OPINION AND ORDER
(ECF Case)
This securities class action was brought by persons who purchased Nokia Corpora
I. BACKGROUND
A. Nokia’s Relevant Financial History
Unless where otherwise indicated, the following facts are taken from the Consolidated Amended Complaint and do not constitute findings of the Court.
Nokia, a Finnish corporation, is one of the world’s leading cell phone manufacturers. For the fiscal year of 2003, Nokia’s net sales totaled $37.1 billion and its net profits totaled $4.5 billion. The company has approximately 50,000 employees, maintains production facilities in nine countries, and sells a variety of communication devices in over 130 countries. Nokia is a publicly held company whose stock is primarily traded on the Helsinki Exchange, and the New York Stock Exchange (where approximately sixty percent of Nokia’s securities are traded), in the form of ADRs. Nokia shares were also listed throughout the Class Period on the Frankfurt, Stockholm, and Paris stock exchanges and were traded on the London stock exchange until November 2003.
Nokia’s communication devices operate using three major digital transmission technologies: Time Division Multiple Access (“TDMA”), Global System for Global Communications (“GSM”), and Code Division Multiple Access (“CDMA”). Nokia also introduced a gaming device, the “N-Gage” in late 2003.
During all relevant periods, Jorma Ollila was Nokia’s Chairman of the Board and Chief Executive Officer, Pekka Ala-Pietila was Nokia’s President and an Executive Board Member, Matti Alahuhta was Nokia’s Executive Vice President, Chief Strategy Officer, and an Executive Board Member. Beginning January 1, 2004, Richard A. Simonson was Nokia’s Chief Financial Officer and an Executive Board Member. Olli-Pekka Kallasvuo preceded Simonson as Nokia’s CFO and was also Nokia’s Executive Vice President, General Manager of Mobile Phones Division, and an Executive Board Member. During the Class Period, Anssi Vanjoki was a Nokia Executive Vice President, General Manager of its Multimedia Division, and an Executive Board Member. The class, represented by Generic Trading of Philadelphia, LLC, Martin Bergljung, and Gerald Hob-erman, consists of parties who purchased Nokia’s common stock during the Class Period.
From October 2003 through March 2004, Nokia reported growth in its cell phone market share and made projections of expected increases in cell phone sales of three to seven percent for the first quarter of 2004 as well as increases in its earnings per share. Nokia attributed its success for
During this fourth quarter upsurge in Nokia’s performance, the Consolidated Amended Complaint alleges that Defendants were aware of various factors that would negatively impact Nokia’s financial results. In contravention of applicable securities laws, however, Defendants failed to disclose this information to investors and actively misled investors by claiming Nokia’s strategy was responsible for Nokia’s aberrant positive performance in the fourth quarter of 2003 and projected growth of three to seven percent in the first quarter of 2004.
Despite industry-wide growth, on April 6, 2004, Defendants made a pre-quarterly announcement that sales had declined by two percent during the first quarter of 2004. On the day following this announcement, Nokia shares fell sixteen percent, a single day market capitalization loss of $17 billion. Ten days later, on April 16, 2004, Defendants released Nokia’s first quarter 2004 financial statements which showed a fifteen percent decrease in sales of its core cell phone business and stated that Nokia’s sales would continue to be depressed in the next few quarters. The April 16, 2004 revelations caused Nokia’s stock to drop an additional nine percent in one day, an $8 billion loss in market capitalization.
B. The Consolidated Amended Complaint
The Consolidated Amended Complaint alleges that Defendants made several materially misleading statements throughout the Class Period related to the strength of Nokia’s product portfolio, Nokia’s product pipeline, and the N-Gage’s introduction. It also alleges that Nokia manipulated its reported quarterly and year-end revenues in 2003 in violation of accounting standards, including United States Generally Accepted Accounting Principles (“GAAP”). 1
The eighty-two-page CAC relies on eleven allegedly fraudulent statements made by and/or, on behalf of, Defendants. According to Plaintiffs, all of these statements were false and misleading in violation of the securities laws. The CAC further relies on seven post-Class Period statements to establish that the earlier statements were knowingly false when made. For the sake of clarity and completeness, both sets of statements are listed here. The statements are in chronological order. In a troubling number of instances, Plaintiffs have relied on selective quotations from Defendants’ statements. Portions of statements not included in the CAC, but clearly incorporated by reference in the CAC, are included here for context in italics.
Allegedly False Statements
1. On October 16, 2003, Nokia issued a press release announcing that it had met its third quarter sales and earnings per
Following an announced commitment two years ago to strengthen our position in the global CDMA handset market, I am very happy to say that we have now doubled our share to the mid-teens from the same quarter last year. We expect to see continued momentum in CDMA going into the fourth quarter as we increase shipments to China, India and all major U.S. CDMA operators.
Recent months have marked our entry into a number of new and exciting areas of mobility. We have introduced several camera phones, begun shipments of games devices and announced half a dozen phones for new growth markets.
The Nokia N-Gage has just gone on sale at 30,000 stores around the world to a very positive initial consumer response. Many outlets sold out of the device during the first day of release. Following on from this, we are seeing strong order intake from distributors and retailers....
(Am. Compl. ¶ 86; Defs.’ Ex. 0)
2. On October 16, 2003, Ollila and Ulla James, 3 hosted Nokia’s “Third Quarter 2003 Earnings Conference Call” with market analysts. 4
Of the various technologies, GSM, CDMA, and PDC, grew basically in line with overall year-on-year market growth, while PDMA volumes continued to decline.
Nokia’s market positions strengthened in the Americas across all the technologies. We have achieved major market share gains in Latin America where our market share currently exceeds the global 39% level. In the U.S.A. we’re the clear market leader and we are well positioned to make further gains during the holiday season.
The strong momentum in CDMA continued with our CDMA market share doubling from a year ago to the mid-teens. Going into the fourth quarter, we see an opportunity for a major increase in our CDMA volumes in India, China and the U.S.
We have now achieved the number one position in the Chinese GSM market. Our distribution strategy [is] bearing fruit and Nokia brand is stronger than ever supported by competitive product offering from low end to localized feature-rich devices like the pin based Nokia 6108.
Outlook for the fourth quarter indicates a further acceleration of the market to year-on-year growth in the mid-teens culminating in full year 2003 volume of 460 million units. I expect Nokia volume growth in the fourth quarter to exceed the overall market growth.
Our offering is being strengthened by the ramp up of several significant new products, such as the Nokia N-Gage, the new imaging phones, Nokia 6600, Nokia 3660, the GSM [inaudible] CDMA-based Nokia 7600, and the highly competitive entry level phone, the Nokia 3200 series.
I’m looking forward to a quarter that is expected to bring Nokia new volume and market share records.
(Am. Compl. ¶ 89; Defs.’ Ex. N)
b) In the question and answer portion of the conference call, analyst Mike Walkley asked, “[m]aybe we can talk just a little more about [] CDMA. It appears you’re doing a great job in gaining share in CDMA. I was just curious maybe the profitability for CDMA since a lot of your phones are maybe on the lower end and how that maybe impacts your overall mix on the ASP front.” (Defs.’ Ex. N) In response, Ollila said:
Yeah, I think the — if we look at the CDMA market, we really are pleased with the very steady progress that we have made in CDMA in the last three quarters. So, it’s really a consistent good progress having some of these key operators, Sprint and Verizon in the U.S., Unicom in China, as well as Reliance in India as our customers, all of them in volume, you know, shipping in volume as we speak. So, we really are very pleased with how that has worked out.
The business model, the dynamics as it is in CDMA has a slightly lower EPS as an average, has a slightly lower margin. But it is a good business. We are getting a good, healthy margin, and we just love to get that business and really make progress in that segment.
(Am. Compl. ¶ 90; Defs.’ Ex. N)
Okay. I think the — first of all, we want to be present in all the key segments of the CDMA market. And we have introduced our first CDMA camera phone, or imaging product, as we would say. And that phone will be shipping initially Latin America in Q4 and is a good indication of how we will be moving. Then if we look at the form factors, we will be moving to a broader set of form factors, also with CDMA, including clamshells with time. So, you will see all of that.
And if we look at the broader set of products and opportunities in CDMA, we are working with a number of multimedia segment products which will hit the market in 2004 and 2005. So, the product road map is a very exciting one and it has all the same elements tvith time that our GSM wideband CDMA portfolio does have.
(Am. Compl. ¶ 91; Defs.’ Ex. N)
d) A Sanford Bernstein analyst asked about the delivery of camera phones scheduled for the fourth quarter of 2003, whether there were any delivery delays, and whether these phones would be in stores in time for the 2003 Christmas selling season. He also requested a projection “as to what percentage of [Nokia’s] phones you believe in the fourth quarter might have a camera included?” (Defs.’ Ex. N) Ollila answered:
... all of the phones you mentioned are shipping in the fourth quarter. So, we do not have delays. We really are working well and both our operational as well as the component are in good shape. So we will ship those all well in [the] fourth quarter....
So, if you look at the high end, you know, what’s the proportion of that out of the total? The share of color in terms of value now accounts for about 50% of the total. And that we expect to grow significantly in the fourth quarter. And if you look at the value of the camera phones, we expect that to be in the range of 20% of the total in the fourth quarter.
We are well on our way to that as we speak. So, we feel good about that. And that just shows that it’s changed towards the higher end offerings is happening. Obviously, simultaneously you have in terms. So, volume simultaneously a very strong show from the emerging countries. But that — we’ll have to that business, as well.
(Am. Compl. ¶ 91; Defs.’ Ex. N)
e)Analyst Tim Long asked about Nokia’s growth in the Chinese and Indian markets and the ASP developments in those markets. Ollila responded:
I think if you’re looking at two markets like China and India, you know, these are two markets where it is even more pronounced than in some others that taking an average of ASP of any other factor, you know, really distorts the picture because you have a very strong high end segment, but most of it obviously, is low and middle, entry level and middle range phones. So, you really have to look at how the segments are performing.
And we’re getting a healthy margin. That’s our main driver, a healthy margin from both of those markets. And that’s coming from both the high end and middle range as well as entry.
(Am. Compl. ¶ 92; Defs.’ Ex. N)
3. On November 24-25, 2003, Nokia hosted a “Capital Markets” conference in Dallas, Texas for market analysts covering Nokia. Various Nokia executives made presentations at the conference.
a) Ollila gave an introductory speech at the conference updating Nokia’s fourth quarter outlook for 2003 and outlined the various Nokia segment presentations to follow:
Nokia’s own mobile phone volumes have progressed really well in line with our plan and we have had a really encouraging stability in our ASP’s during the quarter, sequentially, and I think that really speaks well for what is happening in the marketplace and how our strategy is working. When we look at the view for infrastructure market, it has evolved as indicated earlier, and Nokia networks’s performance well in line with the plans that we have outlined, so the stabilization in the markets, our restructuring has really paid off and we can go ahead with, with a very encouraging morale atmosphere in our organization and the way that is paving the future with our customer base. So based on how the quarter has evolved so far, we believe that we’ll be able to achieve the Qi guidance both in terms of the sales as well as EPS as indicated to you.
First of the business groups is the mobile phones. It will continue to offer a unique global range of highly competitive mobile phone products for large consumer segments.... The economies of scale obviously to be exploited to make sure that we get the lowest cost structure and that we get the fast product renewal to ensure product competitiveness which has been our strength in the past.
We expect multimedia business group to reach, break even by the end of next year, 2001. This is an area where we know we can really make it big, where there are tremendous growth opportunities, we have know-how, where we can bring mobility to many of these areas, particularly the games imaging, media products, and we have the concepts to make it happen. We also have the partnership network so this is an area where we feel that you will see the new Nokia happen in the next three to five years.
But finally, my final comment will be around the key things that I feel will maintain the competitiveness, will make the competitiveness of Nokia in the future. Things that will make Nokia to achieve the great results we have in mind, which I’m sure you will expect us to have in the years to go. First of all, it’s all about products. We are a product company. It’s all about product range, the segmentation. The product cycles are being accelerated. That’s the push for the market, how we can respond to that, and the fact that industry is becoming highly competitive. We feel this area is number one among the factors for us.
(Am. Compl. ¶¶ 96-98; Defs.’ Ex. M)
b) Olli-Pekka Kallasvuo gave a presentation at the conference about Nokia’s mobile phone unit:
Cost leadership will continue to be of extreme importance and I think we really need to continue to be cost leaders inall categories. So the thinking, okay let’s leave the low-end if you will aside, and concentrate on mid-end, if there is a concept like mid-end, and the high-end and really kind of escape to that direction, I don’t think it is a winning strategy. Cost leadership in all segments of the market will continue to be our strategy, and obviously the fact that one can get the volumes there by being present in all segments, it’s extremely important ivhen it comes to your volume benefit and also in the so-called low end you can exploit modularity in a mature way. Well Pertti was mentioning about art and science. I think here we’ve got an example. This is both art and science, when it comes to segmentation. Unfortunately my time will not allow [me] to talk about this more, but I think there’s a lot of benefit we can bring to the table by continuing to segment the market in a way that makes sense from the sales and branding point of view, and this low end mid range high end thinking continues to be overly simplistic.
Now, before moving to the cost leadership I want to tackle CDMA briefly. Not other segments of this business I will simply make some comments on the CDMA, there being many questions here. I’m sure there will be more during the course of today and obviously especially in when you are in the U.S. CDMA attracts a lot of attention. So obviously we’ve got, we’ve made some very good progress in CDMA this year and we are making that progress right now as we speak. We have doubled our market share and we really can in a very realistic way target even higher market share here. So why is this happening now? I think it’s very simple. For a long time I think we were under-investing in CDMA when it comes to R
& D. We basically did not necessarily completely understand the complexity there is in the CDMA market, and really didn’t seem to get there [no matter] how hard we always tried. In the summer of 2000 we made important decisions to increase our investments in CDMA, really made a commitment saying that now we simply need to pay more [attention] by investing more to get the sustainable position and then really catch the other players in the industry. And I think this what we are seeing now is simply a consequence of that decision. Money being spent, invested, of course there again that’s expense while doing so, and we are seeing the results. I think we are now in a situation where we really are competitive when it comes to CDMA engine. And the engine really is well performing. And now really it’s time for us to make the expansion based on that engine to other, to more categories of the market, cover more segments, more high-end if you will. The possibility to that is right there, and we are doing right now. And then of course also drive CDMA to convergence and push, for instance, Symbian to CDMA. And the beauty here is that when doing so, the commonality between different standards, between CDMA markets and GSM markets will increase. When you move to the higher layers of software and application platforms, you really can benefit more from the commonality there between CDMA and GSM, and I think that will increase our competitive position here.
(Am. Compl. ¶¶ 100-02; Defs.’ Ex. M)
c) An analyst posed a series of questions concerning CDMA strategy at the conference. The questioner said that “in terms of CDMA strategic directions, if I look you guys [ha]ve done a really good job in gaining and you have a really good momentum
So but to be quite honest you know, this time we are getting closer because this we have, we have really worked on and thought about and you know, now we are getting into a situation that there probably would be benefit because we are getting into new areas. There are different complexities, there are the service platforms, etcetera, etcetera. And you know, not to go anything deeper to it but this is something that we have worked on, lets leave it at that.
(Am. Compl. ¶ 103; Defs.’ Ex. M)
Kallasvuo supplemented Ollila’s response (in a portion not contained in the CAC):
About the design and the clamshell question you know, I’ve said many times before in situations like this and elsewhere that Nokia’s brand value is such that we are not designing me too products and we took some time to look at you know, how we are going to approach this clamshell thing. We have now introduced the first product and I am absolutely convinced that this is going to be one of the highest margin products in this industry once we get it out in volume in January, and it will not sell because it’s a clamshell, it will sell because it’s beautifully styled.
(Defs.’ Ex. M)
d) Anssi Vanjoki also made a presentation at the conference about multimedia, including camera phones and gaming devices:
If we look at the current camera industry which equals about [a] hundred million devices, why should we not count this industry to be the addressable market for Nokia as well? I have at least started to count it as my market. What’s special in making a camera? After all in two years we became [the] world’s largest manufacturer of cameras .... Right now we see our cameras are exactly what’s there. There are a number of megapixels and multiple megapixel cameras available in the market but first of all are they affordable to the consumer? The answer is no. Secondly, is the whole imaging chain to take use of these cameras existing and in balance? The answer is again no. But next year this is not going to be so anymore. The whole imaging chain is able to support this kind of camera, and Nokia’s early selection of technology to go with Pima sensors in the cameras is really starting to pay off for us in a big manner. And in this way we can make the right cost, right cost balance for sophisticated imaging devices. At the same time we need to involve all those [other] market makers into this.
Games are hot. Christmas is coming. And this year we participate in that market in a grand scale. We have brought the first N-Gage unit to the market and we have started the games business also in the publishing side. If there are hot areas in games it’s online and it’s mobile. What N-Gage does, it puts these two hot areas together and makes it truly hot. It’s not going to be one Christmas phenomenon and we are not expecting that the first Christmas is going to make it for us, but when we have gone through three cycles, i.e. three Christmases, because game industry peaks to the tune of Christmas, then we can say whether we have this market in the pocket or not. The starting’s very good. We are tracking this business, we are seeing repeat orders come in and in certain markets which are more prone for this we see the whole thing starting to work just as we have planned.
Currently the games offering is not very wide but it is growing rapidly and by the end of 200k we will have more than 100 games supported and next summer will be very important because then the first games that have been from the first row of code [have] been developed for online mobile multiplayer games will hit the market.
(Am. Compl. ¶¶ 105, 107; Defs.’ Ex. M)
e) Later in the presentation, someone inquired: “on N-Gage when can we expect an update to the first generation hardware platform that would deal with some of the limitations of the first product, and second I know you don’t want to get into a month by month sales figure for N-Gage but with the initial ramp would it be a help if you give us some sort of update on the 400,000 units shipment for N-Gage that you gave earlier in the quarterf?]”' (Defs.’ Ex. M) Vanjoki responded:
Those few hundred thousand people who up to now have bought the unit are really critical for us because they are the first true customers who have paid their own money for the devices. And they want to give us feedback. They are giving us feedback and the great thing in comparison to many other devices that been brought to the games market is that we have the N-Gage arena. We have an online connection with these people and we are getting a lot of feedback. This feedback is converted already today into activity into our R & D and I expect that when the next cycle, i.e. Christmas 2004 comes, we have fixed any of those things that the consumers today are not liking in this product, so definitely we are taking action in this area and like I said you know, we are here for the long haul with the games industry. The starting is really very good and the endorsement of the key players in this business gives us good feeling that the long haul will actually pay off.
(Am. Compl. ¶ 108; Defs.’ Ex. M)
f) Another analyst asked about the general sentiment that operators do not want to see Nokia gain in market share. He asked Vanjoki to “comment on what you think the marketshare development will be and how your relationship with operators might need to change such that your brand does not, since it’s ahead of them in their brand rankings, become a threat to their plans to offer their own brand services[?]” (Defs.’ Ex. M) Vanjoki responded:
Yeah. I think that it is the same for anybody in any business that if you have a strong partnership with somebody and that represents a majority in your business dealing with the partner you start to sort of suspect that you know, is thisright? And then it is very much a behavioral question. If the other party behaves in a way that is encouraging the cooperation rather than in a way that is all the time setting it in question then I think the true partnership can be found. This is what we have found with the big operator groups around the world where the main driver in fact is the trustworthiness of the partnership and the behavior that you show. If we would behave in a way that would give a reason for operators to shoot for something else, then I’m sure that you know, they would use their power much stronger than what it is today. I think it is only natural for any operator or any other business where you are part of the chain that you want to sort of hedge your bets and you want to enable other people as well to play in the equation and as such we have nothing against this as long as we always have the same chance, and so far I can only report that we’ve had the same chances as the newcomers.
(Am. Compl. ¶ 110; Defs.’ Ex. M)
g) Ollila closed the Capital Market presentation with some comments:
At the same time we are seeing a replacement market which is at the level today than what we thought it would be a few years back or a little higher. Share of the total industry we estimate to be total industry volume shift we expect to be well over 60 percent this year and somewhat bigger in 2004. So when we look at the percentage of phones replaced from the subscriber base we can see that this renewal rate has, is changing. It’s not a curve which goes down. It’s actually recovering and the renewal rate has experienced a turning point, seems to be stabilizing at 25 percent, and really does represent a significant and interesting and sort of annuity for a company like ourselves with the kind of customer loyalty, brand recognition that we have. So growing customer base, growing base of subscribers providing through the renewal rate, an interesting opportunity for a company like ourselves. When we look at the market we are back on the growth path after a disappointment in 2001 and not much of a recovery to write home about in 2002. But this year growth of more than 10 percent, 460 million units, perhaps a bit stronger you might say. Yes, perhaps a bit stronger. In 2004 growth of more than 10 percent allowing an interesting opportunity that is given a little bit of a hint also from the stabilization of the ASP’s in the fourth quarter, as I noted first thing at noon when we kicked off.
This 40 percent target was very well set I feel because it was not an easy one, but at the same time attainable, and we are getting very, very close in the fourth quarter, so let’s revisit that topic in January, February, when we’re, when we’ll be able to communicate to you more.
So we look at gaining share, continuing to do that, also in 2004. That’s the way we set our business goals. Then if we look at our strategic areas this year. Early this year in January and February we were quite explicit that there are three areas where we want to set our sights and make sure that we will do better towards the year end. First of all the, it was the issue of the U.S. We did not have much fun in terms of our market position evolution in the U.S. But now with the vastly improved product portfolio, greatly improved share in CDMA, and first time ever in all the major U.S. carrier quarter four campaigns, us being included, it means that we are now in a very strong position inthe U.S. In China our marketshare has improved during the last four or five months with our China-specific products and distribution, and we have gained our number one position back in GSM and we have entered the CDMA market, so our position in China is well stabilized and Colin Giles who has done a great job in a very challenging marketplace will be available to you tomorrow and he has some pretty good stories to tell. And then finally in CDMA, I think Olli-Pek-ka already told about that. We have doubled our share. We, you know, when we set our sights on something we get results. And I think that our CDMA effort is a good testament for that. And you’ll hear more about all these three things tomorrow.
(Am. Compl. ¶¶ 112-113; Defs.’ Ex. M)
4. In a press release dated January 8, 2004, 6 Nokia stated:
Nokia Mobile Phones sales in the fourth quarter of 2003 increased to approximately EUR 7 billion, up 4% year on year (versus the previous guidance of flat to slightly up) due to better than expected market development leading to strong Nokia unit volumes. Due to this and a favorable product mix, Nokia Mobile Phones’ pro forma operating margin continued at the excellent level of between 24% and 25% for the quarter. At the moment, Nokia is not in a position to comment on overall mobile industry volume growth for the fourth quarter 2003. However, Nokia Mobile Phones’ fourth quarter unit volumes were 55.3 million.
(Am. Compl. ¶ 116; Defs.’ Ex. B)
Ollila is quoted in the release saying:
The strong seasonal development in both Nokia Mobile Phones and Nokia Networks exceeded even our own expectations. High volumes and an excellent mix in Nokia Mobile Phones delivered healthy sales and an average selling price that was up sequentially. Nokia Networks results were impacted by stronger than expected year-end operator investments and product mix which resulted in much stronger than expected sales and stronger than expected operating profits.
(Am. Compl. ¶ 117; Defs.’ Ex. B)
5. On January 22, 2004, Nokia hosted an earnings call in conjunction with the release of its fourth-quarter and year-end results for 2003.
a) In this call, Ollila discussed 2003 and projected for the first quarter of 2004:
For Nokia Mobile Phones 2003 was a great year. Nokia Mobile Phones was able to deliver record volume and record sales and profit.... At constant currency, sales growth was an impressive 12%.
For the first quarter, we currently do expect first of all that Nokia net sales will grow between 3 to 7%. Secondly, that the diluted reported EPS will range between 17 and 19 euro cents.
The good momentum of the handset industry is expected to continue also in the first quarter. We project the market volumes to grow somewhat over 20% year-on-year versus 11% market growth a year ago in the first quarter. With our current product lineup gaining momentum we expect to grow volumes faster than the market.
I also feel encouraged by our product pipeline for the rest of the year. These new products and product concepts will enable us to further strengthen our overall competitiveness.
(Am. Compl. ¶¶ 119-20; Defs.’ Ex. C)
b)Ollila also discussed Nokia’s ability to forecast demand:
The higher than expected robust industry demand during the fourth quarter [2003] resulted in a very healthy level of channel inventories at year-end.
In spite of some tightness of supply in the market, ive were able to deliver according to our plan but our ability to capitalize on the upside during the biggest sequential volume ramp-up in the history of mobile phone industry was limited. Vendors with previously high channel inventories were able to benefit from the unexpected demand while the ones with lean channel inventories experienced occasional stock-outs.
I would now like to comment briefly on the importance and some of the issues relating to the mobile phone industry volume estimate and the relevance of that to us.
Nokia deploys internal bottom-up process in the market forecasting. Our aim is to have a fact-based market understanding both globally and on [a] country level in order to support our internal planning.
I believe our market estimates historically have been pretty accurate for several reasons. We have exceptionally good visibility throughout the channel as we are present in most of the country markets. Distribution channels as well as in most of the technologies, and in most of them we are also the market leader.
With our performance, we have demonstrated that we have been able to forecast demand with a high degree of accuracy and our view of the market side is also shared by the other leading mobile phone manufacturers. I also believe that any attempt to measure a truly global market of several hundreds of millions is always an estimate, even at best.
(Am. Compl. ¶¶ 121, 125; Defs.’ Ex. C)
c) In response to a question from analyst Paul Sagawa regarding future projected ASPs, Ollila explained:
I think there are good chances for us to get better there, but I would like to hasten to add that as I’ve said in my previous comments, you know, we don’t run the business based on ASP[]s, and I really want to underline that Paul. We manage this based on revenue, market share to drive profits. So this is how we want to optimize it, and when we look at how the earnings, the margin level and the overall earnings developed, it was just tremendous in the fourth quarter.
So ASP was not something that we would follow or that I would get reports weekly or something, but I do get reports weekly on revenue and on how we feel we are doing against our competition and how our share is evolving. So those are the parameters which then drive the profits which we have in mind.
So the ASP is something which is a little bit of an end product of all that, and all I can say is that, yes, there’s a good chance of doing better than the constant currency 5%, but I don’t have a figure that I would be ivorking against, because it’s not a parameter in my model which I have in my head and in front of me.
(Am. Compl. ¶ 122; Defs.’ Ex. C)
d) During the call, Ollila also discussed the positive fourth quarter of 2003:
In the fourth quarter Nokia delivered a record volume of 55.3 million phones representing a sequential volume increase of 10 million units, and a sequential growth of 22%. A shift to color and to more feature-rich devices together with an increase in the newness of our product portfolio were the drivers for the positive 2% sequential ASP development in the fourth quarter.
(Am. Compl. ¶ 123; Defs.’ Ex. C)
e) During the call, Ollila also discussed Nokia Mobile Phones’ strong year in 2003:
For the first time in Nokia Mobile Phones history, annual gross margins exceeded 40% driven by newness of the portfolio, improving quality, and continuing efficiency gains.
(Am. Compl. ¶ 124; Defs.’ Ex. C)
f) In the question and answer portion of the call, an analyst asked, “[o]n your [market] share it doesn’t seem to have risen last year significantly on the last six months although you reach your strategic objectives in China and CDMA, in America you’re reaching them. Do you feel there’s a chance you’re perhaps hitting a ceiling on your market share now that, or what really has to happen for that share to hit 40% in 2004, do you think?” (Defs.’ Ex. C) Ollila responded:
Well I think that loe wouldn’t have had any problem in getting more share had we wanted to go down in price going in the low end. So that’s the general statement. And then, obviously, we have a situation where we, as I noted I my opening comments, we, in the fourth quarter, we were constrained in shipping more than what we actually did, so I don’t think, so we are very relaxed about the 40% and the target, and the 38% that we achieved, because we know that we are in that ballpark, can be reached. It’s not, it would not have been beyond our reach had we planned a little bit better the volumes in the low end, so we certainly have not reached the ceiling. That’s really the conclusion from that.
(Am. Compl. ¶ 126; Defs.’ Ex. C)
g)Another analyst asked about Nokia’s projected market share for Europe in the first quarter of 2004. Ollila responded:
On Europe, we expect to gain share in Q[l] in Europe. It’s a major market for us. Our product positioning worked really well in the fourth quarter, particularly in the high end, and our, some limited availability in the low end and also unwillingness then to move price meant that share was not what we had in mind in the fourth quarter, but we did very well there.
Now there is scope to do a bit better and when I commenced earlier on the momentum of the final quarter of last year continuing to the first quarter, I think that’s really Europe, which one can refer to more than to any other region.
(Am. Compl. ¶ 127; Defs.’ Ex. C)
6. On February 6, 2004, Nokia filed with the SEC its Form 20-F for the fiscal year of 2003. The 20-F included sections on “Risk Factors,” “Core Business Strengths,” and “Operating and Financial Review and Prospects.” 7 The 20-F also contained certification statements from various Nokia executives.
a) “Risk Factors” — Plaintiffs allege the following factors from that nine-page section are misrepresentations:
Changes in the mobile communications industry require us to develop complex, evolving technologies to use in our various businesses, some of which are newto us. If we fail to develop these technologies or successfully commercialize them as new advanced products and solutions that meet the demands of the market, or fail to do so on a timely basis, or if the evolution of our operating environment is slower than anticipated leading to delays in the deployment and acceptance of new services, it may have a material adverse impact on our business, our ability to meet our targets, and our results of operations.
Despite our recent reorganization, we may not be able to commercialize new products and services successfully or profitably, or respond fast enough to the changes in the industry.
The technologies, functionalities and features on which we choose to focus may not achieve as broad customer acceptance as we expect. This may result from numerous factors including the availability of more attractive alternatives or a lack of sufficient compatibility with other existing technologies, products and solutions.
In our mobile device businesses, we seek to maintain healthy levels of sales and profitability through offering a competitive portfolio of mobile devices, growing faster than the market, working to improve our operational efficiency, controlling our costs, and targeting timely and successful product introductions and shipments. For us a competitive portfolio means a wide and balanced mix of commercially appealing mobile devices with attractive features, functionality and design, covering all major user segments and price points.
We may experience difficulties in adapting our supply to the demand for our products, ramping up or down production at our facilities, adopting new manufacturing processes, find the most timely way to develop the best technical solutions for new products, or achieving manufacturing efficiency and flexibility, whether we manufacture our products and solutions ourselves or outsource to third parties. Such difficulties may have a material adverse effect on our sales....
[A] failure could occur at any stage of our product creation, manufacturing and delivery processes, resulting in our products and solutions not meeting our and our customers’ quality, safety and other corresponding requirements, or being delivered late, which could have a material adverse effect on our sales, our results of operations and reputation and the value of the Nokia brand.
Should we fail to implement the new organizational structure effectively and smoothly, the efficiency of our operations and performance may be affected, which may have a material adverse impact on our sales and results of operation during 2004, and possibly also thereafter.
(Am. Compl. ¶ 130; Defs.’ Ex. Q)
b) “Core Business Strengths”- — Plaintiffs selected one of the five listed core business strengths as a misrepresentation:
Strong Product Offering: Our strong product offering goes beyond voice-centric mobile phones to include entirely new functional categories of mobile devices, such as enhanced communicators, entertainment and gaming devices and media and imaging phones.
(Am. Compl. ¶ 132; Defs.’ Ex. Q)
c) “Operating and Financial Review and Prospects” — Plaintiff selectively quotes
Our gross margin in 2003 improved to 41.5% compared to 39.1% in 2002, with the improvement coming primarily from Nokia Mobile Phones and to a lesser extent from, Nokia Networks. In 2003, the clear improvement in the quality of our mobile phones resulted in a lower quality cost per phone than in 2002. Also the product mix consisted of slightly more lower-end phones with lower product costs, and contributed to a lower average cost per phone. Depreciation of the U.S. dollar and also the Japanese yen also contributed to a lower average cost per phone because more than 50% of our mobile phone components are sourced in U.S. dollars and approximately 25% in Japanese yen. All these factors together decreased cost of sales in Nokia Mobile Phones.
Net sales of Nokia Mobile Phones reached their highest level ever at EUR 23,618 million in 2003, representing an increase of 2%, compared to EUR 23,211 million in 2002, driven by the consumer uptake of color-screen and camera phones, Nokia’s growing presence in growth markets, and Nokia’s increased share of the US, China and CDMA markets. While Nokia Mobile Phones volumes grew by 18%, net sales were adversely affected by the weak U.S. dollar. At constant currency, Nokia Mobile Phones net sales would have grown by 12% year on year. Sales growth in Europe, Middle-East & Africa was to a large extent offset by lower sales in the Americas and Asia-Pacific.
Nokia Mobile Phones launched 40 new products during 2003 with an emphasis on more advanced devices, CDMA technology, entry-level phones and market localization. Of the new products launched, 31 models had color screens, 14 models had cameras and 24 models were MMS-enabled. There were 12 Nokia camera phone models on the market by year-end.
We strengthened our position in three strategic areas by attaining the number one market position in the United States and the number one position in GSM in China, as well as significantly increasing global CDMA market share.
(Am. Compl. If 135; Defs.’ Ex. Q)
d) The CAC also includes statements regarding the Symbian Operating System, in which Nokia “would soon seek to acquire a controlling share,” noting that the operating system:
has wide support from the mobile industry as well as a very active and large group of applications developers and operators .... At the moment, revenue from our software licensing activities is immaterial.
(Am. Compl. ¶ 136; Defs.’ Ex. Q)
e) The CAC also quotes the Form 20-F certification statements of Jorma Ollila and Richard A. Simonson. (Am. Compl. ¶¶ 138-39; Defs.’ Ex. Q)
7. On February 6, 2004, Nokia also issued its 2003 Annual Report to Shareholders. The Report included a section titled “Review by the Board of Directors” and “Risk Factors.”
a) The CAC quotes from the Review by the Board of Directors from a subsection titled “Nokia Mobile Phones in 2003”:
For the full year 2003, Nokia volumes reached a record 179 million units, leading to an estimated market share slightly above 38%.
Nokia Mobile Phones broadened and revitalized its product portfolio by launching 40 new products during 2003 with anemphasis on more advanced devices, CDMA technology, entry-level phones and market localization. In addition to focusing on innovation and design in the portfolio in 2003, Nokia also made good progress in improving the quality of its processes and products, leading to concrete results.
(Am. Compl. ¶ 141; Defs.’ Ex. J)
b) Plaintiff also quotes from the Risk Factors section:
Changes in the mobile communication industry require us to develop complex, evolving technologies to use in our various businesses, some of which are new to us. If we fail to develop these technologies or successfully commercialize them as new advanced products and solutions that meet the demands of the market, or fail to do so on a timely basis, or if the evolution of our operating environment is slower than anticipated leading to delays in the deployment and acceptance of new services, it may have a material adverse impact on our business, our ability to meet our targets, and our results of operations.
Reaching our targets depends on numerous factors, such as our ability to offer products and solutions that meet the demands of the market and to manage the prices and costs of our products and solutions, our operational efficiency, the pace of development and acceptance of new technologies, our entry into new business areas, and general economic conditions. Depending on those factors, some of which we may influence and others of which are beyond our control, we may fail to reach our targets and we may fail to provide accurate forecasts of our sales and results of operations Our sales and results of operations could be adversely affected if we fail to efficiently manage our manufacturing and logistics, or fail to ensure that our products and solutions meet our and our customers’ quality, safety and other corresponding requirements and are delivered in time.
If we are unable to effectively and smoothly implement the new organizational structure effective January 1, 2004, we may experience a material adverse impact on our operations, sales, and results of operations.
(Am. Compl. ¶ 143; Defs.’ Ex. J)
8. On February 23, 2004, Nokia hosted a press conference at the Cannes World Congress.
a) Plaintiffs cite various statements Olli-la made at the conference:
The third area of opportunity in today’s mobile industry continues to be voice, where there is, tremendous growth, as well as innovation insight. We move into 2004 building on the base of strong development in 2003, last year.
(Am. Compl. ¶ 145; Defs.’ Ex. S)
Imaging is, today, the most important application in the mobile multi-media. Camera phones became a huge success last year, with the global market volumes exceeding 70 million units. Nokia has been in the forefront in bringing high quality imaging devices to the market, and the Nokia 6600 is the greatest example, where we have combined high quality camera and advanced smart phone functionality into an easy to use package. I’m happy to. share with you today that the Nokia 6600, after its introduction to the market last October, has become the world’s best selling smart phone, with volumes to date exceeding two million units.
(Am. Compl. ¶ 146; Defs.’ Ex. S)
I’ll be very brief. The — because the nature seems to talk as well. So the, I think we’re very pleased with the dialogue we have had with Vodafone relating to that 2-1/2 G Vodafone Live Implementation, particularly the success of 6600, as well as the 3 or 4 other phones that are part of the Vodafone Live are good, good omen going forward, because we have some very good, very interesting, exciting discussions underway as Arun [Arun Sarin, Vodafone CEO] indicated about how we can get new products, 3G products particularly, into the market as part of the Vodafone offering and, we will work very well with a number of our other operator customers because that’s the way the collaborative approach needs to work, going forward, and, and I think the Vodafone and Nokia cooperation has been really exemplary in the respect.
(Am. Compl. ¶ 148; Defs.’ Ex. S)
9. On March 17, 2004, Nokia executives held a press conference at a trade show, known as CeBIT, in Hannover, Germany.
a) The executives made statements concerning the N-Gage:
It’s been five months, or actually five months and ten days, to be exact, that we introduced the N-Gage game deck to the market. Our expectation at the time was that it will be hard, it will be challenging, and it will be interesting. And we certainly receivefd] what we’ve expected. But also, what we’ve expected is consumer behavior online, and ive’ve also received that. So from an online perspective, it’s truly been also what we’ve expected.
And clearly we’ve broken the ice on the online area with the rich games of N-Gage. But ensuring on the mobile online story is the fact that N-Gage is also the number one device on downloadable games, as you can see of the statements of some of our stakeholders. Whether it’s Java games or Symbian downloada-ble games, you can always say that has been a success. • For us, again, that’s a very assuring, because the N-Gage device is actually used for what it was intended to be used for, mobile gaming. It’s the right track and we’re building on it.
(Am. Compl. ¶ 150; Defs.’ Ex. T)
b) The Nokia presenters were later asked why the N-Gage’s selling price had so rapidly fallen since it was introduced to the market. Pasi Polonen responded:
I can answer that concerning the pri[c]e point. The first pri[c]e point was, obviously too high, so that’s why it was changed.
(Am. Compl. ¶ 151; Defs.’ Ex. T)
c) Another questioner noted that Nokia had stated that the 3G and Series 60 devices were selling well and inquired whether this would have any sustainable impact on Nokia’s average selling price. Polonen responded:
The average selling price is, you know, for this device as being 3G or being Series 60 devices, are clearly above our normal mobile phone, so the more we sell there it has a positive impact on Nokia’s average selling price, if that’s what you are meaning. I’m meaning [unintelligible]. I think definitely we’ll see new functionality adding also value at the terminal, so people will buy it, new device, mobile devices with higher price in the future because they provide more.
(Am. Compl. ¶ 153; Defs.’ Ex. T)
10. On March 25, 2004, Nokia held its annual shareholders meeting in Helsinki,
2003 was a record year for the mobile handset industry and for Nokia Mobile Phones.... ■ Nokia Mobile Phones reached not only record profits, but also higher-than-ever sales and volumes.
(Am. Compl. ¶ 155; Defs.’ Ex. R)
There are several factors which impacted positively on our net sales — for instance, high sales volumes of Nokia Mobile Phones and a favorable product mix. Nokia Networks’ restmcturing had a positive impact on Nokia’s profitability. The actions already showed results in the fourth quarter as Nokia Networks’ profitability improved.
During the year [2003], Nokia was able to reach several important strategic milestones: we attained the number one market position in the United States in mobile phones and the number one position in GSM mobile phones in China. We also significantly increased our global CDMA handset market share.
We reached these goals in part due to our strong product portfolio. As we have earlier stated, we launched 40 new products last year. This was a record number of mobile device launches for Nokia during one year. This year, we expect to launch a similar number of products. I strongly believe that our product portfolio continues to be very competitive.
(Am. Compl. ¶ 156; Defs.’ Ex. R)
In the game industry, Nokia has a long-term strategy. We are currently developing this business area and budding the N-Gage brand. After N-Gage was introduced, we have conducted several surveys among gamers. Based on the results, we can say that the N-Gage brand and the completely new ways of mobile gaming it offers are already well recognized.
(Am. Compl. ¶ 158; Defs.’ Ex. R)
With our strategy and our new organization, we are well positioned to take advantage of the next growth phases in our industry as well as offer the benefits of mobility to consumers, businesses and the global community.
Even in a challenging environment, we have built a strong base for the next growth phase.
(Am. Compl. ¶ 159; Defs.’ Ex. R)
11. On March 25, 2004, Nokia also issued a press release in connection with the annual shareholder meeting. The release quotes Ollila:
Nokia launched a record 40 new mobile devices last year, and we expect to launch a similar number in 2004.... Our product portfolio will continue to be very competitive.
(Am. Compl. ¶ 157; Defs.’ Ex. P)
Statements that Allegedly Establish Defendants’ Earlier Statements were False when Made
12. On April 6, 2004 Nokia conducted their First Quarter 2004 Update call.
a) Ollila stated in his opening comments:
For the first quarter, Nokia net sales are expected to decline by 2% year on year versus a guidance of S to 7% growth year on year ...
Nokia market share development was positive in Latin Ameñca China and the rest of Asia remained stable. Due to some gaps in our product portfolio, mainly in the mid range, we were not able to maintain our market position and fully capitalize on the positive market development in Europe and the U.S.Sales of the mobile phones business group were below expectations. Sales declined in Europe and Asia year on year. In Europe, the decline was driven by somewhat lower than expected volume and a product mix more weighted towards the low end.
In Asia, Nokia’s volume development was positive. But sales were negatively impacted by the mix shift towards the low end.
While our product portfolio in the first quarter was not at its strongest, we believe that during this year with around W product launches we expect to see improvement in our market position in the coming quarters.
(Am. Compl. ¶ 164; Defs.’ Ex. I)
b)In the question and answer portion of the call, an analyst asked, “I was wondering, if you look at the key element, which seems to be some vulnerability in your product portfolio in, I think you specifically mentioned Europe and the U.S. I was wondering, what steps you might be looking at in order to alleviate that, and what sort of time line do you think it may take for that direction to change? Would it be something that would you begin to expect in the second quarter, or what sort of time line?” (Defs.’ Ex. I) Ollila responded:
I think if we look at the particularly mid range, you know, we saw early on last year that what might be happening is that we are not fully competitive, so certainly we have started to take measures. So if you now look at what is happening this year, we have launched seven new models and have started shipping five products that have — that ivere launched last year. Most of them addressing the — the areas of vulnerability, as you said.
They will be more phones coming to the market that will be launched in the second quarter as well as in the second half. And all of those mil have a meaningful impact during 200b. With around bO phones totally being launched, we expect that this will be a typical year in that respect. But in the early part of the year we will not be quite as competitive in those segments that we did — than we have been earlier and that we will feel that we will be towards the end of the year. It’s particularly GSM clam shell, mid-range classic and some of the high-end must have areas.
(Am. Compl. ¶ 165; Defs.’ Ex. I)
c) Another analyst asked, “[i]s it just a problem with the midend, or have you been losing share, do you think, or have you been seen more share pressure in other regions outside of Europe or is it just in the midend?” (Defs.’ Ex. I) Ollila responded:
Our strength in Asia, including China, as well as Latin America, has compensated somewhat, but the way in which we have not been able to grow with the market in Europe and the U.S. where our share has been very, very strong, incidentally, U.S. has been impacted by the shift from TDMA to GSM, and Europe we have a very high share in many of the countries. And the gap really comes from the mid-range. That’s where it is coming from. And I — I think I would hold on to that when we have analyzed what’s happening in the market.
(Am. Compl. ¶ 166; Defs.’ Ex. I)
d) Another analyst asked how Nokia planned to regain its share in the “midend of the market,” and what potential cost implications this would have. (Defs.’ Ex. I) Ollila responded:
I don’t think there’s anything specific there. It’s really that the product portfolio which is in the product road mapwhich will make a difference. There’s no trick. We have certainly had a quiet spell in our product road maps. We will improve, and there will be — there will be a better coverage of the key segments in that mid-range. And generally speaking, our competitiveness obviously we’ll continue to improve through a better cost — it’s not simply unattractiveness of design but always question of having a flow of products which are — which are cost efficient, vis-a-vis the niche of the market, so you can maintain a healthy profitability, which is obviously our goal.
So, yes, design does play a role, and the different form factors which we will cover better to when we move towards the second half of this year. And some of the issues which we have [ ] addressed in the road maps which are in place. So it’s not that we start tomorrow and then get something out in 12 to 18 months. It’s something which — things being in the road map already and we feel we will be covering the ground a lot better.
(Am. Compl. ¶ 167; Defs.’ Ex. I)
13. On April 16, 2004, Nokia issued a press release noting net sales decline of two percent in the first quarter of 2004.
a) The release explained:
Net sales in all sales areas, except for North America, were impacted by a product mix more weighted towards the low end. In addition, net sales in Europe and the United States were impacted by gaps in the mid-range of the portfolio.
(Am. Compl. ¶ 170; Defs.’ Ex. K)
14. On April 16, 2004, Nokia hosted its First Quarter 2004 Earnings Conference call.
a) On the call, Ollila reviewed the first quarter of 2004:
Sales in Asia, including China, declined due to U.S. depreciation and product mix weighted more towards the low end. Sales development was weakest in Europe and associated with certain weakness in the current mid-range product offering.
(Am. Compl. ¶ 172; Defs.’ Ex. U)
I would now like to end by making a few comments regarding our handset portfolio. As mentioned, we have made many changes over the last year to improve our product portfolio. Over the coming months you will see the results of this work in a number of new products, but more importantly, in the variety of features and phone factors. We are not satisfied where we are today, but we are seeing steady improvement in our product road map and expect to again have the leading portfolio in the months ahead. In very broad terms, out of our current portfolio of close to 100 prod-uctfs], 10% can be allocated to entry-level, and the rest is split evenly between mid-tier and high-end.
We have already started to ship six new products this year, and we have also announced another nine products, with shipments estimated to commence mostly during the second and third quarter. We intend to launch a total of approximately 10 products this year. Nine products have already been launched and the coming launches will be more or less evenly spread in the coming quarters with shipments weighted towards the second half of the year.
We expect half of the new products to be in the high price point higher functionality categories, while the balance will be evenly split between mid-tier and entry level. By the end of the year we expect to have around half a dozen clam-shell handsets together with other phone factors shipping, and, of course, the vastmajority of these will have color screens and cameras
With the enhanced product portfolio gradually coming into play, with our new organization focused on customer and market operations, as well as global operations ensuring the timely delivery, we should be in a position to see the benefits of this improved portfolio in sales, market share, and margin towards the end of the year.
(Am. Compl. ¶ 173; Defs.’ Ex. U)
b) An analyst posed a question to Ollila, “just sort of strategically, obviously you guys are after big market share, you really understand and recognize the market dynamics, early on you mentioned earlier in the last year that you guys need clam-shells. So any thoughts on what happened between — that accounts for a little bit of a pause in the product lineup right now? Are there some unforseen software development issues that you’re finding out it’s taking longer for some of the people to bring out the new products or how do you sort of — what do you see that the mistake maybe we made in terms of the product portfolio currently? Is it sort of more of a short term? Is it more of a strategic decision because clam shells tend to have lower margins? Can you kind of walk us through, so it helps us to understand a little bit kind of going forward what will change and why it will change?” (Defs.’ Ex. U) Ollila responded:
I don’t think there is anything which either would have been a sort of big mistake in terms of addressing the technologies or such, or that there would have been a big problem in either one software area or one hardware or whatever. I think the transition that the industry is technologically going underway means that there are a lot of architectural issues which we have had, which one would call legacy issues, which we have addressed but which has taken a little bit more time to then implement in products. And this includes phone factors, this includes a number of other things.
So there are architecture issues which have led into some execution delays so that we would have liked to be sort of six months ahead ideally with some of our product lines. Some of our product introductions. But it’s not that there was a glitch which put a brake on everything. It’s just a transition that is very much underway and which I suppose could have been that for somebody who is there without a legacy could have addressed somewhat differently.
(Am. Compl. ¶ 174; Defs.’ Ex. U)
d) Another analyst recognized Nokia’s “mid-range product gap” and asked whether the “competition is just tougher than it was” previously or that the overall market “is just lower end and, therefore, you have to fight harder with pricing and things like that?” (Defs.’ Ex. U) Ollila responded:
I don’t think it is that fundamental ... one sort of has to — when we look at the fourth quarter, and look at the margin, the position we were in in the fourth quarter, both in margins, as well as pretty healthy growth and now capability to deliver, so there is some change in how our products fared against the mid-tier offering. So if you have four competitors, and when we have a bit of a hole here and there, and each of them fills in one hole, then we’re against certainly all of them and not against one competitor, and this is the picture more than anything else. And there is a major mid-tier market which is kind of, since we have those holes, not enabled us to move from low-end to mid-end in the upgrade market and that then hits the ASP and the total revenue line.
(Am. Compl. ¶ 175; Defs.’ Ex. U)
I think the relationships that we are enjoying with the operators are continuing to improve in terms of how we are working with them on a practical level, but obviously, that is not immediately or short-term necessarily reflected in the purchasing position, so there will be a lot of fluctuation. It is very difficult to forecast what is happening there.
(Am. Compl. ¶ 176; Defs.’ Ex. U)'
15. A Morgan Stanley Equity Group Report, dated April 28, 2004, outlines its company update of Nokia after meeting with Pekka Ala-Pietila. The report states:
[T]he shortfall in [Nokia’s] mid range product line-up surfaced back in 3Q03 and was not only related to 1Q04. Component constraints in IQOS has masked its weakness there: Nokia’s strong supply chain relationships enabled it to deliver product when competitors could not.
It seems that Nokia now believes it un-derinvested in the mid end and over-invested — too much and too early — in its new domains, Multimedia and Enterprise.
Nokia now recognises that it has not been willing to comply with operators demands in the past — in other words, customize phones for operators — but has been more willing to do so in recent quarters. Nokia has recently spent more time “clearing the air” with some operators started through more active and open dialogue.
(Am. Compl. ¶¶ 177-78; Defs.’ Ex. L)
16. The CAC alleges that in a second quarter 2004 Earnings conference call with analysts, Ollila said:
While out product portfolio is gradually improving, we are still not in where we want to be. Therefore, we have taken certain specific action. First, we have spent a great deal of time and energy in owning our product roadmaps. The product portfolio will continue to gradually improve throughout this year and I strongly feel, based on what we have in the pipeline, that we will make a huge improvement starting in the fourth quarter. Secondly, we have heightened our ambitions in the technology road-maps and product specifications, which means greater emphasis on best-in-class technology implementations like Wide-band CDMA, displays, and cameras. We are also paying special attention to our abiity to support the operators in their differentiation needs.
(Am.Compl^ 179)
17. The CAC further alleges that on or about August 9, 2004, Handelsbanken Capital Markets analysts met with a Nokia Vice President of marketing for mobile phones.
a) The analysts’ report said:
Nokia admits that its portfolio has been weak since Q3 2003, and that its success in Q4 2003 was from the weakness in competition.
b) The report said that by this “admission,” Ollila acknowledged that:
Nokia’s earlier refusal to support the operators in their differentiation needs had harmed sales.
(Am.Compl.l 180)
18. The CAC also alleges that on September 9, 2004, Richard Simonson, Nokia’s CFO, held an analyst conference call. On this call, the CAC alleges, Simonson “suggested that Nokia’s higher earlier reported sales in Europe may have been a result of deliveries into the channel that had not then been sold to consumers — i.e., the dif
Going back to second quarter, specifically to your question on Europe and the sell in, sell out, we have said there had been a sequential decline in sell in, but our sell out we had very good positive signs there, indicating that we have had a 3.5 million additional clearing of the inventory, ie., sell out. So that it where we were in the second quarter. (Am.Compl^ 180)
19. The CAC also alleges that on November 3-4, 2004, Nokia held its annual Capital Markets Day event for market analysts in New York City. During that conference, the CAC alleges, Ollila made comments about Nokia’s changing relationship with its key customers:
When we speak about operators and especially key or mega operators, big operators, we had done a fair, a bit of soul-searching how we can find a way to work together and how we can find a way to configure to their business success. It’s a bit funny to use the following words in front of this audience but internally we use that and we say that the results of the outcome from that soul-searching is actually that, it’s — we have to love and care for our key customers .... Customization is something which has been part of the discussions for long with operators. In some areas, it has been easier for us to respond to the requests but there has been many areas which have been quite challenging for us to be responsive.
(Am.ComplY 182)
II. DISCUSSION
A Motion to Dismiss
In considering a motion to dismiss under Rule 12(b)(6), the Court “accept[s] all of the plaintiffs’ factual allegations as true and draw[s] all reasonable inferences in favor of the plaintiffs. Dismissal is proper if, accepting all the allegations in the complaint as true and drawing all reasonable inferences in plaintiffs favor, the complaint fails to allege any set of facts that would entitle plaintiff to relief.”
In re Sharp Intern. Corp.,
Securities fraud claims brought under Section 10(b) and Rule 10b-5 are subject to the heightened pleading standards required by Federal Rule of Civil Procedure 9(b).
See Rombach v. Chang,
The Private Securities Litigation Reform Act (“PSLRA”) further modifies the Rule 12(b)(6) analysis when reviewing a complaint in a securities fraud action. Under the PSLRA, the complaint must “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allega
B. Section 10(b) and Rule 10b-5 Claims
Rule 10b-5 states, in part, that it is “unlawful for any person ... to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5. To state a claim for relief under Section 10(b) and Rule 10b-5, Plaintiffs must adequately allege (1) that Defendants made misstatements or omissions of material fact, (2) with scienter, (3) in connection with the purchase or sale of securities, (4) upon which plaintiffs relied, and (5) that plaintiffs’ reliance was the proximate cause of their injury.
See Dura Pharm., Inc. v. Broudo,
Here, Defendants contend the Consolidated Amended Complaint fails to identify any actionable statements. Defendants assert that the statements identified in the CAC are not actionable because: (1) Plaintiffs failed to adequately explain the reason(s) why the alleged misstatements were false when made; (2) the alleged misstatements are immaterial statements of corporate optimism or expressions of puffery; and/or (3) the alleged misstatements are protected under the “bespeaks caution” doctrine or the PSLRA’s safe harbor provision. In addition, Defendants contend that the CAC should be dismissed because it fails to adequately plead scienter.
1. Material Misstatements and Omissions
Plaintiffs allege that Defendants made numerous statements that were materially misleading, because the statements were optimistic about Nokia and its products when it was under an affirmative duty to disclose negative information about Nokia’s prospects. Defendants counter, that the statements alleged to be misleading are not actionable because they were true when made, mere puffery, or protected under the PSLRA safe harbor provision or the common law “bespeaks caution” doctrine. These statements, alleged by Plaintiffs to be actionable, can be broken down into two categories — those made or issued by Defendants that purportedly discussed contemporaneous or historical events, and those offering predictions of Nokia’s future profitability and growth. While there is some overlap in the analysis of these types of statements, there are differences as well.
(a) Present Fact Statements and Backward Looking Statements
The first category to be addressed is Defendants’ statements relating to current or historical events. Under the pleading requirements, a complaint must explain, with adequate specificity, why the alleged false or misleading statements were actually false or misleading when made.
See Rombach,
Plaintiffs allege that a number of Defendants’ statements about current or past events were false or misleading. These allegations focus on Defendants’ statements regarding the competitiveness of Nokia’s phones, Nokia’s progress in CDMA, its success in camera phones, the market’s response to the N-Gage gaming device, and Nokia’s relationship with its operators. Yet, Plaintiffs fail to adequately allege how or why many of these statements were either false or misleading. For example, Plaintiffs repeatedly allege that Nokia knew its positive fourth quarter 2003 phone ASPs were due to component shortages that hurt its competitors and allowed Nokia to gain market share. (Am. Compm 99(a), 114(a), 118, 128(d)) Yet, Plaintiffs assert, despite this knowledge, Nokia misleadingly attributed its strong fourth quarter 2003 ASPs and volume growth to its good product mix. Without the component shortage affecting its competitors, Plaintiffs allege, Nokia’s market share growth would not have been as pronounced. Plaintiffs fail to recognize, however, that in the January 22, 2004 earnings call quoted in the CAC, Ollila noted the component shortages in the market, its effect on Nokia, and how Nokia could not take full advantage of the shortages. As Ollila stated, “[t]he higher than expected robust industry demand during the fourth quarter [of 2003] resulted in a very healthy level of channel inventories at year-end. In spite of some tightness of supply in the market, we were able to deliver according to our plan but our ability to capitalize on the upside during the biggest sequential volume ramp-up in the history of [the] mobile industry was limited.” (Am. Compl. ¶ 125; see supra Part I.B.5(b)) Therefore, it is clear that Nokia did attribute at least some of its higher fourth quarter ASP to the component shortage. At worst, Plaintiffs can only truly claim that Ollila’s read of the market dynamics of the fourth quarter of 2003 proved to be wrong. That, however, does not mean he knew it was wrong at the time he made this comment.
In fact, the CAC utterly fails to assert when Defendants allegedly knew to what degree the component shortages contributed to its higher ASPs. At oral argument, the best Plaintiffs could allege was that statements made by Defendant Ollila on April 16, 2004, several months after the allegedly false statements were made, show that Nokia made knowingly false statements about its ASPs. (Hr’g. Tr. 70-74, Jan. 27, 2006 (“1/27/06 Tr.”)) This allegation is mere conjecture. The statement Plaintiffs referred to at argument, but which was not cited in the CAC, comes from Nokia’s first quarter 2004 Earnings
It seems as though in the mid range the problem really relates to the Series 40 platform introduced in 2002 competing against newer products introduced by essentially all of your competitors with new platforms for the second half of 2003. My question comes in, on, why did it take so long for those products to have this impact on you? It’s been a couple quarters since we first saw these introductions, yet, really in the numbers I’ve seen, in terms of European sales, we aren’t really getting an inkling of it until really February. So why did it take so long?
Second of all, given the new products came out in the second half of last year, wouldn’t it have — why weren’t the aggressive actions that you’re going to be taken in the second quarter begun sort of earlier in anticipation of this, some thinking about that, or at least the ability to sort of prepare us for what might have happened.
(Defs.’ Ex. U)
Ollila responded:
I think, Paul, obviously, we are working on a continuous basis and not one-off in terms of our shaping up our portfolio, so you can be assured that we’re working hard, so not resting and waiting for problems to occur. And I think the comment on why did it take so long, until February or so, sort of six months, or whatever, I mean, I think, one of the things that really does come to mind, and this is not at all encompassing answer, I don’t think there’s a right or wrong answer here, by the way, but if I venture an answer here, it must come around delivery capability.
If you see an excellent product, as we have seen for ten years from so many people, then they haven’t been able to ship, in terms of millions, and we have had a very good delivery capability with our product which have put is in a good position, as it did in the fourth quarter, and then you might say that this was different towards the end of the first quarter, and, I’m just offering this as one alternative and one possible explanation. I don’t think there’s a right or wrong answer in this respect.
(Defs.’ Ex. U)
These statements provide no basis to allege that Defendants’ earlier statements about its ASPs were knowingly false when made. First, Ollila’s equivocal comment, made in April, lends no support to Plaintiffs’ contention that Ollila knew back in January 2004 (the latest the ASP statements noted above were-made) to what degree Nokia’s delivery capabilities accounted for its rising ASPs.
8
Second, as with many of the statements Plaintiffs rely upon, Ollila’s answer here merely acknowledged that 'one possible after-the-fact rationalization to explain Nokia’s drop-off in the first quarter of 2004 as compared to fourth quarter of 2003 is that Nokia had a distribution advantage over its competi
Similarly unpersuasive are Plaintiffs’ allegations about Nokia’s statements concerning its efforts to improve its product mix. “ ‘Defendants may not be held liable under the securities laws for accurate reports of past successes, even if present circumstances are less rosy.’ ”
In re Duane Reade Inc. Sec. Litig.,
No. 02 Civ. 6478,
With these principles in mind, it is clear that many of Plaintiffs’ claims regarding Defendants’ statements about the Nokia product mix fail as a matter of law. For example, the CAC repeatedly alleges that Defendants’ positive statements about its CDMA products were false because Nokia was not as strong as its competitors across all segments of the CDMA market. Specifically, Plaintiffs assert that Nokia’s October 16, 2003 statement that “following an announced commitment two years ago to strengthen Nokia’s position in the global CDMA handset market,” Nokia “doubled its share to the mid-teens from the same quarter last year,” and that Nokia expected “to see continued momentum in CDMA going into the fourth quarter” was false at the time it was made. (Am. Compl. ¶ 86;
see supra
Part I.B.1) Plaintiffs argue this statement was false because Nokia was not adapting as quickly as its competitors to the demand for CDMA phones and Nokia was only able to compete in the low-end CDMA market. (Am.Compl^ 87) While Nokia may not have adequately anticipated the shift to CDMA, the CAC does not challenge the accuracy of the historical statement, Nokia’s growth in the CDMA market, or that this growth was, at the time, a legitimate and reasonable basis for an optimistic outlook.
See San Leandro Emergency Med. Plan. v. Philip Morris, Go.,
Defendants were also candid with the market about its near-term prospects in the CDMA market and how it viewed its
As noted above, not being as competitive as other companies does not restrict a company from being reasonably optimistic about its future prospects. Yet, in connection with Nokia’s launch of the N-Gage gaming device, Plaintiffs allege that Defendants’ statements were false or misleading because Nokia’s statements about the launch were positive while “consumers’ immediate response to N-Gage was highly negative and those sales that were made relied heavily on promotional discounts.” (Am.ComplY 109) As with many of Defendants’ statements discussed throughout the CAC, Plaintiffs selectively edited Defendants’ full statements regarding the N-Gage. The statements about the N-Gage launch, in context, admitted that Nokia was working on the problems that customers had with the original product and were looking to make it profitable in the following years. Indeed, rather than being overly optimistic about the N-Gage, Defendants told investors that it did not expect to know whether the N-Gage was a success for another three Christmas seasons, that it was working on fixing consumers’ problems with the product, and expected to have the improved product for the 2004 Christmas season. (Am. Compl. ¶¶ 107-OS; see supra Part I.B.3(d)-(e)) Nokia also acknowledged that the N-Gage’s price was initially set too high, (Am. Compl. ¶ 151; see supra Part I.B.9(b)) and that it did not have a wide offering of games for the N-Gage at the time of its launch, but by the end of 2004 it planned on having 100 games available. (Am. Compl. ¶¶ 105, 107; see supra Part I.B.3(d)) Thus, contrary to Plaintiffs’ assertion, Nokia never represented that the N-Gage was an outright success and was quite frank about the N-Gage’s shortcomings. Accordingly, statements 3(d)-(e), 9(a)-(b) (see supra Part I.B) (corresponding to Am. Compl. ¶¶ 107-08, 150-51) are also not actionable. 9
The next category drawing fire from Plaintiffs is forward-looking statements by Defendants. Specifically, Plaintiffs allege that a number of these statements were materially misleading because they were unrealistic given Nokia’s business model and sales data. In reviewing forward-looking statements, courts are instructed to consider the total mix of information and are supposed to “bear in mind that disclosure requirements are not intended to attribute to investors a child-like simplicity. Rather, investors are presumed to have the ability to be able to digest varying reports and data.”
In re Nokia Corp. Sec. Litig.,
No. 96 Civ. 3752,
Statements that, in retrospect, were inaccurate or were too highly optimistic do not typically constitute material misstatements.
See Rombach,
Under these standards, none of the forward looking statements in the Consolidated Amended Complaint is actionable. For example, the statement that “[w]e expect to see continued momentum in CDMA going into the fourth quarter as we increase shipments to China, India, and all U.S. CDMA operators,” (Am. Compl. ¶ 86; see supra Part I.B.l) is not actionable because it is a general statement of optimism that is not alleged to be without a basis in fact. Other statements about Nokia’s positive outlook for developing its CDMA phones are likewise not actionable. For example, Defendant Ollila was optimistic about Nokia’s CDMA phones, stating, “we want to be present in all the key segments of the CDMA market.... [I]f we look at the form factors, we will be moving to a broader set of form factors, also with CDMA, including clamshells with time. So, you will see all of that.... And if .we look at the broader set of products and opportunities in CDMA, we are working with a number of multimedia segment products which will hit the market in 2004 and 2005. So, the product road map is a very exciting one and it has all the same elements with time that our GSM wide-band CDMA portfolio does have.” (Am. Compl. ¶ 91; see supra Part I.B.2(c)) Plaintiffs allege these CDMA projections were misleading because Nokia lagged behind its competitors in this market segment and that the purported strength of Nokia’s road map was false because Nokia’s products were noncompetitive and “lacked form designs such as clamshells that Nokia’s customer surveys had indicated were in high demand.” (Am. Compl. ¶ 194) Plaintiffs fail to note, and again disturbingly leaving out of their selective quotations of Defendants’ statements in the CAC, that Nokia expressly cautioned in these very statements (included here in full at supra Part I.B) that its goals of introducing clamshells and further developing a competitive product road map would only occur “with time.” (See supra Part I.B.2(c)) Moreover, the Court is unaware of any authority, and Plaintiffs fail to cite any authority, that it is improper for corporate officials to be hopeful that it will be competitive in the future. Accordingly, these and other similar vaguely positive statements regarding Nokia’s hopeful outlook for its CDMA phones and its other new products including camera phones, statements 2(b), 3(a), (b), (d), (g), 5(a), 7(a), 10, 11 (see supra Part I.B) (corresponding to Am. Compl. ¶¶ 90, 96-98, 102, 105, 113, 120, 141, 156-57), are non-actionable expressions of corporate optimism. 10
The Consolidated Amended Complaint also alleges Defendants’ optimistic statements about Nokia’s general business outlook were false. For example, Ollila, in projecting Nokia’s fourth quarter 2003 and beyond, said, “[o]ur distribution strategy [is] bearing fruit and Nokia brand is stronger than ever supported by competi
Similarly, when discussing the N-Gage’s entry into the market, only a couple of months after it was introduced, Defendants explained, “[i]t’s not going to be one Christmas phenomenon and we are not expecting that the first Christmas is going to make it for us. But when we have gone through three cycles, i.e. three Christmases — because game industry peaks to the tune of Christmas — then we can say whether we have this market in the pocket or not. The starting is very good. We are attracting this business, we are seeing repeat orders come in, and in certain markets, which are more attuned for this, we see the whole thing starting to work just as we have planned.”' (Am. Compl. ¶ 107; see supra Part I.B.3(d)) Five months after the N-Gage’s introduction Defendants further noted:
Our expectation at the time [the N-Gage was introduced] was that it will be hard, it will be challenging, and it will be interesting. And we certainly receive[d] what we’ve expected. But also, what we’ve expected is consumer behavior online, and we’ve also received that. So from an online perspective, it’s truly been also what we’ve expected.... And clearly we’ve broken the ice on the online area with the rich games of N-Gage. But ensuring on the mobile online story is the fact that N-Gage is also the number one device on downloadable games, as you can see of the statements of some of our stakeholders. Whether it’s Java games or Symbian downloada-ble games, you can always say that has been a success. For us, again, that’s a very assuring, because the N-Gage device is actually used for what it was intended to be used for, mobile gaming. It’s the right track and we’re building on it.”
(Am. Compl. ¶ 150;
see supra
Part I.B.9(a)) Plaintiffs allege these statements were materially false “because N-Gage had been a failure from the first month of its introduction. The device was ill-designed as a phone for playing games, and the devices delivered in 4Q03 remained stuck in retail channels to 2004, and only
2. Bespeaks Caution Doctrine and the PSLRA’s Safe Harbor Provision
Forward looking statements are also protected by the “bespeaks caution” doctrine and the PSLRA’s safe harbor provision. The “bespeaks caution” doctrine refers to the use of cautionary language aimed at warning investors of potential risks that may occur in the future.
See Stolz Family P’ship L.P. v. Daum,
In order to be effective, cautionary language needs to warn of, or directly relate to, the risk that brought about the plaintiffs loss.
Halperin,
Similarly, the PSLRA safe harbor provision provides that no liability attaches to certain forward-looking statements made by an issuer. See 15 U.S.C. § 78u-5(c). In order to receive such protection, statements must be forward looking, be identified as forward looking statements, and be accompanied by meaningful cautionary language identifying important factors that could cause actual results to differ materially from those in the forward looking statements. 15 U.S.C. § 78u-5(c)(l)(A)(i).
The bespeaks caution doctrine is applicable to a number of statements in this case. For example, the October 16, 2003 statement “[w]e expect to see continued momentum in CDMA going into the fourth quarter ...(Am.ComplJ 86) is clearly forward looking. Plaintiffs allege this statement was false because (1) the market shift to CDMA was harming Nokia’s sales and market share, (2) by this
Specifically, along with these hopeful projections about the CDMA product line, the October 16, 2003 press release clearly and unequivocally cautioned investors that statements preceded by words such as “expect” are forward looking that involve risks and uncertainties. (Ex. O, 15) The release also explicitly warned that results may differ from the projections due to numerous factors, including “the intensity of competition in the mobile communications market and changes in the competitive landscape,” and “[tjhere is a risk that we will not be successful in maintaining and developing [the] wide portfolio [of phones], or that the technologies and related products and solutions on which we focus may not be brought to market by us and/or mobile network operators as quickly as anticipated, may not achieve as broad a customer acceptance among operators or end-users as we expect, or may not prove to be sufficiently compatible with the existing technologies and products of other product and solution providers.” (Ex. O, 15) The release further cautioned that “the intensity of competition in the mobile communications market and changes in the competitive landscape” are factors that could cause Nokia’s results to differ from its expectations. (Ex. O, 15) This cautionary language is not mere boilerplate as it directly relates to the risks that ultimately are alleged to have, in part, brought about Plaintiffs’ losses — namely, the competition in the higher-end CDMA phones. That these warnings are sufficiently particular speaks to the generic nature of Plaintiffs’ allegations. Plaintiffs cannot make generic allegations in their Consolidated Amended Complaint and then dismiss any cautionary language by asserting that the warnings were “wholly generic.” (Pis.’ Br. 26) As alleged in the CAC, Nokia apparently was not able to bring to market as quickly as it hoped popular cell phones and could not compete in certain market segments as well as it desired due to increasing competition, i.e., it was not as successful as it specifically warned it might not be, in the mid- and high-end CDMA phone market. The fact that these risks turned out to be true does not make Defendants clairvoyant, but rather, it demonstrates that Nokia adequately imparted to its investors the potential risks the company foresaw that may affect its results.
Similarly, Defendant Ollila’s cautiously hopeful outlook for Nokia’s projected market share for Europe in the first quarter of 2004, (Am. Compl. ¶ 127;
see supra
Part I.B.5(g)) when read alongside its accompanying cautionary language, (Defs.’ Ex. D. 11-13) could not have misled a
reasonable
investor into thinking that the risks Plaintiffs identify did not exist. For example, Defendant Ollila said that Nokia’s product positioning in Europe during the fourth quarter of 2003, particularly in the high-end of the market, “worked really well.” (Am. Compl. ¶ 127;
see supra
Part I.B.5(g)) Yet, he also recognized that Nokia did not do as well as it had hoped in the low-end of the market, but it remained hopeful that the momentum from the fourth quarter of 2003 could translate to better results for the first quarter of 2004 in Europe. (Am. Compl. ¶ 127;
see supra
Part I.B.5(g)) As noted earlier, this statement, even without extra cautionary language, is not actionable because it is exact
Reviewing similar optimistic statements in the context in which they were made along with the accompanying cautionary statements that bespoke caution, the Court finds as a matter of law that none of these statements could mislead a reasonable investor. Thus, the other forward looking statements relied upon in the CAC that were accompanied by specific cautionary language are not actionable. Accordingly, statements 1, 2(a), (c), 3(g), 5(a) (see supra Part I.B) (corresponding to Am. Compl. ¶¶ 86, 91, 112-13, 120) are not actionable.
3. Scienter
Even if the Court were to find (1) that Nokia’s statements were material and misleading, and (2) that those statements were not deemed immaterial by adequate warnings, the Consolidated Amended Complaint must still be dismissed because of Plaintiffs’ failure to adequately plead scienter.
Having alleged that Defendants misled investors, Plaintiffs must also adequately plead scienter. To do so, the CAC is required to allege facts that give rise to a strong inference of intent to “deceive, manipulate or defraud.”
Ganino v. Citizens Utils. Co.,
A strong inference of conscious misbehavior or recklessness arises when defendants (1) engage in deliberate illegal behavior, (2) knew or should have known that they were misrepresenting material facts, or (3) failed to check information they had a duty to monitor.
Novak v. Kasaks,
Similar to the limitations on materiality, the Second Circuit has identified several limitations that apply to the scienter analysis. First, Plaintiffs cannot satisfy this pleading requirement with allegations of fraud by hindsight.
See Novak,
Here, Plaintiffs argue that Defendants were reckless because they withheld information that contradicted their public statements. Plaintiffs claim, for example, that Defendants made statements about Nokia’s business and the competitiveness of its products throughout the Class Period when they were aware that these “professed beliefs bore no resemblance to reality.” (Pis.’ Resp. 32) Plaintiffs allege that Defendants’ conscious misbehavior is most pointedly evidenced by Ollila’s post-Class Period admissions of inadequacies in Nokia’s products, which demonstrate that since early 2003 Nokia’s product portfolio was not competitive. (Pis.’ Resp. 29)
Specifically, Plaintiffs believe that the best evidence of fraudulent intent are Olli-la’s April 6, 2004 statements and other statements thereafter, which Plaintiffs claim are admissions of his knowledge during the Class Period that Nokia’s product portfolio was lackluster. 13 In particular, Plaintiffs cite the April 6, 2004 conference call that Ollila had with analysts right after Nokia’s first quarter 2004 announcement that its net sales would fall below its previous projections. During this call, Ollila answered an analyst’s question about vulnerability in Nokia’s product portfolio by saying: 14
I think if we look at the particularly mid range, you know, we saw early on last year that what might be happening is that we are not fully competitive, so certainly we have started to take measures. So if you now look at what is happening this year, we have launched seven new models and have started shipping five products that have — that were launched last year. Most of them addressing the — the areas of vulnerability, as you said.
They will be more phones coming to the market that will be launched in the second quarter as well as in the second half. And all of those will have a meaningful impact during 2001. With around 10 phones totally being launched, we expect that this will be a typical year in that respect. But in the early part of the year we will not be quite as competitive in those segments that we did — than we have been earlier and that we will feel that we will be towards the end of the year. It’s particularly GSM clam shell, mid-range classic and some of the high-end must have areas.
(Am. Compl. ¶ 165; see supra Part I.B.12(b))
Plaintiffs interpret Ollila’s April 6, 2004 statement to be an admission that he knew in early 2003 that Nokia was not competitive in either its mid-range or high-end phones and therefore Nokia’s confidence in its projections during the Class Period were knowingly misguided. (Pis.’ Resp. 29) This interpretation is not reasonable considering the entire context of the statement and the other statements included in the Consolidated Amended Complaint. First, taking the statement at face-value, it states that Nokia was aware in early 2003 that in
one
segment of its phone
Second, the April 6 statement also clearly notes that Nokia started to take measures to address “the areas of vulnerability” in their product line in 2003 and into 2004. (Am. Compl. ¶ 165;
see supra
Part I.B.12(b)) Any reasonable reading of this statement must recognize that Ollila was suggesting that Nokia took action in 2003 to fix some of its problems and there would also be more phones introduced in the second half of 2004 to hopefully make Nokia even more competitive in those areas. Recognizing remedial action taken by Nokia during the Class Period is in no way an admission that Ollila’s optimistic statements during the Class Period were false when made. The opposite is true. If Nokia had taken no corrective measure in early 2003 then Plaintiffs may have a more compelling argument that Nokia’s positive statements later in 2003 were misleading because the company might have known otherwise. Here, however, having tried to fix some of its problems, Nokia was well within reason to have an optimistic outlook about its new products. The fact that, in retrospect, such optimism may have been too optimistic does not retroactively make its prior statements knowingly false, in particular when Defendants’ wishful statements were not worded as guarantees. See
In re Duane Reade Inc. Sec. Litig.,
Plaintiffs, however, do not stop there. By Nokia’s own admission, according to Plaintiffs, it takes Nokia twelve to eighteen months to develop new phones. (Pis.’ Resp. 29-30) Therefore, Plaintiffs argue, Nokia must have been aware of its product shortfalls by late 2003 if it claimed it could remedy its inadequacies by late 2004 (as discussed in the April 6 statement). (Pis.’ Resp. 29-30) Accordingly, say Plaintiffs, Nokia could have had no basis for optimism in late 2003 if its products were deemed to be not fully competitive at that time. Yet, if Plaintiffs’ assumptions are true, then any company that works on a somewhat lengthy production schedule would always be operating on a “non-competitive” basis. Designing for what a company anticipates (based on demand and technology) cannot by implication mean that the company’s current or past efforts are or were insufficient, or that optimistic statements about the company’s current products are misleading because the company is planning something even better for the next product cycle.
Finally, even assuming, as Plaintiffs suggest, that Ollila’s statement is an admission that he knew in early 2003 that Nokia had bottom-line changing product short
It is perfectly reasonable for Ollila to have known that Nokia had room for improvement in its mid-range phones in early 2003, but still feel positive about the viability of its overall product portfolio going forward in 2003 and 2004.
Cf. Rombach,
Besides Ollila’s alleged admissions, Plaintiffs also allege scienter by the fact that the individual Defendants knew, or should have known, that they were misrepresenting material facts, based on their senior positions in the company, and by holding themselves out as knowledgeable about Nokia’s products in presentations. (Pis.’ Resp. 30-36) Such generalized allegations are insufficient, as a matter of law, to establish scienter.
See, e.g., Kinsey v. Cendant,
No. 04 Civ. 0582,
Plaintiffs also allege scienter based on Ollila’s admitted access to weekly reports, or “order books,” that detailed Nokia’s revenue and market share. Quoting portions uf a January 22, 2004 conference call, Plaintiffs allege that Ollila and others at Nokia “received detailed sales information on a global and per country level in the course of Nokia’s ‘internal, bottom-up process’ to support Nokia’s internal planning and that they had ‘exceptionally good visibility throughout the channel,”’ and that Ollila himself “received ‘reports weekly on revenue and on how we are doing against our competition and how our share is evolving.’ ” (Am.ComplY 187) Therefore, Plaintiffs contend, by the time of Ollila’s March 25, 2004 comment to shareholders, when he said that he “strongly believed” that Nokia’s product portfolio remained
Scienter can be sufficiently pled when a complaint alleges that defendants were updated on a regular basis about the facts upon which the falsity is alleged.
See, e.g., In re Globalstar Sec. Litig.,
No. 01 Civ. 1748,
Because Plaintiffs have not sufficiently alleged motive let alone conscious misbehavior or recklessness, that can be attributed to Defendants, they have failed to adequately plead scienter, and thus, their claims under Section 10(b) and Rule 10b-5 must be dismissed.
A Accounting Allegations
Plaintiffs initially attempted to state a claim for securities fraud based on Defendants’ alleged improper accounting practices, (Am.Compl.lffl 75-80) but later retreated from this claim in their Response. 17 Even as a securities fraud claim, however, this allegation fails. The alleged improper practices include: (1) delivery of phones with the understanding that unsold phones would be returned to Nokia; (2) billing customers while holding the goods on the shipping dock; (3) early shipment of products before year-end; and (4) intentional shipment of defective goods with the knowledge they would be returned. (Am. Compilé 75-80)
These allegations do not satisfy the requirement that in order to be material, a complaint alleging false financials “must contain allegations tending to demonstrate the materiality of the alleged overstatements in light of the defendant’s total financial picture.”
Gavish v. Revlon, Inc.,
No. 00 Civ. 7291,
Further, “[a]llegations concerning GAAP violations, absent sufficient allegations of fraudulent intent, are not sufficient to properly allege scienter.”
In re LaBranche Sec. Litig.,
C. Leave to Amend
In the event that the Consolidated Amended Complaint is insufficiently pled, Plaintiffs requested leave to amend the CAC to plead additional facts from Nokia’s 2004 Form 20-F and from Nokia’s Fourth Quarter 2004 Earnings conference call (held in January 2005). (Pis.’ Resp. 6 n. 3, 17 n. 8) Typically, leave to amend should be freely granted,
see
Fed.R.Civ.P. 15(a), however, given that Plaintiffs’ request to amend is untimely, procedurally improper, and the proposed amendments would be futile, leave to amend must be denied.
See Dluhos v. Floating & Abandoned Vessel, Known as N.Y.,
While delay alone usually does not warrant denial of a request to amend,
see Parker v. Columbia Pictures Indus.,
However, even if timely, the proposed amendment should be denied as futile. Here, unlike many situations, the Court need not guess what alterations would be made to the Consolidated Amended Complaint, as Plaintiffs have identified the information they would rely on in amending the CAC. Specifically, if allowed to further amend the CAC, Plaintiffs contend that the 2004 Form 20-F would demonstrate the ten percent volume drop in Nokia’s Fourth Quarter 2003 United States sales, thereby making Nokia’s positive statements materially misleading. (Pis.’ Resp. 17 n. 8) Plaintiffs would also add information from a January 2005 Earnings Call showing that Nokia maintained an “order book” for operator purchases on a quarterly basis to show that Defendants reasonably knew Nokia’s projected sales three weeks into the quarter. (Pis.’ Resp. 6 n. 3) Plaintiffs also claim that the January 2005 Earnings Call further demonstrates Ollila’s knowledge in 2003 of Nokia’s “efficiency” and “effectiveness”
“In assessing whether proposed [amended] claims are futile ... the court is required to adopt the same analysis as that applied on a motion to dismiss for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Thus, [the Court] must treat the facts alleged by plaintiff as true, and view them in the light most favorable to him.”
Olumuyiwa v. Harvard Prot. Corp.,
No. 98 Civ. 5110,
D. Foreign Investors Claims
Defendants challenge the Court’s subject matter jurisdiction over claims by foreign investors who purchased Nokia securities on foreign exchanges. (Mem. of Law in Support of Defs.’ Mot. to Dismiss the Consolidated Am. Am. Compl. 37-40) Without deciding the question of law, and in light of the fact that the Court is dismissing the action without leave to amend, this claim is moot.
E. Claims Against Individual Defendants
Plaintiffs also seek to hold individual Defendants Ollila, Pekka Ala-Pietila, Matti Alahuhta, Richard A. Simonson, Kallasvuo, and Vanjoki liable as “controlling persons” under Section 20(a) of the Exchange Act.
{See
Am. Compl. ¶¶ 27-38, 207-210) Because Plaintiffs have failed to adequately allege a primary violation, namely a Section 10(b) or Rule 10 — b(5) violation, their Section 20(a) claims must also fail.
See
F. Rule 11
The PSLRA modified the application of Fed.R.Civ.P. 11(b) in private actions for securities fraud. Under 15 U.S.C. § 78u-4(c)(1), courts are required, “upon final adjudication of the action” to make specific Rule 11 findings. 15 U.S.C. § 78u-4(c)(l);
see also Rombach,
III. CONCLUSION
For the reasons set forth above, Defendants’ Motion to Dismiss is GRANTED and the Consolidated Amended Complaint is dismissed.
SO ORDERED.
Notes
. Somewhat after-the-fact, Plaintiffs stated in a footnote in their Response that these serious accounting allegations are only offered, at this point, to “buttress Plaintiffs’ claims with respect to , the lack of customer acceptance of Nokia[’s] 'new' products, including the N-Gage, in 4Q03.” (Pis.’ Mem. of Law in Opp’n to Defs.' Mot. to Dismiss the Consolidated Am. Compl. 4 n. 1 (“Pis.’ Resp.”))
. The release contains a lengthy risk factors statement warning investors of the uncertainty of the forward-looking statements included in the release. It alerts investors that due to risk factors "actual results may differ materially from the results [Nokia] currently expect.” (Decl. of Kenneth M. Kramer in Support of Defs.’ Mot. to Dismiss the Consolidated Am. Compl. Ex. O 15 ("Defs.' Ex.”)) These factors include: (1) “demand for Nokia's products and solutions,” (2) "market acceptance of new products,” (3) "the intensity of competition” and “changes in the competitive landscape,” (4) "the impact of changes in technology,” (5) "pricing pressures,” (6) Nokia’s ability to "maintain[] efficient manufacturing and logistics as well as high product quality,” (7) "the success of [Nokia’s] product development,” and (8) "inventory management risks resulting from shifts in market demand.” (Defs.' Ex. O 15) The warning also incorporated the risk factors listed in Nokia's Form 20-F for the 2002 fiscal year (see infra n. 4). (Defs.' Ex. O 15)
. The CAC mistakenly states that this conference call was hosted by Olli-Pekka Kallasvuo rather than Ulla James. Defendants' Exhibit N, a transcript of the conference call, identifies Ulla James and Jorma Ollila as the Nokia participants on the call. Nowhere is Olli-Pekka Kallasvuo listed as a Nokia participant in that conference call.
. The Conference Call was preceded by a message from Ulla James, Nokia's Vice President of Investor Relations. James warned that the call's forward-looking statements "involve risks and uncertainties” that could cause Nokia's results to differ from its projected results. (Defs.’ Ex. N) She went on to note that factors that could cause such differences could be found in Nokia's 2002 Form 20-F and also in a press release issued by the company earlier that day.
Nokia's 2002 Form 20-F contained a seven-page detailed "Risk Factors” section outlining which factors Nokia thought could cause its results to differ from its projections. The factors include: (1) “the markets for [Nokia’s] products and solutions are characterized by rapidly changing and increasingly complex technologies.... In order to be competitive, Nokia Mobile Phones must continuously maintain and develop a wide portfolio of mobile phones that covers all major consumer segments and technology standards.... There is a risk that we will not be successful in maintaining and developing this wide portfolio, or that the technologies and related products and solutions on which we focus may not be brought to market by us ... as quickly as anticipated, may not achieve as broad a customer acceptance among operators or end-users as we expect ....”; (2) "competitors may deliver new products and solutions earlier, or provide more attractively priced, enhanced or better quality products and solutions, than we do.”; and (3) Nokia’s quarterly net sales "can be affected by the global growth rate in mobile phone unit sales, which depends in part on regional economic factors ..., competitive pressures, seasonali
. The CAC mistakenly attributes this answer to Kallasvuo. Defendants’ transcript of the event has Ollila giving the answer quoted in the CAC. Kallasvuo follows Ollila's answer with an answer of his own not contained in the CAC, but supplied here for completeness.
. The release is titled "Nokia fourth quarter 2003 sales and profitability to exceed its guidance: Stronger than expected Q4 will result in pro forma EPS (diluted) of EUR 0.28— 0.29”
. Plaintiff mistakenly identifies this section as "Management Discussion & Analysis.”
. The only post-January 2004 statement regarding ASPs that Plaintiffs allege is false was made on March 17, 2006. (See Am. Compl. ¶ 153; see also Part 1.13.9(c)) Plaintiffs do not allege the March 17 statement is false because of Nokia’s distribution advantage over its competitors, rather, Plaintiffs allege it was false because by that date Nokia's “phone ASPs were sharply dropping as a result of the absence of mid-tier and high-end competitive products in its phone portfolio.” (Am. Comply 154) For different reasons, this allegation also fails to properly allege how Defendants’ statement was false. This statement merely acknowledges the unsurprising fact that Nokia’s higher priced phones had higher ASPs than its “normal” phones, and therefore, the more higher priced phones Nokia sold would result in an overall higher ASP for Nokia's overall phone sales.
. Plaintiffs’ allegations regarding Nokia's relationship with operators (Am. Compl. ¶¶ 110, 148;
see supra
Part I.B.3(f), 8(b)), Nokia's Risk Factors (Am. Compl. ¶ 130;
see supra
Part I.B.6(a)), and the Symbian Operating System (Am. Compl. ¶ 136;
see supra
Part I.B.6(d)) are also not actionable because they are all non-forward-looking statements that Plaintiffs fail to adequately why they were false when made. For example, at the Capi
. For similar reasons, Nokia's general statement of corporate optimism regarding Nokia’s relationship with Vodafone is also not actionable. (See Am. Compl. ¶ 148; see supra Part I.B.8(b)) (‘’[W]e’re very pleased with the dialogue we have had with Vodafone ... because we have some very good, very interesting, exciting discussions underway as Arun [Arun Sarin, Vodafone CEO] indicated about how we can get new products ... and, we will work very well with a number of our other operator customers because that’s the way the collaborative approach needs to work, going forward, and, and I think the Vodafone and Nokia cooperation has been really exemplary in the respect.”)
. The same 2002 Form 20-F language is referenced in Nokia’s January 22, 2004 conference call (Defs.’ Ex. C; see supra Part I.B.5) and the November 2003 Capital Markets Day presentation (Defs.’ Ex. M; see supra Part I.B.3). Nokia's April 6, 2004 conference call also referenced similar cautionary language in Nokia's 2003 Form 20-F. (Defs.’ Ex. I; see supra Part I.B.12) Nokia's 2003 Form 20-F’s risk factors are stated more fully at supra Part I.B.7(b).
. The Consolidated Amended Complaint's allegations of scienter are solely based on Defendants' alleged knowledge that its Statements "were false or misleading or acted recklessly in not determining their truth.” (Am.ComplA 186-88) There are no allegations in the CAC that Defendants' scienter is based on any motive and opportunity to commit fraud. Further, Plaintiffs acknowledged in their Response that they only "rely on the second prong of this test [i.e., motive], as they have alleged strong direct and circumstantial evidence of both conscious misbehavior and recklessness.” (Pis.’ Resp. 28) Yet, elsewhere in their Response, Plaintiffs allude, for the first time, to a potential motive that “Nokia's officers would in fact personally benefit by manipulating sales to push Nokia’s earnings
. These statements are quoted in full at supra Part I.B. 12-19.
. Of concern to the Court, this is another instance where Plaintiffs again failed to include Defendants’ complete statement in the CAC. It is disturbing that Plaintiffs did not find room in their eighty-two-page CAC to include the full statements upon which they so heavily rely. Defendants' statement is included here, in full, to provide context. Portions of the statements elided from the CAC by Plaintiffs are italicized.
. Plaintiffs conceded at oral argument that access to the "order book” could not reasonably suggest that Ollila knew when, if ever, his statements were overly optimistic. (1/27/06 Xr. 77) ("[I]t is difficult, and I won't say that I can show it to you right now, because I can’t, all right, I can’t tell you right now whether or not Mr. Ollila had the orders by January 22, 2004.”). Instead, at argument, Plaintiffs fell back upon general conclu-sory allegations that Ollila "had plenty of information about deficiencies in his product line in terms of not having clamshells, of not having phones with high-resolution color, of not having mid-level and higher-quality CDMA phones, of refusing operators' requests for customization....” (1/27/06 Xr. 77) Plaintiffs’ conclusion that they personally "cannot imagine” that Ollila did not have the first quarter 2004 orders by March 25 (1/27/06 Xr. 77-78) is similarly insufficient to show what, if any, knowledge Ollila had at the time his statements were made about Nokia’s first quarter sales.
. Plaintiffs argue this disclosure, "only” ten days before Nokia’s financial statement was due, as compared to two months early in a previous Nokia case,
In re Nokia Corp. Sec. Litig.,
. Plaintiffs stated in a footnote in their Response that their serious accounting allegations were only offered, "at this time,” to "buttress Plaintiffs’ claims with respect to the lack of customer acceptance of Nokia['s] 'new' products, including the N-Gage, in 4Q03.” (Pis.’ Resp. 4 n. 1)