaintiffs need to allege in their amended complaints to satisfy Dura, you’re in luck. At least, that is, if you happen to be in Judge Samuel Conti’s (N.D. Cal.) courtroom. You see, Plaintiffs’ complaint in the OmniVision securities class action originally alleged that "members of the Class acquired OmniVision securities during the Class Period at artificially high prices and were damaged thereby." Ah, the Good Old Days. But put away that nostalgia, as Judge Conti (unsurprisingly) held this allegation to be "insufficient" under Dura. But he gave the investors a chance to try again. So the second time around, the complaint said: "Plaintiffs purchased OmniVision securities at artificially inflated prices and suffered damages when revelation of the true facts caused a decline in the value of their investments." In ruling on the OmniVision and its executives’ motions to dismiss, the court found this was "a sufficient allegation of economic loss as required" by Dura. Sorry to those of you wanting more out of your Dura, but that's it. Seven more words. Really. No, really.

As for the rest of the Defendants’ arguments, Judge Conti denied them all, even despite the fact that "the allegations concern understating of revenue," instead of overstating it. Why? Well, Judge Conti said because "the one third drop in OmniVision's stock price on June 9, 2004 overwhelmingly demonstrates that the investing community finds improper revenue recognition incidents to be serious matters regardless of the direction of the improper recognition."

But just when the Plaintiffs thought they were home-free, Judge Conti ruled that "the restatement and GAAP violations" were not enough to meet scienter. But that didn’t save Defendants because they had engaged in suspicious inside trading, in which "two of the Individual Defendants more than doubled the relative proportion of their shares they sold during the class period," and "the other two simply sold all of their shares." Defendants countered that "because this case involves earnings understatements, instead of overstatements, insider sales are not indicative of scienter." But the judge rejected this "misconstrued theory," saying that Defendants suffer from a "dramatic misconception of how stock markets function." Ouch. "As demonstrated by the movement of OmniVision's stock" "by approximately one third on June 9, 2004 when the company first announced its accounting problems," "Defendants' argument that there is a distinction between overstatements and understatements of revenue is simply not credible."

You can read In re OmniVision, issued July 29, 2005, at 2005 U.S. Dist. LEXIS 16009.

Nugget: "The Court holds that at this time the group pleading doctrine does apply."

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