b'Hessefort v. Super Micro Computer, Inc.,consequences to the Audit Committee and our external Case No. 18-cv-00838, 2020 WL 1551140auditors, and with respect to one transaction, appear to (N.D. Cal. Mar. 23, 2020); 2021 WL 1169906have attempted to minimize material facts about a sales (N.D. Cal. Mar. 29, 2021)transaction, was insufficient to support an inference of scienter to the specific defendants because plaintiffs had Aggressive Focus On Revenuenot included enough detail in the operative complaint to Super Micro Computer, Inc. provides advanced servershow that each defendant had a culpable state of mind. technology and computing solutions. In 2015, Super MicroThe statements in the Form 10-K generally referred to [s]failed to meet SEC filing deadlines and issued a priorenior management and officers and managers and period adjustment, though the company subsequentlyfailed to identify specific defendants or provide sufficient assured investors it had implemented a new accountingcontext to infer scienter to each individual defendant.system to avoid future issues. In October 2017, SuperSecond, the court found that the magnitude of Micro announced that it discovered further accountingoverstatements and alleged GAAP violations were irregularities causing its Audit Committee to begin annot significant enough to establish that the defendants internal investigation, which would cause the companyknew or must have been aware of the improper revenue to fail to meet SEC filing requirements. On January 30,recognition[.] The court explained that, while significant 2018 the company announced that the investigation wasviolations of GAAP standards may provide evidence of complete, but its 2018 filings would be delayed while itscienter, here, the alleged overstatements were merely analyzed the impact of the investigation on the companys1.1% of revenue, 6.8% of net income, and 6.8% of earnings historical financial statements.per share for fiscal years 2013 through 2017, which was Investors filed a putative class action lawsuit against Supernot significant enough, on its own, to create an inference Micro and its officers under Sections 10(b) and 20(a) of theof scienter. Third, the court held that resignation of some 1934 Act and Rule 10b-5 promulgated thereunder, allegingof the defendants did not establish scienter because that defendants made false or misleading statementsplaintiffs failed to establish that the resignations were regarding the companys business, operational, andsuspicious or uncharacteristic. Fourth, the court rejected compliance policies.plaintiffs attempt to plead scienter through the core operations doctrine (i.e., that the individual defendants On August 23, 2018, the companys stock was delisted byhad actual access to the accounting violations and that NASDAQ. The companys CFO and senior vice presidentthe breadth of this misconduct was such that it would of international sales both resigned. On May 17, 2019,be absurd to suggest that they did not know about it). the company announced that between fiscal years 2013The court explained that plaintiffs allegations of general and 2017, it overstated its revenue by 1.1%, its net incomeinvolvement in day-to-day operations were not particular by 6.8%, and earnings per share by 6.8%, requiring aenough to show actual access, and the complaint lacked financial restatements for each of those years. And on thespecific admissions by any defendant of their specific same day, Super Micro filed its fiscal year 2017 Form 10-K,involvement in Super Micros operations and revenue restating its 2013 through 2017 financials and revealingrecognition policies. The court further acknowledged material weaknesses in its internal controls over financialthat, even if the complaint had such admissions, it further reporting due to a culture of aggressively focusing onlacked allegations tying the defendants not only to such quarterly revenue without sufficient focus on compliance.policies but also to the allegedly suspect transactions. The Form 10-K also indicated that certain officers andFinally, the court found that, even considering the managers were aware of, condoned or were involved inallegations holistically, plaintiffs did not establish the actions that reflected an inappropriate tone at the top.requisite inference of scienter given that the alleged The company set forth a remediation plan to address theviolations did not constitute a significant percentage of disclosed issues. Super Micros bottom line such that scienter could be On June 21, 2019, the lead plaintiff filed a secondinferred to the individual defendants. Thus, the court amended consolidated complaint, alleging Superheld that the plaintiffs failed to overcome the opposing Micro made materially false statements concerning theinnocent inference[.] Because plaintiffs failed to allege companys internal operations and controls, its financialscienter, the court did not address whether any of the performance, its compliance with generally acceptedchallenged statements were actionable.accounting principles (GAAP), and its internal audit.After the dismissal, plaintiffs filed a third amended Defendants moved to dismiss, which the court granted,consolidated complaint, and then a fourth amended with leave to amend, holding that plaintiffs failed toconsolidated class action complaint after the SEC issued sufficiently allege scienter. First, the court held that thethree cease-and-desist orders to defendants. Defendants companys Form 10-K for the fiscal year 2017, which statedin turn filed another motion to dismiss, arguing that in part that [s]ome employees, including officers andPlaintiffs failed to plead scienter. On March 29, 2021, managers. failed to raise issues with material accounting 17'