GLANCY BINKOW & GOLDBERG LLP LIONEL Z....

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GLANCY BINKOW & GOLDBERG LLP LIONEL Z. GLANCY (134180) PETER A. BINKOW (173848) MICHAEL GOLDBERG (188669) EX KANO S. SAMS II (192936) ROBERT V. PRONGAY (270796) 1925 Century Park East, Suite 2100 Los Angeles, CA 90067 Telephone: 310/201-9150 310/201-9160 (fax) [email protected]

Lead Counsel for Plaintiffs

[Additional counsel appear on signature page.]

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

OAKLAND DIVISION

ROBERT CURRY, et al., Individually and on Behalf of All Others Similarly Situated,

Plaintiffs,

vs.

HANSEN MEDICAL, INC., et al.,

Defendants.

This Document Relates To:

ALL ACTIONS.

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Lead Case No. 4:09-cv-05094-CW

CLASS ACTION

PLAINTIFFS’ OPPOSITION TO DEFENDANT CHRISTOPHER SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT

DATE: April 19, 2012 TIME: 2:00 p.m. COURTROOM: The Honorable

Claudia Wilken

TABLE OF CONTENTS

Page

PLAINTIFFS’ OPPOSITION TO DEF SELLS’ MOTION TO DISMISS THE THIRD CONSOLIDATED AMENDED COMPLAINT - 4:09-cv-05094-CW

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I. INTRODUCTION ...............................................................................................................1

II. STATEMENT OF FACTS ..................................................................................................3

A. Background..............................................................................................................3

B. Overview of Hansen’s Domestic and International Sales’ Channels ......................4

C. Hansen’s Revenue Recognition Policy....................................................................5

D. Hansen’s Improper Revenue Recognition on Domestic Sales ................................5

E. Hansen’s Improper Revenue Recognition on Sales to “Independent” International Distributors .........................................................................................6

F. Defendants’ Explicit Denials of Unused Systems and Rationalization for Perceived Low Utilization .......................................................................................7

G. The Truth Emerges Within a Matter of Months ......................................................7

III. DEFENDANT SELLS IS LIABLE UNDER §10(b)...........................................................8

A. Under Rule 10b-5(b), SVP Sells Is Liable for Making False and Misleading Statements .............................................................................................8

B. SVP Sells Is Primarily Liable Under Rule 10b-5(a) and (c) for the Deceptive Conduct Alleged ...................................................................................11

IV. PLAINTIFFS ALLEGE THE FRAUD WITH PARTICULARITY .................................14

V. PLAINTIFFS PLEAD A STRONG INFERENCE OF SCIENTER .................................16

VI. PLAINTIFFS ADEQUATELY PLEAD LOSS CAUSATION ........................................24

VII. PLAINTIFFS SUFFICIENTLY PLEAD CONTROL PERSON LIABILITY .................25

VIII. CONCLUSION..................................................................................................................25

TABLE OF AUTHORITIES

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CASES

Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937 (2009)......................................................................................10

Asher v. Baxter Int’l, Inc., No. 02 C 5608, 2005 U.S. Dist. LEXIS 2131 (N.D. Ill. Feb. 3, 2005).............................................................................................................20

Atlas v. Accredited Home Lenders Holding Co., 556 F. Supp. 2d 1142 (S.D. Cal. 2008)....................................................................................19

Backe v. Novatel Wireless, Inc., 607 F. Supp. 2d 1145 (S.D. Cal. 2009)....................................................................................18

Basic Inc. v. Levinson, 485 U.S. 224 (1988).................................................................................................................10

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)...................................................................................................................3

Broudo v. Dura Pharm., Inc., 339 F.3d 933 (9th Cir. 2003), rev’d on other grounds, 554 U.S. 336 (2005).................................................................................................................20

Cent. Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994).........................................................................................................1, 8, 11

Chiarella v. United States, 445 U.S. 222 (1980).................................................................................................................10

Dreiling v. Am. Online, Inc., 578 F.3d 995 (9th Cir. 2009) .....................................................................................................8

Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005)...................................................................................................................3

Eminence Capital, L.L.C. v. Aspeon, Inc., 316 F.3d 1048 (9th Cir. 2003) .................................................................................................25

Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999)....................................................................................................20

Gross v. Medaphis Corp., 977 F. Supp. 1463 (N.D. Ga. 1997) .........................................................................................21

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Howard v. Everex Sys., Inc., 228 F.3d 1057 (9th Cir. 2000) .................................................................................................25

In re Adaptive Broadband Sec. Litig., No. C 01-1092 SC, 2002 U.S. Dist. LEXIS 5887 (N.D. Cal. Apr. 2, 2002) ..........................................................................................................19

In re Accuray Sec. Litig., 757 F. Supp. 2d 936 (N.D. Cal. 2010) .....................................................................................22

In re Allstate Life Ins. Co. Litig., No. CV-09-8162-PCT-GMS, 2012 U.S. Dist. LEXIS 7678 (D. Ariz. Jan. 23, 2012)..............................................................................................................9

In re Alstom SA Sec. Litig., 406 F. Supp. 2d 433 (S.D.N.Y. 2005)......................................................................................13

In re Apollo Grp., Inc. Sec. Litig., No. CV-10-1735-PHX-JAT, 2011 U.S. Dist. LEXIS 124781 (D. Ariz. Oct. 27, 2011) ...........................................................................................................22

In re Apple Computer, Inc., 243 F. Supp. 2d 1012 (N.D. Cal. 2002) ...................................................................................23

In re Bank of Am. Corp. Auction Rate Sec. (ARS) Mktg. Litig., No. 09-md-02014 JSW, 2011 U.S. Dist. LEXIS 18208 (N.D. Cal. Feb. 24, 2011).........................................................................................................17

In re Cadence Design Sys., Inc. Sec. Litig., 692 F. Supp. 2d 1181 (N.D. Cal. 2010) .............................................................................22, 24

In re Cadence Design Sys., Inc. Sec. Litig., 654 F. Supp. 2d 1037 (N.D. Cal. 2009) ...................................................................................22

In re Constellation Energy Grp., Inc., 738 F. Supp. 2d 614 (D. Md. 2010) .........................................................................................25

In re Daou Sys., Inc., 411 F.3d 1006 (9th Cir. 2005) .......................................................................................3, 18, 23

In re Hansen Natural Corp. Sec. Litig., 527 F. Supp. 2d 1142 (C.D. Cal. 2007) ...................................................................................25

In re Interlink Elecs., Inc. Sec. Litig., No. SACV 05-8133-AG(SHx), 2008 WL 4531967 (C.D. Cal. Oct. 6, 2008) ...........................................................................................................24

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In re John P. Flannery, Admin. Proceeding No. 3-14081, 2011 WL 5130058 (SEC Release No. 438, Oct. 28, 2011) ....................................................................................14

In re LDK Solar Sec. Litig., No. C 07-05182 WHA, 2008 U.S. Dist. LEXIS 80717 (N.D. Cal. Sept. 24, 2008) .......................................................................................................16

In re Medicis Pharm. Corp. Sec. Litig., 689 F. Supp. 2d 1192 (D. Ariz. 2009) .....................................................................................19

In re Medicis Pharm. Corp. Sec. Litig., No. CV-08-1821-PHX-GMS, 2010 U.S. Dist. LEXIS 81410 (D. Ariz. Aug. 9, 2010) ............................................................................................................19

In re Metawave Commc’ns. Corp. Sec. Litig., No. C02-625RSM, 2009 U.S. Dist. LEXIS 25331 (W.D. Wash. Mar. 27, 2009) ...................................................................................................21

In re MicroStrategy, Inc. Sec. Litig., 115 F. Supp. 2d 620 (E.D. Va. 2000) ................................................................................19, 20

In re New Century, 588 F. Supp. 2d 1206 (C.D. Cal. 2008) ...................................................................................24

In re Northpoint Commc’ns Grp., Inc. Sec. Litig., 221 F. Supp. 2d 1090 (N.D. Cal. 2002) ...................................................................................21

In re Redback Networks, Inc. Sec. Litig., No. C 03-5642 JF (HRL), 2007 U.S. Dist. LEXIS 27389 (N.D. Cal. Mar. 30, 2007)........................................................................................................24

In re Sipex Corp. Sec. Litig., No. C 05-00392 WHA, 2005 U.S. Dist. LEXIS 30854 (N.D. Cal. Nov. 17, 2005)........................................................................................................23

In re UBS Auction Rate Sec. Litig., No. 08 Civ. 2967 (LMM), 2010 U.S. Dist. LEXIS 59024 (S.D.N.Y. June 10, 2010).........................................................................................................17

Janus Capital Grp., Inc. v. First Derivative Traders, __ U.S. __, 131 S. Ct. 2296 (2011).................................................................................. passim

Lormand v. US Unwired, Inc., 565 F.3d 228 (5th Cir. 2009) ...................................................................................................24

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Matrixx Initiatives, Inc. v. Siracusano, __ U.S. __, 131 S. Ct. 1309 (2011)............................................................................................2

MB Fin. Grp., Inc. v. U.S. Postal Serv., 545 F.3d 814 (9th Cir. 2008) ...................................................................................................13

Middlesex Ret. Sys. v. Quest Software, Inc., No. CV 06-6863 DOC (RNBx), 2008 U.S. Dist. LEXIS 68419 (C.D. Cal. July 10, 2008) .............................................................................................17, 19, 21

Munoz v. China Expert Tech., Inc., No. 07 Civ. 10531 (AKH), 2011 U.S. Dist. LEXIS 128539 (S.D.N.Y. Nov. 4, 2011) ..........................................................................................................11

Nguyen v. Radient Pharm. Corp., No. SA CV 11-0406 DOC (MLGx), 2011 U.S. Dist. LEXIS 124631 (C.D. Cal. Oct. 26, 2011) ...................................................................................................17, 20

N.Y. City Empls. Ret. Sys. v. Berry, 616 F. Supp. 2d 987 (N.D. Cal. 2009) ...............................................................................12, 19

Provenz v. Miller, 102 F.3d 1478 (9th Cir. 1996) ...........................................................................................17, 19

Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001) ...................................................................................................10

S. Ferry LP v. Killinger, 542 F.3d 776 (9th Cir. 2008) .........................................................................................2, 17, 24

Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977).................................................................................................................13

SEC v. Berry, 580 F. Supp. 2d 911 (N.D. Cal. 2008) .....................................................................................15

SEC v. Boock, No. 09 Civ. 8261 (DLC), 2011 U.S. Dist. LEXIS 129673 (S.D.N.Y. Nov. 9, 2011) ..........................................................................................................12

SEC v. Collins & Aikman Corp., 524 F. Supp. 2d 477 (S.D.N.Y. 2007)......................................................................................13

SEC v. Daifotis, No. C 11-00137 WHA, 2011 U.S. Dist. LEXIS 116631 (N.D. Cal. Oct. 7, 2011).......................................................................................................2, 11

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SEC v. Kelly, No. 08 Civ. 4612(CM), 2011 WL 4431161 (S.D.N.Y. Sept. 22, 2011)........................................................................................................14

SEC v. Mercury Interactive, LLC, No. 5:07-cv-02822-WHA, 2011 WL 5871020 (N.D. Cal. Nov. 22, 2011)........................................................................................................13

SEC v. Pentagon Capital Mgmt. PLC, No. 08 Civ. 3324, 2012 U.S. Dist. LEXIS 18504 (S.D.N.Y. Feb. 14, 2012) ...........................................................................................................1

SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968).....................................................................................................12

Simpson v. AOL Time Warner Inc., 452 F.3d 1040 (9th Cir. 2006), vacated on other grounds, 552 U.S. 1162 (2008).........................................................................................................12, 16

Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008)......................................................................................................... passim

Swartz v. KPMG LLP, 476 F.3d 756 (9th Cir. 2007) ...................................................................................................15

Teamsters Local 617 Pension & Funds v. Apollo Grp., Inc., 633 F. Supp. 2d 763 (D. Ariz. 2009) .......................................................................................23

Teamsters Local 617 Pension & Welfare Funds v. Apollo Grp., Inc., 690 F. Supp. 2d 959 (D. Ariz. 2010) ...............................................................................3, 4, 22

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)...........................................................................................................17, 20

United States SEC v. Carter, No. 10 C 6145, 2011 U.S. Dist. LEXIS 136599 (N.D. Ill. Nov. 28, 2011)......................................................................................................2, 10

United States SEC v. Geswein, No. 5:10CV1235, 2011 U.S. Dist. LEXIS 111904 (N.D. Ohio Aug. 2, 2011) ........................................................................................................14

United States SEC v. Geswein, No. 5:10CV1235, 2011 U.S. Dist. LEXIS 111893 (N.D. Ohio Sept. 29, 2011) ......................................................................................................14

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United States v. O’Hagan, 521 U.S. 642 (1997).................................................................................................................13

Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003) .................................................................................................15

WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir. 2011) .....................................................................................13, 14, 20

Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) .............................................................................................21, 22

STATUTES, RULES AND REGULATIONS

15 U.S.C. §78..............................................................................................................................................9 §78j(b).............................................................................................................................. passim §78p............................................................................................................................................9 §78t(a) ..................................................................................................................................3, 25

Federal Rules of Civil Procedure Rule 8 .........................................................................................................................................3

17 C.F.R. §200............................................................................................................................................9 §240.10b-5 .................................................................................................................8, 9, 11, 13 §240.10b-5(a).................................................................................................................1, 11, 12 §240.10b-5(b).................................................................................................................8, 12, 13 §240.10b-5(c).................................................................................................................1, 11, 12

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I. INTRODUCTION

The Third Consolidated Amended Complaint for Violations of the Federal Securities Laws

(“TAC”) states a claim with the requisite particularity for securities fraud against defendant

Christopher Sells.1 By way of his motion, Sells asks this Court to hold at the pleading stage that a

corporate officer – in charge of sales and who participates in obviously improper “sales” transactions

and later, the illicit revenue recognition of them – is not liable as a matter of law for the admittedly

materially false financial results in press releases and Securities and Exchange Commission (“SEC”)

filings that he reviewed and authorized as a member of Hansen Medical, Inc.’s (“Hansen” or the

“Company”) disclosure committee, or for his deceptive conduct that led to those false financials.

Yet, Sells is no innocent cog in Hansen’s fraud and his motion should be denied.

Despite Sells’ best efforts to rewrite it, under the guise of Janus Capital Grp., Inc. v. First

Derivative Traders, __ U.S. __, 131 S. Ct. 2296 (2011), the law for fraudulent acts remains. Janus

did not eliminate claims under Rule 10b-5(a) & (c). A fact one court recently noted: “Defendants

have put forth no persuasive reason why Janus should be read to reach . . . claims alleging scheme

liability pursuant to Rule 10b-5(a) & (c), and the Court can identify none.” SEC v. Pentagon Capital

Mgmt. PLC, No. 08 Civ. 3324, 2012 U.S. Dist. LEXIS 18504, at *117 (S.D.N.Y. Feb. 14, 2012).

Sells is liable under §10(b) as a primary violator for his deceptive conduct. See Cent. Bank,

N.A. v. First Interstate Bank, N.A., 511 U.S. 164, 167, 177, 179 (1994); Stoneridge Inv. Partners,

LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 158 (2008). This conduct cannot be brushed aside as

“aggressive salesmanship.” It does not take an accounting degree or training for the Senior Vice

President (“SVP”) of Commercial Operations, one of only six Hansen officers to know that, for

example, a side agreement in contravention of the Company’s stated revenue recognition policy is

improper. Particularly where that SVP regularly participates in meetings with Hansen’s CFO to

reach a consensus as to which sales could be recognized as revenue. ¶52.

1 References to “¶__” are to the TAC, all internal citations and footnotes are omitted and all emphasis is added unless otherwise noted.


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Further, as a member of the disclosure committee and a Company officer, it was “‘necessary

or inevitable’” that the false and misleading statements Sells reviewed regarding Hansen’s financial

condition would be communicated to investors. See Janus, 131 S. Ct. at 2303; ¶¶23-24. He had the

ultimate authority for the Company’s false and misleading press releases and SEC filings and thus

“made” the false statements under Janus. United States SEC v. Carter, No. 10 C 6145, 2011 U.S.

Dist. LEXIS 136599, at *6-*8 (N.D. Ill. Nov. 28, 2011) (allegations that the CEO approved releases

before they were publicly available sufficient under Janus). Factual disputes regarding who “made”

the statements at issue should be decided after plaintiffs are afforded discovery. SEC v. Daifotis, No.

C 11-00137 WHA, 2011 U.S. Dist. LEXIS 116631, at *10-*11 (N.D. Cal. Oct. 7, 2011).

SVP Sells’ attempts to disclaim his scienter equally fall flat. He played a key role in the

fraud perpetrated on Hansen’s investors and, as a result is the target of the SEC fraud action related

to the instant securities case. Specifically, he manipulated Hansen’s operational and financial results

while knowing fully well that those results would be included in the Company’s reported financial

statements. E.g., ¶¶5-6, 8, 23-24, 26, 48, 50-52, 90-91, 95-96, 98-113, 122-123, 125-127, 133-136,

142-160, 178, 182, 192, 285-287, 375, 379-389. Sells participated in the fraud by inter alia: (1)

directing the installation of unwanted Sensei Robotic Catheter Systems (“Sensei Systems” or

“Systems”) for the purpose of recognizing revenue and then de-installing them; (2) directing the

forgery of a doctor’s signature to make it falsely appear that all the necessary steps had been taken to

recognize revenue; and (3) entering into a side agreement to circumvent Hansen’s revenue

recognition policy. Id. At this stage, plaintiffs’ allegations must be accepted as true. See Matrixx

Initiatives, Inc. v. Siracusano, __ U.S. __, 131 S. Ct. 1309, 1314 (2011).

It defies common sense for SVP Sells to pretend he was unwittingly duped into participating

into the other officer defendants’ fraudulent scheme to falsely report Hansen’s revenue when a

quarter of the Systems reported as revenue during his tenure at the Company were improperly

recognized. See ¶194; see also S. Ferry LP v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008) (A

complaint’s allegations should be “viewed with a practical and common-sense perspective.”). While

plaintiffs need only allege deliberate recklessness, SVP Sells’ conduct overwhelmingly points to

intent. Viewed holistically, the TAC more than sufficiently alleges scienter. Matrixx, 131 S. Ct. at


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1324. Perhaps most telling is that Hansen’s other officers point to SVP Sells as the impetus for

Hansen’s falsely reported revenue.2

SVP Sells also cannot at this stage limit his damages under the pretense that loss causation is

not sufficiently alleged as to certain partial disclosures. The TAC sets forth the causal connection

between the alleged fraud and the partial disclosures. Dura Pharm., Inc. v. Broudo, 544 U.S. 336,

347 (2005); In re Daou Sys., Inc., 411 F.3d 1006, 1026 (9th Cir. 2005) (loss causation is adequately

pled where the plaintiff gives “some indication” that the drop in stock price was “causally related” to

the defendants’ fraud). No more is required at the pleading stage.

Likewise, the TAC adequately alleges under Rule 8 that SVP Sells is a control person for

purposes of §20(a) of the Securities Exchange Act of 1934 (“Exchange Act”). He had direct or

indirect power or control over Hansen and its employees, including his “right-hand man,” VP of

Sales Timothy Murawski, who, inter alia, directed forged documents in order to improperly book

uncompleted “sales” as revenue. ¶¶386-388. Teamsters Local 617 Pension & Welfare Funds v.

Apollo Grp., Inc., 690 F. Supp. 2d 959, 965-73 (D. Ariz. 2010) (citing Bell Atl. Corp. v. Twombly,

550 U.S. 544, 555, 570 (2007)).

For all of the reasons set forth above and herein, Sells’ motion to dismiss should be denied.

II. STATEMENT OF FACTS

A. Background

Hansen is a medical equipment company that has been publicly traded since its November

2006 IPO. ¶¶2, 28. In Q207, Hansen recognized its first revenues after the U.S. Food and Drug

Administration (“FDA”) approved its first and primary product – Sensei System – for sale to

hospitals for use in cardiac surgical procedures. Id. The purchase of this $650,000 to $750,000

device also necessitated hospitals to use and further purchase Hansen’s $1,600 disposable Artisan

2 See Defendants Hansen Medical, Inc., Frederic H. Moll, Steven M. Van Dick and Gary C. Restani’s Notice of Motion and Motion to Dismiss the Third Consolidated Amended Complaint; Memorandum of Points and Authorities in Support Thereof (Dkt. No. 82) (“Hansen Mem.”) at 6. Herein, Moll, Van Dick and Restani are referred to collectively as the “Hansen Defendants.”


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Control Catheters (“Catheters”) for each procedure. Id. System sales were responsible for nearly all

of Hansen’s revenues, with Catheter sales largely responsible for the rest. ¶2.

From the time Hansen commenced selling its System in Q207, the appearance that System

sales were increasing was crucial to the Company’s future success. ¶¶28-29. With its “razor/razor

blade” business model and promise to generate a high-margin recurring revenue stream from

Catheter sales, the primary metric Hansen reported/touted to the public was its “Installed Base,” or

the total number of Systems sold and recognized as revenue since the first sale in Q207. ¶¶28-30.

Thus, investors were also focused on “utilization,” or how actively hospitals were using the System

to conduct procedures and purchase Catheters. ¶30.

In a series of disclosures commencing on October 19, 2009, Hansen revealed that it had

improperly recognized revenue on at least 24 of the 59 System sales the Company had reported

during its past seven quarters (Q407 to Q209) – an astounding 40% – requiring Hansen to issue

restated financial statements for those periods (the “Restatement”). ¶¶5, 10. The impact of the

Restatement was massive. ¶¶194-195. For example, Hansen’s originally reported FY08 revenue

and gross profit had been overstated by nearly 30% and 103.34%, respectively. ¶10.

B. Overview of Hansen’s Domestic and International Sales’ Channels

Domestically, Hansen sells its products directly through its own sales force of regional sales

executives who are supported by clinical account managers that provide ongoing clinical

training/support to customers. ¶31. For domestic sales, contracts typically required Hansen to

install the System at the customer site and to train at least one physician (intended to use the System)

in either California or Ohio. ¶32. Hansen referred to this initial training as “Level 2” training. Id.

After installation and Level 2 training, Hansen would provide ongoing clinical support until the

customer/physician was able to independently use the System. ¶34.

Internationally, Hansen mostly relied on distributors to market, sell and support its products.

See ¶35. Hansen had “Tier 1” (or “T1”) distributors that were those that provided technical and

clinical support, as well as “Tier 2” (or “T2”) distributors that elected to forego providing either the

technical or clinical support. ¶37. According to Confidential Witness 2 (“CW2”), even though sales

went through a distributor, Hansen still provided the Level 2 training to the ultimate customer/end-


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user. ¶36. Requirements in Hansen’s standard T1 distribution agreement about updating Hansen on

the distributors’ sales efforts, provided Hansen visibility and knowledge of the T1 distributors’

actual and potential sales, forecasts, customer identities, and for each transaction, whether the T1

distributor had a customer (end-user) identified to purchase the System. ¶73. The T1 distribution

agreements set forth the respective obligations of the parties with respect to installation, training, and

clinical support. ¶¶78, 84, 87. CFO Van Dick confirmed during a July 2009 conference call that

Hansen’s obligations were “spelled out pretty specifically in the distributor arrangements.” ¶46.

C. Hansen’s Revenue Recognition Policy

Hansen’s revenue recognition policy was based on American Institute of Certified Public

Accountants Statement of Position 97-2, “Software Revenue Recognition,” because software was

more than incidental to the functioning of its System. ¶42. Because most domestic sales contracts

or purchase orders included installation and training, to recognize revenue under Hansen’s own

policy, the System had to be delivered, installed, and Hansen had to train a physician. ¶¶42-46.

Hansen’s sales to its T1 distributors were evidenced by (1) a distribution agreement

governing the relationship together with (2) purchase orders governing each transaction.3 See, e.g.,

¶71. Hansen’s obligations under the individual purchase orders with the distributors impacted when

Hansen could record revenue on the transaction. ¶¶46, 74-76. However, due to the extra contractual

layer (i.e., a distribution agreement governing the relationship), Hansen also had to complete any/all

of its obligations to its distributor under the distribution agreement (e.g., to train the distributor’s

personnel) prior to recognizing revenue on any sales to that distributor. ¶46. To recognize revenue

upon shipment, the distributor needed to be independent from Hansen and able to independently

provide services to its customers (i.e., the end-users). ¶76.

D. Hansen’s Improper Revenue Recognition on Domestic Sales

Hansen’s 2009 Restatement acknowledged that the Company improperly recognized Class

Period (February 19, 2008 to October 18, 2009, inclusive) revenue on domestic sales prior to

3 Purchase orders are governed by the terms and conditions of the distribution agreements. ¶73.


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completing all of the requirements under its revenue recognition policy due to, among others,

unwanted temporary installations, unfulfilled training obligations, and side arrangements. ¶117. For

example, Hansen improperly recognized revenue on at least three Systems “sales” in Q208,

temporary installations designed to feign compliance with the Company’s revenue recognition policy

and Generally Accepted Accounting Principles (“GAAP”). ¶120. To that end, between Q308 and

Q109, defendant Sells: (1) directed the installation of Systems to improperly recognize revenue –

only to have them immediately dismantled and placed into storage; (2) directed the forgery of a

doctor’s signature on a training form to make it falsely appear that all the necessary steps had been

taken to recognize revenue; and (3) entered into a separate, undisclosed “side agreement” to offer

different terms to a purchaser to circumvent the Company’s revenue recognition policy. ¶¶122-155.

E. Hansen’s Improper Revenue Recognition on Sales to “Independent” International Distributors

Hansen also had improperly recognized revenue on international distributor sales upon

shipment because the “distributors were not independently capable of installing systems and/or

clinically training end users” and the “revenue . . . should have been deferred until installation and

training had occurred at the distributor’s end user.” ¶57. All told, Hansen improperly recognized

revenue upon shipment for at least 12 separate transactions involving at least five different

distributors between Q407 through Q209, including 5 to its Italian distributor. See ¶¶90-113.

For example, Hansen had post-shipment installation obligations arising from its distributors’

inability to conduct installations. ¶¶57, 60-61. Hansen’s personnel received two weeks of initial

installation training, and then had to spend three to six months under the supervision of a senior

employee before being allowed to independently conduct installations. See ¶¶59-63, 90-108. The

two days of installation “training” received by distributors compared to the minimum of

approximately 70 business days to Hansen employees was thus facially inadequate. ¶59. As to

Hansen’s Russian distributor Rosslyn, it flatly refused to be trained to support end-users. ¶104.

Further, under the T1 distribution agreements, Hansen possessed the obligation to train the T1

distributors’ end-users. ¶37. Yet, Hansen recognized revenue on at least seven Systems sold to three

different distributors between Q108 and Q209, when there were no end-users to train as the


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distributor had not found a customer to purchase said Systems.4 ¶¶87-89, 94-95, 98. Hansen

ultimately revealed that many of the Systems that had been “sold” to distributors were still in the

distributors’ possession, including at least three Systems being held by AB Medica, its Italian

distributor. ¶¶5, 91.

F. Defendants’ Explicit Denials of Unused Systems and Rationalization for Perceived Low Utilization

As the Class Period progressed, the illicit revenue recognition practices resulted in unused

Systems. See, e.g., ¶¶234, 238, 245. The market perceived the disconnect between prior systems

that had been “sold” and low utilization when there was an incongruous and precipitous drop in

Catheter sales in Q208. ¶¶320-322. The next quarter, Q308, responding to analysts’ questions, CEO

Moll effectively denied that there were idle or “sleeping” Systems, and instead falsely defended the

relatively low utilization rates as slow uptake among new users. ¶233. However, of Hansen’s

originally reported Installed Base of 45 Systems (as of Q308), 11 to 13 Systems were effectively

inactive. ¶234. As the Class Period – and the market’s skepticism5 – progressed, defendants

continued to mask Hansen’s inactive Systems and the lack of Catheter sales to conceal their fraud.

Hansen cannibalized future Catheter sales to create an appearance of increasing quarterly sales –

while denying doing so. ¶¶236-246.

G. The Truth Emerges Within a Matter of Months

Soon after Hansen conducted a public stock offering to raise more than $35 million in April

2009, its financial condition began to decline. ¶¶290, 338. Less than a month after a June 10, 2009

presentation during which Moll essentially affirmed FY09 guidance of sales of 53-60 Systems and

suggested that the economic environment had eased slightly since the end of FY08, on July 6, 2009,

the Company warned of disastrous preliminary financial results for Q209 and withdrew its FY09

4 The agreement clearly states that it is Hansen’s obligation to provide the physician training to the end-user. ¶87 (“END-USER PEER TRAINING – TO BE PROVIDED BY HANSEN MEDICAL” and requires an evaluation and certificate of training by Hansen).

5 See, e.g., ¶¶330-332 (price decline following analyst report that its survey of 50 hospitals revealed only one was considering a System purchase); ¶¶347-350 (analysts note lack of credibility after defendants sharply reverse course just weeks after bullish presentation).


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guidance. ¶342. While Hansen had shipped six Systems that quarter, it only expected to recognize

revenue on three (albeit improperly, as to at least two). ¶194. Two months later, when defendants

finally announced on October 19, 2009 that Hansen would restate seven quarters of financial results,

investors were damaged yet again. ¶¶356-358. Hansen’s stock dropped over 9% on unusually

heavy volume. ¶358. Subsequently, the SEC initiated an enforcement proceeding against defendant

Sells and Hansen’s former VP of Sales Murawski, for the fraudulent conduct alleged in the TAC,

and the Company entered into a cease-and-desist order with the SEC. ¶¶1, 8.

III. DEFENDANT SELLS IS LIABLE UNDER §10(b)

A. Under Rule 10b-5(b), SVP Sells Is Liable for Making False and Misleading Statements

SVP Sells misconstrues Janus. Mot. at 4.6 Janus merely holds that a secondary actor cannot

be held primarily liable for statements made by the corporate entity at issue absent attribution to that

secondary actor or control over the statements released. 131 S. Ct. at 2301-04. Janus is, thus,

distinguishable from the situation here where defendants – including SVP Sells – are not secondary

actors but primary, corporate officers.7 Regardless, even if Sells was not considered to be a primary

actor, plaintiffs’ allegations concerning SVP Sells’ actions in making the alleged false statements

satisfy the test used in Janus to determine the “maker” of a statement. Id.

The plaintiff in Janus brought alleged violations of §10(b) of the Exchange Act and SEC

Rule 10b-5 promulgated thereunder against (1) Janus Capital Group, Inc. (“JCG”), a publicly traded

company that created the Janus family of mutual funds; and (2) Janus Capital Management LLC

(“JCM”), a mutual fund investment advisor for the Janus family of mutual funds. Id. at 2299-2301.

The putative class consisted of investors in JCG. Id. at 2300-01. The plaintiff alleged that JCG and

6 “Mot.” refers to Defendant Christopher Sells’s Notice of Motion and Motion to Dismiss Third Consolidated Amended Complaint for Violations of the Federal Securities Laws and Memorandum of Points and Authorities in Support Thereof (Dkt. No. 81).

7 The Supreme Court defined “secondary actors” in Stoneridge as an issuing firm’s customers and suppliers, 552 U.S. at 166, and in Central Bank as “lawyer[s], accountant[s], or bank[s].” 511 U.S. at 191. The Ninth Circuit has expanded “secondary actors” to include an issuing firm’s Internet service provider. Dreiling v. Am. Online, Inc., 578 F.3d 995, 1003 (9th Cir. 2009).


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JCM made false and misleading statements in prospectuses filed with the SEC by JCG’s wholly

owned subsidiary, Janus Investment Fund. Id. at 2299-2301.

The Supreme Court determined that JCM could not be held liable because it did not “make”

the alleged false statements and held that “[f]or purposes of Rule 10b-5, the maker of a statement is

the person or entity with ultimate authority over the statement, including its content and whether and

how to communicate it.” Id. at 2301-02. Since JCM was a “legally separate entit[y],” the Court

found that it had no authority over the content of the false statements. Id. at 2304.

The Janus Court determined that nothing about JCM’s involvement in drafting the

prospectuses made it “‘necessary or inevitable’” for the false information to be included there

because JCM did not have authority over the content of those documents. Id. at 2303. This was the

same rationale employed by the Supreme Court in Stoneridge – “It was Charter, not respondents,

that misled its auditor and filed fraudulent financial statements; nothing respondents did made it

necessary or inevitable for Charter to record the transactions as it did.” 552 U.S. at 161.

SVP Sells’ actions in this case – as an officer of the Company and a member of Hansen’s

disclosure committee – made it “‘necessary or inevitable’” that false and misleading statements

regarding the Company’s financial condition would be communicated to investors. ¶¶23-24. He

was one of only six individuals prominently listed in the “EXECUTIVE OFFICERS AND KEY

EMPLOYEES” section of Hansen’s April 2009 Proxy, which informed investors of his central role

in the Company’s operations and resulting reported financials. Id.8 As an officer, Sells was subject

to the disclosure requirements of §16 of the Exchange Act.9 These allegations are adequate to show

that Sells made statements because such attribution, even if in part, “‘is strong evidence that a

statement was made by . . . the party to whom it is attributed.’” In re Allstate Life Ins. Co. Litig., No.

8 Sells’ Forms 4 filed with the SEC reflect that he held himself out as an officer of Hansen. See Declaration of Ex Kano S. Sams II in Support of Plaintiffs’ Oppositions to Defendants’ Motions to Dismiss the Third Consolidated Amended Complaint, Exs. 1-2.

9 See 15 U.S.C. §78 (requiring disclosure of financial results each quarter); Regulation S-X (17 C.F.R. §200) (requiring certain information – including net revenue, net income or loss from continuing operations – in Forms 10-Q and 10-K).


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CV-09-8162-PCT-GMS, 2012 U.S. Dist. LEXIS 7678, at *19 (D. Ariz. Jan. 23, 2012) (prominent

position of defendants’ names on company statements sufficient for attribution under Janus).

As a corporate insider, Sells also had fiduciary responsibilities to Hansen’s shareholders

and thus had a duty to disclose material non-public information to afford investors a true and

accurate picture of Hansen’s financial results. Chiarella v. United States, 445 U.S. 222, 227-29 &

n.9 (1980). The overriding purpose of the federal securities laws is to promote an honest

marketplace and protect investors from “‘[m]anipulation and dishonest practices.’” Basic Inc. v.

Levinson, 485 U.S. 224, 230 (1988). Corporate insiders are thus required to disseminate truthful

corporate information. Id. at 230, 235 n.12.

Further, to the extent that Janus provides that the “maker” of a statement has the ultimate

authority over the statement’s content, and whether and how to communicate it, the allegations here

are sufficient. 131 S. Ct. at 2302-03. As a member of Hansen’s disclosure committee, SVP Sells

had responsibility for the accurate and fair presentation of Hansen’s press releases and SEC

filings each quarter. ¶¶23-24.10 And at the time he was an SVP in charge of key operations –

including the sales organization, clinical training, installations and customer service. ¶23. He also

participated in meetings with other officers to reach a consensus as to which “sales” transactions

could be recorded as revenue. ¶52. Since the federal disclosure laws dictated “whether and how”

the Hansen’s financial results Sells was responsible for were communicated, he was ultimately

responsible for how the Systems were accounted for and disclosed – the very subject of Hansen’s

admitted accounting manipulations. Janus, 131 S. Ct. at 2302; see ¶¶5, 8, 23-24, 52, 122-157, 374-

376; see also Carter, 2011 U.S. Dist. LEXIS 136599, at *6-*8 (allegations that CEO approved press

releases sufficient for Janus). The financial results he manipulated, the decisions he made and the

actions he took made it ‘“necessary or inevitable’” that Hansen would issue false financial results to

10 Since plaintiffs have pled with particularity facts evidencing “ultimate authority,” and not just the “bare elements” of their claim under §10(b), Sells’ reliance on Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1954 (2009), and Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001), is misguided. See Mot. at 4-5.


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investors. Janus, 131 S. Ct. at 2303; Stoneridge, 552 U.S. at 161. These allegations are sufficient to

allege that Sells had “ultimate authority” over Hansen’s publicly disseminated financial results.

And to the extent that questions of fact exist as to which statements were “made” by SVP

Sells under Janus, “it is not necessary at this time to parse through which statements meet the Janus

standard and which do not.” Daifotis, 2011 U.S. Dist. LEXIS 116631, at *10-*11. “Come summary

judgment time, it will be determined which statements raise issues of fact under the Janus standard.”

Id. at *11; see also Munoz v. China Expert Tech., Inc., No. 07 Civ. 10531 (AKH), 2011 U.S. Dist.

LEXIS 128539, at *4-*5 (S.D.N.Y. Nov. 4, 2011) (factual disputes can be raised after discovery).

B. SVP Sells Is Primarily Liable Under Rule 10b-5(a) and (c) for the Deceptive Conduct Alleged

Under Rule 10b-5:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. §240.10b-5.

In Central Bank, the Supreme Court held that §10(b) imposes liability for a defendant’s

manipulative or deceptive acts, provided that a plaintiff can prove the other elements of the claim.

Cent. Bank, 511 U.S. at 167, 177. Later, in Stoneridge, the Court rejected the notion that §10(b)

liability a defendant to “make” a statement, holding that “[i]f this conclusion were read to suggest

there must be a specific oral or written statement before there could be liability under §10(b) or

Rule 10b-5, it would be erroneous.” 552 U.S. at 158. “Conduct itself can be deceptive” under

§10(b). Id. Deceptive acts of secondary actors are thus actionable, as long as reliance upon such


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acts can be established. Id. at 159.11 Following Stoneridge, courts have held that “‘[w]hile Rule

10b-5(b) addresses liability for material misstatements or omissions, “Rules 10b-5(a) and (c)

encompass conduct beyond disclosure violations.”’” N.Y. City Empls. Ret. Sys. v. Berry, 616 F.

Supp. 2d 987, 995 (N.D. Cal. 2009) (scheme liability where defendant devised an option backdating

practice and then hid it by falsifying corporate records). Janus is “of no moment” where a defendant

is “a primary actor in ‘employ[ing a] device, scheme, or artifice to defraud.’” SEC v. Boock, No. 09

Civ. 8261 (DLC), 2011 U.S. Dist. LEXIS 129673, at *5-*6 (S.D.N.Y. Nov. 9, 2011).12

In Simpson v. AOL Time Warner Inc., the Ninth Circuit explained that to plead “scheme”

liability, the plaintiff must allege that the defendant “engaged in conduct that had the principal

purpose and effect of creating a false appearance of fact in furtherance of the scheme. . . . [T]he

defendant’s own conduct contributing to the transaction or overall scheme must have had a

deceptive purpose and effect.” 452 F.3d 1040, 1048 (9th Cir. 2006), vacated on other grounds, 552

U.S. 1162 (2008) (emphasis in original).

Rule 10b-5(c) “make[s] it unlawful for any person . . . ‘to engage in any act, practice, or

course of business which operates or would operate as a fraud or deceit upon any person.’” Id. at

1046. Here, Sells personally participated in many acts and courses of business that operated as a

fraud or deceit. See, e.g., ¶¶5-6, 8, 23, 26, 48, 50-52, 105, 111, 122-123, 125-127, 133-136, 142-

160, 178, 182, 192, 285-287, 375, 379-389. Plaintiffs need not allege that Sells specifically intended

his misconduct to defraud plaintiffs. SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833, 854-55, 861-62 &

n.27 (2d Cir. 1968) (“proof of a specific intent to defraud is unnecessary”). “‘[A] fraud or deceit can

11 In Stoneridge, the Supreme Court determined that no liability could lie only because the plaintiffs could not show that investors relied on the contracts between Charter and its third party vendors in making investment decisions. 552 U.S. at 166-67. Investors’ reliance on Hansen’s reported financial results is not an issue here.

12 In dicta, Janus notes that the deceptive conduct of the third party in Stoneridge would not have satisfied Janus’ test for liability under Rule 10b-5(b) (if that party had been alleged to have “made” a statement) because the decision to make the false statement at issue in Stoneridge, as in Janus, rested with “an independent entity.” 131 S. Ct. at 2304.


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be practiced on one person, with resultant harm to another person or group of persons.’” United

States v. O’Hagan, 521 U.S. 642, 656 (1997).

Deceptive conduct has been found to include such activities as “wash sales, matched orders,

or rigged prices.” See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476-77 (1977). Additionally, “if

one person were to create a false prospectus knowing that it would be transmitted to investors, and

another were to then transmit that prospectus to investors knowing it to be false, each individual

would have contravened the text of section 10(b) by employing a fraudulent device in connection

with the sale of securities.” SEC v. Collins & Aikman Corp., 524 F. Supp. 2d 477, 486-87 (S.D.N.Y.

2007). This reasoning applies here where, for example, Sells created “sales” for the purposes of

recognizing revenue, full well knowing that the “sales” were not legitimate, but being recorded as

revenue on Hansen’s financials and allowing it to raise funding. ¶¶8, 149-155, 283-290.

WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir. 2011),

does not preclude the scheme liability claims here.13 The case involved allegations of omissions by

Spot Runner executives of sales of their shares while soliciting WPP to buy shares in the same

company. Id. at 1044-45. Having found a valid omissions claim under Rule 10b-5(b), the court

addressed whether Rule 10b-5(b) omission claims may be recast as scheme liability claims. Id. at

1057. In doing so, it held that when alleging scheme liability, “the scheme [must] encompass[ ]

conduct beyond . . . misrepresentations or omissions” and no such allegations were alleged. Id.

Conduct beyond the alleged misrepresentations is alleged here.

Judge Fogel’s recent decision in SEC v. Mercury Interactive, LLC, is instructive. No. 5:07-

cv-02822-WHA, 2011 WL 5871020 (N.D. Cal. Nov. 22, 2011). He rejected the very argument

raised here – that plaintiffs’ scheme claims are recast misstatements claims. Id. at *2. Defendant

Sells’ attempts to distinguish it are futile. The deceit plaintiffs allege here encompasses far more

13 “[I]t is possible for liability to arise under both subsection (b) and subsections (a) and (c) of Rule 10b-5 out of the same set of facts.” In re Alstom SA Sec. Litig., 406 F. Supp. 2d 433, 475 (S.D.N.Y. 2005) (cited by WPP, 655 F.3d at 1058); see also MB Fin. Grp., Inc. v. U.S. Postal Serv., 545 F.3d 814, 819 (9th Cir. 2008) (“a plaintiff is generally entitled to plead alternative or multiple theories of recovery on the basis of the same conduct on the part of the defendant”).


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than just misstating Hansen’s financials – plaintiffs allege that from the time he arrived at Hansen to

his forced resignation, Sells acted deceptively by engaging in widespread conduct that was

“wrongful in and of itself” (id.) – side agreements and forgeries to name two. Such acts are

deceptive.14

Neither SEC v. Kelly, No. 08 Civ. 4612(CM), 2011 WL 4431161 (S.D.N.Y. Sept. 22, 2011),

nor In re John P. Flannery, Admin. Proceeding No. 3-14081, 2011 WL 5130058 (SEC Release No.

438, Oct. 28, 2011), compels the result defendants urge. In Kelly, the court decided whether the

defendants’ conduct in structuring legitimate transactions was deceptive when the SEC conceded

that it was “‘typical in business and a matter of common sense.’” 2011 WL 4431161, at *4. In

contrast, Sells’ actions here were facially deceptive and defy common sense. For example, he

knowingly directed the installation of unwanted Systems that were then immediately dismantled and

placed in storage, directed the forgery of a doctor’s signature on a training form and entered into a

secret side agreement against Company policy. ¶¶5-6, 8, 23, 26, 48, 50-52, 105, 111, 122-123, 125-

127, 133-136, 142-160, 178, 182, 192, 285-287, 375, 379-389. Similarly, Flannery is inapposite as

the SEC Administrative Law Judge, with the benefit of an 11-day hearing, 500 exhibits and the

testimony of multiple witnesses, simply concluded that the case solely involved misstatements and

omissions. 2011 WL 5130058, at *35, *37. Here, Sells engaged in a pervasive fraudulent scheme.

IV. PLAINTIFFS ALLEGE THE FRAUD WITH PARTICULARITY

Sells avers that plaintiffs have not pled with particularity what he did that Hansen’s

accountants and auditors relied upon to prematurely recognize revenue. Mot. at 16-18. Not so. The

TAC alleges with particularity the who – SVP Sells (e.g., ¶¶5-6, 8, 23), the what – improper revenue

recognition on Systems that were purportedly installed or sold to hospitals while knowing the “sales”

were not complete and participating in outright deceit (e.g., ¶¶5-6, 8, 52), the when and where –

14 See, e.g., United States SEC v. Geswein, No. 5:10CV1235, 2011 U.S. Dist. LEXIS 111904, at *56-*57 (N.D. Ohio Aug. 2, 2011) (recommendation that allegations of improper use of bill-and-hold, fraudulent manipulation of reserves, used equipment write-ups, and improper capitalizing of expenses were sufficient for scheme liability) (relevant portion adopted by United States SEC v. Geswein, No. 5:10CV1235, 2011 U.S. Dist. LEXIS 111893 (N.D. Ohio Sept. 29, 2011)).


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between Q208 and Q109 (¶119), Hansen issued press releases and SEC filings containing false and

misleading financial information premised on illicit sales transactions (e.g., ¶¶192-197), and the how

– revenue was improperly recognized on Systems which were installed and then immediately

dismantled, a System for which the documentation required for revenue recognition was forged, a

System for which a side agreement was entered into which circumvented Hansen’s revenue

recognition policy, and Systems where contingencies such as training and installation remained (e.g.,

¶¶95, 98-113, 120-155). Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (for

particularity plaintiffs must allege the “‘who, what, when, where, and how’ of the misconduct

charged”).15 Despite his knowledge of phony System installations and lack of required training,

Sells reached a consensus with CFO Van Dick and other officers to recognize revenue on those

transactions and allowed the overstated revenue to be disseminated in press releases and SEC filings

each quarter as a member of Hansen’s disclosure committee after the secret illicit transactions had

been reviewed by Hansen’s accountants and auditors. ¶¶23, 52.

Sells’ complaint that there lacks particularized allegations against him is belied by the alleged

facts. Only 45 systems were “sold” during Sells’ tenure and 11 or nearly 25% were admittedly

improperly recognized as revenue based on facts known at the time the original financials were

recorded. ¶194. Moreover, Sells was directly involved in the overstatement of Hansen’s revenue in

Q208 (49.51% overstatement), Q308 (13.49% overstatement), Q408 (36.37% overstatement), and

Q209 (12.11% overstatement). ¶195. The complaint abounds with detail, including that:

(i) Sells participated in calls with the V.A. Hospital of Cincinnati’s (Hospital A), and reprimanded an employee for documenting the agreement in an e-mail that the System “installed” by those under his direction at the hospital would immediately be taken apart, stored and reinstalled in a later quarter when the construction of the hospital’s laboratory was complete. ¶¶125, 127;

15 Sells’ case law does not compel a different standard. Mot. at 17. First, the Court’s analysis of the pleading standard in SEC v. Berry concerned the allegations regarding a defendant’s involvement in the company’s SEC filings themselves, not in the fraudulent transactions that gave rise to the false financials in the SEC filings. 580 F. Supp. 2d 911, 922 (N.D. Cal. 2008). And in Swartz v. KPMG LLP, the Court was concerned about differentiating the allegations of different defendants, not of a defendant and his direct report. 476 F.3d 756, 764-65 (9th Cir. 2007).


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(ii) Sells directed a Hansen employee to obtain the signatures required to recognize revenue from a System “sold” to Yale (Hospital B) even though he knew that it would be impossible for the required physician training to be completed in Ohio or California before the end of the quarter. ¶¶134-136;

(iii) Sells entered into a side agreement which violated the Company’s stated accounting policies because he agreed to make the leasing company whole if St. Joseph’s (Hospital C) returned the System by helping the leasing company find another buyer or by Hansen taking the System back. ¶¶142-148;16

(iv) After emphasizing the importance of selling ten Systems in Q109 to Hansen’s sales staff due to its prospects for raising capital, SVP Sells helped arrange for the installation and then immediate dismantling and storage of a System sold to St. Barnabas Medical Center (Hospital D) which allowed Hansen to record approximately $550,000 in revenue for the quarter. ¶¶149-154; and

(v) Sells was involved in at least nine other transactions that were improperly recognized because of, for example, known training contingencies. ¶¶5-6, 23, 48, 50-52, 90-91, 95-96, 98-113, 172, 194, 285-287.17

The TAC does not lack for particularized allegations as to Sells.

V. PLAINTIFFS PLEAD A STRONG INFERENCE OF SCIENTER

Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), plaintiffs need only

plead facts giving rise to a strong inference that Sells “knew or w[as] deliberately reckless to the

falsity of [his] statements.” In re LDK Solar Sec. Litig., No. C 07-05182 WHA, 2008 U.S. Dist.

LEXIS 80717, at *29 (N.D. Cal. Sept. 24, 2008). In the context of scheme liability, plaintiffs are

only required to demonstrate that Sells engaged in deceptive conduct with scienter. Simpson, 452

F.3d at 1047. Throughout his motion, Sells isolates individual allegations of scienter and attempts to

16 Sells disingenuously characterized plaintiffs’ allegations regarding Hospital C as vague. Mot. at 17. Plaintiffs specifically lay out the terms of the side agreement – Sells agreed to make the leasing company whole if the hospital returned the System by taking the System back or by finding another buyer for the System – which violated Hansen’s stated policies for revenue recognition because not all the risks of ownership passed to the leasing company. ¶¶144-147.

17 Moreover, Sells is wrong that he is not implicated in the fraudulent scheme with respect to Catheter sales. By manipulating “sales” transactions of unwanted Systems and where training contingencies remained, Sells knew of the “sleeping Sensei” but concealed that information and permitted Hansen to report quarterly increases in Catheter sales. E.g., ¶¶7, 232-234, 238-239. Indeed Sells (who was in charge of sales) was “cannibalizing future Catheter sales by offering discounts” or in other words, stuffing the channel and masking the unused systems. ¶¶217, 238-239. To that end, he discussed and monitored utilization as well as Catheter sales data which demonstrated that certain Systems were purportedly “installed” but not actually used. ¶¶7, 48, 164.


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attack each one as insufficient standing alone. Mot. at 9-15.18 But in considering scienter

allegations, “courts must . . . consider the complaint in its entirety.” Tellabs, Inc. v. Makor Issues &

Rights, Ltd., 551 U.S. 308, 322-23 (2007). “[A] court should look to the complaint as a whole, not

to each individual scienter allegation.” S. Ferry, 542 F.3d at 784. “[T]he court’s job is not to

scrutinize each allegation in isolation but to assess all the allegations holistically.” Tellabs, 551 U.S.

at 326.

Moreover, “the ‘inference that the defendant acted with scienter need not be irrefutable, i.e.,

of the “smoking-gun” genre, or even the “most plausible of competing inferences.””’ Middlesex Ret.

Sys. v. Quest Software, Inc., No. CV 06-6863 DOC (RNBx), 2008 U.S. Dist. LEXIS 68419, at *10-

*11 (C.D. Cal. July 10, 2008) (quoting Tellabs, 551 U.S. at 324). Such an inference can be met

through circumstantial evidence. See Provenz v. Miller, 102 F.3d 1478, 1490 (9th Cir. 1996);

Nguyen v. Radient Pharm. Corp., No. SA CV 11-0406 DOC (MLGx), 2011 U.S. Dist. LEXIS

124631, at *22 (C.D. Cal. Oct. 26, 2011). Viewed holistically, plaintiffs have satisfied their burden.

Sells was one of only six executives in the Company, and as the SVP of Commercial

Operations, he was specifically responsible for key operations, including sales, training, installation

and customer service. ¶23. He participated in weekly meetings with the other defendants regarding

the status of System sales and installations, received System sales and installation reports, monitored

utilization and Catheter sales data, and directed or oversaw the improper revenue recognition of

Systems shipped to “independent” distributors who were not capable of independently conducting

installations and supporting end-users as well as Systems in which the revenue recognition

requirements for documentation and training were not satisfied. See, e.g., ¶¶5, 7-8, 25-26, 48, 50-52,

18 SVP Sells’ claim that plaintiffs fail to satisfy the PSLRA pleading standards simply because their allegations have some similarity to those in the SEC’s complaint is baseless. See Mot. at 8-9, 15. The case law that he relies upon is inapposite because plaintiffs do not solely rely on the existence of the SEC complaint. See In re UBS Auction Rate Sec. Litig., No. 08 Civ. 2967 (LMM), 2010 U.S. Dist. LEXIS 59024, at *58 n.11 (S.D.N.Y. June 10, 2010) (plaintiffs referenced the existence of an SEC lawsuit and Settlement Order as evidence of inadequate disclosures); In re Bank of Am. Corp. Auction Rate Sec. (ARS) Mktg. Litig., No. 09-md-02014 JSW, 2011 U.S. Dist. LEXIS 18208, at *36 n.5 (N.D. Cal. Feb. 24, 2011) (plaintiffs alleged the existence of regulatory settlements as evidence of scienter). Rather, plaintiffs simply rely on facts alleged in the SEC complaint and a myriad of other facts as evidence of scienter.


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55-57, 59-95, 98-99, 105, 108, 111, 115, 119, 122-155, 161, 164, 166, 172-173, 176, 178, 183-189,

192, 285-289. Critically, he was involved in reaching a consensus with Hansen’s CFO on

recognizing revenue on “sales” while knowing that Hansen’s Systems had not been installed and/or

that end-users had not yet received training on these “sales.” ¶52. Sells also knew that Hansen’s

stated revenue policy was to “defer all [S]ystem revenues until training and installation are

completed.” ¶42. It was a policy Sells was informed of and understood. TAC, Ex. 1, ¶24.

Further, Hansen only had 68 System sales during the entire Class Period (45 sales during

Sells’ tenure) and they constituted the majority of Hansen’s revenues. ¶¶194-195, 281. And the

violations of GAAP and Company-stated revenue recognition policies – policies which SVP Sells

was instructed on when he joined the Company – were basic, significant and widespread. See, e.g.,

¶¶55, 57, 108, 120-121, 128, 139, 141, 147, 153; TAC, Ex. 1, ¶24. During Sells’ tenure, more than

$5.5 million or over 20% of recorded revenue was improper. ¶195. In addition to artificially

inflating Hansen’s stock price, defendants wanted the appearance of stair-step sales growth in order

to raise operating capital. ¶¶283-88. To that end, Sells chastised his sales force in a December 19,

2008 e-mail for weak sales, noting “this is a very important quarter [Q408] with additional funding

on the line for Hansen” and that “finish[ing] below 12 [s]ystem [sales]” would jeopardize funding.

¶286. Hansen recorded ten sales in Q408, but 40% would later be restated as improper, including

the sale to Yale (Hospital B).19 In that “sale,” providing training in three days was impossible and

thus a forged signature was obtained to verify said training. ¶¶132-141, 194. Sells was ultimately

forced to resign after an audit committee investigation uncovered his wrongful conduct. ¶23.

Taking all these allegations together, plaintiffs have easily established scienter.

Reporting revenue before it is earned violates such simplistic accounting principles that

“[d]efendants’ GAAP violations just as likely support an inference of scienter as an inference of

innocent and unknowing behavior.” See Backe v. Novatel Wireless, Inc., 607 F. Supp. 2d 1145,

1162-63 (S.D. Cal. 2009); Daou, 411 F.3d at 1016 (““‘revenue must be earned before it can be

19 The SEC identified the names of the hospitals in its opposition to defendant Sells’ motion to dismiss filed on January 13, 2012 (Dkt. No. 36). The names of the hospitals are referred to herein.


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recognized’””).20 Sells’ manipulation of Hansen’s sales transaction also supports scienter because

they contravene Hansen’s revenue recognition policy – a policy which Sells concedes he understood.

See Provenz, 102 F.3d at 1490 (revenue recognition that violates GAAP and the company’s internal

policy for recognizing revenue establishes scienter at summary judgment).21 Where there are

significant obligations and/or contingencies related to contracts, such as, for example, the side

agreement Sells entered into with St. Joseph’s Hospital (Hospital C), recognition of revenue on such

a contract violates such simple GAAP rules and company accounting policies that they “contribute

probative weight to an inference of scienter.” In re MicroStrategy, Inc. Sec. Litig., 115 F. Supp. 2d

620, 637-38 (E.D. Va. 2000); see also ¶147. The basic, widespread accounting violations that ran

afoul of Hansen’s own revenue recognition policies provide overwhelming support of scienter. See,

e.g., ¶¶55, 57, 108, 120-121, 128, 139, 141, 147, 153.22

Plaintiffs do not just rely on the egregious nature of the accounting violations, but on Sells’

actual knowledge and participation in the illicit sales transactions and eventual improper revenue

recognition. Sells fraudulently manipulated Hansen’s sales and installation processes and

documentation to knowingly work around the applicable accounting principles which he reviewed as

a member of Hansen’s disclosure committee. ¶¶5-6, 8, 23, 52-53, 90-91, 95-96, 98-113, 122-123,

125-127, 133-136, 142-155, 178, 192, 285-287, 381-382, 388. The intent underlying his actions was

undoubtedly sinister – to artificially inflate Hansen’s stock price by creating the false appearance of

20 See also N.Y. City, 616 F. Supp. 2d at 1000 (where “revenues were overstated by a considerable amount, . . . it is possible to infer that those revenues were overstated intentionally so as to have an impact on the [stock] price”); Middlesex, 2008 U.S. Dist. LEXIS 68419, at *15 (“Significant GAAP violations, when described with particularity, may provide powerful indirect evidence of scienter.”).

21 See also Atlas v. Accredited Home Lenders Holding Co., 556 F. Supp. 2d 1142, 1156 (S.D. Cal. 2008) (deviation from defendant’s internal underwriting standards is evidence of scienter); In re Adaptive Broadband Sec. Litig., No. C 01-1092 SC, 2002 U.S. Dist. LEXIS 5887, at *39 (N.D. Cal. Apr. 2, 2002) (violation of internal accounting policies supports an inference of scienter).

22 SVP Sells’ reliance on In re Medicis Pharm. Corp. Sec. Litig., 689 F. Supp. 2d 1192 (D. Ariz. 2009), is highly misplaced. Mot. at 9-10. The court itself later recognized that the “relative simplicity and obviousness” of defendants’ accounting manipulations, such as the ones alleged in the TAC here, weighed in favor of scienter. In re Medicis Pharm. Corp. Sec. Litig., No. CV-08-1821-PHX-GMS, 2010 U.S. Dist. LEXIS 81410, at *15-*23 (D. Ariz. Aug. 9, 2010).


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stair-step growth, and to raise funding by falsely portraying strong System sales. Id.; see WPP, 655

F.3d at 1052 (“continued infusion of investment capital” consideration in fraudulent intent inquiry).

It is preposterous for an officer of Sells’ level to seriously contend that round-trip

installations (install, recognize revenue and then de-install), side agreements, forgeries and system

“sales” with known contingencies do not confer scienter of deceptive conduct or the falsity of

Hansen’s financials. Asher v. Baxter Int’l, Inc., No. 02 C 5608, 2005 U.S. Dist. LEXIS 2131, at

*18-*19 (N.D. Ill. Feb. 3, 2005) (“‘[H]igh-level [] managers . . . may be presumed to have been

aware of [] problems’ at their company” especially where they would be “‘readily recognized by an

outsider.’”) (alterations in original).

Further, while motive is not required, Tellabs, 551 U.S. at 325, Sells had motive and

opportunity to manipulate the System “sales.” See Mot. at 10-11. And his protests that he did know

(1) the re-installation of the System at the V.A. Hospital of Cincinnati (Hospital A) “would take

place after the end of the fiscal quarter,” (2) the signature for the installation at Yale (“Hospital B”)

would be forged because training would not be completed in three business days during the last

week of December several states away,23 or (3) the installation at St. Joseph’s (“Hospital C”) would

not have occurred but for his oral promises, ring hollow and ignore that at best he acted with

deliberate recklessness. Sells reached a consensus regarding revenue recognition on these

transactions, was aware of which Systems had been installed and the requirements for training and

thus would have had every reason to question the accuracy of these transactions when he reviewed

the Company’s press releases and SEC filings before they were issued. See id. at 10-12; ¶¶23-24.

Further, he himself tied sales (which Hansen has admitted were improper) to the motivation to raise

funding for Hansen. ¶¶286-287. This direct and circumstantial evidence of motive and opportunity

is “sufficient to establish the requisite level of scienter.” See Nguyen, 2011 U.S. Dist. LEXIS

23 SVP Sells’ authorities, Greebel v. FTP Software, Inc. and Broudo v. Dura Pharm., Inc., undermine his position because (1) “inflating income through improper revenue recognition,” such as forging a document in order to record a sale, does support a strong inference of scienter and (2) there is no legitimate reason for forging a document “to achieve sales earlier.” 194 F.3d 185, 202-03 (1st Cir. 1999); 339 F.3d 933, 940 (9th Cir. 2003), rev’d on other grounds, 554 U.S. 336 (2005).


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124631, at *22 (finding a strong inference of scienter where there were “red flags” of the company’s

financial condition and defendant was possibly motivated by the company’s need to raise capital).24

Moreover, “[i]t is far too convenient for [SVP Sells] to now argue that [he] did not

understand the accounting implications” of revenue recognition. Middlesex, 2008 U.S. Dist. LEXIS

68419, at *15-*18; see also In re Northpoint Commc’ns Grp., Inc. Sec. Litig., 221 F. Supp. 2d 1090,

1104 (N.D. Cal. 2002) (“it strains credulity” to believe that executives of such a large corporation

would not have been aware of the improper accounting of a product line). It in fact belies what Sells

told the SEC – he understood Hansen’s revenue policy. TAC, Ex. 1 at ¶24. Accordingly, when the

scienter allegations are viewed holistically, the inference that he knew, or was deliberately reckless

in not knowing, that Hansen’s press releases and SEC filings were false and misleading is at least as

compelling as any opposing inference. Middlesex, 2008 U.S. Dist. LEXIS 68419, at *14-*26.25

While not necessary, adding to the mix of scienter is the additional confidential witness

accounts who demonstrate Sells’ knowledge or deliberate disregard of the improper recognition of

nine systems “sold” through foreign distributors as part of the overall scheme to inflate Hansen’s

reported revenue and raise funding. Sells knew these “sales” had required contingencies that had not

been met. As to Rosslyn, Sells – as the person in charge of sales and training – would have known

that one of only a handful of the Company’s distributors flatly refused to be trained to support its

end-users despite repeated requests. ¶¶104-107. Similarly, Sells knew that Hansen performed the

installation for Amayeza’s customer ending on July 12, 2009 because of his responsibilities for

installations and receipt of installation reports – a date after Q209 where revenue had been

24 See also In re Metawave Commc’ns. Corp. Sec. Litig., No. C02-625RSM, 2009 U.S. Dist. LEXIS 25331 (W.D. Wash. Mar. 27, 2009) (scienter sufficiently alleged against a defendant who, inter alia, signed letters that created consignment sales and directed shipments of defective equipment); Gross v. Medaphis Corp., 977 F. Supp. 1463, 1472 (N.D. Ga. 1997) (GAAP allegations coupled with allegation that defendants provided customers with secret side agreements sufficient).

25 Unlike here, in Zucco Partners, LLC v. Digimarc Corp., “there was no specific intent to fabricate the accounting misstatements” and the information at issue was “largely definitional” and not “especially prominent” within the company. 552 F.3d 981, 1001, 1007 (9th Cir. 2009). In further contrast to the TAC, in Zucco, “[n]othing in the complaint suggest[ed] that [defendants] had access to the underlying information from which the accounting numbers were derived.” Id. at 1001.


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improperly recognized. ¶¶109-112. Additionally, not only was Sells in charge of Hansen’s sales

organization, clinical training, and installations, but he participated in Monday calls where according

to CW2 (Hansen’s Sales Director for Central and Eastern Europe from 2007 to 2011), each System

was discussed in detail. ¶¶23-24, 26, 48; Mot. at 13.26 CW1 (Hansen’s Director of Customer

Support from April 2006 to November 2009) elaborated that at the weekly installation meetings,

SVP Sells and defendants Moll, Van Dick and Restani would reach a “consensus” as to which

Systems could be recognized as revenue after reviewing the purchase orders and installation reports

which showed, inter alia, whether the purchase order was acceptable, whether the System was

installed, and whether the physician had been trained. ¶¶50-52; Mot. at 13.27 CW3 (Hansen’s Sales

Director of the SE Region reporting directly to Sells) personally observed his actions and provided

him status updates on System sales. See ¶¶27, 158.28 CW3’s descriptions of SVP Sells’ unethical

sales tactics and lies to customers are properly alleged based on CW3’s personal conversations with

his supervisor. See ¶160.29 And the other witnesses provide corroborating evidence of Sells’ sales

26 SVP Sells misconstrues In re Accuray Sec. Litig. as requiring plaintiffs to plead facts specific to him and only him for every transaction because the Court there merely found a complaint deficient where it “continually group[ed] all Defendants together” and did not “identify[] what each Defendant purportedly knew.” See Mot. at 13: 757 F. Supp. 2d 936, 949 (N.D. Cal. 2010). The TAC identifies knowledge specific to Sells.

27 Unlike in the cases relied upon by SVP Sells, plaintiffs provide detailed allegations of how he participated in and had knowledge of the System installation and revenue recognition processes at Hansen. See Mot. at 13; In re Cadence Design Sys., Inc. Sec. Litig. (“Cadence I”), 654 F. Supp. 2d 1037, 1047 (N.D. Cal. 2009); In re Apollo Grp., Inc. Sec. Litig., No. CV-10-1735-PHX-JAT, 2011 U.S. Dist. LEXIS 124781, at *49 (D. Ariz. Oct. 27, 2011).

28 SVP Sells’ reliance on Zucco and Apollo is misplaced because “generalized claims about corporate knowledge” fail to create a strong inference of scienter only where “they fail to establish that the witness reporting them has reliable personal knowledge of the defendants’ mental state.” See Mot. at 14; 552 F.3d at 998. In this case, the allegations in the TAC do show that – as his direct report – CW3 has reliable personal knowledge of Sells’ scienter.

29 In re Cadence Design Sys., Inc. Sec. Litig. (“Cadence II”), 692 F. Supp. 2d 1181, 1188 (N.D. Cal. 2010) (finding a confidential source’s statements based on hearsay – discussions with others – was supportive of scienter).


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tactics. E.g., ¶158 (“Sells was obsessed to make his numbers.”) and (“Sells was evil.”); ¶159 (Sells

“would manipulate the rules and would do things that were downright wrong.”).30

The sudden exodus of its VP of Global Sales, Jed Palmacci, as well as its General Counsel

adds to the already strong inference of scienter. Palmacci repeatedly warned defendant Moll about

Sells’ unethical sales practices leading up to his departure. ¶¶157, 160. Palmacci departed shortly

after the end of Q408 when Sells put into motion a flurry of fraudulent activity – including directing

forged documentation indicating that the physicians had received the necessary training – that led to

the improper revenue recognition of a System sold to Yale even though the physicians had not been

trained. ¶¶132-141. So did Hansen’s General Counsel. ¶180. The most plausible inference based

on the TAC’s allegations that high-ranking officers were aware of Sells’ illicit conduct and

suspicious activity is that these executives left to avoid individual culpability for the known fraud.

Importantly, SVP Sells’ own resignation in October 2009, shortly after the Audit

Committee’s investigation concluded and around the same time that Hansen publicly revealed it

would restate its financials, supports his scienter. ¶¶1, 23; see, e.g., Teamsters Local 617 Pension &

Funds v. Apollo Grp., Inc., 633 F. Supp. 2d 763, 799 (D. Ariz. 2009) (defendant’s resignation lent

“credence to a finding of scienter” where the complaint contained additional allegations of his

‘“wrongdoing’”); In re Sipex Corp. Sec. Litig., No. C 05-00392 WHA, 2005 U.S. Dist. LEXIS

30854, at *3 (N.D. Cal. Nov. 17, 2005) (“house-cleaning and reforms do not follow innocent

mistakes”).

In addition to Sells’ direct participation and knowledge of the accounting trickery at issue

here, the core business alone would support scienter as explained in detail in §III.A.2.D. of

Plaintiffs’ Opposition to the Motion to Dismiss Filed by Defendants Hansen Medical, Inc., Frederic

H. Moll, Steven M. Van Dick, and Gary Restani (“Pltfs’ Mem.”), filed concurrently herewith.

30 “Where plaintiffs rely on both confidential witnesses and on other facts, ‘they need not name their sources as long as the latter facts provide an adequate basis for believing that the defendants’ statements were false.’” Daou, 411 F.3d at 1015. Moreover, Sells quotes In re Apple Computer, Inc. out of context. See Mot. at 14. The Apple Court actually declared that “[u]nless other details about the identity of the CW are necessary to establish the CW’s reliability, a job title will usually be an adequate description of a CW.” 243 F. Supp. 2d 1012, 1027 (N.D. Cal. 2002).


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System sales comprise nearly all of the Company’s revenues every quarter and hence are “of such

prominence that it would be ‘absurd’ to suggest that management was without knowledge of the

matter.” S. Ferry, 542 F.3d at 786. Moreover, the fact that SVP Sells was one of only six executives

at Hansen also supports the inference that defendants informed each other “of the facts that rendered

the accounting treatment of the [System sales] incorrect.” See Cadence II, 692 F. Supp. 2d at 1192.

Viewed holistically, scienter is more than sufficiently alleged as to defendant Sells.

VI. PLAINTIFFS ADEQUATELY PLEAD LOSS CAUSATION

SVP Sells does not dispute that plaintiffs adequately plead loss causation with respect to

Hansen’s October 19, 2009 disclosure that it planned to restate its prior financial results. Mot. at 18.

Where loss causation as to a single disclosure is adequately alleged, no further inquiry is conducted

with respect to other alleged partial disclosures. See In re Interlink Elecs., Inc. Sec. Litig., No.

SACV 05-8133-AG(SHx), 2008 WL 4531967, at *4 (C.D. Cal. Oct. 6, 2008) (so holding). Indeed,

once a plaintiff has met the pleading standard, whether additional allegations of loss are sufficient

goes to the amount of damages, not whether a claim is stated. See Lormand v. US Unwired, Inc.,

565 F.3d 228, 266 n.33 (5th Cir. 2009). Nevertheless, plaintiffs will briefly address SVP Sells’

improper effort to limit damages at this stage and incorporate by reference plaintiffs’ opposition to

the Hansen Defendants’ motion which addresses the issue in detail. See Pltfs’ Mem., §II.B.

The partial disclosures on July 28, 2008, July 31, 2008, January 8, 2009, July 6, 2009 and

August 4, 2009 involve Company-specific financial information which was triggered by the

accounting manipulations alleged and resulted in Hansen’s stock plummeting – 17.12% (¶¶313-315),

21.71% (¶¶318-323), 34.27% (¶¶333-337) and 8% (¶¶352-354), respectively. Unlike in In re

Redback Networks, Inc. Sec. Litig., “the sales in question, and the resulting revenues” from the

Systems were not “real.” No. C 03-5642 JF (HRL), 2007 U.S. Dist. LEXIS 27389, at *15 (N.D.

Cal. Mar. 30, 2007) (emphasis in original).31 The partial disclosures were each a materialization of

31 Sells misleadingly quotes the Court in In re New Century. The disclosure the Court was referring to concerned financial statements for which the auditor did not provide an audit opinion. 588 F. Supp. 2d 1206, 1237 (C.D. Cal. 2008). Here, Sells had ultimate authority over all the partial disclosures alleged by plaintiffs. ¶23.


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the risks concealed by defendants – risks created by their fraudulent revenue accounting which is

logically intertwined with Hansen’s falsely inflated sales, utilization, demand, earnings, projections

and controls – and caused Hansen’s stock price to decline precipitously. ¶¶313-315, 318-323, 333-

337, 352-354.

VII. PLAINTIFFS SUFFICIENTLY PLEAD CONTROL PERSON LIABILITY

To plead a §20(a) claim, “it is not necessary to show actual participation or the exercise of

actual power” – rather, a plaintiff need only show that defendants were in a position of control.

Howard v. Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000). Here, plaintiffs have sufficiently

alleged a primary violation under §10(b) and that Sells was in a position of control. ¶23; see also In

re Constellation Energy Grp., Inc., 738 F. Supp. 2d 614, 640 (D. Md. 2010) (declining to dismiss

control person claims of a subsidiary president). For example, Sells had direct control over

Murawski who solicited a forged training form in connection with the improperly recognized sale to

Yale and engaged in other deceits. E.g., ¶¶8, 136, 149; see also ¶156 (Sells brought over Murawski

and others to employ “highly-aggressive and pressure-based sales tactics.”). In contrast to In re

Hansen Natural Corp. Sec. Litig., 527 F. Supp. 2d 1142, 1163 (C.D. Cal. 2007), plaintiffs allege not

only Sells’ position, but his active participation and awareness of the accounting manipulations and

false statements in the TAC. See IV.-V., supra.

VIII. CONCLUSION

For all the reasons set forth above, Sells’ motion to dismiss should be denied. If the Court

grants any part of Sells’ motion, plaintiffs request leave to amend. Eminence Capital, L.L.C. v.

Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003). This is the first time any court has considered the

substance of plaintiffs’ allegations as to defendant Sells.

DATED: February 27, 2012 Respectfully submitted, ROBBINS GELLER RUDMAN & DOWD LLP WILLOW E. RADCLIFFE

/s/ Willow E. Radcliffe WILLOW E. RADCLIFFE


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Post Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: 415/288-4545 415/288-4534 (fax)

ROBBINS GELLER RUDMAN & DOWD LLP IVY T. NGO 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax)

Additional Counsel for Plaintiffs

GLANCY BINKOW & GOLDBERG LLP LIONEL Z. GLANCY PETER A. BINKOW MICHAEL GOLDBERG EX KANO S. SAMS II ROBERT V. PRONGAY 1925 Century Park East, Suite 2100 Los Angeles, CA 90067 Telephone: 310/201-9150 310/201-9160 (fax)

Lead Counsel for Plaintiffs

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CERTIFICATE OF SERVICE

I hereby certify that on February 27, 2012, I authorized the electronic filing of the foregoing

with the Clerk of the Court using the CM/ECF system which will send notification of such filing to

the e-mail addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I

caused to be mailed the foregoing document or paper via the United States Postal Service to the non-

CM/ECF participants indicated on the attached Manual Notice List.

I further certify that I caused this document to be forwarded to the following Designated

Internet Site at: http://securities.stanford.edu.

I certify under penalty of perjury under the laws of the United States of America that the

foregoing is true and correct. Executed on February 27, 2012.

s/ Willow E. Radcliffe WILLOW E. RADCLIFFE

ROBBINS GELLER RUDMAN & DOWD LLP Post Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: 415/288-4545 415/288-4534 (fax) E-mail: [email protected]

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