Co-authored by Elizabeth D. Langdale.

The US District Court for the Eastern District of Washington recently granted defendants’ motion to dismiss plaintiffs’ class action complaint for failure to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA).

Lead plaintiff, the City of Royal Oak Retirement System, brought this federal securities fraud class action pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 on behalf of all persons who purchased or otherwise acquired Itron, Inc. (Itron) securities during the class period. Plaintiffs alleged that Itron overstated its net revenue for the three quarters ending September 30, 2010, by improperly (or prematurely) including revenue from an extended warranty contract.

Defendants moved to dismiss the complaint on the basis that plaintiff failed to allege particularized facts establishing a “strong inference” of scienter as required by the PSLRA. Plaintiffs argued, among other things, that: (i) Itron restated its financial statements for the three quarters at issue; (ii) the restatement was material in that it involved more than 5% of net revenue; (iii) the accounting rules at issue were not complex; (iv) that a substantial percentage of management’s compensation was tied to net revenue; and (v) senior management signed Sarbanes-Oxley certifications attesting to the accuracy of the company’s financial statements.

The court observed that the scienter requirement is satisfied where a complaint pleads facts showing that the defendant made the misstatement at issue intentionally or with deliberate recklessness. To satisfy the deliberate recklessness requirement, the facts alleged must show not simple or excusable negligence, but “an extreme departure from the standards of ordinary care.”

The Court found that the accounting error at issue was “barely above” the 5% “rule of thumb” for determining materiality, the case did not concern “a myriad” of accounting errors, and the restatement involved “premature” and not “fictitious” revenue. As a result, the court concluded, the more cogent and compelling inference was that the company “made a mistake” and was not acting with intent to deceive investors.

City of Royal Oak Retirement System v. Itron, Inc., No. CV-11-77-RMP (E.D. Wash. Sept. 11, 2012).