Thursday, September 2, 2010

Federal Judge dismisses security fraud lawsuit against Accuray

Judge Claudia Wilken of the U.S. District Court for the Northern District of California, dismissed a class action securities lawsuit against Accuray, Inc..  The dismissal was without prejudice giving the plaintiffs an opportunity to refile the case.

This blog has previously discussed the difficulties in pleading securities fraud.  Essentially, you need at least one person (ideally many people) that had personal knowledge of both the defendants' lies and the defendants' mental state.  Pleading these indirectly or by inference is insufficient.

The plaintiffs argue that the company misrepresented the earnings potential in how it defined (and later redefined) "backlog."  At first backlog was defined as payments that customers are contractually obligated to make, later it became payments contingent on future events happening.  Company executives stated that they expected 90% of the backlog to be converted into revenue.  However, that never happened.  In order to prove fraud, the plaintiffs would have to show that executives KNEW they could not make this estimate.  This is difficult, since contingent contracts depend on the behavior of someone outside the company, so they plaintiffs would have to demonstrate that the company's officers entered into contracts with people from other companies with knowledge that those companies would never accomplish the events upon which the backlog was contingent.  At this stage, nothing indicates that is the case, but the plaintiffs have another chance to find some people with knowledge of these events.

The case is In re Accuray Securities Litigation, Case No. 09-3362, and the opinion is below the jump.

Here is the opinion
In Re Accuray MTD

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