On January 12, 2009, the US Court of Appeals for the Ninth Circuit affirmed a lower court’s dismissal of the securities class action filed against Digimarc Corp. and certain of its officers, agreeing that plaintiffs failed to adequately plead a strong inference of scienter. Plaintiffs had alleged that Digimarc purposefully manipulated its financial prospects by capitalizing internal software development expenditures that should have been expensed.
The Ninth Circuit found that under Tellabs, it was necessary for it to
conduct a dual inquiry: first, we will determine whether any of the plaintiff’s allegations, standing alone, are sufficient to create a strong inference of scienter; second, if no individual allegations are sufficient, we will conduct a “holistic” review of the same allegations to determine whether the insufficient allegations combine to create a strong inference of intentional conduct or deliberate recklessness.
The Court concluded that
Although the allegations in this case are legion, even together they are not as cogent or compelling as a plausible alternative inference—namely, that although Digimarc was experiencing problems controlling and updating its accounting and inventory tracking practices, there was no specific intent to fabricate the accounting misstatements at issue here. Instead, the facts alleged by Zucco point towards the conclusion that Digimarc was simply overwhelmed with integrating a large new division into its existing business.
The Court therefore affirmed the district court’s dismissal of case with prejudice.