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Western Pennsylvania Electrical Employees Pension Fund v. Mentor Graphics Corp.

United States District Court, D. Oregon

May 29, 2018

WESTERN PENNSYLVANIA ELECTRICAL EMPLOYEES PENSION FUND and GEORGE HAROUTUNIAN, Plaintiffs,
v.
MENTOR GRAPHICS CORPORATION, WALDEN C. RHINES, GREGORY K. HINCKLEY, and JOSEPH REINHART, Defendants.

          FINDINGS AND RECOMMENDATION

          Honorable Paul Papak United States Magistrate Judge

         Former putative lead plaintiff George Haroutunian filed this putative securities class action against defendants Mentor Graphics Corporation ("Mentor" or "MENT"), Walden C. Rhines, Gregory K. Hinckley, and Joseph Reinliart on March 18, 2016. Effective July 11, 2016, these chambers granted the motion of then-movant Western Pennsylvania Electrical Employees Pension Fund (the "Fund") to be appointed as lead plaintiff to represent the putative class in this action. On August 10, 2016, lead plaintiff amended the complaint originally filed by Haroutunian. On June 2, 2017, these chambers recommended that the Fund's claims be dismissed without prejudice, and on August 23, 2017, Judge Brown adopted that recommendation without modification. The Fund amended its complaint a second time (inaccurately styling its complaint as its "First Amended Complaint") effective October 18, 2017.

         By and through its second amended complaint, lead plaintiff the Fund alleges that the defendants violated federal securities laws by disseminating materially false and misleading statements and concealing material adverse facts regarding Mentor's then-current financial condition and growth prospects. Arising out of the foregoing, the Fund alleges all defendants' liability (i) for employing devices, schemes, and artifices to defraud, making false or misleading statements of fact, or otherwise engaging in acts, practices, and a course of business that operated as fraud on the Fund and others similarly situated in connection with their purchases of Mentor common stock at material times in violation of Section 10(b) (codified at 15 U.S.C. § 78j(b)) of the Securities Exchange Act of 1934 (the "Exchange Act" or the "1934 Act") and of Rule 10b-5 (codified at 17 C.F.R. § 240.10b-5) promulgated thereunder, and (ii) for directly or indirectly inducing one another to violate Section 10(b) and Rule 10b-5 in violation of Section 20(a) (codified at 15 U.S.C. § 78t(a)) of the Exchange Act. The Fund seeks award of actual damages in unspecified amounts on its own behalf and on behalf of all others similarly situated, interest on such damages, and attorney fees and costs. This court has jurisdiction over the Fund's putative class action pursuant to 28 U.S.C. § 1331 and 15 U.S.C. § 78aa(a).

         Now before the court are defendants' motion (#92) to dismiss all of the claims against them and defendants' requests (#94, 103) for judicial notice and/or notice of incorporation by reference. I have considered the motions, oral argument on behalf of the parties, and all of the pleadings and papers on file. For the reasons set forth below, defendants' motion (#92) to dismiss should be granted as discussed below, defendants' requests (#94, 103) for judicial notice should be granted as discussed below, and the Fund's claims in this action should be dismissed with prejudice in their entirety.

         LEGAL STANDARDS

         I. Motion to Dismiss for Failure to State a Claim

         To survive dismissal for failure to state a claim pursuant to Rule 12(b)(6), a complaint must contain more than a "formulaic recitation of the elements of a cause of action;" specifically, it must contain factual allegations sufficient to "raise a right to relief above the speculative level." I Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). To raise a right to relief above the speculative level, "[t]he pleading must contain something more . .. than ... a statement of facts that merely creates a suspicion [of] a legally cognizable right of action." Id., quoting 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed. 2004); see also Fed. R. Civ. P. 8(a). Instead, the plaintiff must plead affirmative factual content, as opposed to any merely conclusory recitation that the elements of a claim have been satisfied, that "allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), citing Twombly, 550 U.S. at 556. "In sum, for a complaint to survive a motion to dismiss, the non-conclusory 'factual content,' and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief." Moss v. United States Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009), citing Iqbal, 556 U.S. at 678.

         "In ruling on a 12(b)(6) motion, a court may generally consider only allegations contained in the pleadings, exhibits attached to the complaint, and matters properly subject to judicial notice." Swartz v. KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007). In considering a motion to dismiss, this court accepts ail of the allegations in the complaint as true and construes them in the light most favorable to the plaintiff. See Kahle v. Gomales, 474 F.3d 665, 667 (9th Cir. 2007). Moreover, the court "presume[s] that general allegations embrace those specific facts that are necessary to support the claim." Nat'l Org. for Women v. Scheidler, 510 U.S. 249, 256 (1994), quoting Litjan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). The court need not, however, accept legal conclusions "cast in the form of factual allegations." Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981).

         II. Judicial Notice

         Federal Evidence Rule 201 provides the federal courts with authority to take notice of "adjudicative facts" under appropriate circumstances, even in the absence of evidentiary proof. Fed.R.Evid. 201(a). An adjudicative fact is subject to judicial notice when the fact is not subject to reasonable dispute because it:

(1) is generally known within the trial court's territorial jurisdiction; or
(2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.

Fed. R. Evid. 201(b). The courts are permitted to take judicial notice of such adjudicative facts sua sponte, and are required to do so "if a party requests it and the court is supplied with the necessary information." Fed.R.Evid. 201(c).

         FACTUAL BACKGROUND

         I. The Parties

         Plaintiff the Fund is an entity that purchased Mentor common stock at material times. The Fund has been appointed as the lead plaintiff representing the putative class of all persons who purchased or otherwise acquired common stock of Mentor at any time between August 21, 2014, and November 19, 2015, inclusive (the "class period").

         Defendant Mentor is a publicly traded entity incorporated under Oregon law and headquartered in Oregon. Mentor is engaged in the business of developing, manufacturing, and distributing electronic design automation ("EDA") products allowing users to emulate the designing, testing, and analysis of technologically complex products before manufacturing them.

         Defendant Rhines was at all material times the chairman of Mentor's board of directors and its CEO. Defendant Hinckley was at all material times Mentor's President and CFO. Defendant Reinhart (collectively with Rhines and Hinckley, the "individual defendants") was at all material times Mentor's VP of corporate development and investor relations.

         II. Judicial Notice and Incorporation by Reference

         By and through their first-filed request (#94) for judicial notice, defendants assert that the documents attached as Exhibits 1-33 to the Declaration (#93) of John C. Roberts, Jr, ("Roberts Decl. I"), are all subject to incorporation by reference as having been expressly referenced in the Fund's second amended complaint and as underlying the Fund's claims in part; in the alternative, defendants argue that these documents contain information fit for judicial notice. In addition, defendants argue that information contained within a further five documents either filed by the parties or issued by the court in connection with patent litigation among mentor and two of its competitors is fit for judicial notice without being subject to incorporation by reference. By and through their second-filed request (#103) for judicial notice, defendants assert that the document attached as Exhibit 36 to the Declaration (#101) of John C. Roberts, Jr. ("Roberts Decl. II"), is subject to incorporation by reference as having been expressly referenced in the Fund's second amended complaint and as underlying the Fund's claims in part, and alternatively that information contained within that document is fit for judicial notice, This court has previously deemed incorporated by reference into the Fund's first amended complaint the documents attached as Exhibits 1-4, 8-9, 12-14, 16-19, 21-22, 24-27, and 30 to Roberts Decl. I, and has additionally previously deemed incorporated by reference portions of the documents attached as Exhibits 32-33 to Roberts Decl. I, while the document attached as Exhibit 36 to Roberts Decl. II constitutes further excerpts from the same transcript of trial testimony excerpted as previously noticed Exhibit 9 to Roberts Decl. I.

         Of the 34 documents defendants assert to be subject to incorporation by reference, (i) Exhibits 2, 18-19, 24, and 32-34 to Roberts Decl I are documents filed by Mentor with the SEC, (ii) Exhibits 10-14, 17, 20-23, 27, and 30 to Roberts Decl I are transcripts of Mentor's quarterly earnings calls to investors and analysts, (iii) Exhibits 1, 3, 15, 26, and 31 to Roberts Decl I are transcripts of remarks made by Mentor executives regarding Mentor's business at conferences, (iv) Exhibits 4-5 and 9 to Roberts Decl I and Exhibit 36 to Roberts Decl II constitute excerpts of trial testimony offered by Mentor employees in connection with an action Mentor brought against a competitor, and (v) Exhibits 6-8, 16, 25, 28-29, and 35 are financial analyst reports and/or financial news articles, interviews, or blog posts regarding Mentor and its business. I agree with the defendants that these documents are referenced in the Fund's second amended complaint and that the claims in this action arise in part out of each of them. As such, it is appropriate for the court to deem all such documents incorporated by reference into the second amended complaint, such that this court may appropriately consider them without first converting defendants' motion into one for summary judgment. See Daniels-Hall v. Nat'l Educ. Ass'n, 629 F.3d 992, 998 (9th Cir. 2010). Material facts from the incorporated documents will be set forth below in the course of my recital of the Fund's material allegations.

         The five documents defendants assert to be fit for judicial notice without also being subject to incorporation by reference were all filed in connection with patent litigation Mentor and its competitors, Synopsis Inc. ("Synopsis"), and EVE-USA, Inc. ("EVE"), in which Mentor obtained an award for damages against Synopsis for patent infringement. As noted above, Federal Evidence Rule 201 provides that the courts may take judicial notice of an adjudicative fact sua sponte, see Fed. R. Evid. 201(c), and must take judicial notice of adjudicative facts when requested to do so by a party and provided with all necessary information, see id., where each such adjudicative fact is either "generally known within the trial court's territorial jurisdiction" or "can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned," Fed, R. Evid. 201(b). A fact is considered "adjudicative" for judicial notice purposes if it is material to "the immediate parties-who did what, where, when, how, and with what motive or intent." Fed.R.Evid. 201(a) advisory committee's note; see also Valdivia v. Schwarzenegger, 599 F.3d 984, 994 (9th Cir. 2010). I agree with the defendants that these documents contain at least some adjudicative facts fit for judicial notice. Such facts will be set forth below in the course of my recital of the Fund's material allegations.

         I further find that it is appropriate for this court to take judicial notice sua sponte of the following adjudicative fact bearing materially on the merits of the claims herein:

• Cadence Design Systems, Inc., released an emulation product known as Palladium Zl on November 16, 2015, see https://www.cadence.com/content/cadence-www/ global/enUS/home/company/newsro om/press-releases/pr/2015/c adence-ushers-in-new-era-of-data-center-class-emulation-with-palladium-zl-enteiprise-emulation-platform.html.

         IV. The Fund's Allegations Regarding the Parties' Dispute [1]

         During the class period (August 21, 2014, to November 19, 2015), and for some years prior to it, the EDA market was dominated by three business enterprises, namely Mentor, Synopsys, and Cadence Design Systems, Inc. ("Cadence"). See Second Amended Complaint, ¶ 5. During Mentor's fiscal year 2015[2] (February 1, 2014, through January 31, 2015), it received 40% of its revenue from its "Integrated Circuit Design to Silicon" product segment, in which its key EDA product was known as "Calibre," 25% of its revenue from its "Scalable Verification" product segment, in which its key EDA product was known as "Veloce2," and the remaining 35% of its revenue from its "Integrated Systems Design," "New and Emerging Products," "Services," and other product segments. Id., ¶¶ 33, 78. Mentor marketed Calibre and other products falling under the rubric of Integrated Circuit Design to Silicon to semiconductor companies, while Veloce2 and other Scalable Verification products were marketed to both semiconductor and systems companies. See Id. Prior to the class period, Intel Corporation ("Intel"), a semiconductor company, was by far Mentor's largest customer, accounting for approximately 70% of Mentor's emulator sales and approximately a third of the entire EDA market overall. See id, ¶¶ 6, 40, 41.

         Under Mentor's business model during and in the years immediately prior to the class period, its software sales to its customers were made pursuant to long-term (typically, three-year), non-cancelable contracts, and its hardware sales were made pursuant to a backlog of booked orders with long lead times, such that Mentor could know with reasonable certainty what 50-80% of its revenues would be in any given fiscal quarter prior to the first day of that quarter. See id., ¶¶ 33, 56, 87-88. Moreover, under Mentor's business model, the time lag between beginning to negotiate a new EDA business relationship to realization of revenue from that relationship could be 12 to 27 months, which period can be broken down to three to twelve months for technical qualification review, three to nine months for negotiation of financial terms, and roughly six months for manufacturing or production. See id., ¶¶ 51-55.

         At all material times, the individual defendants participated in drafting, preparing, or approving all of the allegedly false or misleading statements that underlie the claims herein and were aware of, or recklessly disregarded, the falsity of those statements and/or of the omissions that rendered them misleading. See id., ¶ 31. Similarly, at all material times the individual defendants controlled the content of Mentor's SEC filings, press releases, and public statements. See Id. >¶ 32.

         In the course of consolidated patent litigation proceedings in this court, the lead case of which (No. 10-CV-954) was initiated in August 2010, Mentor Vice President and General Counsel Dean Freed testified that in 1998, prior to the class period herein, Mentor filed a patent for emulation technology developed by its employees Alain Reynaud and Luc Burgun, and used that technology to launch its entiy into the emulation business. See Roberts Decl, Exh. 4 ("Freed Testimony"), 167:17-168:21. In the course of those same proceedings, Burgun testified that in 2000 he left Mentor's employ and founded EVE-USA, Inc., which began manufacturing and marketing a proprietary emulator ("ZeBu") competitive with Mentor's emulators. See Roberts Decl., Exh. 5 ("Burgun Testimony"), 968:18 - 972:19, 978:5 - 979:1. Freed testified in those proceedings that in 2006, Mentor sued EVE for infringement of Mentor's 1998 emulation patent. See Freed Testimony, 181:17-20. Freed further testified in those proceedings that Mentor and EVE settled their dispute, with Mentor agreeing to license its patented emulation technology exclusively to EVE for use in its ZeBu emulators. See id., 184:4-10. Freed further testified in the course of those proceedings that EVE's license from Mentor specifically provided that if EVE were acquired by any other company, the license would terminate. See Id. The Fund makes no allegation to the contrary of any of the foregoing, but rather alleges consistently with the foregoing that Mentor's motive for requiring the license to terminate in the event of such an acquisition was to ensure that Synopsis, whose sales force was significantly larger than Mentor's, would not be able to compete with Mentor directly in the emulator market with technology comparable to Mentor's. See Second Amended Complaint, ¶¶ 46-47.

         In September 2012, Synopsis and EVE filed a declaratory judgment action against Mentor in this court, seeking this court's declaration that Mentor's 1998 patent was invalid. See No. 13-CV-579, Docket No. 1. In October 2012, still prior to the class period herein, Synopsys acquired EVE. See Second Amended Complaint, ¶ 49.

         On September 20, 2012, EDA industiy analyst Gaiy Smith, whose blog the individual defendants followed for news about their industiy, see id, ¶ 69 n. 7, predicted that at some time in 2013 Cadence would release an emulator product ("Palladium Zl") that would be competitive with or superior to Veloce2. See id, ¶ 69. (As discussed above, the court may properly take judicial notice that Cadence did not in fact release Palladium Zl until November 16, 2015, or the fourth quarter of Mentor's fiscal year 2016.) Analysts asked defendants about the anticipated release of Cadence's Palladium Zl repeatedly between August 2013 and August 2014. See id., ¶¶ 69-70.

         On September 12, 2013, prior to the class period herein, Hinckley acquired a total of 272, 611 shares of Mentor common stock for $3, 945, 660.60, or a weighted-average per-share price of $14.74, of which he sold 222, 855 shares that same day for $5, 094, 465.30, or a per-share price of $22.86. See Roberts Deck I, Exh. 33 ("Hinckley Form 4s"). On September 13, 2013, still prior to the class period herein, Hinckley acquired 111, 703 shares of Mentor common stock for $1, 585, 065.57, or a per-share price of $14.19, of which he sold 90, 583 shares that same day for $2, 091, 561.47, or a per-share price of $23.09. See Id. On September 14, 2013, still prior to the class period herein, Hinckley acquired an additional 22, 342 shares of Mentor common stock without payment, of which he sold 11, 384 shares that same day for $261, 832.00, or a per-share price of $23.00. See Id. On September 15, 2013, still prior to the class period herein, Hinckley acquired an additional 20, 531 shares of Mentor common stock without payment, of which he sold 10, 461 shares that same day for $240, 603.00, or a per-share price of $23.00. See Id. On December 22, 2013, still prior to the class period herein, Hinckley acquired 16, 426 shares of Mentor common stock without payment, of which he sold 8, 370 shares that same day for $199, 540.80, or a per-share price of $23.84. See Id. On January 8, 2014, still prior to the class period herein, Hinckley acquired an additional 98, 995 shares of Mentor common stock for $1, 052, 317, or a per-share price of $10.63, all of which he sold that same day for $2, 316, 483, or a weighted-average per-share price of $23.40. See Id. Also on January 8, 2014, Rhines acquired 145, 347 shares of Mentor common stock for $1, 504, 341.45, all of which he sold that same day for $3, 401, 119.80, or a weighted-average per-share price of $23.40. See Roberts Deck I, Exh. 32 ("Rhines Form 4s"). On January 9, 2014, still prior to the class period herein, Rhines acquired 17, 671 shares of Mentor common stock for $133, 333.09, or a weighted-average per-share price of $7.55, and sold 92, 688 shares of Mentor common stock for $2, 176, 287.36, or a weighted-average per-share price of $23.48. See Id. On January 10, 2014, still prior to the class period herein, Rhines sold an additional 207, 495 shares of Mentor common stock for $4, 857, 458, or a weighted-average per-share price of $23.41. See Id. On January 11, 2014, still prior to the class period herein, Hinckley acquired 15, 310 shares of Mentor common stock without payment, of which he sold 7, 801 shares that same day for $172, 402.10, or a per-share price of $22.10. See Hinckley Form 4s. On January 12, 2014, still prior to the class period herein, Hinckley acquired 17, 626 shares of Mentor common stock without payment, of which he sold 8, 981 shares that same day for $198, 120.90, or a per-share price of $22.06. See id.

         In 2014, the semiconductor industry experienced a market downturn, resulting in reduced EDA expenditures from the semiconductor market segment and increased consolidations among semiconductor companies. See Second Amended Complaint, ¶ 152. Reduced EDA expenditures and consolidations among the companies comprising the EDA semiconductor customer base typically have a negative effect on EDA revenues industry-wide, as Mentor was aware. See Id. It is reasonable to infer for purposes of resolving the merits of Mentor's motion to dismiss that Mentor, EDA industry analysts, and sophisticated EDA industry investors would have expected these developments to have a negative effect on Mentor's absolute revenues at some time in the future. I do not find that a finder of fact could reasonably infer from the Fund's allegations regarding the market downturn of 2014 that any defendant anticipated or should have anticipated that these developments would necessarily negatively impact Mentor's relative market share or Mentor's revenues in the short term (given the long lead time between orders and realization of revenue).

         In the course of an earnings call on February 27, 2014, Mentor acknowledged the impact the consolidations were having on the emulator industry, including in particular consolidations among Japanese companies, but nevertheless reported record revenues for the fiscal year just closed. See id, ¶ 81; see also Roberts Decl. I, Exh. 23 ("4Q14 Earnings Call Transcript"). In the course of an earnings call on May 23, 2014, in response to a question regarding whether Synopsys' acquisition of EVE's ZeBu emulator would heat up competition in the EDA industry, Rhines acknowledged that Mentor had "experienced extensive competition" from its two primary competitors (Synopsys and Cadence), and that Mentor expected to continue to do so. Roberts Decl. I, Exh, 10 ("1Q15 Earnings Call Transcript") at 7.

         On August 12, 2014, in the course of an industry conference, Rhines told conference attendees that Mentor respected Cadence as an emulation competitor, and expressly acknowledged the risk that Cadence's anticipated new emulator might "have l[e]gs and gain momentum." Roberts Decl. I, Exh, 11 ("Pacific Crest Forum Transcript").

         On August 21, 2014, the first day of the class period, Mentor conducted an earnings call with its investors and financial analysts. See Second Amended Complaint, ¶¶ 26-28, 71, 79. In the course of that earnings call, analysts inquired regarding Cadence's anticipated new emulator, specifically asking Rhines whether release of Cadence's new product would have an adverse effect on Mentor's market share. See id., ¶ 71. Rhines nevertheless told investors and analysts that he expected Mentor to "grow substantially th[at] year in the emulation business," while defendant Hinckley told investors and analysts that he believed such growth would be in the range of "20% to 25%" over the previous year. Id., ¶ 108. Indeed, Rhines advised that while Mentor was not at that moment the largest maker of in-circuit emulation products, it was the largest maker of virtual emulation products like Veloce2 and Palladium Zl, and that he thought it would "take a long time" for any of Mentor's competitors to produce a virtual emulation product as advanced as Veloce2. Id., ¶ 109. Notwithstanding the foregoing, Rhines predicted that Mentor's competitors would "ultimately offer many of the kinds of features that Mentor has with virtual stimulus and accelerated test benches and the ability to do software development," and that when that occurred, Mentor would view its competitors as a greater risk. Id. Rhines suggested that, until that time, he would not expect to see competitive products like the one anticipated from Cadence negatively impact Mentor's market growth. See Id. Rhines additionally reported that, at that time, more than half of Mentor's EDA customers were semiconductor companies. See id., ¶ 79. Analyst reports issuing after the earnings call indicated that Mentor did not expect to see its competitors' products reducing its EDA market share. See id., ¶ 110. It is the Fund's position that each of the foregoing statements made in the course of the August 21, 2014, earnings call was knowingly false or misleading.

         As will be discussed below, in March 2016 (after the close of the class period), defendants advised industry analysts that as a result of the anticipated release of Palladium Zl, technical evaluations and bookings of orders were being delayed as customers tried to compare the two competitors' products. See id., ¶ 59. It is the Fund's position that as a result of those delays, defendants saw evidence that Palladium Zl was reducing the size of Mentor's EDA market share by as early as the third quarter of its fiscal year 2015 (in or around August 2014, more than one year before Cadence's product was in fact released).

         On September 11, 2014, Hinckley acquired 15, 310 shares of Mentor common stock without payment, of which he sold 7, 801 shares that same day for $172, 402.10, or a per-share price of $22.10. See Hinckley Form 4s. That same day, Rhines acquired 19, 138 shares of Mentor common stock without payment, of which he sold 9, 751 shares that same day for $215, 497.10, or a per-share price of $22.10. See Rhines Form 4s. On September 12, 2014, Hinckley acquired 17, 626 shares of Mentor common stock without payment, of which he sold 8, 981 shares that same day for $198, 120.86, or a per-share price of $22.06. See Hinckley Form 4s. That same day, Rhines acquired 22, 033 shares of Mentor common stock without payment, of which he sold 11, 226 shares that same day for $247, 645.56, or a per-share price of $22.06. See Rhines Form 4s. On September 14, 2014, Hinckley acquired 22, 342 shaies of Mentor common stock without payment, of which he sold 11, 384 shares that same day for $251, 586.40, or a per-share price of $22.10. See Hinckley Form 4s. That same day, Rhines acquired 26, 458 shares of Mentor common stock without payment, of which he sold 13, 481 shares that same day for $297, 930.10, or a per-share price of $22.10. See Rhines Form 4s. On September 15, 2014, Hinckley acquired 20, 532 shares of Mentor common stock without payment, of which he sold 10, 462 shares that same day for $231, 210.20, or a per-share price of $22.10. See Hinckley Form 4s. That same day, Rhines acquired 24, 155 shares of Mentor common stock without payment, of which he sold 12, 307 shares that same day for $271, 984.70, or a per-share price of $22.10. See Rhines Form 4s.

         The ZeBu emulator dispute among Mentor, EVE, and Synopsis went to trial before Judge Mosman in this court beginning on September 29, 2014. See Second Amended Complaint, ¶¶ 40; see also No. 13-CV-579, Docket No. 513. At trial, Mentor's counsel asserted in his opening statement that Intel was the single most "dominant" and "important" customer in the EDA market, not merely for Mentor but for all emulator industry players, representing 60 to 70% of all United States sales of both Mentor's and Synopsys/EVE's emulators. Second Amended Complaint, ¶¶ 40-41.

         In the course of trial, Mentor's VP of Enterprise Solutions Organization Donald Cantow testified that while Intel had purchased $80 million in EDA products from Mentor to be delivered during calendar year 2013, during that same year it had made the decision to switch from Veloce2 to ZeBu, with the result that between May 2013 and September 2014, Mentor booked only $0.5 million in (future) sales to Intel. See id., ¶ 42; see also id, ¶ 43. For purposes of resolving the merits of Mentor's motion to dismiss now before the court, 1 find that it may reasonably be inferred from the Fund's allegations of a two to three orders of magnitude differential in (future) sales to Intel before and after May 2013 and from the Fund's allegation that Cantow testified that he had been advised in advance of Intel's decision to switch to ZeBu, that defendants knew by not later than May 2013, and likely earlier, that Mentor had either temporarily or permanently lost virtually all of Intel's EDA business to its competitor Synopsys. Cantow further testified that after Synopsis took over Intel's EDA business, it began competing with Mentor for virtually all of Mentor's EDA customers, with the result that Mentor's competitive environment "changed very dramatically," Id., ¶ 44. Cantow further testified that as a result of the increased competitive threat posed by Synopsys, Mentor had lowered both its costs and its pricing for its Veloce2 emulators. See id., ¶ 45.

         Also in the course of those same trial proceedings, as noted above, Mentor General Counsel Dean Freed testified that because Synopsys had a larger sales organization than Mentor, Mentor was concerned that if Synopsys were to sell an EDA technology functionally indistinguishable from Mentor's Veloce2, Synopsys would constitute "a significant competitive threat to Mentor and its emulation business." Id., ¶ 46. For purposes of resolving the merits of Mentor's motion to dismiss now before the court, I find that it may reasonably be inferred from the Fund's allegations regarding Freed's testimony that by not later than October 2012, defendants had actual awareness of a risk that Synopsys' acquisition of EVE would constitute a significant competitive threat to Mentor.

         On September 5, 2014, Mentor filed its Form 10-Q with the SEC for the second quarter of its fiscal year 2015. See id., ¶ 111. Mentor's Form 10-Q of September 5, 2014, contained the following cautionary language:

We or our competitors sometimes pre-announce or provide "road maps" of the expected availability of new hardware or software products or product features, Such pre-announcements, whether offered by the pre-announcing company or vendors of competitive products, can result in customers canceling or deferring orders for currently offered products as customers anticipate that currently offered products may be uncompetitive or lacking in features or performance,
Our competitors may acquire technology or companies offering competing or complementary product offerings which could adversely impact our ability to compete in the marketplace. They may be able to deliver better or broader product offerings, offer better pricing, or otherwise make it more desirable for our customers to buy more of the tools in their design flow from the competitor after the acquisition.

Id., ¶¶ 111-112. Also on September 5, 2014, Mentor filed its Form S-8 Registration Statement with the SEC, incorporating by reference its Form 10-K previously filed on March 17, 2014. See id, ¶ 113. The Form 10-K filed March 17, 2014, contained the statements that *'[N]o material portion of [Mentor's] business is dependent on a single or a 'few customers," and that "We do not believe that the competitive loss of one or more individual products at one or more of [Mentor's] customers would have a material adverse effect on [Mentor's] revenues." Id. Mentor's Form S-8 Registration Statement did not contain language repudiating or qualifying those statements. See id. It is the Fund's position that each of the foregoing statements made in the SEC filings of September 5, 2014, was knowingly false or misleading.

         On October 10, 2014, Mentor obtained a jury verdict in the patent litigation proceedings in its own favor on the question whether the Synopsys/EVE emulator infringed Mentor's 1998 patent, receiving award of approximately $36 million in lost profits. See No. 10-CV-954, Docket No. 723.

         On October 20, 2014, Mentor customer GlobalFoundries, a semiconductor foundry, announced a $1.5 billion deal to acquire Mentor customer IBM coiporation's global commercial semiconductor technology business. See Second Amended Complaint, ¶¶ 96, 152. I find that it is reasonable to infer from the Fund's allegations regarding GlobalFoundries' acquisition of IBM's global commercial semiconductor technology business that the defendants had contemporaneous awareness of the likelihood that this consolidation, like the 2014 semiconductor industry consolidations in general, would tend to lead to decreased revenues for Mentor's EDA business.

         On November 20, 2014, Mentor conducted an earnings call with its investors and financial analysts. See id., ¶¶ 79, 88, 114. In the course of that earnings call, upon being asked if anything in Mentor's outlook had changed from the previous quarter's prediction of 20 to 25% growth, Rhines stated that "[o]f course the year-to-date revenue is quite strong, and from a bookings point of view, I would say it's strengthened.... So if anything, I think I'd say that our outlook has improved, .. ." Id., ¶ 114. It is the Fund's position that Rhines' statement made in the earnings call of November 20, 2014, was knowingly false or misleading. Analyst reports following the earnings call were favorable. See id., ¶ 115.

         On December 4, 2014, Mentor filed its Form 10-Q with the SEC for the third quarter of its fiscal year 2015. See id., ΒΆ 116. Mentor's Form 10-Q of December 4, ...


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