In Re Remec Incorporated Securities Litigation

ORDER RULING ON PENDING MOTIONS;

[Doc. Nos. 173, 194, 263, 308, 310, 336]

DISMISSING CASE WITH PREJUDICE

MICHAEL M. ANELLO, District Judge.

Currently pending before the Court are four summary judgment motions and several evidentiary motions in these consolidated securities fraud cases against Defendants REMEC, Inc., Ronald E. Ragland, and Winston E. Hickman. In sum, for the reasons stated below, and because the Court finds that Defendants are entitled to summary judgment on the element of scienter, judgment shall be entered in favor of Defendants and the case shall be dismissed with prejudice.

1

1.

Background

A.

Basic Facts

Defendant REMEC, Inc. (“REMEC”) designed and manufactured “high frequency subsystems used in the transmission of voice, video and data traffic over wireless communications networks and in space and defense electronics applications.” FAC

2

¶2. This action concerns REMEC’s Commercial segment (also known as the Wireless Systems division).

3

Defendant Ronald

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Ragland, an engineer, founded REMEC in 1983 and served as its Chief Executive Officer (“CEO”) and Chairman of the Board of Directors until February 2004. Ragland Decl. ¶¶ 3-4. In November 2003, REMEC purchased Paradigm Wireless Systems, Inc., and hired that company’s Chief Financial Officer (“CFO”) Winston Hickman to serve in that same position at REMEC. Hickman Decl. ¶ 4; Ragland Decl. ¶ 11.

Plaintiffs accuse REMEC of materially overstating its financial results by failing to recognize millions of dollars in losses related to goodwill impairment.

See e.g.,

FAC ¶¶ 3-6, 139-225. Although the heart of Plaintiffs’ case concerns impaired goodwill, Plaintiffs allege REMEC engaged in other deceptive accounting practices such as inflating revenue by overstating the value of excess, obsolete inventory and by failing to disclose significant internal control deficiencies.

See e.g.,

FAC ¶¶ 8, 11, & 14.

4

The FAC contains two causes of action. REMEC, Ragland, and Hickman are named in the first cause of action for securities fraud pursuant to § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Plaintiffs’ second claim alleges control person liability against Ragland and Hickman under § 20 of the Securities Exchange Act of 1934.

The Court certified a class of plaintiffs who purchased or otherwise acquired RE-MEC securities between September 8, 2003 and September 8, 2004. Fed.R.Civ.P. 23(a) & (b)(3); Order Granting Pis.’ Mo. for Class Certification. [Doc. No. 103.]

B.

Defining Goodwill Impairment Testing

Plaintiffs’ case primarily involves an accounting method to test the value of goodwill, which is calculated and reported on a company’s financial statement. Goodwill is an intangible asset that reflects the “excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed.” Williams Decl. Ex. 1 at 105.

5

In other words, goodwill, though it is an intangible asset, must be measured. If the value of the goodwill is “impaired,” the company

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must deduct or “write off’ that value on the balance sheet. When the value is positive, the company records goodwill as an asset. Williams Decl. Ex. 2 at 42 (FY02 Form 10-K at F-8 reports purchases of Solitra and Pacific Microwave Corp. and subsequent $17.7 million write-off associated with Pacific).

Goodwill is customarily acquired when an existing company purchases another company. With each acquisition, goodwill is recorded on the company’s financial statement. In this case, Plaintiffs allege that REMEC pursued an aggressive strategy of buying companies and recording inflated goodwill values in a scheme to mask the true financial condition.

See e.g.,

FAC ¶ 87. Under Ragland’s command, part of REMEC’s business strategy was to expand by buying other specialized technology companies that would complement REMEC’s product offerings. Williams Decl. Ex. 2 at 8-9 (FY02 Form 10-K at 6-7 describes strategy to pursue acquisitions); Williams Decl. Ex. 56 at 10 (FY03 Form 10-K).

6

Beginning in 1999, RE-MEC’s Commercial unit acquired several companies. REMEC recorded the acquired goodwill as an asset on its financial statements in most of those transactions.

7

For example, in November 2003, during the class period, REMEC bought Paradigm Wireless (Hickman’s former employer) and recorded $17 million on its financial statement as goodwill, or 81 % of the $21 million purchase price.

See

Pis.’ Opp. Br., Attachment 3; Fraser Decl. Ex. 4 at 1 (Hinkle mem. dated 2/19/04). Plaintiffs calculate that REMEC recorded goodwill totaling $55.9 million from the Commercial Wireless’s four main acquisitions (or 64% of the $87 million purchase prices).

See

Pis.’ Scienter Opp. Br., Attachment 3.

As mentioned, companies must test the value of goodwill using generally accepted accounting procedures (“GAAP”). The Financial Accounting Standard (“FAS”) Board changed the rules governing the valuation of intangible assets in 2002. Under the prior rule, companies accounted for goodwill by amortizing the value over a period of years as a long-term asset. Brownlie Decl. Ex. D (FAS 121). The prior rule instructed companies to account for and disclose impaired goodwill “whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recovered.”

Id.

at 84.

The statement of FAS 142 eliminated the prior method of amortizing goodwill. Williams Decl. Ex. 1. Instead, FAS 142 uses a two-step test to identify potential goodwill impairment and to measure the amount of loss.

Id.

at 12 (¶ 18). The first

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step compares the fair value of a reporting unit with its carrying value.

Id.

at 12-14 (¶¶ 19 & 23-25). If the fair value exceeds the carrying amount, goodwill is not impaired and the second step is not required.

Id.

at 12 (¶ 19). If the carrying amount exceeds its fair value, the second step is performed to measure the amount of impairment loss.

Id.

The second step “compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.”

Id.

at 13 (¶ 20).

The accounting method to value goodwill involves predictions of future results and other uncertain variables. The language of FAS 142 states that it measures a “reasonable estimate of the value of goodwill.” Williams Decl. Ex. 1 at 12 & 108 (¶ 18 n. 13). “Unlike many other assets that are tested for impairment, goodwill does not have a set of cash flows uniquely associated with it. Instead, the cash flows associated with acquired goodwill usually are intermingled with those associated with internally generated goodwill and other assets because entities generally enter into business combinations to reduce costs and achieve synergies, which entails integrating the acquired entity with the acquiring entity.”

Id.

at 50 (App.B84);

id.

at 54 (App. B96 & B97);

id.

at 61-62 (App.B127) (“a goodwill impairment test by its very nature will include some level of imprecision”). As the definition states, goodwill measures amorphous concepts like the “synergy” created by merging two companies. Goodwill is measured in large part on predictions, such as predictions of future sales and estimates of the cost savings that will be achieved by combining two entities (e.g., reductions in duplicative labor and facilities).

The prediction of gross profit margin is central to Plaintiffs’ suit against REMEC. These types of business judgments should not be invalidated merely because, in hindsight, they proved wrong.

FAS 142 also changed the timing of goodwill testing. It required companies to test the value of goodwill every fiscal year. In addition to the annual test, certain conditions “that would more likely than not reduce the fair value” of an acquisition could trigger a requirement to perform an interim test.

Id.

at 15 ¶ 28.

REMEC implemented the new FAS 142 rule in early 2002 and first reported its compliance after its FY03 ended on January 31, 2003.

See

Williams Decl. Ex. 2 at 28; Katsell Supp. Decl. Ex A at 12 & 16.

8

The first test conducted under the new rule is called the transitional test. RE-ME C’s transitional test applied “as of’ the beginning of REMEC’s fiscal year, and the company had six months to complete it. Williams Decl. Ex. 1 at 23 (¶ 55). The annual test must be conducted the “same time every year,”

id.

at 14 (¶ 26), and REMEC elected to measure goodwill im

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pairment “as of’ the last business day of December.

In its Securities and Exchange Commission (“SEC”) filings, REMEC told investors that it tested goodwill and found no impairment.

See e.g.,

Williams Decl. Ex. 56 at 33 (FY03 Form 10-K at 27) (‘We did not recognize any goodwill impairment as a result of performing this annual test.”). Plaintiffs dispute the accuracy of those statements. Plaintiffs allege Defendants falsely assured the market it used assumptions that were “consistent with the plans and estimates that we use to manage the underlying business” to calculate its goodwill. FAC ¶¶ 5 & 151. Plaintiffs further allege that REMEC used unreasonable assumptions to test the goodwill and should have conducted interim goodwill impairment tests. FAC ¶¶ 9-10. Of particular importance to Plaintiffs’ case, REMEC assumed, for purposes of its annual impairment analyses in FY03 and FY04, that its gross profits in future years would range from a low of 24% to a high of 38%. Williams Decl. Ex. 56 at 33 (FY03 Form 10-K at 27);

id.

Ex. 5 at 25 (draft FY04 Form 10-K at 22).

9

Plaintiffs emphasize that REMEC’s actual performance had been much worse: 7.1 % in FY02, 10.2% in FY03, and 12.3% in FY04. In short, Plaintiffs accuse REMEC of using numbers that crossed the line from optimism to manipulation.

In reviewing the accounting claims at issue in this lawsuit, the Court bears in mind that measuring goodwill entails the exercise of professional judgment.

See e.g.,.

Katsell MSJ Decl. Ex. E (Minstein Dep. at 27); Regan Rebuttal Report at 12-15; Katsell Decl. to Mot. to Strike Ex. 2 at 8, 14, & 17 (hereinafter “Holder Rebuttal Report”). Professional judgment is involved in accounting for goodwill in general because it is an intangible asset and specifically because it depends upon predictions of future results.

See e.g.,

Williams Decl. Ex. 1 at 6 (the two-step process “begins with an estimation of the fair value of a reporting unit”);

id.

(¶ 18 n. 13) (“The fair value of goodwill can be measured only as a residual and cannot be measured directly.”);

id.

at 13 (¶ 23) (defining fair value as the amount for which willing parties could buy or sell the asset);

id.

at 67 (App.B153) (allowing “latitude” to measure fair value).

“Accountants have long recognized that ‘generally accepted accounting principles’ are far from being a canonical set of rules that will ensure identical accounting treatment of identical transactions. ‘Generally accepted accounting principles,’ rather, tolerate a range of ‘reasonable’ treatments, leaving the choice among alternatives to management.”

Thor Power Tool Co. v. C.I.R.,

439 U.S. 522, 544 , 99 S.Ct. 773 , 58 L.Ed.2d 785 (1979);

In re Cirrus Logic Sec. Litig.,

946 F.Supp. 1446, 1457 (N.D.Cal.1996).

FAS 142 also gives management discretion to make reasonable estimates in the totality of circumstances.

See e.g.,

Williams Decl. Ex. 1 (“some consideration

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should be given to industry trends.”). This is not to say that goodwill is wholly subjective. Companies are permitted to select an appropriate valuation method, and REMEC selected the discounted cash flow method.

Id.

at 67 (App.B150-52). “[WJhen cash flows are used to estimate fair value, those cash flows should be consistent with the most recent budgets and plans approved by management.”

Id.

(App. B 152). FAS 142 also requires that “cash flow estimates shall be based on reasonable and supportable assumptions.”

Id.

at 14 (FAS ¶ 24);

id.

at 95 (App. E ¶ 41a).

With these principles in mind, the Court turns to the pending motions.

II.

Summary Judgment Standard

Summary judgment is appropriate when the “pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c);

Celotex Corp. v. Catrett,

477 U.S. 317, 322 , 106 S.Ct. 2548 , 91 L.Ed.2d 265 (1986).

Plaintiffs bear the burden of proving these elements: (1) a material (2) misrepresentation of fact; (3) scienter; (4) connection with the purchase or sale of a security; (5) reliance (also known as transaction causation); (6) loss causation; and (7) economic loss.

Dura Pharm., Inc. v. Broudo,

544 U.S. 336, 341-42 , 125 S.Ct. 1627 , 161 L.Ed.2d 577 (2005);

Provenz v. Miller,

102 F.3d 1478, 1483 (9th Cir.1996). Courts may analyze falsity and scienter together, even though they are separate elements, because they generally depend upon the same set of facts.

See In re Daou Systems, Inc. Sec. Litig.,

411 F.3d 1006, 1015 (9th Cir.2005).

Plaintiffs must come forward with “specific facts showing that there is a genuine issue for trial.”

Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

475 U.S. 574, 587 , 106 S.Ct. 1348 , 89 L.Ed.2d 538 (1986);

Celotex,

477 U.S. at 325 , 106 S.Ct. 2548 .

The Court must construe the evidence and draw justifiable inferences in favor of the non-moving party.

Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 255 , 106 S.Ct. 2505 , 91 L.Ed.2d 202 (1986).

“Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial.’ ”

Matsushita,

475 U.S. at 587 , 106 S.Ct. 1348 . “This rule does not require that there be no factual dispute. ‘[T]he mere existence of

some

alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no

genuine

issue of

material

fact.’ ”

Hanon,

976 F.2d at 500 (quoting

Anderson,

477 U.S. at 247-48 , 106 S.Ct. 2505 ). “Where material factual disputes exist, the court must allow a jury to resolve the factual disputes.”

Provenz,

102 F.3d at 1483 .

III.

Cross Motions for Summary Judgment on False or Misleading Statements

The parties filed cross motions to determine whether or not certain statements were false or misleading as a matter of law.

In a securities fraud case, “Pliability depend[s] on the plaintiffs’ success in demonstrating that one of the statements made by the company was actually false or misleading.”

In re Convergent Tech. Sec. Litig.,

948 F.2d 507, 512 (9th Cir.1991). “Thus, to prevail, the plaintiffs must demonstrate that a particular statement, when read in light of all the information then available to the market, or a failure to disclose particular information, conveyed a false or misleading impression.”

Id.;

15

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U.S.C. § 78a (“to make any untrue statement of material fact or to omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading”).

“The fact that an allegedly fraudulent statement and a later statement are

different

does not necessarily” establish falsity because the statement must be evaluated at the time it was made and not by hindsight.

In re GlenFed, Inc. Sec. Litig.,

42 F.3d 1541 , 1549 (9th Cir.1994) (prePrivate Securities Litigation Reform Act of 1995) (“PSLRA”). The Ninth Circuit cautioned that the application of “flexible accounting concepts ... do not always (or perhaps ever) yield a single correct figure.”

Id.

In order to create a triable issue of fact on falsity, Plaintiffs must demonstrate more than a “difference between two permissible judgments, but rather [must present facts explaining that the statement is] the result of a falsehood.”

Id.

A.

Plaintiffs’Accounting Expert Witnesses’ Opinions are Admissible under Daubert

Plaintiffs rely on expert testimony from two CPAs as evidence that REMEC’s goodwill impairment tests were manipulated by using unrealistic assumptions. Defendants move to exclude the expert opinions of Andrew G. Minstein and D. Paul Regan. Fed.R.Evid. 702. Defendants argue that Minstein and Regan did not use a reliable methodology in forming their opinions, but simply substituted their own subjective judgments.

In

Daubert v. Merrell Dow Pharms., Inc.,

509 U.S. 579, 589 , 113 S.Ct. 2786 , 125 L.Ed.2d 469 (1993), the Supreme Court directed trial judges to exercise their “gatekeeping responsibility” to ensure that expert testimony be “not only relevant, but reliable.” The Supreme Court gave examples of factors to determine reliability, but its list is not exclusive because the test is flexible to fit the subject matter.

Kumho Tire Co., Ltd. v. Carmichael,

526 U.S. 137, 141, 150, 153 , 119 S.Ct. 1167 , 143 L.Ed.2d 238 (1999). “[N]othing in either

Daubert

or the Federal Rules of Evidence requires a district court to admit opinion evidence which is connected to existing data only by the ipse dixit of the expert.”

G.E., Inc. v. Joiner,

522 U.S. 136, 146 , 118 S.Ct. 512 , 139 L.Ed.2d 508 (1997). The proponent of the witness bears the burden of establishing an expert’s qualifications, reliability, and helpfulness.

Having reviewed the expert reports and declarations, the Court overrules Defendants’ objections because their arguments bear on the weight of the evidence.

1.

Minstein Expert Report

Defendants complain that Minstein’s analysis is conclusory. Defs.’ Mot. to Strike at 3-4 (“Minstein simply substitutes his judgment for that of REMEC’s, and concludes that REMEC was wrong.”);

Daubert,

509 U.S. at 590 , 113 S.Ct. 2786 (expert’s opinion cannot be based upon subjective belief or unsupported speculation). The Court overrules the objections as they pertain to the FY03 and FY04 annual impairment tests, but sustains the objections to his conclusory opinions as to whether REMEC should have performed interim tests.

a)

FY03 and FY04 Goodwill Impairment Tests

The Court finds that Minstein’s expert opinions are sufficiently reliable to be admissible evidence because his declaration elucidates the basis of his conclusions. His expert report supports Plaintiffs’ claims that REMEC made false and misleading statements that its goodwill was

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not impaired in its Form 10-K for FY03 and FY04.

10

Minstein concludes that REMEC’s analysis of goodwill impairment was conducted in violation of GAAP in both FY03 and FY04.

See e.g.,

Minstein Decl. ¶¶ 24(b), 26-29, & 31-33. Minstein opines that the assumptions REMEC used to project gross profit margins and operating expenses as a percentage of revenue were inappropriate and indefensible. Minstein bases his opinion on factors such as RE-MEC’s low performance in recent years, continuing pressure from competitors, the slow progress of moving manufacturing operations from Finland to China, and poor selection of guideline companies. Minstein Report at 4-10 & 17-21. Min-stein notes that these conditions existed both when REMEC reported goodwill and when it took the writeoff. Minstein Decl. ¶ 6. He points to facts that support his conclusion, such as the small margins in the FY03 and FY04 tests, the small percentage of the calculated fair value in contrast to the carrying value, and the impact that small changes had on REMEC’s continued losses.

Id.

¶ 24(b).

Minstein also explains how he chose the assumptions he used in his computer model. Minstein uses actual data from Andrew Corporation — one of the guideline companies that REMEC used.

See e.g.,

Williams Decl. Ex. 12 at 8 (listing Andrew as guideline company). Although Andrew consistently outperformed REMEC, Min-stein states that he gave REMEC the benefit of doubt that it could achieve similar numbers. Minstein Decl. ¶¶ 19, 21(d),

&

41(b), (c), & (e). He applied an across-the-board 10% revenue growth rate in each of the last eight years of the projection based on “industry and company expectations.” Minstein Report at 19 & Ex. 18; Minstein Decl. ¶¶ 21(a)

&

41(a). He explains how he arrived at a gross profit margin of 30% after allowing for a 15% margin in the first year. Minstein Report at 19

&

Ex. 19; Minstein Decl. ¶¶ 21(b)

&

41(b). He also contrasts the different gross profit margin assumptions that RE-MEC used in two tests in the same year. Minstein Decl. ¶ 4.

In sum, the Court concludes Minstein explains the steps of his analysis and justifies the numbers he used; consequently, his expert opinion is admissible.

Defendants point to various weaknesses in Minstein’s analysis. These include such matters as (1) his professional judgment (e.g., his assertion that “Powerwave is the better indicator of expected REMEC com

*1219

mereial performance,” Minstein Report at 17; Minstein Decl. ¶ 5); (2) his interpretation of the governing accounting standard

(e.g.,

“In my opinion Defendants did not comply with requirements of FAS 142 because they ... did not base their FY03 goodwill impairment assumptions on historical performance, which is the best available evidence because company budgets and forecasts historically were not achieved,” Minstein Decl. ¶ 10(b));

id.

¶ 27(b) (same for FY04);

id.

¶ 10(e) (RE-MEC “improperly excluded the best comparison company”); (3) his heavy reliance on historical performance and the hindsight of actual performance as compared to predictions of future improvement

(e.g., id.

¶ 16(b)-(e));

id.

¶ 33(d) (“Actual performance for FY04 was even worse than the forecasted amounts”);

id.

¶¶ 36 & 38 (relying on historical performance of guideline company); and (4) the accuracy of certain factual assertions and calculations

(e.g.,

“forecast results were directed by management,” Minstein Report at 20; REMEC’s budgets “must be regarded as inherently unreliable,”

id.

at 21; “REMEC’s goodwill impairment test was based on unrealistic and unachievable budgets,” Minstein Decl. ¶¶ 12 & 16(b)).

Defendants may explore these perceived deficiencies through cross examination.

Primiano v. Cook,

598 F.3d 558, 564 (9th Cir.2010) (“Shaky but admissible evidence is to be attacked by cross examination, contrary evidence, and attention to the burden of proof, not exclusion.”) (citing

Daubert,

509 U.S. at 596 , 113 S.Ct. 2786 );

e.g., Robinson v. Hartzell Propeller, Inc.,

326 F.Supp.2d 631, 649 (E.D.Pa.2004) (determination of weight and sufficiency of expert evidence is “sole province of the jury”).

For the present purpose of ruling on the summary judgment motion, the Court OVERRULES Defendants’ laundry list of evidentiary objections to Minstein’s report. Defs.’ Evid. Obj. [Doc. No. 339-2],

b)

Interim Tests

The Court SUSTAINS Defendants’ objection to Minstein’s expert opinion on whether REMEC failed to conduct necessary interim tests between its annual tests. Minstein concludes that REMEC should have conducted interim tests for the quarters ending May 2, 2003 and October 31, 2003. Minstein Report at 3,15-17.

FAS 142 provides that “[gjoodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.” Williams Decl. Ex. 1 (FAS 142 ¶ 28). The standard gives examples of such events or circumstances, such as “a loss of key personnel.”

The Court agrees with Defendants that Minstein does not explain his reasons and does not conduct any analysis under the standard — he simply jumps to conclusions. Minstein identifies the events that, in his opinion, triggered the duty to conduct an interim test. For example, Minstein claims that the loss of key personnel, namely Morash as CFO in September 2003 and Ragland as CEO in February 2004, qualify as triggering events. Minstein Decl. ¶ 22-24 (interim); Minstein Report at 16. What is lacking, however, is any analysis of the language in FAS 142 that states the event

“would more likely than not reduce the fair value of a reporting unit below its carrying amount.”

When asked about his analysis at his deposition, Minstein admitted that he had not performed an impairment test to demonstrate that the identified events would have reduced the fair value of the Commercial wireless segment below its carrying value. Katsell MSJ Decl. Ex. E (Minstein Dep. at 302-03). As such, his opinion rests on his

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subjective belief or unsupported speculation.

Daubert,

509 U.S. at 590 , 113 S.Ct. 2786 .

c)

Scienter

The Court agrees with Defendants that Minstein exceeded his role as an expert witness on accounting when he gave his opinions about the Defendants’ mental state. The Court discusses that issue in the scienter section below.

2.

Regan Rebuttal Report

Plaintiffs offer Regan’s expert report to rebut the report by Defendant’s expert William W. Holder. Rogers Decl. Ex. 1 (Regan Decl. Ex. A.) (hereinafter “Regan Rebuttal Report”). [Doc. No. 252.]

Defendants first contend the rebuttal report was untimely filed in relation to Plaintiffs’ opposition brief. This procedural objection is overruled. The pretrial schedule was extended to allow the parties to exchange the rebuttal reports on February 3, 2009. Plaintiffs submitted the report as soon as it was available on February 9, 2009. The Court observes that Defendants filed their expert’s rebuttal report on the same day. [Doc. No. 254.] The Court prefers to resolve summary judgment motions on a complete record.

Next, Defendants argue Regan’s report exceeds the scope of a proper rebuttal brief because Regan conducted his own goodwill impairment analysis whereas Defendants’ expert Holder did not undertake that task. The Court OVERRULES this objection because Regan’s analysis contradicts Holder’s opinion on the same subject matter, specifically, whether RE-MEC used assumptions, estimates, and forecasts to evaluate goodwill that complied with GAAP.

Compare

Regan Rebuttal Report at 17-26

with

Holder Rebuttal Report at 8-9 & 13-18. Regan also addressed Holder’s reliance on the Ernst & Young audit work papers and the analysis by the successor Certified Public Accountant (“CPA”).

Id.

Defendants’ substantive argument is that Regan ignored the relevant legal standard and completely failed to explain or justify how or why the assumptions he made are more appropriate than the assumptions REMEC used to value goodwill.

The Court OVERRULES the objection because the allegations are belied by the report itself. Regan explains precisely why he believes REMEC used inappropriate assumptions and then supports his reasons for selecting alternative inputs.

See e.g.,

Regan Rebuttal Report at 17-25. As the Ninth Circuit observed on remand from the Supreme Court, “the test of

Daubert

is not the correctness of the expert’s conclusions but the soundness of his methodology.”

Daubert v. Merrell Dow Pharms., Inc.,

43 F.3d 1311 , 1318 (9th Cir.1995). Defendants may make use of the traditional methods of testing the weight of an expert’s opinion by vigorous cross examination and presentation of contrary evidence.

Daubert,

509 U.S. at 596 , 113 S.Ct. 2786 .

For the present purpose of ruling on the summary judgment motion, the Court OVERRULES Defendants’ laundry list of evidentiary objections to Regan’s report. Defs.’ Evid. Obj. [Doc. No. 339],

B.

Statements Before and During Class Period

The cross motions for summary judgment involve these statements: (1) RE-MEC performed a goodwill impairment test in' February 2002; (2) REMEC’s goodwill for FY03 was not impaired (particularly the gross profit margin assumptions); (3) REMEC would soon return to profitability; (4) Ragland “retired” as CEO; (5) the “China Ramp” was “on plan”; and (6) other accounting practices and financial performance.

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A corporate officer who, on behalf of corporation, signs the financial statement “makes” a statement for potential liability under the federal securities laws.

Howard v. Everex Sys. Inc.,

228 F.3d 1057, 1061-62 (9th Cir.2000). In this case, Ragland was CEO at the start of the class period, but he left REMEC in the middle of it. Hickman was not employed by RE-MEC at the start of the class period, but remained through the end of it. Because the two executives had different terms, it is important to pay attention to the date of the statements contained in the SEC filings.

1.

Factual Issues Remain on the Falsity of the Statement that REMEC conducted a Transitional Goodwill Impairment Test as of February 1, 2002

Plaintiffs contend that Defendants falsely told investors that REMEC “performed its transitional goodwill impairment test as of February 1, 2002.” Fraser Deck Ex. 9 at 12 (Q3 04 Form 10-Q filed Dee. 13, 2003) (“REMEC did not recognize any goodwill impairment as a result of performing this transitional test.”);

accord

Williams Deck Ex. 56 at 33 (FY03 Form 10-K at 27) (R887571) (same, pre-class statement). They seek summary adjudication on this issue. Pis.’ MSJ Br. at 17-20.

Defendants counter that the company did perform that transitional test, which was the first test conducted under the new standard in FAS 142, but cannot locate the actual document. Plaintiffs argue that the fact that REMEC cannot produce, when ordered to do so, the 2002 test demonstrates that it does not exist.

See

Order Granting in part and Denying in part Pis.’ Mot. Compel Production of Docs, and Interrog. Resp. [# 193]; Order Granting Mot. to Compel Dep. Answers. [#270].

11

After Plaintiffs’ motion was fully briefed, the Court permitted Defendants to file a supplemental brief because they located documents reflecting that the transitional test had been performed. Defendants now rely on circumstantial evidence from their accountant to show that the test was conducted.

The Court concludes that Plaintiffs are not entitled to a partial summary judgment that REMEC did not conduct its transitional test in February 2002. Defendants submitted evidence that REMEC’s independent auditor reviewed that initial test during its audit in April 2003. Katsell Supp. Deck Ex. A (Ernst & Young Audit Results).

12

The auditor’s statement that it “reviewed” the initial test “performed by the Company” on the Commercial segment which used the “discounted cash flow analysis” for both segments “as of February 1, 2002” is circumstantial evidence that RE-MEC did conduct the transitional impairment test as stated in its Form 10-K.

Id.

at 12 (R1928030). Ernst & Young reviewed Arthur Andersen’s valuation of Solitra, including the fair value of goodwill, as a part of the audit.

Id.

(noting its review of the Oct. 2001 Solitra analysis);

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Furukawa Surreply Decl. Ex. A (Arthur Andersen Valuation Analysis of Solitra, dated Oct. 2001). Nonetheless, REMEC has not produced the document and none of REMEC’s witnesses definitively testified to personal knowledge that the test was performed. Furukawa Decl. Ex. B (Hinkle Dep. at 243-44) (“I don’t recall any analysis.”); Furukawa Surreply Decl. Ex. B at 51 & 55 (Sackett Dep. at 124 & 151) (General Counsel does not know of any supporting documents); Fraser Decl. Ex. 11 (Morash Dep. at 36) (doesn’t believe separate transitional test done)

&

Ex. 30 (Gibbs Dep. at 14-15) (“I do not know if that was done”);

but see

Katsell MSJ Decl. Ex. G (Gray Dep. at 12) (“I spearheaded” the transitional test with assistance from outside consultant). Consequently, there is a triable issue on this disputed fact.

In their supplemental brief, Defendants further argue that REMEC

properly

tested the goodwill by relying on third-party valuations of recent acquisitions. Defendants argue that the accounting standards permit this approach because the acquired entities constituted a “significant portion” of the Commercial Wireless segment. Defs.’ Supp. Opp. Br. at 2-3; Williams Decl. Ex. 1 (FAS 142, App. B ¶ 155); Furukawa Surreply Decl. Ex. B at 52-55 (Sackett Dep. at 125-29). Plaintiffs objected to the new issue, but responded in their own supplemental brief by disputing whether the transitional test, as reported in the corroborating documents, complied with the accounting standard to value the “reporting unit as a whole.” Williams Decl. Ex. 1 (FAS 142 ¶23). Plaintiffs contend that REMEC improperly substituted an analysis of one acquisition (Solitra) by an outside accounting firm instead of conducting a complete test of the Commercial segment’s goodwill.

The Court declines to address this new issue — whether the transitional test, assuming it exists, complied with FAS 142 — because it was not part of either party’s original motion for summary judgment.

See Martinez v. Ylst,

951 F.2d 1153, 1156-57 (9th Cir.1991) (declining to review issue not raised in opening brief, but raised for the first time in a reply brief);

Miller v. Fairchild Indus., Inc.,

797 F.2d 727 , 738 (9th Cir.1986) (declining to consider summary judgment issue that was not “specifically and distinctly argued” in initial brief). The Court granted leave to file supplemental briefs on the issue of the existence of the transitional test based upon Defendants’ inability to locate documents reflecting that test. [Doc. Nos. 311, 313, 316.] The Court did not grant leave for the parties to advance a new legal theory about the transitional test.

2.

FY03 Goodwill Impairment Test

The next statement concerns the first annual test of goodwill that REMEC conducted under the new FAS 142 accounting standard.

One introductory caveat is appropriate. REMEC filed its Form 10-K in April 2003

before

the class period commenced in September of that year. Statements made

before

the class period can be relevant evidence on this issue of

scienter

because “they may provide insight into what the defendant knew during the class period.”

DeMarco v. DepoTech Corp.,

149 F.Supp.2d 1212 , 1223 n. 6 (S.D.Cal.2001),

aff'd,

32 Fed.Appx. 260 (9th Cir.2002);

accord In re Scholastic Corp. Sec. Litig.,

252 F.3d 63, 72 (2d Cir.2001) (pre-class data relevant to confirm what a defendant should have known at start of class period);

In re Merck & Co., Sec. Litig.,

432 F.3d 261, 271-72 (3d Cir.2005) (adopting Second Circuit’s analysis in

Scholastic

that statements from outside the class period may be relevant evidence for purpose of drawing an inference about defendant’s knowledge). A defendant may be held liable, however, only for the statements

*1223

made during the class period.

DeMarco,

149 F.Supp.2d at 1223 n. 6 (citing

In re IBM Corp. Sec. Litig.,

163 F.3d 102, 107 (2d Cir.1998)). Here, the class period dictates that liability may be based only upon statements made by Defendants between September 8, 2003 and September 8, 2004. However, the Court considers whether the pre-class period statements are false or misleading on the issue of

falsity

because it bears on whether Defendants acted with

scienter

during the class period. The Court analyzes the scienter element below.

The Form 10-K included the following language on the valuation of REMEC’s goodwill for the fiscal year that ended on January 31, 2003.

The required goodwill impairment test was performed as of December 27, 2002. Our impairment review process is based on a discounted future cash flow approach that uses our estimates of revenue for the reporting units, driven by assumed market growth rates and assumed market segment share, and estimated costs as well as appropriate discount rates.

These estimates are consistent with the plans and estimates that we use to manage the underlying business.

The estimates we used assume that we will gain market segment share in the future and the Commercial segment will experience recovery and a return to growth and profitability from the current trends. We may incur charges for goodwill impairment in the future, if the products fail to gain expected market acceptance or if we fail to achieve our assumed revenue growth rates or assumed gross margins.

In performing the fiscal 2003 annual test for the Commercial segment, we assumed

sales growth rates ranging from

5%-15%; gross profit margins ranging from 30%-38% (excluding depreciation);

an income tax rate of 18% and a discount rate of 20% .... We did not recognize any goodwill impairment as a result of performing this annual test.

Williams Decl. Ex. 56 at 33 (Form 10-K at 27) (emphasis added).

Plaintiffs allege that REMEC falsely stated that its goodwill was not impaired for FY03 (measured “as of’ Dec. 27, 2002). They argue that REMEC used inflated and unreasonable gross profit margins to perform that test. Specifically, they seek summary adjudication that REMEC falsely stated that the gross profit margin “estimates are consistent with the plans and estimates we use to manage the underlying businesses.”

Id.;

Pis.’ MSJ Br. at 14-17 n. 17.

13

In contrast to the narrow question that Plaintiffs raise, Defendants raise a broader issue. In their competing motion, Defendants move for summary adjudication that there is no evidence that the company’s goodwill impairment analysis for FY03 was improper, misleading, or fraudulent.

(a)

A Jury Must Decide Whether RE-MEC’s FY03 Assumptions of Future Gross Profít Margins of 30% to 38% were “Consistent” with its Business Plan

In conducting its FY03 goodwill impairment test, REMEC assumed gross profit margins of 30% for FY04, 35% for FY05, and 38% for the next seven years. Williams Decl. Ex. 56 at 33 (Form 10-K at 27); Katsell Opp. Decl. Ex. J at 298.

14

*1224

Plaintiffs argue that REMEC’s internal forecast of its expected gross profit was much less — only 21.7% for FY03. This figure comes from a budget dated February 4, 2003. Fraser Decl. Ex. 24 at 2 (R000172). Plaintiffs use the figure from FY03 because REMEC said the FY04 forecast was based on the “current budget.” Katsell Opp. Decl. Ex. J at 299 (EY-004847) (“Fy 2004 based on current budget.”). Plaintiffs argue that the public statement was false at the time it was made because the assumption that RE-MEC would achieve a 30% gross profit margin in FY04 was inconsistent with the forecast REMEC was using to manage the business (that is, the current budget of FY03 used 21.7%). REMEC, in a subsequent Form 10-K, acknowledged that even “a l%-2% change” in the gross profit margin of the Commercial segment could have a “significant impact” on the outcome of the impairment test. Williams Decl. Ex. 5 at 25 (draft FY04 Form 10-K at 22); Hickman Decl. ¶ 13. The much higher estimate is not “consistent” with the actual 21.7% rate used privately to run the Commercial segment.

In opposition, Defendants’ witnesses explained that the figure in the budget includes depreciation; by contrast, the goodwill impairment analysis excludes depreciation. Katsell MSJ Decl. Ex. L at 283-84 (Hinkle Dep. at 158-59); Katsell Opp. Decl. Ex. N at 405-06 (Gray Dep. at 35-36);

see

Katsell Opp. Decl. Ex. J at 299 (“Gross margin excludes depreciation”). Defendants argue that if the 5% depreciation figure is deducted from the 30% assumption for FY04, it shows that REMEC used consistent gross profit margins in its internal budget and its public statements about goodwill impairment test.

Plaintiffs challenge this logic. Even taking into account a 5% difference for depreciation leaves a disparity of 4.3% in FY04.

As further evidence, Plaintiffs cite to the Internal Control and Fraud Considerations form that Ernst

&

Young completed to prepare for its audit of REMEC’s FY03 books. Plaintiffs’ brief states that Ernst & Young “called the GPM assumptions ‘aggressive and unrealistic’ ” as if the auditor specifically identified the gross profit margin assumptions in REMEC’s goodwill impairment analysis. Pis. MSJ Br. at 16. This is a mischaracterization. The memo actually states a concern with “[m]anagement’s commitment to analysts, creditors, and other third parties to achieve aggressive or unrealistic forecasts.” Nonetheless, Ernst

&

Young’s observation does state its general opinion that REMEC had used unrealistic forecasts.

Plaintiffs also cite a draft of a three-year strategic plan to support their motion. Williams Decl. Ex. 10 at 1. The plan forecasts gross margins for the Commercial segment of 25.9% for FY04, 28% for FY05, and 30% for FY06.

Id.

at 63 (R001319). Plaintiffs argue that these in-house assumptions are inconsistent with the higher

*1225

gross profit margins announced to the investing public in the Form 10-K.

Defendants raise two objections to the admissibility of the August 2003 Three Year Strategic Plan exhibit that Plaintiffs submitted. Williams Decl. Ex. 10. First, Defendants argue the exhibit has not been authenticated. The Court overrules this objection because it is clear that REMEC created the August draft and a proper foundation easily can be laid by a person with personal knowledge that the document is what it is purported to be.

Hal Roach Studios v. Feiner & Co.,

896 F.2d 1542, 1551 (9th Cir.1990);

Burch v. Regents of the Univ. of Calif.,

433 F.Supp.2d 1110, 1120 (E.D.Cal.2006);

see

Katsell MSJ Decl. Ex. J at 269 (CFO Hickman states budgets were based upon “the 2003 strategic plan”). Indeed, Defendants submitted the September 2003 version of that same document. Katsell Opp. Decl. ¶22

&

Ex. T. Second, Defendants argue the exhibit is irrelevant because RE-MEC did not use the August draft in its goodwill analysis, rather, it used a September 2003 version as the basis for the assumed revenue. The Court overrules this objection because Plaintiffs offer the earlier draft as evidence of the information that was available to REMEC at the time it prepared its financial statements. Fed.R.Evid. 402.

The Court’s review of the record leads to the conclusion that Defendants have raised questions of fact that defeat Plaintiffs’ motion as to the falsity of this preclass period statement. First, Defendants cite a budget for FY04, which began on February 1, 2003. Katsell Opp. Decl. Ex. K. That budget, which is dated March 13, 2003, forecast a 25.12% gross profit margin for the Commercial segment.

Id.

at 2 (R315180). Adding back the 5% for depreciation makes the assumption 30.12%, which is the same as the 30% assumption that REMEC stated it would achieve in FY04.

Second, the budget had been prepared with estimates provided by the product line managers and then consolidated at the corporate level. Defendants argue this “bottom up” approach protected the budget from manipulation by executives.

Third, Defendants point to testimony that the company used the information it had available and the results that it expected to achieve. Katsell Reply Decl. Ex. 4 at 103-05 (Ernst & Young Partner Niki Krutop Dep.); Katsell Reply Decl. Ex. 7 at 182-84 (CFO Morash Dep.).

Fourth, Defendants cite evidence to explain the higher figures REMEC used for FY05 to FY10. Morash defended using projections of 35% to 38% gross profit margins after FY04 because “[w]e thought things were going to continue to improve, and so, we add a modest improvement on top of that.” Katsell Opp. Decl. Ex. C at 245 (Morash Dep. at 110). In particular, Morash believed that once the manufacturing operations were completely located in China, REMEC’s costs would reduce from “$40 an hour to 40$ an hour.”

Id.

“So, if that doesn’t improve your gross margin, then I don’t know what does.”

Id.

Morash also testified that he discussed the assumptions with Ernst & Young during the audit, and the CPA approved them. Katsell Scienter Decl. Ex. A (Morash Dep. at 72).

Fifth, REMEC’s independent auditor reviewed the FY03 goodwill impairment testing assumptions as part of its annual audit of the financial statements, and found they were “in line with managements forecasts and expectations of the relative segments’ performance in subsequent years.” Katsell Supp. Decl. at 12 (Audit Results, Report to the Audit Comm, of the Bd. of Directors) (dated Apr. 17, 2003). This included the gross profit margins used by the Commercial segment.

*1226

“Based on the results of [Ernst & Young’s] analyses,

no indicators of impairment were noted.” Id.

(emphasis added).

The Court concludes that a reasonable jury could accept Defendants’ explanation and take the 5% depreciation into account to reconcile the different figures in the current budget and the goodwill impairment test. There is certainly room for the parties to argue whether these numbers fall within the definition of the word “consistent.” Because a jury could find that REMEC used gross profit margin figures that were the same as its internal projections, Plaintiffs are not entitled to summary adjudication on the falsity of the challenged statement.

One further observation: Plaintiffs criticize the use of a budget dated March 13, 2003 to evaluate a goodwill impairment test “as of’ December 27, 2002. Plaintiffs argue that the Defendants’ evidence is irrelevant because the document was “dated 2^ months

after

the date as of which RE-MEC publicly reported it conducted the test” and “could not possibly be a document used to run the business at the time the test was performed.” Pis. Reply Br. at 7 (emphasis in original). Plaintiffs appear to believe that the “as of’ date is the date on which the goodwill impairment test was “performed.” They also argue that documents prepared closer in time to December 27 are more reliable than those created later. For example, Plaintiffs argue that the version of the budget printed on February 3, 2003 is better evidence than a version prepared in March 2003.

Id.

at 8 (“While Plaintiffs’ evidence is dated approximately one month after the date the test was conducted “as of,” it was the budget nearest in-time to the testing that Plaintiffs could find in Defendants’ production.”).

This- is inaccurate. The “as of’ date is selected by a company to measure goodwill; the company uses the same date in every annual test. REMEC selected the last business day of December for its annual test. Although REMEC’s goodwill was valued “as of’ December 27, 2002, the impairment test itself is performed over many weeks.

See generally

Williams Decl. Ex. 1 at 81-82 (FAS 142, App. B ¶¶ B142, B204 & B210) (discussing amount of work involved in impairment testing and allowing six months for companies to complete initial test under new method). The test can rely on information available during that time period.

15

During that same time period, REMEC would have been closing its fiscal year end books to prepare its SEC filings and Ernst & Young would have been conducting its annual audit of REMEC’s financial statements.

By necessity, a test is conducted “as of’ a date selected by the company even though the books for that period have not yet been closed and the budget for the new year has not yet been finalized. Katsell Reply Decl. Ex. 4 (Krutop Dep. at 103-04) (“the period that is selected is not the period that all the information has to be available ... if you do it, say as of December 27, ... your books for that period, by definition, wouldn’t be closed, nor would you have a budget from that period forward as of that date”). As Defendants point out, REMEC created a “working build” document and then revised the budget several times thereafter. Williams Decl. Ex. 51 at 2 (R000172) (same as Fraser Decl. Ex. 24); Defs.’ Opp. Br. at 3 n. 6. The early versions, including the one dated February 3, 2003, were subject to modification. Katsell Opp. Decl. Ex. C at 245-46 (Morash Dep. at 110-11) (referring to

*1227

R012945, “it was a preliminary budget” that was “printed” on Feb. 4, 2003, but “[t]here might have been modifications to it after that, ... it’s not final.”). More importantly, FAS 142 provides that companies should use “the most recent budget” to estimate cash flows. Williams Decl. Ex. 1 (FAS App.B ¶ B 152).

Moreover, a goodwill impairment test necessarily refers to estimates, forecasts, and projections of future events. It is natural to expect these figures would be modified and refined as the company solidified its strategy for the coming years.

Plaintiffs’ complaint that the March 13, 2003 budget was created “one day after E

&

Y

signed off

on the impairment analysis” also fails. Pis.’ Reply Br. at 7 (emphasis is original); Williams Decl. Ex. 44 (Ernst & Young initialed “3/12/03”). The budget was available to REMEC during the time it was analyzing the value of its goodwill. To the extent that Defendants rely on Ernst & Young’s approval of the assumptions, the original memorandum was dated January 30, 2003; was written by Kristen Janis, Senior Manager at Ernst & Young; and disclosed that REMEC assumed a 38% gross margin rate for the commercial segment. Williams Decl. Ex. 44 at 1.

The Court further notes that Plaintiffs also rely .on documents created after the “as of’ date of December 27, 2003 to support their own motion. Plaintiffs cite three documents that were created well after REMEC announced the goodwill impairment test for FY03. First, they rely on the “Internal Control and Fraud Considerations” form that Ernst & Young prepared in connection with its annual audit in the subsequent year (FY04). Pis.’ MSJ Br. at 16 (citing Fraser Decl. Ex. 23, which is same as Williams Decl. Ex. 26 (EYE-008934)). The form is not dated but the footer contains the date “08/03.” Second, Plaintiffs rely on a version of the three-year strategic plan, dated August 2003.

Id.

at 17 & n. 19 (citing Fraser Decl. Ex 25, which is same as Williams Decl. Ex. 10 (R001266)). Third, Plaintiffs cite a three-year forecast created in August 2003.

Id.

(citing Fraser Decl. Ex. 26).

(b)

A Jury Must Decide Whether RE-MEC’s Goodwill Impairment Analyses were False or Misleading

Defendants move for summary adjudication in their favor as to Plaintiffs’ goodwill claims. Their motion covers Plaintiffs’ allegations about the annual goodwill impairment tests for both FY03 and FY04, as well as allegations that RE-MEC should have conducted interim tests on the Commercial Wireless division. Defs.’ MSJ Br. at 6-16. Defendants argue that Plaintiffs have not presented evidence sufficient to support a verdict in their favor on the element of falsity.

Celotex,

477 U.S. at 323 , 106 S.Ct. 2548 (when moving party is defendant .on an element that plaintiff must prove);

Apple Computer,

886 F.2d at 1113. The Court DENIES the motion.

Defendants’ motion is based entirely on their argument that Plaintiffs’ experts’ reports are unreliable and are therefore inadmissible under

Dauberb.

Defs.’ Br. at 10-12 (FY03), 13-14 (interim), & 15-16 (FY04). The Court, however, has concluded that the expert opinions are admissible in so far as they pertain to the annual impairment tests. Consequently, there are competing expert opinions as to whether REMEC’s valuation of goodwill violated GAAP.

Compare

Minstein Report at 18 (“The projected gross margins exceeded what REMEC had historically achieved or would reasonably be expected to achieve.”),

id.

at 13 & Ex. 13 (calculating a goodwill impairment charge of $133.9 million for FY03),

id.

at 19 & Ex. 19 (using 25% gross margin — a number in line with REMEC’s internal information but still optimistic about future growth—

*1228

resulted in a $69.8 million goodwill impairment for FY04);

accord

Minstein Decl. ¶¶ 9-11 (FY03) & 26-33 (FY04)

and

Regan Rebuttal Report at 17-19, 21 (FY03), & 22-25 (FY04)

with

Holder Report at 18 (“the methodology employed by REMEC in its related impairment analyses appears reasonable”).

Provenz,

102 F.3d at 1490 (“As a general rule, summary judgment is inappropriate where an expert’s testimony supports the non-moving party’s case.”) (citations omitted). To the extent that Defendants point to evidence in the record that supports REMEC’s analysis, these present questions of fact.

16

Whether RE-MEC’s FY03 and FY04 goodwill impairment tests violated GAAP is, therefore, a jury question.

(c)

Plaintiffs’ Claim on Interim Testing Fails as a Matter of Law

Defendants also move for summary judgment on Plaintiffs’ related claim that REMEC’s failure to conduct interim tests violated GAAP. Plaintiffs contend REMEC falsely stated, both before and during the class period, that there were no impairment indicators.

See e.g.,

Brownlie Decl. Ex. H (2Q04 Form 10-Q at 19) (“Through August 1, 2003, there have been no such indicators.”). Plaintiffs’ only evidence on this issue was Minstein’s expert testimony. The Court has stricken the relevant portions of Minstein’s testimony because he offers unsupported and unreliable conclusions. Without that evidence, Plaintiffs have not created a genuine issue of fact as to whether certain events triggered RE-MEC’s obligation to conduct interim evaluations of goodwill. As such, the Court GRANTS Defendants’ motion, as to that issue.

C.

Ragland’s Optimistic Statements about Future

Plaintiffs contend that Ragland misled the market by making overly optimistic statements in December 2003.

17

Pis.’ MSJ Br. at 6-13; Pis.’ Reply Br. at 4 n. 3. Defendants filed a cross motion on the December statements and they seek partial summary judgment that similar statements in September were not misleading as a matter of law. Defs.’ MSJ Br. at 17-19.

“Projections and general expressions of optimism may be actionable under the federal securities laws.”

In re Apple Computer Sec. Litig.,

886 F.2d 1109, 1113 (9th Cir.1989) (pre-PSLRA). “In this circuit, a projection or statement of belief may be actionable to the extent that one of the three implied factual assertions is inaccurate: ‘(1) that the statement is genuinely believed, (2) that there is a reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts tending the seriously undermine the accuracy of the statement.’ ”

Hanon v. Dataproducts Corp.,

976 F.2d 497, 501 (9th Cir.1992) (quoting

Apple Computer,

886 F.2d at 1113 );

accord Virginia Bank-

*1229

shares, Inc. v. Sandberg,

501 U.S. 1083, 1093-94 , 111 S.Ct. 2749 , 115 L.Ed.2d 929 (1991) (statement of belief may be actionable if speaker knows the opinion has no reasonable basis in fact at the time it is expressed);

Marx v. Computer Sciences Corp.,

507 F.2d 485, 489 (9th Cir.1974) (“a forecast, essentially a prediction, may be regarded as a ‘fact’ within the meaning of’ Rule 10b-5). “The fact that the prediction proves to be wrong in hindsight does not render the statement untrue when made.”

In re VeriFone Sec. Litig.,

11 F.3d 865, 871 (9th Cir.1993) (citing

Marx,

507 F.2d at 489-90 ). The Ninth Circuit has held that misleading opinions (as compared to statements of fact) must be “both objectively and subjectively false or misleading.”

Rubke v. Capitol Bancorp, Ltd.,

551 F.3d 1156, 1162 (9th Cir.2009).

“[A]s opposed to simple representations of historic fact,” an optimistic prediction of future growth, profit, or success “presents more subjective issues.”

Apple Computer,

886 F.2d at 1113 ;

G & M, Inc. v. Newbern,

488 F.2d 742, 745-46 (9th Cir.1973) (“Under the securities law a reasoned and justified statement of opinion, one with a sound factual or historical basis, is not actionable. Here, however, considering the gross disparity between prediction and fact ..., we have no difficulty finding this ‘prediction’ to be actionable.”). In certain circumstances, a generalized, run-of-the-mill assertion of corporate optimism amounts to “mere puffery” that cannot be the basis of a securities fraud lawsuit.

In re Impac Mortgage Holdings, Inc. Sec. Litig.,

554 F.Supp.2d 1083, 1096 (C.D.Cal.2008) (citing

Glen Holly Entm’t, Inc. v. Tektronix, Inc.,

352 F.3d 367 , 379 (9th Cir.2003));

In re Wet Seal, Inc. Sec. Litig.,

518 F.Supp.2d 1148, 1168 (C.D.Cal.2007). Courts often analyze the materiality of such statements because no reasonable investor would rely on a company’s subjective expression of optimism for the future.

See e.g., In re Copper Mountain Sec. Litig.,

311 F.Supp.2d 857, 868-69 (N.D.Cal.2004);

VeriFone,

11 F.3d at 870 . Here, however, the parties have not moved for summary judgment on the materiality element, but instead analyze whether the statements are false or misleading. Pis. MSJ Br. at 1-2, 7-9 (Sept, statement); Defs.’ MSJ Br. at 3-5 & 16-19 (Sept.

&

Dec. statements);

but see

Defs.’ MSJ Br. at 17 (mentioning materiality in passing).

1.

September 2003 Statements

REMEC issued a press release on September 8, 2003 to announce the results of its second quarter of FY04. Williams Deck Ex. 24. REMEC reported the hard financial data, including net sales, net loss, and gross profit. The last paragraph quotes Ragland in his role as CEO as follows:

Continued improvement in sales and gross margins, as well as reduction in operating expenses and critical competitive wins, supports our confidence in REMEC’s game plan to exit FY'04 with sustainable growth and profitability. In addition to continued strong market share gains, we believe that the OEM and service provider customers are again spending on wireless infrastructure. Our Defense and Space Group continues to perform at record levels, while we continue to improve the performance of our Commercial Group The acquisition of Himark expands our ability to serve the China market and provides important momentum and competitive advantage in achieving our goal of a near term return to profitability and a strong second half performance.

Id.

18

Defendants argue that these statements are the type of soft information

*1230

predicting the future that are not actionable as a matter of law. Plaintiffs rely on their expert’s opinion that Ragland’s projections were flatly contradicted by other, non-disclosed information.

A close look at Ragland’s statement shows that part of it concerned the

entire

company. When Ragland spoke in general terms of factors that supported “confidence” in the “game plan” to achieve profitability by the end of the fiscal year on January 31, 2004, he was predicting the

consolidated

results for both segments of the company.

Id.

Defendants point to the record to show that shortly before Ragland made that public prediction, REMEC internally forecast that its consolidated operations would earn a profit in the third and fourth quarters. Williams Decl. Ex. 7 at 65 (R001426) (forecasting $1.7 and $1.6 million net income in third and fourth quarters, respectively, for entire company); Katsell Opp. Decl. Ex. C at 247 (Morash Dep. at 219) (the entire company “was expecting a small profit” in third quarter); Fraser Decl. Ex. 11 (Morash Dep. at 215-17). Plaintiffs’ expert criticizes Ragland’s statements because he did not disclose that REMEC’s internal forecast for the

operating

income (as compared to net income) predicted consolidated losses of $2.2 million and $700,000, respectively. Min-stein Report at 23; Minstein Decl. at 23. Plaintiffs’ expert opines that Ragland’s predictions were misleading because RE-MEC had large operating losses and the forecast of net income was “only possible with substantial income from non-recurring items unrelated to operations,” Min-stein Decl. at 24, ¶¶ 42, 43, & 44(b), namely, a $2 million gain from an executed trade of foreign exchange. Williams Decl. Ex. 7 at 56 (R001417).

The last part of Ragland’s statement concerns the Commercial Wireless Segment. Ragland stated that the performance of that separate segment had been improving in comparison to prior quarters. He identified the acquisition of Himark as a factor that supported his optimism that REMEC would be “achieving our goal of a near term return to profitability.” Williams Decl. Ex. 24. Plaintiffs’ expert notes that this prediction of profit is contradicted by the internal forecast of large net losses in both the third and fourth quarters for the Commercial segment. Minstein Decl. at 23, ¶ 44(a) & (b)(i); Williams Decl. Ex. 7 at 66 (R001427) (forecasting $4.9 and $3.5 million losses in third and fourth quarters).

19

The Court DENIES Defendants’ motion as to the September 2003 statements. Al

*1231

though Ragland was predicting uncertain, future results, the record contains financial forecasts that cast doubt on his optimism. The interpretation of the financial forecasts may be open to debate, but Plaintiffs present evidence that REMEC had internally forecast large losses just three days before Ragland predicted the company would show a profit at the end of FY04. Given the amount of the Commercial segment’s actual net losses in the first and second quarters, $9.2 and $7.7 million, and its projected losses of $4.9 and $3.5 million for the third and fourth quarter, Plaintiffs raise a triable issue of fact as to whether Ragland’s projections ignored facts that seriously undermined his September 2003 statements.

Manon,

976 F.2d at 501-03 ;

Marx,

507 F.2d at 490 . The

consolidated

financial situation was no better, as even the forecast of $1.7 and $1.6 million net profit would not wipe out the $7.1 and $3.6 million losses from the two prior quarters.

2.

December 2003 Statements

REMEC announced its third quarter results on December 8, 2003. Ragland predicted that REMEC would make a profit soon. In the press release, Ragland said, “we believe we are on track to achieve profitability in the near term.” Williams Deck Ex. 30 at 3 (R2601287). In the conference call that same day, Ragland stated, “we are quite convinced that we’re still steadily in the growth mode.” Williams Deck Ex. 31 at R2601287. Rag-land described his expectations as being “quite upbeat.”

Id.

at R2601286;

id.

at R2601290 (“I happen to be pretty damn optimistic about the way the marketplace looks.”). After Ragland commented on some of the positive indications and his confidence in the development, management, and sales teams at REMEC, he then said, “[o]ur goal is to breakeven for the quarter.”

Id.

at R2601287;

id.

at R2601292 (setting goal for gross margin in coming year).

The parties dispute whether Ragland falsely described REMEC’s financial situation in the press release and earnings conference call.

20

Plaintiffs contend that when Ragland announced on December 8, 2003 that REMEC would soon return to profitability, the company faced extreme pricing pressures and REMEC’s internal projections contradicted any belief of profit by the end of FY04. Pis.’ MSJ Br. at 7. In their cross motion, Defendants argue that “[w]ith two months to go in the quarter and the internal forecast being so close to breakeven, these numbers do not show that a breakeven fourth quarter was impossible to achieve.” Defs. MSJ Br. at 18.

Like his predictions in September 2003, Ragland’s December statements are optimistic statements that usually are not actionable as securities fraud.

Copper Mountain,

311 F.Supp.2d at 879 (rejecting statements that business was “strong,” “solid,” and “on track to meet revenue and earnings expectations”). Plaintiffs rely on the exception to that general rule. They argue that Ragland knew his positive, public statements were inaccurate at the time he made them. Pls. MSJ Br. at 7-13;

see

Pls.’ Opp. Br. at 21-23.

As support, Plaintiffs rely on the presentation at a Board of Directors meeting on December 5, 2003 when REMEC forecast-ed a net loss of $600,000 for the fourth quarter and estimated a net loss of $15.4 million for FY04. Williams Deck Ex. 8 at 33 (R001619). That presentation also informed Ragland that the expected savings from the “China ramp” had not yet come to fruition because of delays in getting out of Finland. Indeed, the delay was costing

*1232

REMEC $3 to 5 million each quarter. Fraser Decl. Ex. 2 at 70 (R001656). Second, the presentation reported that “[e]ontinuing industry pricing pressure will keep underlying Gross Profit margins” low while “material costs remain high.” Williams Decl. Ex. 8 at 20 (R001606 year to date challenges);

id.

at 28 (R001614 fourth quarter forecast). Given this information, Plaintiffs contend that Ragland’s positive statements three days later were misleading.

21

In addition, Plaintiffs note that REMEC did not have a track record of meeting its forecasts. For example, at the September 2003 Board of Directors meeting, REMEC had predicted it would earn a profit in the third quarter. Williams Decl. Ex. 8 at 33 (R001426). That goal was not met. Instead of earning a $1.7 million profit, RE-MEC suffered a net loss of $4.1 million that quarter.

Compare

Williams Decl. Ex. 7 at 65 (R001426) (Sept. 5, 2003 forecast for Q3)

with

Williams Decl. Ex. 8 at 33 (Q3 actual result). Plaintiffs argue that because the actual result was a loss twice as large as the early forecast, Ragland must have known his prediction for the fourth quarter was equally doomed to fail.

Plaintiffs also note that others with the same information doubted that REMEC would quickly return to profitability.

22

First, Plaintiffs rely on Hickman’s testimony that he “would not have said that” REMEC’s goal was to breakeven in the fourth quarter. Fraser Decl. Ex. 10 (Hickman Dep. at 123). Second, a member of the Board of Directors had been concerned with REMEC’s “lack of profitability and sales growth” throughout his tenure. Fraser Decl. Ex. 12 (Hughes Dep. at 85-86). Third, Plaintiffs state that Ernst & Young did not believe REMEC would achieve the goal of profitability given its consistent losses in the first three quarters of FY04. The basis of this inference is that Rag-land’s statement that REMEC would return to profitability caused the auditor to be on the lookout for overstating revenues when it conducted the annual audit.

Defendants argue the internal forecast did not seriously undermine Ragland’s optimism for improvement during the two remaining months of the fourth quarter because it was a small number. It was not impossible that REMEC would eliminate the projected loss of $600,000 and breakeven. They minimize the significance of RE-MEC’s past performance. In the recent past, REMEC’s actual results showed increased sales in the first, second, and third quarters as well as a declining net loss. Williams Decl. Ex. 8 at 33 (R001619) (sales increased from $81 to $86 to $104 million in the three prior quarters, while the net loss of $7.1 million in the first quarter was reduced to a $4.1 million loss in the third). Defendants further argue Ragland genuinely believed REMEC’s forecasts were reasonable. Prior to the third quarter, the company had expected to earn a “small profit.” Katsell Opp. Decl. Ex. C at 247 (Morash Dep. at 219) (CFO, at that time, testified REMEC forecast a little better than break even). REMEC’s budget for FY04 projected net income of $2.2 million. D’s Opp. p. 1. Finally, Defendants argue the company had a plan to increase gross profit margins over the near term in order to meet the target. Katsell Opp. Decl. Ex.

*1233

D (Pat Gray’s Global Operations FY05 Budget) [Doc. No. 259-2],

On this record, the Court concludes that triable issues of fact exist and DENIES the cross motions as to the falsity of the December 2003 projection.

Hanon,

976 F.2d at 501-03 ;

Marx,

507 F.2d at 490 .

D.

Statement of Ragland’s Reason for Leaving REMEC

On February 10, 2004, REMEC issued a press release stating that “Ronald E. Ragland, 62, has announced his

retirement

from REMEC, Inc.” Fraser Decl. Ex. 31 (emphasis added).

Plaintiffs move for summary judgment that the announcement that Ragland “retired” was false. They argue the record is clear that Ragland was forced out of the company for poor performance, therefore, REMEC’s public statement portraying his departure solely as a personal decision to retire was misleading.

“To be actionable under the securities laws, an omission must be misleading; in other words it must affirmatively create an impression of a state of affairs that differs in a material way from the one that actually exists.”

Brody v. Transitional Hospitals Corp.,

280 F.3d 997, 1006 (9th Cir.2002). The Court agrees that Plaintiffs have presented evidence to satisfy that standard.

Plaintiffs have shown the statement was false because the actual circumstances under which Ragland left REMEC cannot be characterized as “retirement.” First, the minutes of the January 30, 2004 meeting of the independent Board of Directors states:

After an extensive discussion of the financial condition of the Company and management’s inability to satisfactorily improve the financial performance of the business, upon motion duly made, seconded and unanimously carried it was decided that Ronald E. Ragland was to be removed immediately as Chief Executive Officer of the Company. Messrs. Shaner and Nash were appointed to offer Mr. Ragland the opportunity to retire and to negotiate an appropriate transition agreement with Mr. Ragland.

Fraser Decl. Ex. 6. Second, three Directors testified in their depositions that Ragland was asked to resign because of his poor performance.

Id.

Ex. 12 at 4 (Harold Hughes Dep. at 215);

Id.

Ex. 15 at 3 (Thomas Waechter Dep. at 52);

Id.

Ex. 30 at 4 (William Gibbs Dep. at 216-17). Ragland confirmed in his deposition that the Board used the “art form” of being “encouraged to retire.”

Id.

Ex. 7 at 3 (Ragland Dep. at 132-33) (“The board of directors asked me to retire from RE-MEC.”). The press release did not disclose that Ragland “was to be removed immediately” and as a result he agreed to accept the Board’s offer to retire.

Id.

Ex. 30 at 5 (William Gibbs Dep. at 219-20) (Board decided to give Ragland opportunity to retire to avoid any wrongful termination litigation, and “[a]fter some negotiation, he took the agreement.”);

GlenFed,

42 F.3d at 1551 (statement “even if literally true” can be misleading).

Another piece of incriminating evidence is that REMEC drafted a script to answer questions regarding Ragland’s departure:

Why did Ron Ragland step down? Was Ragland forced to resign? Was Ragland’s retirement a direct result of the poor financial results?

After founding REMEC in 1983 and leading the company for over 20 years, Ron Ragland took the personal decision that at the age of 62, he wanted to finally retire.

Did Ron’s resignation come as a surprise?

There was no surprise or spur of the minute decision. The board was fully aware of Ron’s intentions and before

*1234

leaving, he had agreed to assist the company, at its request.

Did the board try to prevent Ron from retiring?

Retirement is a completely personal decision and therefore the board completely respected Ron’s wishes.

Fraser Decl. Ex. 32 at 1.

Plaintiffs’ evidence shows that REMEC portrayed a

“fagade that

Ragland was leaving the company of his own volition.” Pis.’ Br. at 23. In fact, Ragland described the experience as feeling “like my beloved mother had just told me I was a bastard.” Fraser Decl. Ex. 7 (Ragland Dep. at 133).

Defendants oppose the motion on the ground that the omission was not material, however, materiality is a separate element distinct from falsity. Defs.’ Opp. Br. at 11-12;

TSC Indus., Inc. v. Northway, Inc.,

426 U.S. 438, 449-50 , 96 S.Ct. 2126 , 48 L.Ed.2d 757 (1976) (“there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available”) (footnote omitted);

accord Basic Inc. v. Levinson,

485 U.S. 224, 231 , 108 S.Ct. 978 , 99 L.Ed.2d 194 (1988).

Defendants also argue REMEC followed a standard business practice not to reveal that Ragland retired only because he had been asked to retire.

E.g.,

Katsell Opp. Decl. Ex. S at 501 (Horn Dep. at 267) (“When people retire, it is not the practice — I’ve never seen any announcement saying, ‘Mr. X has retired because he was asked to retire.’ This is not the way things are done in business.”). That such omissions are common however does not immunize them from being misleading.

The Court concludes that Plaintiffs’ evidence demonstrates the absence of a genuine issue of fact as to the misleading nature of the statement in the February 10, 2004 press release that Ragland retired.

Celotex,

477 U.S. at 323 , 106 S.Ct. 2548 .

E.

Statement that “China Ramp” was On Schedule

REMEC manufactured its wireless products and components worldwide, but decided to close its Finland operations and build new manufacturing plants in China.

See

Williams Decl. Ex. 56 at 10 (10-K at 4). The goal was to reduce costs. This project was called the “China ramp.” On December 8, 2003, REMEC issued a press release that quoted Ragland as saying that “our China ramp is proceeding on plan.” Fraser Decl. Ex. 13 at 3. The parties filed cross motions as to whether this statement is false or misleading.

Defendants argue that the statement that the relocation of REMEC’s manufacturing to China was “on plan” is not actionable as a matter of law. Defs.’ Br. at 16-17. Defendants argue the statement constitutes an amorphous, soft forecast of optimism.

In re Dot Hill Sys. Corp. Sec. Litig.,

594 F.Supp.2d 1150, 1158 (S.D.Cal.2008) (rejecting statement that integration of technology was “on schedule and continuing smoothly” and “already a success”);

Copper Mountain,

311 F.Supp.2d at 880 (characterization of business as “on track” to report earnings was “inactionable puffery”).

The Court does not agree with Defendants’ characterization of the statement as forward-looking; instead, the statement describes a current business condition.

In re Secure Computing Corp. Sec. Litig.,

120 F.Supp.2d 810, 818 (N.D.Cal.2000);

see Copper Mountain,

311 F.Supp.2d at 880 (“To the extent that such statements rested upon a characterization of the present state of the company, such statements are not properly considered forward-looking.”). The Court also rejects Defendants’ argument that the statement is mere puffery.

*1235

Ragland’s statement does not subjectively evaluate the quality of the plan. Rather, his statement asserts that the plan to transition manufacturing from Finland to China is proceeding according to the established schedule.

Wet Seal,

518 F.Supp.2d at 1168 (contrasting statements that can be objectively verified from those lacking a standard against which “a reasonable investor could expect them to be pegged”) (citations omitted).

In their motion, Plaintiffs seek partial summary judgment that the statement was false because, at the time it was made, Ragland knew the project was suffering costly delays. Pis. Br. at 2. Specifically, three days before REMEC made its public statement, the Board of Directors learned that one challenge REMEC had faced in the third quarter was that the “China ramp too slow, costing $3-$5M/Quarter.” Fraser Decl. Ex. 2 at 70 (R001656) (Dec. 5, 2003 presentation). Plaintiffs note that this was not new information. When the Board of Directors held its June 2003 meeting, the China ramp was “3 months behind original plan.” Fraser Decl. Ex. 3 at 14 (R001087). Similarly, at the September 5, 2003 Board of Directors meeting, REMEC reported that “[s]lower than planned phase-down of Finland manufacturing causing $2.5M/qtr budget overrun.” Fraser Decl. Ex. 8 at 13 (R001374) (noting delay in setting up supply chain of “China manufacturing ramp”).

One executive testified that the three or four months of delay “was not [an] insignificant amount of time.” Fraser Decl. Ex. 15 at 4 (Thomas Waechter, Chief Operating Officer, Dep. at 82). Plaintiffs emphasize that REMEC depended upon the transition out of Finland and into China to achieve considerable cost savings that would overcome the pricing pressures facing the wireless industry.

Id.

(Dep. at 84) (“with the pricing pressures we had and the importance of getting to lower cost products, yes, [the delay] was significant”); Fraser Decl. Ex. 18 (Jon Opalski Dep. at 207) (a transition to lower cost manufacturing “was the only idea that was going to make our company profitable”).

One industry analyst concurred and concluded that the “eventual transition of the company’s Finland-based manufacturing to China ... should enable the company to show gross margin improvement ■ in its next fiscal year.” Fraser Decl. Ex. 17 at 1. The analyst reported that, as of September 2003, REMEC was incurring $2.5 million per quarter of costs by operating duplicate manufacturing facilities in Finland and China. Those costs were expected to increase in the third quarter, and then to decrease upon a complete transition to China.

Id.

at 1-2.

Defendants contend that Ragland’s December 8, 2003 statement is consistent with the internal reports and therefore is not misleading. H. Clark Hickock, Vice President of Global Operations, testified that the statement was accurate when it was made during the fourth quarter. Katsell MSJ Decl. Ex. K at 276 (Hickock Dep. at 118). Plaintiffs point to the weakness of Hickock’s assertion, however, since he based his opinion on REMEC’s press release, rather than personal knowledge of how the company had been performing. Furukawa Reply Decl. Ex. A (Hickock Dep. at 119).

Defendants also rely on Ragland’s deposition testimony that “China was performing the plan and the ramp was too slow. They’re not mutually exclusive.... [W]e were not getting out of Europe as fast as we liked. So we were performing the plan, but we’d like to be performing a lot faster.” Katsell MSJ Decl. Ex. V (Rag-land Dep. at 209).

The Court DENIES Plaintiffs’ motion to find the statement — “our China ramp is proceeding on plan” — false as a matter of

*1236

law. Whether the statement is misleading given the available inside information depends upon the credibility and weight afforded Ragland’s explanation.

Brody,

280 F.3d at 1006 ;

Provena,

102 F.3d at 1483 (jury resolves fact disputes).

F.

“Other” Accounting Practices and Historic Financial Performance

Plaintiffs allege that REMEC’s financial reports were false and misleading because, aside from the valuation of goodwill, the company artificially inflated its reported earnings by reducing its inventory reserves in the second and third quarters of FY04. FAC ¶ 8 (“manipulating inventory reserves to artificially improve profits”). Defendants move for summary adjudication of this allegation because Plaintiffs have failed to present any evidence to substantiate it.

The Court agrees. Plaintiffs oppose the motion with attorney argument but without any evidentiary support. Pis.’ Opp. Br. at 18 & 23-24. They cite one page of a two-hundred page document without any testimony to explain how it relates to their fraud theory. Fraser Decl. Ex. MM (U.S. Amps as of 10/31/03). Plaintiffs offer no evidence to defend allegations in the complaint that REMEC over-valued inventory or sold “zero value” inventory. FAC ¶ 11(a) & (b). Further, Plaintiffs also fail to cite even a “scintilla” of evidence that supports their allegation that REMEC falsely stated its historic results regarding sales and revenue. FAC ¶¶ 3 & 8. Accordingly, to the extent that the Plaintiffs allege REMEC committed other types of accounting fraud, the Court GRANTS Defendants’ motion for summary adjudication.

Matsushita,

475 U.S. at 587 , 106 S.Ct. 1348 ;

Celotex,

477 U.S. at 325 , 106 S.Ct. 2548 (When moving party is the defendant, plaintiff may not “resist a properly made motion by reference only to its pleadings.”)

IV.

Scienter

Defendants seek summary judgment on the scienter element of the first cause of action which alleges a violation of § 10(b).

23

15 U.S.C. § 78j; SAC ¶¶ 382-92.

In order to prevail at trial on a § 10(b) claim, a plaintiff must establish that each defendant made the allegedly false or misleading statements with scienter.

Kaplan v. Rose,

49 F.3d 1363, 1378 (9th Cir.1995);

see also Howard,

228 F.3d at 1064 (PSLRA did not alter substantive requirement for scienter on a summary judgment motion).

“Generally, scienter should

not

be resolved by summary judgment.”

Provenz,

102 F.3d at 1489 . The court must deny a defendant’s motion for summary judgment on intent “unless

all

reasonable inferences that could be drawn from the evidence defeat the plaintiffs claims.”

Id.

(quoting

Vaughn v. Teledyne, Inc.,

628 F.2d 1214, 1220 (9th Cir.1980) (emphasis added)). A plaintiff opposing summary judgment “must present significant probative evidence” of scienter.

Id.

“Thus, summary judgment on the scienter issue is appropriate

only

where there is no rational basis in the record for concluding that any of the challenged statements was made with the requisite scienter.”

Id.

(quotations and citations omitted).

“To establish scienter, plaintiffs must show that defendants had ‘a mental state embracing an intent to deceive, manipulate, or defraud.’ ”

Id.

(quoting

In re Worlds of Wonder Sec. Litig.,

35

*1237

F.3d 1407, 1424 (9th Cir.1994) (quoting

Ernst & Ernst v. Hochfelder,

425 U.S. 185 , 193-94 n. 12, 96 S.Ct. 1375 , 47 L.Ed.2d 668 (1976))). Negligence, even if inexcusable, is not sufficient.

Hollinger v. Titan Capital Corp.,

914 F.2d 1564, 1569 (9th Cir.1990) (citations and quotations omitted). “Plaintiffs can ‘establish scienter by proving either actual knowledge or recklessness.’ ”

Id.

(quotation omitted). The Ninth Circuit defines recklessness “as a form of intentional or knowing misconduct” and, at a minimum, requires a showing of conscious or “deliberate recklessness.”

In re Silicon Graphics, Inc. Sec. Litig.,

183 F.3d 970, 976-77 (9th Cir.1999).

“ ‘[T]he proof of scienter in fraud cases is often a matter of inference from circumstantial evidence.’ ”

In re Software Toolworks, Inc.,

50 F.3d 615, 627 (9th Cir.1994) (quoting

Herman & MacLean v. Huddleston,

459 U.S. 375 , 390 n. 30, 103 S.Ct. 683 , 74 L.Ed.2d 548 (1983)). “However, ‘[t]he mere publication of inaccurate accounting figures, or a failure to follow [Generally Accepted Accounting Principles] GAAP, without more, does not establish scienter.’ ”

Id.

(quoting

Worlds of Wonder, 35

F.3d at 1426). GAAP “tolerates a range of reasonable treatments, leaving the choice among alternatives to management.”

Cirrus,

946 F.Supp. at 1457 .

Before applying the summary judgment standard, the Court makes an initial observation. Counsel for Plaintiffs are skilled litigators, and they have ably and zealously argued their interpretation of the facts at hand. Plaintiffs’ opposition brief is written such that one might readily accept their conclusion that “Ragland and Hickman were directly involved and knew the goodwill test assumptions were false and misleading.” Pis.’ Opp. Br. at 14 (heading). In resolving the pending motions, however, the Court must separate rhetoric from evidence. The Court repeatedly examined the evidence underlying the generous characterizations in Plaintiffs’ briefs and found faint, if any, support.

At the pleading stage, the Court held that Plaintiffs alleged sufficient facts to create a strong inference of scienter in large part because the FAC quoted several Confidential Witnesses stating that Rag-land and Hickman were directly involved in critical events and had personal knowledge of key facts.

Compare

Order Granting Mo. to Dismiss [SAC] at 16-17

with

Order Denying Mo. to Dismiss FAC at 6 (citing FAC ¶¶ 99-126). None of those allegations are supported by the proof presented. After a taxing and thorough discovery process, Plaintiffs did not submit a deposition or declaration from a single Confidential Witness to substantiate the FAC’s allegations regarding the executives’ knowledge or personal involvement.

See e.g.,

FAC ¶¶ 128 & 136 (alleging Rag-land “issued his directives” to reduce manufacturing costs “in a futile attempt to improve gross profit margins”);

id.

¶¶ 102 (alleging “Hickman personally adjusted this forecast”), 112-13, 117, & 134-35 (alleging Hickman was “definitely involved” and “intensely debated” gross profit margins with independent auditors).

The Court is mindful that “credibility determinations, the weighing of evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge when he is ruling on a motion for summary judgment.”

Anderson,

477 U.S. at 255 , 106 S.Ct. 2505 . This is particularly important for the intent element. While ordinarily the issue of scienter presents a triable issue of fact, this case proves the exception. “Rule 56 must be construed with due regard not only for the rights of the persons asserting claims and defenses that are adequately based in fact to have those claims and defenses tried to a jury, but also for the rights of persons

*1238

opposing such claims and defenses to demonstrate in the manner provided by the Rule, prior to trial, that the claims and defenses have no factual basis.”

Celotex,

477 U.S. at 327 , 106 S.Ct. 2548 . A jury trial is unnecessary when attorney argument is not supported by the facts that were produced during an extensive and exhaustive discovery process.

Anderson,

477 U.S. at 256-57 , 106 S.Ct. 2505 (courts may resolve intent in summary judgment motions when “the plaintiff has had a full opportunity to conduct discovery” and no rational jury would return a verdict in its favor);

Celotex,

477 U.S. at 327 , 106 S.Ct. 2548 (“Summary judgment procedure is properly regarded not a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed to ‘secure the just, speedy and inexpensive determination of every action.’ ”).

Despite their impressive stack of exhibits (the 81 consolidated exhibits on the scienter and reliance motions exceed 3,000 pages [Doc. Nos. 286-98]), Plaintiffs have not produced evidence sufficient to raise a question of fact of an intent to deceive.

Anderson,

477 U.S. at 255 , 106 S.Ct. 2505 (“[T]he plaintiff, to survive the defendant’s motion, need only present evidence from which a jury might return a verdict in its favor.”). Defendants correctly state that “all of the evidence shows the opposite— good faith conduct on the part of defendants — and that there is no plausible inference to be drawn that Defendants did anything with scienter.” Defs. MSJ Br. at 1. Defendants marshaled substantial, if not overwhelming evidence, that Defendants acted in good faith.

Worlds of Wonder,

35 F.3d at 1425 (defendants “conclusively rebutted” plaintiffs’ “speculative inferences” of fraud).

This case involves a complicated accounting analysis that is infused with the exercise of professional judgment. All of the experts in this case agree that professional judgment is applied throughout goodwill impairment testing. Katsell MSJ Decl. Ex. E (Minstein Dep. at 27, 29, 37, 52, 226, 234-35,

&

269). Professional judgment is exercised when predicting future results, for example, assessing the company’s plans and whether its goals are achievable.

Id.

(Minstein Dep. at 235 & 258). Goodwill impairment analysis does not produce an absolute, black-or-white, definitive result.

In re Actema Corp. See. Litig.,

378 F.Supp.2d 561, 583 (D. Maryland 2005). Plaintiffs have shown their experts reached different conclusions than Defendants about the value of REMEC’s goodwill; but they have not shown that the difference is the result of fraudulent conduct.

GlenFed,

42 F.3d at 1549 (“flexible accounting concepts” rarely “yield a single correct figure” and different results may reflect “two permissible judgments” rather than a falsehood);

Acterna,

378 F.Supp.2d at 583 .

At best, Plaintiffs produce evidence of corporate mismanagement.

Santa Fe Indus., Inc. v. Green,

430 U.S. 462, 473-79 , 97 S.Ct. 1292 , 51 L.Ed.2d 480 (1977) (§ 10(b) does not regulate internal corporate mismanagement, when not accomplished through deception);

Impac Mortgage,

554 F.Supp.2d at 1094 (management team’s poor judgment or even incompetence are not actionable as deceit under federal securities law);

In re ICN Pharm,., Inc. Sec. Litig.,

299 F.Supp.2d 1055, 1065 (C.D.Cal.2004) (“delinquent write-down of the impaired assets, without anything more, does not state a claim of securities fraud, stating at best a bad business decision”). “[T]here is no rational basis in the record for concluding that any of the challenged statements was made with the requisite scienter” to establish securities fraud.

Provenz,

102 F.3d at 1489 (quotation omitted).

*1239

A.

Individual Defendant Ronald E. Ragland

Defendant Ragland seeks summary judgment on scienter and submits a sworn declaration to demonstrate the absence of evidence to support Plaintiffs’ claim against him. “As CEO of REMEC, I did not make any decisions and did not participate in the making of any decisions regarding ... goodwill, goodwill impairment, interim impairment testing or any other accounting matters.” Ragland Decl. ¶ 5. Ragland relied on the accounting department to make those decisions.

Id.

“While I was certainly apprised of significant accounting decisions, they were not mine to make and I never overruled or changed any accounting decisions made by our accounting department, CFO, or Audit Committee.”

Id.

He states that he had a good faith belief that the financial statements were true and in compliance with GAAP; he did not make any statement about RE-MEC with the intent to deceive; and he relied on the staff accountants as well as outside auditors to prepare accurate financial reports. Decl. Ragland ¶¶ 6-10.

Plaintiffs’ opposition brief asserts that Ragland was “directly involved” in accounting matters, “reviewed the assumptions used,” and “knew the goodwill test assumptions were false and misleading.” Pis.’ Opp. Br. at 14-15. The Court read each document Plaintiffs cite to support their broad allegations. The Court carefully examined the record and found that most of Plaintiffs’ allegations lack substance.

Anderson,

477 U.S. at 256-57 , 106 S.Ct. 2505 (summary judgment can be granted on state of mind; discredited testimony is not normally sufficient basis to draw contrary conclusion).

As to the very weak inference that can be drawn from certain evidence, Defendants have rebutted it with substantial evidence that Ragland lacked the intent to defraud investors, including a lack of motive and opportunity.

Vucinich v. Paine, Webber, Jackson & Curtis, Inc.,

739 F.2d 1434, 1436 (9th Cir.1984) (“A plaintiff, however, must offer more than conclusory allegations, and if the defendant presents affidavits or other evidence establishing a lack of scienter, the plaintiff must come forward with some affirmative showing.”).

1.

Ragland’s Statements

Plaintiffs identify several statements, that may or may not be false, that are attributable to Ragland. One was made before the class period began,

i.e.,

the statement that REMEC’s goodwill was not impaired for FY03. During the class period, Plaintiffs challenge whether REMEC conducted a transitional goodwill test in February 2002; Ragland’s prediction that REMEC would return to profitability; and his comment that the China ramp was on plan. Ragland left REMEC on February 10, 2004 — statements after that date are not attributable to him. Factual issues remain as to the misleading nature of these statements. In regard to the scienter element, the precise question is whether Ragland knew or recklessly disregarded the alleged falsity at the time he made the challenged statement.

Plaintiffs argue Ragland was aware REMEC could not meet the inflated expectations, yet he knowingly continued to report misleading positive news. They contend that the egregious deficiencies in REMEC’s accounting practices raise a genuine issue of material fact with regard to the intent to deceive the public. As support for this theory, Plaintiffs make the following points. Ragland discussed and reviewed the assumptions used in the FY03 test and Plaintiffs’ experts conclude that the goodwill impairment analyses violated GAAP; Ernst & Young identified a potential risk of fraud in Ragland’s public statements about REMEC’s return to profitability.

*1240

The sole document that connects Ragland in any concrete way to the FY08 impairment testing is an Ernst & Young memo, dated January 30, 2003, that discusses the goodwill impairment test that REMEC was conducting at that time. Williams Decl. Ex. 44. Ernst & Young lists the assumptions that REMEC used to calculate the values, including a gross margin rate of 38% for FY06 to FY10. The memo states: “We discussed each of the above assumptions with the Company’s management, including: CEO, Ron Rag-land, CFO, Dave Morash, and the Controller, Pat Gray.”

24

Id.

at 2.

The memo does not, as Plaintiffs urge, demonstrate the Ragland “must have known, or was reckless in disregarding, the fact that the GPM estimates used in the impairment test were much higher than internal estimates ‘used to run the business,’ contrary to what they told the public.” Pis. Opp. Br. at 15;

Kaplan,

49 F.3d at 1379 (rejecting conclusory argument that statements were “so false” that individual defendant “must have known” the statements were false). Reading this memo in the light most favorable to Plaintiffs, it simply states that the independent auditing firm “discussed” the “assumptions” with Ragland. Katsell Reply Decl. Ex. 5 at 113 (Gray Dep. at 55) (“the auditors had access to our key management where they would speak with them as part of the regular process of an audit”);

see Metzler,

540 F.3d at 1068-69 (in motion to dismiss, complaint failed to allege external auditor counseled manager that his proposal was improper; rather, allegations pointed only to disagreement and questioning). A general discussion does not in itself indicate that Ragland was involved in selecting or manipulating the assumptions used in the impairment test.

Vantive,

283 F.3d at 1087-88 (plaintiff needs at least one specific item of information conveyed that relates to alleged fraud);

cf. Provenz,

102 F.3d at 1491 (question of fact raised by defendant who was “personally involved in and approved each decision” to make misleading statement);

Software Toolworks, Inc.,

38 F.3d 1078, 1089 (9th Cir.1994) (plaintiffs defeated summary judgment because defendants participated in drafting false projections).

A related piece of evidence is Ragland’s testimony that he reviewed the estimates, assumptions, and financial statements. Ragland Decl. ¶ 5. Ragland states he “did not prepare [the goodwill impairment testing] estimates and forecasts, but I did review them and was familiar with them.”

Id.

¶ 8.

Plaintiffs jump on Ragland’s “admission” that he “reviewed” the relevant financial documents as proof of his opportunity to manipulate the outcome. In their motion on REMEC’s allegedly false and misleading statements concerning the FY03 goodwill impairment test, Plaintiffs conclude that Ragland must have known that assuming gross profit margins of 30% to 38% in future years was false. Pis.’ MSJ Falsity Br. p. 16-17. Plaintiffs speculate that Ragland told the market they were the same as those used to run the business to “bolster” their legitimacy because he knew the market would be skeptical of such high numbers.

Id.

The evidence does not support this sweeping allegation. All of the evidence

*1241

before the Court shows that Ragland was not involved in the analysis of goodwill impairment.

In relation to the calculations of goodwill, which is the cornerstone of Plaintiffs’ fraud allegations, Ragland states that he “did not make any decisions” and “did not participate” in any accounting matters. Ragland Deck ¶ 5. As CEO, Ragland “was certainly apprised of significant accounting decisions,” but he never changed those decisions.

Id.

The accounting department, CFO, and Audit Committee made the decisions regarding goodwill impairment and Ragland relied in good faith on their competence and expertise, as well as the outside auditors Ernst & Young.

Id.

¶¶ 5-7.

Plaintiffs rely on William Gibbs’ deposition as evidence that Ragland was “responsible for the impairment testing.” Pis.’ Opp. Br. at 15. Gibbs’ actual testimony does not support that characterization. Gibbs, a member of the Board of Directors and its Audit Committee, testified during his deposition as follows:

Q. Do you know who is responsible for the oversight of the goodwill testing in determining an impairment existed?

A. Ultimately, the CEO and then the CFO. Q. Do they share the responsibility?

A. Well, the buck stops at the CEO. He delegates it to the CFO, so it’s the CFO’s primary responsibility.

Q. And is it your understanding the CFO makes a determination, but the CEO would review that determination? [objection omitted]

A. I don’t know.

Q. You said the CEO delegates it to the CFO so it’s the CFO’s primary responsibility; however, you said the ultimate responsibility was the CEO[’s], correct?

A. That doesn’t mean he reviews everything. The buck stops there.

Williams Deck Ex. 37 at 3 (Gibbs Dep. at 150).

This testimony describes nothing more than a CEO’s responsibility to oversee the business.

See Vantive,

283 F.3d at 1087-88. It does not demonstrate Ragland’s involvement in the goodwill testing during his tenure when that analysis was actually performed by other employees. Ragland was not directly involved in goodwill impairment testing. There is no evidence that Ragland circumvented the accounting department.

As noted, Plaintiffs have not produced a witness to testify to the truth of the aspersions recited in the complaint. Instead, the witnesses who were deposed testified that Ragland was not involved in the impairment testing. Patrick Gray, who served as Corporate Controller before taking a higher position, testified that he “spearheaded” the analysis and did “not recall whether Ron [Ragland] was involved” in the goodwill testing process or in creating the assumptions used in the test. Katsell MSJ Deck Ex. G at 216 & 220 (Gray Dep. at 12 & 18); Katsell Scienter Deck Ex. D at 22-23 (Gray Dep. at 34). Similarly, David Hinkle, who took over as REMEC’s Corporate Controller when Gray was reassigned, testified that he was responsible for conducting the impairment testing. Katsell Scienter Deck Ex. C. Hinkle did not recall any discussions with Ragland about the goodwill impairment analysis.

25

Id.

at 14 & 17 (Hinkle Dep. at 345 & 394).

*1242

Nor is there any evidence that Ragland provided, let alone manipulated, the data that was input into the goodwill impairment test. REMEC’s budgets were prepared by many employees within the company, including product line managers. Katsell MSJ Decl. Ex. G at 223-24 (Gray Dep. at 24-25). The budget “numbers weren’t picked by any one person.” Katsell MSJ Decl. Ex. K at 275 (Hickock Dep. at 82) (“I didn’t provide any of the inputs. I did approve the final product, but these numbers that you’re looking at on this piece of paper are the results of a very detailed, bottoms-up, add-all-that-together- and-you-get-this results.”). Hinkle would then compile the information for a consolidated budget.

Id.

Ex. L at 280-82 (Hinkle Dep. at 18-19, 48). The Court agrees with Defendants that a reasonable inference from the “bottoms-up” procedure is that management did not have the opportunity to falsify the budget numbers used to evaluate goodwill.

Moreover, Plaintiffs’ rank speculation is wholly discredited by Ragland’s sworn declaration. He states his subjective belief that “the estimates used in the goodwill impairment testing were based on and, in fact, were the same as the estimates and forecasts that management used to run REMEC’s business.” Ragland Decl. ¶ 8. Ragland understood the “forecasts for earnings, profitability and margins exceeded our actual performance at that time” but he explains the specific reasons behind the optimism.

Id.

These include the fact that REMEC’s sales and revenues had been increasing; that the transfer of manufacturing to Costa Rica, the Philippines, and China would be successful; and the industry was poised for a resurgence, both in national and international markets, in the products that REMEC manufactured.

Id.

Plaintiffs rely on their expert, Minstein, as support that the goodwill impairment test conducted during Ragland’s tenure was so flawed that the magnitude of the accounting errors creates an inference that the report was deliberately manipulated to defraud investors. Minstein opines that REMEC’s assumptions for the Commercial segment were flawed, unsupported, and unrealistic. REMEC assumed 30% to 38% gross profit margins for the FY03 impairment test at a time when its internal forecast was 21.7% and its recent actual performance for FY02 was approximately 7%.

26

The Court agrees with Defendants that Minstein’s testimony at times crosses into impropriety when he offers his opinions as to Defendants’ mental state.

Elsayed Mukhtar v. Cal. State Univ.,

299 F.3d 1053 , 1066 n. 10 (9th Cir.2002),

amended by

319 F.3d 1073 (9th Cir.2003);

In re Rezulin Prods. Liab. Litig.,

309 F.Supp.2d 531, 546-47 (S.D.N.Y.2004) (expert opinions on intent or motives of corporations not admissible). Examples of Minstein’s conclusions regarding the intent

*1243

of Defendants include, among others, (1) “REMEC willfully and knowingly used unrealistic assumptions in order to avoid recognizing an impairment loss.” Min-stein Report at 20;

e.g., id.

(REMEC “intentionally” omitted Powerwave as a guideline company; selected other companies “with a goal of manipulating data to achieve a desired result”; and “[w]hen REMEC wanted to write off goodwill in July of 2004, they used much more reasonable assumptions”); (2) REMEC acted “recklessly”

(e.g.,

Minstein Deck ¶ 7 (“the company recklessly failed to conduct” the transitional test); (3) “Clearly management’s intent in doing the numerous goodwill impairment tests was not to achieve a sensitivity analysis.” Minstein Deck ¶ 35;

id.

¶ 35(d) “the tests were conducted with the goal of achieving a desired numerical result”). Nevertheless, Minstein points to the large difference between the gross profit margin actually achieved and the one forecast for the upcoming year. His opinion creates a question of fact about the misleading nature of the conclusion that REMEC’s goodwill was not impaired in FY03. Plaintiffs argue one can infer from the vast disparity that Ragland must have known the number was inflated.

This argument fails for three reasons. First, Plaintiffs’ assertion, like that in the

Kaplan

case, is that the “statements are so false that defendants must have known they were false and must have intended to mislead the public.”

Kaplan,

49 F.3d at 1379 . In that case, as here, the “argument does not suffice to rebut the declaration[ ] of good faith made by the defendant ].”

Id.

Ragland stated in his sworn declaration that he believed in good faith that the financial statements were true and complied with GAAP.

Id.

Ragland is an electrical engineer with bachelors and masters degrees in that field, and has no accounting education. Deck Ragland ¶ 3. Plaintiffs presented no evidence to discredit Ragland’s sworn statement that he relied in good faith on inside and outside professionals to produce accurate financial reports.

Id.

¶¶ 5-7 & 9.

Second, at best, Plaintiffs’ inference — that Ragland must have known the gross margin assumption was too high— leads to a conclusion that there was a violation of GAAP. “[E]ven deliberate GAAP violations do not by themselves establish scienter.”

Wet Seal,

518 F.Supp.2d at 1163 ;

In re U.S. Aggregates, Inc. Sec. Litig.,

235 F.Supp.2d 1063, 1073 (N.D.Cal.2002). Plaintiffs’ expert opinions about the

falsity

of the statement do not defeat Ragland’s motion for summary judgment as to

scienter

because a deliberate violation of accounting procedures, by itself, is not sufficient to create an inference that the CEO, who was not involved in selecting the data, acted with an intent to defraud investors. “Plaintiffs have failed to provide detailed evidence of the contemporaneous decision-making behind the alleged accounting errors that would combine to show the required scienter.”

ICN Pharm.,

299 F.Supp.2d at 1065 (goodwill impairment).

Furthermore, the evidence shows Rag-land was fired for poor performance. Williams Deck Ex. 41 at 2, 4 (Audit Committee member Harold Hughes recalls discussing Ragland’s performance at every Directors meeting; the reviews were “negative”; and Ragland was fired because “his strategic vision was not working effectively”). While Plaintiffs may have shown mismanagement, they have not presented evidence on which a jury could find that Ragland was acting with the scienter that is necessary to impose personal liability for securities fraud.

Santa Fe,

430 U.S. at 473-79 , 97 S.Ct. 1292 (corporate mismanagement does not create a § 10(b) claim);

Impac Mortgage,

554 F.Supp.2d at 1094 (absent evidence of deceit, poor judgment and incompetence are not actionable).

*1244

Plaintiffs offer a second piece of circumstantial evidence that could give rise to an inference that Ragland acted with the intent to defraud. Plaintiffs rely heavily on comments by Ernst & Young in its “Internal Control and Fraud Considerations” form. Williams Decl. Ex. 26.

27

Plaintiffs point to the audit team’s observations about risk factors relating to material misstatements or fraudulent financial reporting. “The team determined that the biggest risk of fraud was with improper revenue recognition, due to the pressure by executive management to return to profitability in the current year.”

Id.

at 19. The team also noted “[e]xcessive interest by management in maintaining or increasing the entity’s stock price or earnings trend. Management’s commitment to analysts, creditors, and other third parties to achieve aggressive or unrealistic forecasts. Domineering management behavior by the Company’s CEO.”

Id.

at 24. Though the memo does not name Rag-land, it is clear that the comments relate to him.

See

Williams Ex. 45 at 2 (“as a result of the CEO’s resignation our initial consideration of the risk of understatement of expenses in order to attain profitability was no longer deemed to be a key risk”);

accord id.

Ex. 33 at 2. Plaintiffs argue this form raises an inference that Ragland, who had a “domineering” management style and an “excessive interest” in the share price, had a motive to manipulate the financial reports to vindicate his public statements. Pls.’ Opp. Br. at 15; Williams Decl. Ex. 26 at 7, 19, & 24.

Any negative inference created by Ernst & Young’s concern is largely negated by Ernst & Young’s explanation of the function of the form and Defendants’ affirmative evidence to the contrary. The planning document does not conclude that anyone at REMEC committed fraud; rather, it simply alerts the audit team to certain issues to ensure a complete and effective audit. Katsell Opp. Decl. Ex. M (Krutop Dep. at 274);

id.

Ex. L (Janis Dep. at 404). Ernst & Young prepares the standard form before it conducts an audit so that each member of the team is alert to potential fraud issues in the client’s financial papers.

Id.

at 1. The purpose of the form is to help Ernst & Young decide “the nature, timing, and extent of our audit procedures.”

Id.

The form further states: “We expect one or more fraud risks will be identified for most engagements. In addition, there is a presumption that we will identify one or more fraud risks relating to revenue recognition.”

Id.

at 6.

Patrick Gray, the Controller at the time, explicitly denied that Ragland pressured the business units to forecast certain figures. Katsell Scienter Decl. Ex. D at 20 (Gray Dep. at 30) (“I believe there were targets and goals mutually — mutually developed. But that to my knowledge, there was no undue pressure related to the business units to meet a certain number that year.”);

id.

at 21 (Dep. at 31) (same as to gross margin projections).

Plaintiffs do not present any evidence to show Ragland had reason to believe that REMEC had not conducted the transitional goodwill impairment test in February 2002.

ICN Pharm.,

299 F.Supp.2d at 1065 (“Plaintiffs have failed to provide detailed evidence of the contemporaneous decision-making behind the alleged accounting er

*1245

rors that would combine to show the required scienter.”).

Plaintiffs also rely on Ragland’s prediction that REMEC soon would return to profitability. As discussed above, factual issues exist as to whether Ragland’s optimistic statements in September and December 2003 were false. In evaluating the scienter element, the question is whether Ragland’s optimism was grounded on an objectively reasonable basis and a genuine personal belief.

Rubke,

551 F.3d at 1162 (misleading opinion or projection must be both subjectively and objectively misleading).

Plaintiffs rely on Hickman’s testimony that he “would not have said that” RE-MEC’s goal was to breakeven in the fourth quarter as circumstantial evidence that Ragland made the statement with deceptive intent. The rest of Hickman’s testimony, however, defeats any such inference. Hickman’s complete statement was “but I wasn’t the CEO either.” Fraser Decl. Ex. 10 (Hickman Dep. at 123). Hickman explained that his job as CFO dictated that he take positions that other executives would consider “too conservative,” and he denied having any “real conflicts” about Ragland’s performance.

Id.

Aside from Hickman’s view that the glass was half-empty, Plaintiffs have not presented evidence that Ragland knowingly misled investors; rather, the evidence shows Ragland genuinely believed the company would prosper. Williams Decl. Ex. 30 at R2601290 (“I happen to be pretty damn optimistic about the way the marketplace looks.”). Ragland focused on the positive signs of growth. Ragland Decl. ¶ 8;

see, e.g.,

Williams Decl. Ex. 7 (Sept.2003 BOD presentation showed REMEC’s

consolidated

rate losses had slowed over three quarters, and forecasts for third and fourth quarters predicted profits and earnings per share). Similarly, Ragland articulated his reason for believing that the relocation of manufacturing facilities from Finland to China was “on plan” but needed to go faster.

2.

Defendants Produce Affirmative Evidence that Conclusively Negates any Inference that Ragland Acted with Scienter

Even if Plaintiffs presented evidence that could give rise to an inference in their favor, Defendants have rebutted that inference with affirmative evidence of good faith.

Plaintiffs’ speculation that Ragland knew the company’s goodwill was impaired in FY03 is negated by Ernst & Young’s opinion that the assumptions were reasonable. Acting as REMEC’s outside auditor, Ernst & Young reviewed the goodwill analyses for FY03, and expressly concurred in the conclusion that goodwill was not impaired.

See e.g.,

Katsell Reply Decl. Ex. 2 (FY03 audit work papers).

28

The partner, Niki Krutop, and the senior manager, Kristen Jams, of the audit team testified that they “evaluated” goodwill and concluded REMEC “had come to a reasonable conclusion that goodwill had not been impaired as of the fiscal year ended 2003.” Katsell MSJ Decl. Ex. O;

id.

Ex. T (Janis Dep. at 226, 418-28) (describing audit of assumptions and goodwill test); Katsell Reply Decl. Ex. 4 at 96 (Krutop Dep. at 96) (explaining her analysis of was RE-MEC’s projected gross margins were “reasonable”). Ernst & Young evaluated the 38% figure and did not advise REMEC to change it. “While gross margins historically have been approximately 25% management represents that the historical gross margins include only 30-50% capaci

*1246

ty and the model assumes 80-100% capacity. Gross margins for the Commercial segment in the fourth quarter 2003 were 17%, however as of the fourth quarter management represents that the volume levels had just begun to pick up and were still operating at less than 50% capacity. We noted that gross margins for the fiscal year ended 1998 were approximately 30% and was prior to the establishment of offshore manufacturing facilities which are also expected to provide significant savings.” Williams Decl. Ex. 44 at 2. The independent auditor’s approval of RE-ME C’s annual goodwill impairment testing undercuts any claim by Plaintiffs that Rag-land knew or should have known the assumptions were false.

Cirrus Logic,

946 F.Supp. at 1465 (Even if Plaintiffs raised an issue of material fact that company violated GAAP, the review and approval by auditor “would have negated any inference of scienter.”).

Moreover, as Defendants correctly argue, the level of transparency also serves to negate an inference that Ragland had a scheme to defraud investors. Defendants showed that Ernst & Young had full access to conduct a thorough, professional, and independent audit while Ragland was CEO.

Worlds of Wonder,

35 F.3d at 1425-26 (evidence that defendant’s accountant had full knowledge of facts rebutted scienter);

Cirrus Logic,

946 F.Supp. at 1463 (“This conduct tends to negate an inference of scienter.”).

In addition, Ernst & Young reviewed REMEC’s third quarter financial report, which ended in October 2003. Katsell Reply Deck Ex. 12 (“we performed analytical review procedures” of matters including gross margins). It considered whether any indicators of impairment had arisen since the year end so as to require a cash flow analysis/detailed assessment of impairment.”

Id.

at 206 (mem. at 3). RE-MEC’s management determined that goodwill was not impaired and the CPA firm made an informed decision not to object.

Id.

at 209 (mem. at 6) (“Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements for them to be in conformity with generally accepted accounting procedures.”);

accord id.

Ex. 11 (same, first quarter ended May 2, 2003).

Defendants correctly note that Ragland did not sell any stock during the class period. Deck Ragland ¶ 13. This fact dispels an inference of scienter.

Worlds of Wonder,

35 F.3d at 1425 (“minimal sales of stock also negates an inference of scienter” in summary judgment motion) (citing

Apple Computer,

886 F.2d at 1117-18 );

Acterna,

378 F.Supp.2d at 576-77 (same, no sales).

Finally, the company released other negative information and cautioned investors of the risks of predictions. For example, the Form 10-Q for the second quarter of FY04 again warned investors that “[significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.” Brownlie Deck Ex. H. The company disclosed negative information during the class period. REMEC took a $17,695,000 write off in the fourth quarter of FY02 in relation to the goodwill recorded from the acquisition of Pacific Microwave Corporation. Williams Deck Ex. 2 at 42 (FY02 Form 10-K at F — 8);

e.g.,

Brownlie Deck Ex. L (Feb. 10, 2004 press release entitled “REMEC Announces Preliminary 4th Quarter Results Below Expectations”); Ex. M (Mar. 24, 2004 press release announces $34.7 million net losses

*1247

for 4th quarter). As Ragland states in his declaration, “it makes no sense to me why anyone would take the write-offs we took in [the fourth] quarter while concealing other write-offs that REMEC would have to disclose later. I see no benefit from the conduct that the plaintiffs claim occurred.” Ragland Deck ¶ 12;

see Acterna,

378 F.Supp.2d at 576-77 (if a motive to commit fraud is relevant to scienter, then a lack of motive undermines any such finding).

3.

Plaintiffs’ Other Contentions are Unsupported Conclusions

Plaintiffs press other arguments to support their case against Ragland; however, each fails due to lack of evidence.

Plaintiffs assert that “Ragland, as CEO, was responsible for overseeing the integrity of the financials and certifying to the SEC and the public that they were accurate and complete.” Pis.’ Opp. Br. at 14. This merely states the obvious that Ragland performed the duties of a CEO. A corporate officer’s job title does not prove that he was personally involved with the alleged fraud.

Metzler Inv. GMBH v. Corinthian Colleges, Inc.,

540 F.3d 1049, 1068-69 (9th Cir.2008);

In re Vantive Corp. Sec. Litig.,

283 F.3d 1079, 1087-88 (9th Cir.2002) (awareness of day-to-day workings does not establish scienter); accord

In re Marsh & Mclennan Co., Inc. Sec. Litig.,

501 F.Supp.2d 452, 483 (S.D.N.Y.2006) (organizational role of defendant does not establish his knowledge of facts constituting misconduct).

Plaintiffs further contend that Ragland falsely told investors that RE-MEC had an adequate system of internal controls to ensure accurate financial reports.

29

See e.g.,

FAC ¶¶ 36-37, 47, 73(f), 74(m). They contend that this misstatement is probative of Ragland’s state of mind. Order Grant. Mot. to Dismiss at 10, n. 2 [Doc. No. 34];

In re Atlas Air Worldwide Holdings, Inc. Sec. Litig.,

324

*1248

F.Supp.2d 474, 489

&

n. 7 (S.D.N.Y.2004);

In re Hamilton Bancorp., Inc.,

194 F.Supp.2d 1353, 1359 (S.D.Fla.2002).

The challenged statement is contained in a quarterly financial report that REMEC filed with the SEC during Ragland’s tenure as CEO. Williams Decl. Ex. 28 (Form 10-Q, filed Dec. 2003).

30

The report is accompanied by a Certification, in which Ragland states that he has reviewed the form, and that, based on his knowledge, it does not contain false statements or misleading omissions.

Id.

at 25 ¶¶ 1-3 (R768868). Ragland states that he is “responsible for establishing and maintaining disclosure controls and resources” that ensure he is informed of material information.

Id.

¶ 4. Ragland states that he evaluated the effectiveness of those controls and presented his conclusion in the body of the SEC filing. Turning back to that section of the Form 10-K, Ragland concluded that the internal controls were “effective, in that they provide reasonable assurance that information required to be disclosed” is timely reported.

Id.

at 22 (R768865). The Certification concludes with a statement that Ragland disclosed to the independent auditor and the Board’s Audit Committee “[a]ll significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect [REMEC’s] ability to record, process, summarize and report financial data” and any fraud. Id. at 25 ¶ 5.

Plaintiffs contend that Ragland knew that the internal control procedures were flawed because a few months earlier Ernst & Young told REMEC that it had observed “certain weaknesses involving internal control” when it had conducted its annual audit. Williams Ex. 63 (Mar. 14, 2003 memo). Ernst & Young was primarily concerned that REMEC did not have enough trained accounting staff to prepare timely reports, but it described six “areas where sufficient expertise, oversight or process controls were not employed, resulting in adjustments made subsequent to the initial close.”

Id.

Ernst & Young recommended that REMEC hire and supervise more personnel in the accounting and finance departments; establish a closing calendar; improve communications with foreign locations; and use a computer system to identify obsolete inventory and reserves rather than rely on subjective analysis.

Id.

The memo reports that the auditors consulted with management and that the company had hired new staff, increased review and oversight, re-evaluated its internal control processes, and instituted an internal audit function.

Id.

The Court finds that Ragland’s Certification that REMEC’s internal controls were “effective” is

not

evidence that Rag-land had an intent to deceive.

Cf. Zucco Partners, LLC v. Digimarc Corp.,

552 F.3d 981, 1003-04 (9th Cir.2009) (unless Plaintiffs first prove language is false, boilerplate language in required Sarbanes-Oxley Certification “add[s] nothing substantial to the scienter calculus”). Plaintiffs’ suggested inference is unreasonable for two reasons.

First, the Ernst

&

Young memorandum, dated March 2003, contains the management’s response to the concerns the independent auditor uncovered in the annual audit which shows the weakness had been discussed at some earlier date. The memo

*1249

describes the remedial actions REMEC took to eliminate the problems identified by the auditor. Thus, the Ernst & Young March 2003 memo does not prove that REMEC’s internal controls were not effective at the time, several months later, when Ragland filed the report with the SEC in December 2003.

See also

Katsell Supp. Decl. Ex. A at 7 (Ernst & Young’s audit report for FY03, dated Apr. 17, 2003) (“We noted no material deficiencies”).

Second, there is no evidence that RE-MEC did not respond effectively to the auditors’ concerns. Rather, the memo itself confirms that a past problem had been addressed. The memo that Ernst

&

Young submitted a year later, after completing the FY04 audit, confirms that conclusion. None of the concerns raised in the March 2003 memo were mentioned in the March 2004 memo. Williams Decl. Ex. 64 (listing concerns with derivatives, foreign currency translation, payroll issues, other review processes, and computer security);

accord

Katsell Supp. Decl. Ex. A at 7 (Ernst

&

Young Audit Report dated April 17, 2003) (“We noted no material deficiencies” in internal controls, but recommended two improvements to increase efficiency of cash disbursements and bank reconciliations).

Similarly, evidence that a member of the Board of Directors perceived weaknesses in internal controls while Ragland was in charge bears on mismanagement. Williams Decl. Ex. 66 at 7 (evaluating internal control environment as “still ineffective”), 12, 18, 24, 28.

31

It does not support an inference of securities fraud in the context of this litigation.

In re GlenFed, Inc. Sec. Litig.,

11 F.3d 843, 848-49 (9th Cir.1993). Weak internal controls are an issue of corporate mismanagement or negligence, not federal securities fraud.

Id.,

11 F.3d at 848-49.

32

Plaintiffs do not provide any evidence to support their claim that Ragland “participated in numerous Audit Committee meetings.” Pis.’ Opp. Br. at 15. Plaintiffs did not produce evidence such as the minutes of the Audit Committee meetings that show Ragland participated in any discussion concerning goodwill testing. Instead, Plaintiffs cite to the Audit Committee’s Charter. Williams Decl. Ex. 46. That document outlines the responsibilities of the three directors on the Audit Committee.

Id.

It is not probative of Ragland’s role in the alleged accounting fraud.

Plaintiffs argue that REMEC’s purchase of Himark is indicative of Ragland’s scienter. Plaintiffs note that Ragland was dating the owner of Himark, Shu-Yi Lin, at the time REMEC acquired the company for $12.1 million. Pis.’ Opp. Br. at 12 (describing “deception,” “secret affair,” “impropriety”). The couple later married. Williams Decl. Ex. 38 (Bernard Lirola

*1250

Dep. at 106). After Ragland left REMEC, the Board of Directors decided to sell Hi-mark back to her, but REMEC lost approximately $3 million on the transaction.

Id.

(Dep. at 108).

The Court agrees with Defendants that Plaintiffs have not presented evidence of any misconduct as to that transaction. Attorney argument is not admissible evidence, and the available evidence negates the inference that Plaintiffs attempt to draw. Lirola testified that he had “no reason to believe” that Ragland’s personal relationship influenced REMEC’s decision to buy Himark.

Id.

(Dep. at 107). In addition, the fact that a member of the Board of Directors contacted an attorney for advice is not evidence that the transaction was deceptive, particularly when the conclusion of that independent investigation confirmed there was nothing to disclose. Williams Decl. Ex. 37 at 6 (Gibbs Dep. at 227-29);

id.

Ex. 34 at 129 (minutes show two attorneys advised Board of findings);

but see id.

Ex. 41 at 2-4 (Director Harold Hughes believed the relationship created a conflict of interest problem, but noted the independent investigation found “nothing untowards”).

Ernst & Young concurred. Ernst & Young conducted an independent review of the Himark acquisition and concluded that the purchase price had not been inflated, but was consistent with comparable transactions. Williams Decl. Ex. 45 at 2. Ernst

&

Young concluded that the conditions of the sale had not affected REMEC’s financial statements and REMEC was not required to make any disclosures.

Id.

Though the FAC casts aspersions at the motivation for acquiring Himark and its value, Plaintiffs have not produced evidence to support the allegation.

See e.g.,

FAC ¶¶ 189,192,196.

The Court must construe all reasonable inferences in Plaintiffs favor. By the same token, Defendants should not endure an expensive trial when no reasonable jury could conclude that Plaintiffs have proven their case. The Court concludes that Plaintiffs have not offered “concrete evidence from which a jury might return a verdict in his favor” — it is not sufficient to merely assert “the jury might, and legally could, disbelieve the defendant’s denial of [deceitful intent].”

Anderson,

477 U.S. at 255 , 106 S.Ct. 2505 ;

Matsushita,

475 U.S. at 587 , 106 S.Ct. 1348 (“Where the record taken as whole could not lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial.’ ”).

Even assuming Plaintiffs’ experts are right that REMEC’s goodwill was impaired, their opinions about the

falsity

of the statement do not defeat Ragland’s

scienter

summary judgment. A deliberate violation of accounting procedures, by itself, is not sufficient to create an inference that the CEO, who was not involved in selecting the data, acted with an intent to defraud investors.

Wet Seal,

518 F.Supp.2d at 1163 (“even deliberate GAAP violations do not by themselves establish scienter”);

U.S. Aggregates,

235 F.Supp.2d at 1073 . This is particularly true when the experts’ opinion of falsity is grounded on professional judgment concerning the application of GAAP; the test involves projections of future events; and REMEC’s auditor approved the analysis. Plaintiffs’ attempt to bridge the gap from deliberate accounting violations to fraud is conclusively defeated by the rest of the record. When the evidence “clearly rebuts any inference of bad faith,” a plaintiffs expert’s contrary opinion is “insufficient to defeat summary judgment” on scienter.

Worlds of Wonder,

35 F.3d at 1425-26 (“failure to follow GAAP, without more, does not establish scienter”);

Software,

50 F.3d at 627 ;

Cirrus Logic,

946 F.Supp. at 1457 (“GAAP is not a set of rules ensuring

*1251

identical treatment of identical transactions; rather, it tolerates a range of reasonable treatments, leaving the choice among alternatives to management.”) (collecting cases).

In conclusion, Plaintiffs have not presented sufficient evidence to survive Rag-land’s motion for summary judgment as to scienter.

Celotex,

477 U.S. at 323 , 106 S.Ct. 2548 (“A complete failure of proof concerning an essential element of the nonmoving party’s case necessarily renders all other facts immaterial.”). Plaintiffs have not rebutted Ragland’s declaration that he acted in good faith.

Kaplan,

49 F.3d at 1378-79 (granting summary judgment on defendant’s affidavit when plaintiff failed to set forth specific facts showing a genuine issue for trial). Accordingly, the Court GRANTS Defendant Ronald E. Ragland’s motion for summary judgment on scienter and dismisses him from the first cause of action.

B.

Individual Defendant Winston E. Hickman

Hickman, the other executive named in this class action, moves for summary judgment on the ground there is no evidence that he acted with scienter. Hickman submitted a sworn declaration in support of his motion.

Hickman joined REMEC as CFO on November 14, 2003, when REMEC was in the midst of preparing FY04 reports as well as budgets and forecasts for FY05. Hickman Decl. ¶ 4 & 7. He has an MBA in finance, but relied on accountants for “technical accounting expertise.”

Id.

¶ 5. Hickman states he had a good faith belief that the challenged statements were true; he did not make any statement with the intent to deceive; and he relied on the staff accountants as well as outside auditors to prepare accurate financial reports.

Id.

¶¶ 4-21.

Hickman’s job responsibilities as CFO bring him closer to REMEC’s financial reports; however, the Court finds that Plaintiffs have not produced sufficient evidence of scienter to survive his summary judgment motion. Plaintiffs’ assertion that Hickman was “directly involved and knew the goodwill test assumptions were false and misleading” is not supported by the evidence. Plaintiffs rely on exaggerated characterizations to argue Hickman intended to deceive the investing public.

33

The record contains no such evidence. The Court agrees with Defendants that Hickman did not have an opportunity to manipulate the goodwill impairment tests. That task was performed by other employees, Hickman did not direct the manner in which the test was performed or its outcome, and the outside auditor approved the analysis.

1.

Hickman’s Involvement in FY04 Impairment Testing

Plaintiffs first argue that internal emails that contain different scenarios demonstrate that Hickman intentionally manipulated the numbers to perform a “bogus” goodwill impairment test in FY04. Pis.’ Opp. Br. at 4-5 (“Defendants used false, arbitrary inputs in the calculations to

*1252

reach this foregone conclusion.”);

id.

at 13 (Hickman “hand selected” assumptions to conceal goodwill impairment). Setting aside Plaintiffs’ exaggerated conclusion about the extent of Hickman’s involvement in the calculations, the evidence shows the following course of events.

On February 1, 2004, David Hinkle, Vice President and Corporate Controller, sent Hickman an email with the subject line “FAS 142 — Commercial all scenarios 1-19 vs.xls.” Williams Decl. Ex. 16.

34

Hinkle attached three different versions of the valuation of the Commercial segment “as of’ December 31, 2003.

Id.

at 2, 18, & 34. At the time these documents were prepared, REMEC had the actual numbers through October 31, 2003 and a fairly reliable estimate of results for Q4 of FY04. REMEC’s actual FY gross profit margins had been 25% in 2001, 6% in 2002, 10% in 2003, and approximately 18 to 23% in 2004.

Id.

at 2. The three versions differ in their assumptions and forecasts of the figures for the future years.

35

One scenario would have resulted in a goodwill impairment of $8.4 million, whereas the two other versions calculated no impairment by an excess of at least $44.3 million and at most $263.4 million.

Ultimately, as noted above, in its final April 15, 2004 public filing, REMEC assumed “sales growth rates ranging from 5%-40%; gross profit margins ranging from 24%-28% (excluding depreciation); an income tax rate ranging from 0%-23% and a discount rate of 20%” for the Commercial segment. Williams Decl. Ex. 5 at 25 (draft FY04 Form 10-K). REMEC used numbers in its Form 10-K that were different from those in the three scenarios that Hinkle sent Hickman in February.

Compare

Ex. 5 (highest GPM of 28% & top income tax rate of 23%)

with

Ex. 16 (GPM could reach 31% & income tax rate could reach 25%).

The Court finds that the emails (including those listed

supra

n. 32) are devoid of evidence that Hickman directed that cer

*1253

tain figures be used or manipulated the goodwill impairment analysis in any way. Instead, the emails confirm that Hinkle and the accounting staff derived the assumptions, and then reported their conclusions to Hickman.

See also

Williams Deck Ex. 49 (later, in Mar. 2004, Hickman received information from Ernst & Young on the need for an interim test and he forwarded that information to the accounting employees who were responsible for conducting the analysis).

Any permissible inference that could be drawn from the existence of three different scenarios is negated by undisputed evidence. Hickman acted in a supervisory role by reviewing the final result, but was not involved in selecting the data or dictating a specific outcome. Hickman testified that Controller David Hinkle prepared the annual goodwill impairment test for FY04

36

Hickman Deck ¶ 8; Williams Deck Ex. 32 at 7 (Dep. at 148). Hickman described his own involvement in the process as “reviewing” the completed analysis. Williams Deck Ex. 32 at 6-7 (Dep. at 147-48). Hickman testified that he recalls seeing one scenario and that Hinkle performed the analysis with the assistance of others in the accounting department. Katsell MSJ Deck Ex. J at 270 (Hickman Dep. at 170) (“I don’t recall different scenarios. I recall one analysis.”); Hickman Deck ¶ 8. He testified that the company used an existing model that had been prepared by an outside accounting firm. Hickman Deck ¶ 8. As noted, Hickman testified that he believed the optimistic estimates and forecasts were reasonable.

Id.

¶ 10. He relied on the outside audit by Ernst & Young to evaluate the methodology, estimates, and assumptions.

Id.

¶ 12.

The employees in REMEC’s accounting department confirmed the accuracy of Hickman’s description of his role. Hinkle testified that he “oversaw the analysis.” Katsell MSJ Deck Ex. S at 251 (Hinkle Dep. at 251); Katsell Reply Deck Ex. 3 (attached to this Feb. 19, 2004 Ernst & Young mem. is analysis Hinkle performed on Feb. 5, 2004, in which he states his reasons for predicting future growth “despite the on-going financial difficulties”) (EY-000695 to 000698);

see also

Williams Deck Ex. 19 (on Feb. 14, 2004, Hinkle sent an email to Kristen Janis at Ernst & Young and attached a scenario of goodwill impairment that assumed a gross margin of 21.8%). Tiernan Hussey testified that the accounting staff input the data into the model. Katsell Reply Deck Ex. 8 at 190 (Hussey Dep. at 118) (“We populated the model with our most recent business projection.”).

Furthermore, the independent CPA discerned no impropriety in multiple versions because they were working on determining sensitivity to some of the variables. Katsell Scienter Deck Ex. G (Krutop Dep. at 301-02).

Plaintiffs next assert, without supporting facts, that the lower level employees “were no doubt doing his bidding when they constructed numerous goodwill impairment testing scenarios for the FY04 test until a result of ‘no impairment’ was achieved.” Pis.’ Opp. Br. at 15-16.

The actual testimony unambiguously defeats speculation that Hickman deliberately manipulated the data or outcome. As mentioned, Hinkle, not Hickman, was primarily responsible for goodwill impairment testing. Williams Deck Ex. 52 (Hickman Dep. at 147-48) (Hickman reviewed the

*1254

análysis after Hinkle completed it). In his deposition, Hinkle repeatedly testified that he did not recall any discussions, whether general or specific, with Hickman about the goodwill impairment testing conducted for FY04. Katsell Scienter Decl. Ex. C (Hinkle Dep. at 345-46 & 393-94). Plaintiffs’ counsel specifically asked Hinkle" if Hickman (or anyone else at REMEC) had instructed him to conduct the impairment test in a manner that ensured a particular conclusion. Hinkle again stated that he did not recall any discussions with Hickman about the goodwill impairment testing, “[b]ut I believe if he requested me to do an analysis — any analysis in any way that was not consistent with my own beliefs that I would have objected to.”

Id.

(Hinkle Dep. at 393 & 394 (“nor do I recall any instructions to achieve a certain result in performing the goodwill impairment analysis”)).

In a similar vein, Plaintiffs argue that REMEC “intentionally omitted Power-wave” as a competitor for comparison for the FY03 test, but Hickman conveniently used that company when REMEC took the writeoff the following year. Pis.’ Opp. Br. at 13. Plaintiffs cite their expert’s speculation about Defendants’ state of mind.

Id.

n. 46 (citing Minstein Report). As discussed above, the relevant portion of Minstein’s report is not evidence, it is an improper legal conclusion. There is no evidence that Hickman had any input into the selection of guideline companies.

Plaintiffs rely on the actual results to show that reality did not confirm the optimistic assumptions. The Court discounts the observation because it depends on hindsight.

GlenFed,

42 F.3d at 1549

2.

Independent Auditor Concurred in Test Result

Ernst & Young reviewed and evaluated the annual impairment tests that Hinkle’s accounting team assembled and presented while Hickman was CFO, including the FY04 impairment test conducted during the class period. Ernst & Young examined the methodology REMEC used to value goodwill for FY04. Katsell Reply Decl. Ex. 3 (FY04 audit work papers). The audit team approved the conclusion that REMEC’s goodwill was not impaired in FY04. Williams Decl. Ex. 33 at 8 (FY04 Summ. Rev. Mem.) (“The Company performed an impairment analysis on their intangible assets of year end. We have reviewed the related analysis and

concur with their analysis.”)

(emphasis added); Katsell Reply Decl. Ex. 3 at 49 (Partner Niki Krutop concurs in Senior Manager Kristen Jams’ opinion that “goodwill does not appear to be impaired”). The independent auditor’s approval of REMEC’s goodwill impairment testing corroborates Defendants’ view that the company accurately reported its financial situation.

Plaintiffs discount the value of Ernst & Young’s audits on two grounds.

37

First, Plaintiffs argue that Ernst & Young relied on information provided by senior management — the same individuals who allegedly carried out the fraudulent scheme to conceal the true financial picture. As just discussed, the record does not support this criticism because Hinkle, and others in the accounting department, performed the analysis.

Further, Ernst & Young’s audit work papers describe the specific actions taken to review the impairment test. Katsell Reply Decl. Ex. 3 (FY04). Among other steps, the outside auditor “reviewed sup

*1255

porting forecast analysis, compared analysis to prior year actuals, discussed the assumptions with the Company’s management as well as product line managers who were responsible for the forecast estimates.”

Id.

at 46 (Mem. at 1 ¶ (1)). Ernst & Young examined the disparity between the actual gross margins for FY04 of 18% with the optimistic assumption of future gross margins ranging between 24% and 29%.

Id.

at 47-48 (Mem-¶ (2)). Ernst & Young listed the factors that warranted an expectation that the gross margins would “improve significantly in fiscal 2005 compared to 2004.”

Id.

Plaintiffs criticize one of those reasons

(ie.,

REMEC’s plan to move manufacturing from Finland to China), but Ernst

&

Young provided several other reasons for accepting the assumption.

Id.

In sum, the evidence demonstrates that Ernst & Young conducted an independent check and concurred in the conclusion that REMEC’s goodwill was not impaired for FY04.

See

Hickman Deck ¶ 12 (“I understood that based on its audit procedures, E & Y determined that the estimates and assumptions were appropriate and agreed that the Commercial Wireless Segment’s goodwill was not impaired.”);

Cirrus Logic,

946 F.Supp. at 1463-65 (frank consultation with auditor about an accounting matter tends to negate inference of intent to deceive).

The other reason Plaintiffs discredit Ernst & Young’s audit is that the firm resigned shortly after REMEC disclosed the goodwill writeoff. Plaintiffs suggest that Ernst & Young “questioned Defendants’ conduct” and resigned because the auditor recognized “the potential for fraud.” Pis.’ Opp. Br. at 6.

The record does not support this speculation. There is no evidence to connect Ernst

&

Young’s resignation as REMEC’s outside auditor to any corporate misconduct. The evidence clearly shows that Ernst & Young did

not

resign on the ground that REMEC’s financial statements contained “an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles.” 17 C.F.R. § 229.304 ,

cited in

Williams Deck Ex. 67 at 2 (Form 8-K). REMEC did not issue a restatement.

Cf. Atlas Air,

324 F.Supp.2d at 488-89 (“When a company is forced to restate its previously issued financial statements, the mere fact that the company had to make a large correction is some evidence of scienter.”).

As discussed above in connection with Ragland’s motion, Plaintiffs’ reliance on the Internal Control and Fraud Considerations form is misplaced. The evidence shows that Ernst & Young conducted its audit with those potential fraud considerations in mind and found no misstatements in REMEC’s financial reports. Williams Deck Ex. 33 at 8 (FY04 Summ. Rev. Mem.). Each member of the audit team signed the conclusion which stated: “It is my opinion that the scope of the audit was adequate and that the financial position of REMEC, Inc. at January 31, 2004, and the results of its operations and its cash flows for the year then ended, are in conformity with generally accepted accounting principles applied on a consistent basis.”

Id.

at 12-13. Ernst & Young’s resignation in these circumstances cannot be used to infer Defendants made financial statements with an intent to defraud.

Zueco,

552 F.3d at 1001-02 .

Moreover, Ernst & Young’s concerns about Ragland’s management style did not extend to Hickman. Williams Deck Ex. 26 at 6 (“this risk no longer exists”). Instead, Ernst & Young was “impressed” with Hickman’s “technical and leadership capabilities” and concluded “our view is that the replacement of [former CFO David Morash] with Winston [Hickman] has improved the financial, management and control environment.” Williams Deck Ex. 45

*1256

at 1 (May 13, 2004 Supp. Mem. after FY04 audit).

Plaintiffs submit evidence that Hickman attended an Audit Committee meeting when Ernst & Young discussed the audit results for FY04. Williams Decl. Ex. 65 (Apr. 7, 2004). One item on the agenda was a discussion of the review process for establishing and monitoring inventory and receivable reserves, with an eye toward future compliance with the heightened standards in the Sarbanes-Oxley Act. Hickman also participated in a private, executive session to discuss “finance organization and staff enhancement plan.”

Id.

at 3. This evidence is not probative of Hickman’s scienter.

As with Defendant Ragland, Plaintiffs allege that Hickman made inaccurate statements that REMEC had adequate internal controls. In April 2004, Hickman certified that REMEC’s Form 10-K for FY04 was accurate. Williams Decl. Ex. 5 at 68 (draft FY04 Form 10-K Certification) (R232853). Hickman stated he had evaluated the company’s disclosure controls and procedures, and concluded they were “effective.”

Id.

at 27 (draft FY04 Form 10-K at 24, Item 9a) (R232812). Plaintiffs argue that Hickman falsely told investors that the internal controls were adequate, when in fact, Ernst & Young, the independent auditor, informed Hickman of problems discovered in the annual audit.

Id.

Ex. 64 (Mar. 19, 2004 memo).

38

Arguably, one could draw a rational inference from the nature of the problems listed in the March 2004 memo that Hickman’s public evaluation of the internal controls was suspect; however, any such inference is expressly refuted by a May 2004 memo. There, Ernst

&

Young reconsidered its evaluation of entity level controls in light of Ragland’s departure as CEO in February 2004, as well as the termination of David Morash as CFO in September 2003.

39

Williams Decl. Ex. 45. The May

*1257

2004 memo praises the changes in top management as having improved RE-MEC’s internal controls. Importantly, Ernst & Young concluded that REMEC’s internal controls were “effective.”

Id.

at 6. Therefore, the independent auditor expressly validated the accuracy of Hickman’s statement.

Plaintiffs next argue that REMEC concealed internal control violations during the class period until it disclosed them on September 30, 2004. Pis.’ Opp. Br. at 25 (citing Ex. 67). Once again, Plaintiffs’ characterization of the record is flawed. Plaintiffs cite the Form 8-K in which RE-MEC disclosed that Ernst & Young had resigned as the independent auditor. That document refers to the preliminary internal control issues discussed in Ernst & Young’s March 19, 2004 memo. Williams Decl. Ex. 67 at 2. As the Court discussed above, although Ernst & Young flagged initial concerns in March 2004, upon further evaluation, in May 2004, the auditor concluded that REMEC’s internal controls issues had been cured and did not constitute a “reportable event.”

40

Id.

Exs. 64 (Mar. 19, 2004 memo) & 45 (May 2004 memo). The information does not create an inference of scienter.

3.

Hickman Presented Undisputed Evidence of Good Faith

In addition to the auditor’s approval of the goodwill impairment analysis, Defendants produced other undisputed evidence of Hickman’s lack of scienter. “Insofar as Hickman may have had a sliver of opportunity to commit the alleged fraud,” there is no evidence that he had any motive to do so. Defs.’ MSJ Br. at 2.

His overall conduct is inconsistent with a fraudulent intent.

Apple Computer,

886 F.2d at 1118 (any inference of bad faith “completely dispelled by the defendants’ overall pattern of conduct”). Hickman recognized that the analysis of the FY04 books “estimated that the fair value of the Commercial Wireless Segment exceeded the goodwill associated with it by only $16,216[,000].” Hickman Decl. ¶ 11: Given that narrow margin, REMEC told the public that the goodwill impairment test of FY04 should be weighed with caution. Hickman Decl. ¶ 13 (“because it was a close call, we wanted to make sure that the market was informed of that result”). The Form 10-K included cautionary language.

Over the last several years we have acquired a number of companies. Many of these businesses were small and have required considerable infrastructure upgrade. In addition, we have approximately $65.5 million of goodwill resulting from these acquisitions, which may become impaired should we experience a major change in our business outlook due to the loss of a major customer, our products becoming technically obsolete or if we continue to experience significant losses.

Brownlie Ex. F at 157 (FY03 Form 10-K at 11).

A variance in the discount rate or gross margin assumptions could have a significant impact on the amount of identified goodwill impairment. For example, a l%-2% change in either of these factors in our Commercial segment analysis would have resulted in an indication of possible impairment that would have led us to further quantify the impairment

*1258

and record a charge to write-down these assets.

Id.

at 158.

Further, Hickman discussed his concerns about potential impairment with the outside auditor. Hickman Decl. ¶ 14 (“E & Y advised that we closely watch for indicators that an interim impairment analysis should be performed.”)

Sq

16 (“I consulted with E & Y about whether RE-MEC should conduct an interim test” for the first quarter);

accord

Katsell Scienter Decl. Ex. G (Krutop Dep. at 301-07) (Ernst & Young discussed indicators and suggested disclosure). He followed the independent advice about whether REMEC should conduct an interim test (as opposed to waiting to conduct the annual test at the next FYE). Williams Decl. Ex. 49 (March 17, 2004 emails between Ernst

&

Young and Hickman on the need to conduct an interim test and listing the FAS 142 factors with examples; Hickman forwarded the information to the appropriate employees (Hinkle and Hussey)). On August 24, 2004, Ernst & Young advised Hickman that REMEC should conduct an interim goodwill impairment test based on the Board of Directors’ plan to sell the company. Brownlie Decl. Ex. P. REMEC conducted that interim test and reported the goodwill impairment on September 8, 2004. William Decl. Ex. 23. Hickman’s open communication with the independent auditor dispels any notion that he manipulated the goodwill impairment tests while he was CFO.

Cirrus Logic,

946 F.Supp. at 1463-65 (voluntarily consulting with independent accountant, making full disclosure, and seeking guidance and approval negates any inference that financial transaction was made with intent to defraud);

ICN Pharm.,

299 F.Supp.2d at 1065 .

Plaintiffs contend Hickman ignored actual operating losses, disregarded low profits, and tried to conceal the actual numbers. Pls.’ Opp. Br. 14-16, nn. 49

&

64. Yet, Hickman lacked a motive to delay disclosing adverse.information about RE-MEC’s financial situation.

See Acterna,

378 F.Supp.2d at 576-77 (if a motive to commit fraud is relevant to scienter, then a lack of motive undermines any such finding). Hickman testified that, if he had been in a position to manipulate the outcome, he had a strong personal incentive to make Ragland — who left REMEC in February 2004 at the same time REMEC was conducting the goodwill analysis and preparing its FY04 Form 10-K — look ineffective by blaming him for any problem with the value of REMEC’s acquisitions. Hickman Decl. ¶ 14. It would have behooved Hickman to show REMEC’s goodwill was impaired at the end of FY04 because Ragland had been the architect of the business plan to buy specialized companies and the public would attribute the bad performance to Ragland’s leadership. Instead, REMEC reported the goodwill impairment

after

Ragland departed and at a time when the public could blame Hickman’s leadership for the downturn.

Defendants make a valid observation that the two individual defendants worked at REMEC at different times. Ragland was CEO at the time REMEC hired Hickman from a competitor on November 14, 2003. Ragland and Hickman worked together for barely three months — until Ragland left on February 10, 2004. The Court agrees with Defendants that the brief overlap of their tenures considerably weakens any inference that the two officers carried out a continuous scheme to conceal REMEC’s true financial condition. Defs. MSJ Br. at 2.

Hickman’s lack of motive to commit securities fraud is also exhibited by the absence of any allegation of insider trading.

Worlds of Wonder,

35 F.3d at 1425;

Acterna,

378 F.Supp.2d at 576-77 . Hickman did not sell' any stock during the class

*1259

period and therefore did not take advantage of an allegedly inflated stock price. Hickman Decl. ¶ 21.

Finally, even assuming Plaintiffs could establish that Hickman violated GAAP regarding goodwill impairment, there is no evidence to establish he must have been aware of the violation or that he acted with an intent to deceive investors.

U.S. Aggregates,

235 F.Supp.2d at 1073 (even an obvious failure to follow GAAP does not establish intentional or knowing misconduct).

A reasonable fact finder could not conclude on this record that Hickman acted with an intent to deceive or with recklessness. Accordingly, the Court GRANTS Defendant Winston E. Hickman’s motion and DISMISSES him from the first cause of action.

C.

Corporate Defendant REMEC

The briefs focus on the Individual Defendants, but REMEC also asserts that there is no evidence the corporation acted with scienter.

“A corporate defendant’s scienter is necessarily derived from its employees.”

Marsh & Mclennan,

501 F.Supp.2d at 481 .

41

In most cases, when there is no evidence that an individual acted with intent to commit securities fraud, the corporate entity is not liable.

Teachers Ret. Bd. v. Fluor Corp.,

654 F.2d 843, 853 (2d Cir.1981) (granting summary judgment to corporate defendant when record contained no evidence that any officer acted with scienter).

The Court concludes that this case falls within the general rule and finds no extraordinary circumstances to justify holding REMEC liable when the executives have been granted summary judgment on scienter.

The parties have completed discovery and the Court has analyzed all of the evidence presented in relation to individual Defendants Ragland and Hickman. There is one exception. The February 10, 2004 press release announcing Ragland’s “retirement” was not attributed to either executive. Fraser Decl. Ex. 31 at 2.

42

The Court found this statement misleading as a matter of law. It concerned a tangential issue to the core issue in this case about the proper valuation of goodwill; consequently, that statement is not sufficient to

*1260

create a triable issue of fact as to the corporation.

Accordingly, the Court GRANTS the scienter motion as to the corporation and DISMISSES Defendant REMEC from the case.

V.

Control Person Liability

Plaintiffs’ second cause of action against Individual Defendants Ragland and Hickman is based upon § 20(a), which makes certain “controlling” individuals liable for violations of § 10(b). FAC ¶¶ 393-96. Because Plaintiffs’ cause of action alleging a primary violation of § 10(b) fails on the merits, it necessarily follows that the control person cause of action fails as well.

See VeriFone,

11 F.3d at 872 (on motion to dismiss). Accordingly, Defendants Rag-land and Hickman are DISMISSED from the second cause of action.

The Court notes at this juncture that because Plaintiffs allege only two causes of action, both of which fail as to the individual Defendants, the first of which fails as to all Defendants, this case shall be dismissed in its entirety with prejudice and judgment entered in Defendants’ favor. The Court nevertheless shall rule on all pending motions in this case to be as thorough as possible and for the sake of completeness.

VI.

Reliance

Defendants move for summary adjudication on the element of reliance.

43

The Court DENIES the motion because material factual disputes remain as to whether the class representative, Lowell Sitton, relied on the integrity of the market; therefore, the Defendants have not, as a matter of law, rebutted the fraud-on-the-market presumption.

Initially, the Court designated John Hu and Sitton as class representatives, but Hu is no longer serving in that capacity. Order Granting Mot. to Dismiss PI. Hu [Doc. No. 342], Consequently, the part of Defendants’ summary judgment motion that challenges Hu’s reliance on the integrity of the market is moot.

A.

Sitton’s Transactions in REMEC Stock

By February 2004, Sitton, who had been investing on his own for approximately ten years, had been watching REMEC as a possible investment in his retirement account for a few months. Trippitelli Decl. Ex. B at 249-55 (Sitton Dep. at 33-38).

*1261

Sitton conducted research on Yahoo Finance and looked for stocks priced under $20 a share.

Id.

On February 10, 2004, REMEC announced its financial results for the fourth quarter “will be lower than its break-even net income goal and advised that operating results will be under pressure through at least the first quarter of the Company’s new fiscal year” and that Ragland, who had founded the company, retired as Chief Executive Officer. FAC ¶ 48. On February 11th, the stock dropped to $7.80 per share.

On February 12, 2004, Sitton purchased 5,700 shares of REMEC stock at $6.45 per share because “[t]he price dropped pretty significantly” and he hoped “to sell it on the rebound.” Trippitelli Deck Ex. B at 256 (Sitton Dep. at 39). Sitton thought “it looks like maybe it’s a bargain today.”

Id.

He believed at that moment that the market had undervalued REMEC.

Id.

In September, Sitton read that REMEC had been sued.

Id.

at 246 (Dep. at 29);

id.

at 299-302 (Dep. at 83-85) (by Oct. 6, 2004, Sitton had read a complaint against RE-MEC).

Sitton sold all of his shares on December 8, 2004 at a loss.

Id.

at 283 & 287 (Dep. at 66 & 70) (sold at $6.25 per share).

That same day, however, “the price had dropped a little bit” and Sitton purchased 5,880 shares in an attempt “to recoup some of the losses that I had suffered.”

Id.

at 286 (Dep. at 69). He held those shares only a brief time, selling them on December 10, 2004.

Id.

at 284 (Dep. at 67-68);

id.

at 287 (Dep. at 70) (“I got scared”; “I didn’t know what the stock was going to do.... [I]t didn’t rebound up anywhere where I could recoup any of my losses. So I decided it’s best to cut my losses and get out.”);

see also id.

at 286 (Dep. at 69) (Sitton placed a third order, but cancelled it before it was executed).

B.

Legal Standard

Reliance is an element 'of a securities fraud action.

Dura Pharms.,

544 U.S. at 341 , 125 S.Ct. 1627 (also known as “transaction causation”). “Reliance provides the requisite causal connection between a defendant’s misrepresentation and a plaintiffs injury.”

Basic,

485 U.S. at 243 , 108 S.Ct. 978 .

When a material public misrepresentation has distorted the price of stock on the well-developed, open market, the fraud on the market theory creates a presumption of reliance because proof of actual reliance would be impractical.

Id.

at 243-44 , 108 S.Ct. 978 In recognition of the impersonal method of investing and the common sense “premise that the market price of shares traded on well-developed markets reflects all publicly available information,” courts employ a presumption of reliance as a device to allocate the burden of proof.

Id.

at 244-49 , 108 S.Ct. 978 (citing with approval the Ninth Circuit’s 1975 decision in

Blackie,

524 F.2d at 906);

Apple Computer,

886 F.2d at 1113-14 (“Under the fraud on the market theory, the plaintiff has the benefit of a presumption that he has indirectly relied on the alleged misstatement, by relying on the integrity of stock price established by the market.”). A plaintiff may invoke the presumption by proving that the defendant made material misrepresentations, that the shares were traded on an efficient market, and that he traded shares between the time the misrepresentations were made and the time the truth was revealed.

Basic,

485 U.S. at 248 & n. 27, 108 S.Ct. 978 ;

Blackie,

524 F.2d at 906 (“Materiality circumstantially establishes the reliance of some market traders and hence the inflation in the stock price — when the purchase is made the causational chain between defendant’s conduct and plaintiffs loss is sufficiently established to make out a prima facie case.”; “proof of subjective reliance

*1262

on particular misrepresentations is unnecessary to establish a [Rule] 10b-5 claim for deception inflating the price of stock traded in the open market.”).

When the presumption of reliance arises, the burden of proof then shifts to the defendant. A defendant can rebut the presumption in different ways, including disproving the materiality of the alleged omissions or misrepresentations; establishing that the shares were not traded in an “efficient” market; or with evidence that “severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price.”

Basic,

485 U.S. at 248-49 , 108 S.Ct. 978 ;

Blackie,

524 F.2d at 906;

In re Fortune Systems Sec. Litig.,

680 F.Supp. 1360, 1372 (N.D.Cal.1987). This motion is based on the latter method to rebut the presumption of reliance: Defendants argue that Sitton’s conduct severed the link between REMEC’s allegedly false statements about the financial situation and Sitton’s decision to continue buying stock after the company announced the goodwill impairment write-off.

“[0]ne way to rebut the fraud-on-the-market theory is to show that the plaintiff would have bought his stock at the same price had he known the information that was not disclosed or misrepresented.”

Hanon,

976 F.2d at 507 (citing

Basic,

485 U.S. at 248-49 , 108 S.Ct. 978 );

Blackie, 524

F.2d at 906 (defendant can rebut presumption “by proving that an individual plaintiff purchased despite knowledge of the falsity of a representation, or that he would have, had he known of it.”).

Courts have observed that defendants may find it difficult to rebut the fraud on the market presumption, “as we doubt that a defendant would be able to prove in many instances to a jury’s satisfaction that a plaintiff was indifferent to a material fraud.”

Blackie, 524

F.2d at 906 n. 22

&

908 (common sense dictates “that a stock purchaser does not ordinarily seek to purchase a loss in the form of artificially inflated stock”);

accord Basic,

485 U.S. at 246-47 , 108 S.Ct. 978 (“it is hard to imagine that there ever is a buyer or seller who does not rely on market integrity. Who would knowingly roll the dice in a crooked crap game?”) (quotation omitted);

cf. id.

at 256-57

&

n. 7, 108 S.Ct. 978 (White, J., dissenting) (arguing that presumption is virtually non-rebuttable).

C.

Analysis

Plaintiffs in this case rely on the fraud on the market theory. FAC ¶¶ 379-80. Defendants argue they have presented sufficient evidence to rebut the presumption as a matter of law. Defendants argue that Sitton admitted in his deposition that he did not invest in REMEC in reliance on the integrity of the market price, but instead, purchased his shares for the specific reason that he thought the market

undervalued

REMEC. “This market timing strategy is premised on the belief that the market

had failed to reflect the true value

of REMEC’s stock. It is the polar o

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