Delaware Business Litigation Report

District Court Denies Defendants' Motion to Dismiss Securities Class Action Pursuant to the Heightened Pleading Requirements of the PSLRA.

In re Veritas Software Corp. Securities Litig., C.A. No. 04-831-SLR (Consol.) (D. Del. May 23, 2006). Defendants moved to dismiss a consolidated securities class action that alleged violations of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 on the grounds that the plaintiffs failed to allege fraud with particularity as required by the Private Securities Litigation Reform Act of 1995 (the "PSLRA").

Plaintiff filed a securities class action against defendants Veritas Software Corporation ("Veritas"), Gary L. Bloom and Edwin J. Gillis, alleging that they violated the Exchange Act and Rule 10b-5 by issuing a materially false and misleading press release about their expectations for second quarter 2004 revenue and earnings. After several additional lawsuits were filed, the court consolidated the actions, and the class plaintiffs filed an amended consolidated class action complaint that added a claim that the defendants recognized revenue on sales transactions improperly in Veritas' financial statements filed between April 23, 2003 and April 21, 2004. Defendants moved to dismiss the amended consolidated complaint for failure to meet the heightened pleading requirement for fraud or mistake under the PSLRA. The court denied the motion to dimiss, concluding that plaintiffs met the PSLRA's heightened pleading requirements for fraud or mistake because they alleged (1) that "the earnings forecasts were false or lacked a reasonable basis when made because they related to improper revenue recognition"; (2) that defendants' statements in the Second Quarter 2004 earnings guidance were knowingly false and misleading because defendants knew that the earnings were unattainable; (3) that plaintiffs paid an artificially inflated price for their Veritas stock, which price fell when Veritas' real revenue and earnings were announced; (4) that defendants' "standard practice" was to inflate artifically Veritas' revenue numbers by including "sales" from unexecuted or incomplete contracts; and (5) adequate facts to establish scienter as to all of the defendants.

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