Filed 2/28/20; Certified for publication 3/23/20 (order attached)




        IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                              FIRST APPELLATE DISTRICT

                                         DIVISION TWO


 CITY OF WARREN POLICE AND
 FIRE RETIREMENT SYSTEM et
 al.,                                                     A155613
         Plaintiffs and Appellants,
                                                          (San Mateo County
 v.                                                       Super. Ct. No. CIV537409)
 NATERA INC. et al.,
         Defendants and Respondents.


        Plaintiffs filed a class action against Natera Inc. (Natera) and others
under the Securities Act of 1933 (15 U.S.C. § 77a et seq.), alleging that the
documents issued in connection with Natera’s initial public offering omitted
material facts that were required by regulations or necessary to make the
documents not misleading. Plaintiffs’ primary contention is that the
documents, which became effective on July 1, 2015 improperly “tout[ed]
[Natera] as ‘rapidly growing,’ amid a ‘quarterly’ revenue growth ‘trend’ with
year-over-year revenue increases,” while omitting Natera’s “material
negative financial results” for the second quarter of 2015. The second quarter
had ended the day before, on June 30, 2015, and second quarter financial
results had not yet been made public. The trial court granted defendants’




                                                   1
motion for judgment on the pleadings, judgment was entered for defendants,
and plaintiffs now appeal. We affirm.
              FACTUAL AND PROCEDURAL BACKGROUND
A.    Facts
      We draw our statement of the facts from the First Amended
Consolidated Complaint (Amended Complaint), as well as documents that are
quoted or referenced in the Complaint of which defendants asked the trial
court to take judicial notice.1
      1.      The Parties
      Plaintiffs are the City of Warren Police and Fire Retirement system,
which is an institutional investor, and individuals Mika Cahoj, M. Jim Ellis,
and Van Nguyen, all of whom are suing on behalf of themselves and all
others similarly situated. Each plaintiff claims to have purchased shares of
Natera common stock “pursuant and/or traceable to” the registration
statement and prospectus (collectively, Registration Statement) issued in
connection with Natera’s July 1, 2015 initial public stock offering (IPO).
      Natera is a genetic testing company that develops and commercializes
noninvasive methods for analyzing DNA. Its primary product is Panorama, a
prenatal screening test (NIPT) for fetal chromosomal abnormalities that is
based on a blood draw, rather than amniocentesis. In addition to Natera,
plaintiffs sued eight individual Natera officers and directors (the Natera
Individuals) and five underwriters (the Underwriters).2 We refer to Natera,
the Natera Individuals and the Underwriters collectively as “defendants.”


      1Specifically, we take judicial notice of excerpts from Natera’s
Registration Statement, its forms 8-K issued on July 24, 2015 and August 12,
2015, and the statements made therein.
      2 The Natera Individuals are Matthew Rabinowitz, Chief Executive
Officer and Chairman of Natera; Jonathan Sheena, co-founder, Chief

                                        2
      2.    The Natera IPO
      In May 2014, Natera filed with the Securities and Exchange
Commission (SEC) a draft Registration Statement in anticipation of its IPO.
On July 1, 2015, Natera filed the final amendment to the Registration
Statement and the SEC declared the Registration Statement effective that
same day. The Registration Statement included financial data for the years
ending December 31, 2013, 2014 and 2015, and for three-month periods from
the quarter ending June 30, 2013 (2Q 2013) through 1Q 2015 (1Q 2015).
Natera’s stock was offered to the public on July 2, 2015. Thus, although
Natera completed its IPO two days after the June 30, 2015 close of the second
quarter of 2015 (2Q 2015), the most recent financial results that were
available to investors in the Registration Statement were from the first
quarter of 2015, which closed March 31, 2015 (1Q 2015). The essence of
plaintiffs’ complaint is their claim that interim results for 2Q 2015 should
have been included in the Registration Statement.
      The Prospectus Summary in the Registration Statement characterized
Natera as a “rapidly growing” company. It stated that Natera’s revenues had
grown from $4.3 million in 2010 to $159.3 million in 2014, with net losses
decreasing from $37.1 million for the year ended December 31, 2013 to $5.2
million for the year ended December 31, 2014. Natera attributed its
“commercial success and future growth prospects” to “[e]xtensive expertise in
both molecular biology and bioinformatics,” “[b]est-in-class performance and
coverage,” “[i]ndependent sales force and global network of laboratory


Technology Officer, and director; Herm Rosenman, Chief Financial Officer
and director; and Natera directors Roelof F. Botha, Todd Cozzens, Edward C.
Driscoll, Jr., James I. Healey, and John Steuart. The Underwriters are
Morgan Stanley & Co. LLC; Cowen and Company, LLC; Piper Jaffray & Co.;
Robert W. Baird & Co. Incorporated; and Wedbush Securities Inc.


                                       3
partners,” “[s]ubstantial intellectual property,” “[c]loud-based distribution
model,” “[f]uture applications of our technology connected with prenatal
testing,” and “[f]uture applications of our technology beyond prenatal
testing.”
      The Prospectus Summary also identified certain risk factors. For
example, Natera stated, “We derive most of our revenues from Panorama,
and if our efforts to further increase the use and adoption of Panorama or to
develop new products in the future do not succeed, our business will be
harmed”; “We have incurred losses since our inception and we anticipate that
we will continue to incur losses for the foreseeable future, which could harm
our future business prospects”; “Our quarterly results may fluctuate
significantly, which could adversely impact the value of our common stock”;
and “If we are unable to expand third-party payer coverage and
reimbursement for Panorama and our other tests, if third-party payers
withdraw coverage or provide lower levels of reimbursement due to changing
policies, billing complexities or other factors, or if we are required to refund
any reimbursements already received, our revenues and results of operations
would be adversely affected.”
      In the July 2, 2015 IPO, Natera sold 10.9 million shares of common
stock to the public at $18 per share. At the time this action was filed in
February 2016, Natera stock was trading in the range of $6.50 to $7.00 per
share. Plaintiffs attribute the drop in share price to “information reflecting
the materialization of significant risks misrepresented and omitted from the
Registration Statement . . . and to the partial revelation of material facts
previously omitted and misrepresented.”
      According to plaintiffs, the misrepresentations and omissions in the
Registration Statement began to emerge on July 24, 2015, three weeks after



                                        4
the IPO, when Natera announced preliminary financial guidance for 2015.
Then, on August 12, 2015, Natera reported its financial results for 2Q 2015
and the first six months of 2015, and reiterated its full-year financial
guidance. Natera reported revenues of $45.1 million in 2Q 2015 compared to
$35.8 million in 2Q 2014, and loss from operations of $15.5 million in 2Q 2015
compared to $1.2 million in 2Q 2014.3 Net loss for 2Q 2015 was $19.7 million,
and net loss for the first six months of 2015 was $29.7 million.4 Natera
reported that its research and development and selling, general and
administrative expenses for 2Q 2015 were $34.8 million, an increase from
$18.0 million in 2Q 2014.5 For the first six months of 2015, those costs were
$63.7 million, an increase from $36.7 million in the first six months of 2014.
Natera stated that the increase in the three- and six-month periods over the
previous year “was driven by an increase in research and development and
direct sales headcount,” including a net addition of 218 employees and
contractors from June 30, 2014 to June 30, 2015 “as we increased our focus
on a direct sales model in the United States.”
      Plaintiffs allege that the Registration Statement was misleading in
portraying Natera as “rapidly growing,” because the decline in revenues and
increase in expenses and net loss from 4Q 2014 to 1Q 2015 (which, according
to plaintiffs, Natera “minimized as an aberration”) were followed by further
revenue declines and increases in expenses and losses in 2Q 2015,
developments that were omitted from the Registration Statement. Plaintiffs


      31Q 2015 revenues were $47.4 million and loss from operations was
$6.3 million.
      4 Net loss for 1Q 2015 was $10.0 million. Net loss for 2Q 2014 was $0.5
million, and net loss for the first six months of 2014 was $9.6 million.
      5   In 1Q 2015 these expenses were $28.9 million.


                                        5
allege that, “[g]iven Natera’s ‘cash basis’ accounting, the simplicity and
predictability of the costs and expenses that increased, as well [as] the
auditor and underwriter due diligence concomitant with the IPO,” defendants
knew the 2Q 2015 results before the IPO and went forward with the IPO
despite material misrepresentations and omissions in the Registration
Statement.
B.    Proceedings in the Trial Court
      Plaintiffs’ Consolidated Complaint (Complaint) included three causes of
action for violation of the Securities Act of 1933: securities fraud against all
defendants under Section 11 (15 U.S.C. § 77k) for issuing an inaccurate and
misleading Registration Statement; unlawful solicitation against all
defendants under Section 12 (15 U.S.C. § 77l(a)(2)); and control person
liability against the Natera Individuals under Section 15 (15 U.S.C. § 77o).
      The trial court sustained defendants’ demurrer to the Section 11 cause
of action with leave to amend, and sustained their demurrer to the Section 12
and 15 causes of action without leave to amend.
      Plaintiffs filed a First Amended Consolidated Complaint (Amended
Complaint) alleging their amended Section 11 cause of action. In compliance
with a trial court order, defendants responded to the Amended Complaint by
filing answers and moving for judgment on the pleadings, instead of
demurring.
      The trial court granted defendants’ motion, and judgment was
subsequently entered for the defendants.
                                DISCUSSION
      On appeal, plaintiffs challenge the dismissal of their Section 11 and
Section 15 causes of action as alleged in the Amended Complaint and
Complaint, respectively.



                                        6
A.    Standard of Review
      “ ‘A judgment on the pleadings in favor of the defendant is appropriate
when the complaint fails to allege facts sufficient to state a cause of action.
(Code Civ. Proc., § 438, subd. (c)(3)(B)(ii).) A motion for judgment on the
pleadings is equivalent to a demurrer and is governed by the same de novo
standard of review.’ (Kapsimallis v. Allstate Ins. Co. (2002) 104 Cal.App.4th
667, 672.) ‘All properly pleaded, material facts are deemed true, but not
contentions, deductions, or conclusions of fact or law . . . .’ (Ibid.) Courts may
consider judicially noticeable matters in the motion as well. (Ibid.)” (People
ex rel. Harris v. Pac Anchor Transportation, Inc. (2014) 59 Cal.4th 772, 777.)
B.    Analysis
      1.    Section 11 Cause of Action Against All Defendants
      Section 11 “imposes liability on an issuer of a registration statement in
three circumstances: if (1) the statement ‘contained an untrue statement of a
material fact,’ (2) the statement ‘omitted to state a material fact required to
be stated therein,’ or (3) the omitted information was ‘necessary to make the
statements therein not misleading.’ 15 U.S.C. § 77k(a).” (Stadnick v. Vivint
Solar, Inc. (2d Cir. 2017) 861 F.3d 31, 36 (Stadnick).)
      As a general matter, there is strict liability under Section 11, and
therefore plaintiffs need not plead or prove that the defendant acted with any
intent to deceive or defraud. (See Omnicare, Inc. v. Laborers Dist. Council
Const. Industry Pension Fund (2015) 575 U.S. 175, 179, 192-193, fn. 11
(Omnicare).) “[D]efendants may be liable for even innocent or negligent
misstatements or omissions.” (In re Harmonic Inc. Securities Litigation (N.D.
Cal. 2001) 163 F.Supp.2d 1079, 1088.)
      The plaintiffs here contend that they have stated a Section 11 cause of
action under two alternative theories: first, that the omission of interim



                                        7
financial results from 2Q 2015 renders certain statements in the Registration
Statement misleading; second, that the Registration Statement failed to
disclose a known negative trend, in violation of Item 303 of SEC Regulations
S-K (Item 303). (17 C.F.R. § 229.303(a)(3)(ii).) We consider these theories in
turn.
              a.    Plaintiffs’ Claim that Omission of 2Q 2015 Financial
                    Results Made the Registration Statement Misleading
        Plaintiffs contend that the Registration Statement falsely states that
Natera was “rapidly growing,” and that its “rapid growth of revenues” was
based on the success of Panorama, but omits to report that quarterly
revenues declined from $47.4 million in 1Q 2015 to $45.1 million in 2Q 2015
while net losses increased from $10 million in 1Q 2015 to $19.6 million in 2Q
2015. Plaintiffs argue that the failure to disclose the negative information
about 2Q 2015 while portraying Natera as a “growth story” states a claim
under Section 11; that defendants had a duty to disclose material interim
financial results for 2Q 2015, even though the quarter ended just two days
before the IPO was completed; and that by omitting information about the
negative results of 2Q 2015 the Registration Statement misled investors by
framing risks as possibilities when they had already occurred.
                    (i.)     Legal Standard
        As a general matter, SEC regulations require a registration statement
to include financial statements only if they are more than 135 days old.
(Stadnick, supra, 861 F.3d at p. 36, citing 17 C.F.R. § 210.3-12(a), (g).)
Further, SEC regulations give companies 45 days after the end of a quarter
to report quarterly results (17 C.F.R. § 249.308a(a)(2).) and do not generally
require the disclosure of interim quarterly results. Nevertheless, there is
liability under Section 11 “when an issuer’s failure to include a material fact
has rendered a published statement misleading.” (Omnicare, supra, 575 U.S.


                                        8
at p. 194.) Thus, to state a claim for relief under Section 11 for omission of
2Q 2015 results, plaintiffs must allege sufficient facts from which the court
can infer that the omitted information is material, and that it renders a
statement in the Registration Statement misleading. (Id. at p. 196; see also
Rubke v. Capitol Bancorp Ltd. (9th Cir. 2009) 551 F.3d 1156, 1163 [Section 11
complaint must demonstrate that omission is misleading].)
         To determine whether statements are misleading, we must read them
“in the context of the whole document. [Citation.] And they should be judged
based on ‘the facts as they existed when the applicable registration statement
became effective.’ [Citation.] ‘[T]he central issue . . . is not whether the
particular statements, taken separately, were literally true, but whether
defendants’ representations, taken together and in context, would have
misled a reasonable investor about the nature of the [investment].’
[Citation.]” (In re InterActiveCorp Securities Litigation (S.D.N.Y. 2010) 695
F.Supp.2d 109, 117; see also In re Restoration Robotics, Inc. Securities
Litigation (N.D. Cal. Oct. 18, 2019) __ F.Supp.3d ___ [2019 WL 5295059,
*10].)
                     (ii.)    Application
         In the context of the Registration Statement as a whole, there is
nothing false or misleading about the statement that Natera is “rapidly
growing” or the statement that its “rapid growth of revenues” was based on
the success of Panorama.
         The statement that Natera is “a rapidly growing diagnostics company”
appears in an introductory paragraph that describes the company’s history of
launching new products, its intention to launch new products, its revenue
growth from 2010 to 2014, and an increase in year-over-year revenue from 1Q
2014 to 1Q 2015.



                                         9
      The phrase “rapid growth of revenues” appears in a paragraph headed
“Quarterly Trends” in the sentence, “In general, our rapid growth of revenues
is attributed to reimbursement from increased volumes of our Panorama,
Horizon and Anora tests,” under a chart that shows quarterly results of
operations from 2Q 2013 through 1Q 2015. The statement clearly refers to
the historical growth of revenue from $11 million in 2Q 2013 to $47.4 million
in 1Q 2015, and does not imply that the growth has been constant or will
continue, especially since the chart shows clearly that revenues from 1Q 2015
were lower than 4Q 2015, and that net losses were greater.6 Furthermore,
just above the chart, the Registration Statement cautioned, “Historical
results are not necessarily indicative of the results to be expected in future
periods, and operating results for a quarterly period are not necessarily
indicative of the operating results for a full year.” A similar warning
appeared at the end of the Quarterly Trends paragraph: “Our historical
results should not be considered a reliable indicator of our future results of
operations.” Elsewhere, the Registration Statement cautions that Natera’s
quarterly results should not be relied upon as an indication of future
performance.
      Not only did the Registration Statement clearly state that revenues
had declined from 4Q 2014 to 1Q 2015, it attributed that decline to two
primary causes: decreased average reimbursement for Panorama due to a
new billing code for NIPTs coming into effect in January 2015,7 and delayed


      6The chart shows that revenues decreased from 4Q 2014 ($49.9
million) to 1Q 2015 ($47.4 million).
      7 The Registration Statement explained the significance of the billing
code issue in detail, “In the United States, the American Medical Association,
or AMA, generally assigns specific billing codes for laboratory tests under a
coding system known as Current Procedure Terminology, or CPT, which we

                                       10
revenue recognition. Contrary to plaintiffs’ contentions, the Registration
Statement did not describe the 1Q 2015 revenue decline as an “aberration,”
“hiccup,” or “anomaly.” The Registration Statement included information
indicating that the revenue decline could continue even if sales of Panorama
increased or stayed the same. The Registration Statement reported that the
full effect of the new January 2015 billing code, which reduced average
reimbursement for the Panorama test, had likely not been felt since not all
payers might implement it timely. The Registration Statement also warned
that third-party payers “may decide not to reimburse for Panorama, . . . or
may set the amounts of such reimbursements at prices that do not allow us to
cover our expenses.” The delay in revenue recognition was attributed to the




and our customers must use to bill and receive reimbursement for our
diagnostic tests. Once the CPT code is established, CMS [Centers for
Medicare and Medicaid Services] establishes payment levels and coverage
rules under Medicare while private payers establish rates and coverage rules
independently. [¶] We currently submit for reimbursement using CPT codes
that we believe are appropriate for our testing, but there is a risk that these
codes may be rejected or withdrawn or that payers will seek refunds of
amounts that they claim were inappropriately billed to a specific CPT code.
A new CPT code specific to NIPT came into effect in January 2015; however,
not all payers may implement this code in a timely fashion, and
reimbursement may be less that we have received in the past. We do not
currently have specific CPT codes assigned for Panorama or microdeletions
and there is a risk that we may not be able to obtain such codes, or if
obtained, we may not be able to negotiate favorable rates for such codes, or be
able to receive reimbursement for the average-risk NIPT patient population
using such codes. [¶] We accordingly cannot guarantee that our current or
any future tests will have a CPT code assigned. In addition, there can be no
guarantees that government and commercial third-party payers will
establish positive or adequate coverage policies for our tests or
reimbursement rates for any CPT code we may use.”


                                      11
increase in Natera’s direct sales force, which Natera planned to continue
expanding.8
      The Registration Statement also disclosed that sales of Panorama could
very well decrease: Natera stated that it sought to increase the use and
adoption of Panorama “in all pregnancy risk categories” including specifically
average-risk pregnancies, while reporting that just days before the IPO two
medical organizations issued guidelines stating that conventional screening
methods, rather than NIPT, were the most appropriate choice for first-line
screening for average risk pregnancies.9
      And the Registration Statement included information about costs and
losses, as well as revenues. Total cost and expenses increased each quarter
from 2Q 2013 ($18.4 million) to 1Q 2015 ($53.7 million). In the “Quarterly
Trends” paragraph, Natera reported that in most of the quarters presented
“we added sales and marketing personnel to our direct sales channel and
added laboratory operations, research and development and administrative
personnel to support our growth.” Elsewhere Natera stated, “as we ramp up
our internal sales and marketing and research and development efforts, we




      8 The delay in revenue recognition was attributed to an increase in the
percentage of tests distributed through Natera’s direct sales force, as opposed
to tests distributed by laboratory partners. Even though a test distributed
through the direct sales force “resulted in a higher average payment per
test,” most of the tests so distributed “are billed to insurance payers,” and the
revenue from those tests was “predominantly recognized on a cash basis as
price is not fixed and determinable and collection is not reasonably assured.”
      9The Registration Statement disclosed that the American College of
Obstetricians and Gynecologists and the Society for Maternal Fetal Medicine
had “issued new guidelines for NIPT on June 26, 2015, stating that
conventional screening methods, rather than NIPT, remain the most
appropriate choice for first-line screening for average-risk pregnancies.”


                                       12
expect to incur costs in advance of achieving the anticipated benefits of such
efforts.”
      Over the quarterly periods for which Natera provided data in the
Registration Statement, net losses and income ranged from a $10 million loss
in 1Q 2015 to $3.7 million in income in 3Q 2014. The 1Q 2015 loss was the
largest shown, contrasted with a $1.2 million gain in 4Q 2014.10 Natera
stated that it expected losses to increase as it “continue[d] to devote a
substantial portion of our resources to efforts to increase adoption of, and
reimbursement for, Panorama and our other products, improve these
products, and research and develop future diagnostic solutions.”
      Accordingly, we conclude that plaintiffs fail to state a claim that the
omission of 2Q 2015 financial results rendered statements in the Registration
Statement false or misleading. Plaintiffs’ arguments to the contrary, and the
legal authority on which they rely, are not persuasive.
      Plaintiffs argue that the Amended Complaint states a Section 11 cause
of action that in omitting information about 2Q 2015 financial results the
defendants falsely framed risk factors as “hypothetical” or as “possibilities”
when the risks had already materialized. The allegedly hypothetical risk
factors that plaintiffs identify are “flat-lined” sales of Panorama; declining
prices and third-party reimbursement for Panorama; third-party payers
refusing, reducing or delaying reimbursement for low-to average risk
pregnancies; and the impact of the January 2015 billing code change.
      Plaintiffs’ argument is unconvincing, because the Registration
Statement describes these risks specifically and in depth. (Plevy v. Haggerty


      10 The second largest loss was $9.6 million in 1Q 2014. Of the quarters
reported, just one other showed a net gain: 3Q 2014, with a net gain of $3.7
million.


                                       13
(1998) 38 F.Supp.2d 816, 832 [discussing cases including two Ninth Circuit
decisions and concluding, “where a company’s filings contain abundant and
specific disclosures regarding the risks facing the company, as opposed to
terse generic statements, the investing public is on notice of these risks and
cannot be heard to complain that the risks were masked as mere
contingencies”].) Insofar as sales are concerned, the Registration Statement
was clear that although product revenues had increased each quarter from
2Q 2013 through 4Q 2014, revenue growth from 3Q 2014 to 4Q 2014 was
considerably smaller than the growth between any two previous quarters and
product revenues had fallen from 4Q 2014 to 1Q 2015. The Registration
Statement used positive, not conditional, language in warning that it
expected that it would continue to incur losses for the foreseeable future and
that it expected losses to increase in the future. Similarly, the Registration
Statement stated unambiguously that most third-party payers would not
reimburse for NIPT for average-risk patients and that although medical
organizations had been supportive of NIPT in average-risk pregnancies, a
new guideline stated that conventional screening methods, rather than NIPT,
was the most appropriate first-line screening in average-risk pregnancies.
The Registration Statement also stated that the cost of product revenues had
increased from 4Q 2014 to 1Q 2015 as a result of “reduced average
reimbursement” for Panorama tests as the result of new billing codes coming
into effect in January 2015, and was clear that the full effect of the new
coding may not have been felt because some payers might lag in
implementing it.
      Plaintiffs contend that their case is akin to In re Ulta Salon, Cosmetics
& Fragrance, Inc. Securities Litigation (N.D. Ill. 2009) 604 F.Supp.2d 1188,
1191 (Ulta Salon), a trial court decision denying a motion to dismiss



                                       14
securities class action claims arising from the IPO of a beauty supply retailer.
The plaintiffs in Ulta Salon alleged that IPO documents omitted information
about financial results for a quarter that was to end nine days after the IPO.
(Id. at p. 1192.) They alleged that if the information had been provided, it
would have shown that expenses and merchandise levels had risen sharply,
contrary to the historical trends discussed in the IPO material. (Ibid.) But
Ulta Salon is factually distinguishable. In Ulta Salon, unlike here, the trial
court found that the IPO documents could “reasonably be read to suggest”
that “favorable trends” with respect to expenses and merchandise inventory
“were expected to continue.” (Id. at p. 1196.) Here, the Registration
Statement was clear that Natera’s costs were expected to increase in advance
of yielding any benefits, that losses were expected to increase and that there
was no expectation that its developing sales force would be as effective as its
representatives in the past, or that it could maintain or replicate former
reimbursement arrangements with payers.11
      Another case that plaintiffs claim to be analogous is Shaw v. Digital
Equipment Corp. (1st Cir. 1996) 82 F.3d 1194, which involved a public
offering made in a “streamlined registration form [Form S-3] available only to
certain well-capitalized and widely followed issuers about which a significant
amount of public information is available.” (Id. at p. 1206.) The applicable
regulations in Shaw required discussion of material changes in the issuer’s
affairs that had not yet been described in ordinarily quarterly filings. (Ibid.)
In Shaw, the appellate court held that to state a claim under Section 11 that



      11 Defendants point out that Ulta Salon has been cited only seven times
since it was decided: six times by the Northern District of Illinois when
reciting the elements of a claim, and once by the Northern District of Indiana
when declining to follow it.


                                       15
a Form S-3 registration statement omitted a material fact required by
regulations, it is enough to allege that defendants had possession of, and
failed to disclose, interim quarterly financial results “indicating some
substantial likelihood that the quarter would turn out to be an extreme
departure from publicly known trends and uncertainties.” (Id. at p. 1211.)
Shaw is inapposite because the issue concerning the interim financials was
not whether absence of the quarterly results made the prospectus misleading,
but rather whether there was a regulatory requirement to disclose them.
Here, however, plaintiffs point to no analogous regulatory requirement.
Further, Shaw’s “extreme departure” test for materiality has been
disapproved by the Second Circuit, as explained in another case cited by
plaintiffs. (Stadnick, supra, 861 F.3d at p. 36 [“We have carefully considered
Shaw’s ‘extreme departure’ test and decline to adopt it”].)
            b.     Plaintiffs’ Claim that Defendants Violated Item 303
      Plaintiffs argue that as an alternative theory of liability under Section
11, their Amended Complaint adequately pleads the omission of required
material facts by alleging that defendants violated Item 303, a regulation
requiring the disclosure of “known trends or uncertainties” that the issuer of
a registration statement “reasonably expects will have a material . . .
unfavorable impact on . . . revenues or incomes from continuing operations.”
(17 C.F.R. § 229.303(a)(3)(ii).)
      In an interpretive release regarding the disclosure required by Item
303, the SEC stated that management must make two assessments with
respect to a known trend or known uncertainty. (Management’s Discussion
and Analysis of Financial Condition and Results of Operations, Release No.
33-6835 (May 24, 1989) 54 Fed. Reg., 22427-01, 22430.) First, is the trend or
uncertainty “likely to come to fruition? If management determines that it is



                                       16
not reasonably likely to occur, no disclosure is required.” Second, if
management cannot make the determination that the trend or uncertainty is
not reasonably likely to occur, “it must evaluate objectively the consequences
of the . . . trend . . . or uncertainty, on the assumption that it will come to
fruition. Disclosure is then required unless management determines that a
material effect on the registrant’s financial condition or results of operations
is not reasonably likely to occur.” (Ibid.) Management’s determinations
“must be objectively reasonable, viewed as of the time the determination is
made.” (Ibid.)
      Section 11 generally imposes strict liability. (Omnicare, supra, 575
U.S. at p. 193.) But because actual knowledge of omitted information is an
essential element of a violation of Item 303 it is also an essential element of a
Section 11 claim that is based on a violation of Item 303. (Steckman v. Hart
Brewing, Inc. (9th Cir. 1998) 143 F.3d 1293, 1297 [Item 303 “mandates . . .
knowledge of an adverse trend”]; see also id. at p. 1296 [“allegations which
sufficiently state a claim under Item 303 also state a claim under section
11”].) The actual knowledge element of Item 303 “requires that a plaintiff
plead, with specificity, facts establishing that the defendant had actual
knowledge of the purported trend.” (Das v. Rio Tinto PLC (S.D.N.Y. 2018)
332 F.Supp.3d 786, 811 (Das); see also Blackmoss Investments Inc. v. ACA
Capital Holdings, Inc. (S.D.N.Y. Jan. 14, 2010) 2010 WL 148617, *9.)
      Plaintiffs argue that the Amended Complaint adequately alleged that
at the time of the IPO, defendants had knowledge of 2Q 2015 results, even if
those results were only interim, and therefore knew that Natera’s revenues
had declined in 2Q 2015 for the second consecutive quarter, and knew that
Natera’s losses in 2Q 2015 would be greater than any quarter’s previous
losses. Plaintiffs contend that based on this knowledge, defendants were



                                        17
aware of a negative trend concerning increases in costs and decreases in
reimbursement, resulting in decreases in revenues, and increasing losses.
Defendants, however, failed to inform investors of this trend, which by the
time of the IPO was not only reasonably likely to have, but in fact already
had and would continue to have, a material impact on Natera’s results.
      As an initial matter, we conclude that the Amended Complaint does not
adequately allege defendants were aware of interim or final results for 2Q
2015 at the time of the IPO. The Amended Complaint is replete with general
allegations statements about Natera’s use of cash basis accounting and the
customary interactions between a pre-IPO company and its auditors and
underwriters. But plaintiffs fail to allege specific facts establishing that any
of the defendants had actual knowledge of the 2Q 2015 financial results.
Instead, plaintiffs state that defendants “would have known” or “knew or
should have known” (italics added), or “knew or were reckless in not
knowing” (italics added) 2Q 2015 financial results. General and conclusory
allegations such as these do not suffice to plead actual knowledge. (See Das,
supra, 332 F.Supp.3d at pp. 810-811 [Second Circuit “clarified that ‘Item 303
requires the registrant only to disclose those trends, events, or uncertainties
that it actually knows of when it files the relevant report with the SEC. It is
not enough that it should have known[.]’ (Ind. Pub. Ret. Sys. v. SAIC, Inc.,
818 F.3d 85, 96 (2d Cir. 2016) (emphasis added)”].)
      This matters little, however, because the Registration Statement itself
refutes any argument that defendants failed to disclose the negative trend of
declining reimbursements and revenues with increasing costs and losses.
(See Mosco v. Motricity, Inc. (9th Cir. 2016) 649 Fed.Appx. 526, 528
[affirming dismissal of Section 11 and Item 303 claims where registration
statement “disclosed the very trend that Plaintiffs claim [the company] hid



                                       18
from the market”].) As we discussed above, the Registration Statement
discloses the trend in some depth, outlining and analyzing the decline in
revenues from 4Q 2014 to 1Q 2015 while discussing the expectation of
reduced reimbursements (“we anticipate our average reimbursement per test
will decrease”), increased costs, and increasing losses in the future. Contrary
to plaintiffs’ contention, the case before us is unlike Stratte-McClure v.
Morgan Stanley (2d Cir. 2015) 776 F.3d 94, where the appellate court
concluded that plaintiffs adequately alleged a breach of the obligations
imposed by Item 303. (Id. at p. 106.) There, the required disclosures of
market trends that could negatively affect the defendant “were generic,
spread out over several different filings, and often unconnected to the
company’s financial position.” (Id. at p. 105.) Here, the disclosures were
specific and included within a single document, including in the section of the
prospectus entitled “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” (Italics added.)
      In sum, we conclude that plaintiffs fail to demonstrate any error in the
trial court’s dismissal of their Section 11 claim
      2.    Section 15 Cause of Action Against the Natera Individuals
      Section 15 imposes joint and several liability for “[e]very person who
. . . controls any person liable under [Section 11].” (15 U.S.C. § 77o(a).) To
state a claim under Section 15, a plaintiff must allege a primary violation of
the securities laws (here, a violation of Section 11) and must further allege
that the defendant exercised actual power or control over the primary
violator. (See Howard v. Everex Systems, Inc. (9th Cir. 2000) 228 F.3d 1057,
1065 [addressing control person liability under Section 20 of the Securities
Exchange Act of 1934 (15 U.S.C. § 78t(a)); the analysis is the same under




                                       19
Section 15 of the Securities Act of 1933, as stated in Hollinger v. Titan
Capital Corp. (9th Cir. 1990) 914 F.2d 1564, 1578].)
      As we discussed above, plaintiffs’ Amended Complaint fails to allege a
violation of Section 11. The failure to allege the required primary violation of
the securities laws is fatal to plaintiffs’ Section 15 cause of action.
Accordingly, we need not consider whether the Complaint adequately alleged
that the Natera Individuals are control persons.
                                 DISPOSITION
      The judgment is affirmed. Respondents shall recover their costs on
appeal.




                                        20
                                          _________________________
                                          Miller, J.


We concur:


_________________________
Kline, P.J.


_________________________
Richman, J.




A155613, City of Warren Police & Fire Retirement System, et al. v.
Natera, Inc., et al.




                                     21
Filed 3/23/20

                           CERTIFIED FOR PUBLICATION

        IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                           FIRST APPELLATE DISTRICT

                                     DIVISION TWO


 CITY OF WARREN POLICE AND
 FIRE RETIREMENT SYSTEM et
 al.,                                               A155613
          Plaintiffs and Appellants,
                                                    (San Mateo County
 v.                                                 Super. Ct. No. CIV537409)
 NATERA INC. et al.,                                ORDER CERTIFYING OPINION
                                                    FOR PUBLICATION
          Defendants and Respondents.


BY THE COURT:
        The opinion in the above-entitled matter, filed on February 28, 2020, was not
certified for publication in the Official Reports. For good cause, the requests for
publication are granted.
        Pursuant to California Rules of Court, rule 8.1105, the opinion in the above-
entitled matter is ordered certified for publication in the Official Reports.




Dated: ___________________                         ________________________________
                                                   Kline, P.J.
Trial Court: Superior Court of San Mateo County


Trial Judge: Hon. Gerald J. Buchwald


Robbins Geller Rudman & Dowd LLP, Andrew S. Love, Daniel J.
Pfefferbaum, Armen Zohrabian, Spencer A. Burkholz and James I. Jaconette
for Plaintiffs and Appellants


Katten Muchin Rosenman LLP, Bruce G. Vanyo, Christina L. Costley for
Defendants and Respondents




A155613, City of Warren Police and Fire Retirement System, et al. v. Natera,
Inc., et al.
