MEMORANDUM OPINION AND ORDER
Before the Court is Defendants Tellabs, Inc. (“Tellabs”), Michael J. Birck, Brian J. Jackman, Richard C. Notebaert, and Joan A. Ryan’s (collectively “Defendants”) Motion for Summary Judgment. Defendants seek summary judgment on each of the remaining claims set forth in Plaintiffs Makor Issues & Rights, Ltd., Chris Broholm, and Richard Lebrun, et al.’s (collectively “Plaintiffs”) Second Amended Consolidated Class Action Complaint (“Complaint”). For the following reasons, the Court grants in large part and denies in part Defendants’ motion for summary judgment and grants in part and denies in part Defendants’ Motion to Strike.
BACKGROUND
I. Procedural History
This case has a long procedural history. In June 2002, Plaintiffs filed a putative class action lawsuit on behalf of various individuals and persons who purchased common stock of Defendant Tellabs between December 11, 2000 and June 19, 2001 pursuant to § 10(b) of the Securities and Exchange Act of 1934 (“Section 10(b)”) and SEC Rule 10b-5,17 C.F.R. § 240.10b-5 (“Rule 10b-5”). The Court has jurisdiction over this matter pursuant to 15 U.S.C. § 78aa and 28 U.S.C. §§ 1331 and 1337, and venue is proper in this district pursuant to 28 U.S.C. § 1391(b). (R. 336-1, ¶ 4.)
Initially, the Court granted Defendants’ motion to dismiss Plaintiffs’ complaint in its entirety, but permitted Plaintiffs to amend.
See Johnson v. Tellabs, Inc.,
On February 25, 2008, the parties filed a Joint Status Report identifying their positions regarding the remaining claims and defenses in the case. The parties reported that, as it currently stood, the Complaint alleged: (i) Section 10(b) and Rule 10b-5 claims against Notebaert and Tellabs, (ii) Section 20(a) control person liability claims against Notebaert, Birck, Jackman, and Ryan, and (iii) Section 20(a) insider trading claims against Birck. The parties agreed that the four categories of alleged misrepresentations that remained at issue in the lawsuit were: (i) statements regarding Tellabs’s financial results for fourth quarter 2000 and full year 2000, (ii) statements regarding the TITAN 5500, (iii) statements regarding the TITAN 6500 system, and (iv) Tellabs’s projections of earnings and revenues during 2001. (R. 149-1, Joint Status Report at 2-4.)
On May 23, 2008, after Defendants filed a renewed motion to dismiss, the Court dismissed Plaintiffs’ § 20(a) claim for insider trading against Birck for failure to state a claim under 15 U.S.C. § 78t-l(a).
See Makor Issues & Rights, Ltd. v. Tellabs Inc.,
As a result of this procedural history, three categories of alleged misrepresentations remain at issue in this lawsuit: (i) statements regarding Tellabs’s financial results for fourth quarter 2000 and full year 2000, (ii) statements regarding the TITAN 5500, and (iii) Tellabs’s projections of earnings and revenues during 2001. Defendants now seek summary judgment on each of these claims contained in the Complaint.
II. Northern District of Illinois Local Rule 56.1
When determining summary judgment motions, the Court derives the background facts from the parties’ Local Rule 56.1 statements. Specifically, Local Rule 56.1 assists the Court by “organizing the evidence, identifying undisputed facts, and demonstrating precisely how each side proposefs] to prove a disputed fact with admissible evidence.”
Bordelon v. Chicago Sch. Reform Bd. of Trs.,
Moreover, the purpose of Rule 56.1 statements is to identify the relevant evidence supporting the material facts, not to make factual or legal arguments,
see Cady v. Sheahan,
III. Evidentiary Objections
Both Plaintiffs and Defendants contend that portions of the opposing parties’ statements of material facts are deficient and fail to comply with Local Rule 56.1 The Court will address each of these arguments in turn.
A. Defendants’ Motion to Strike Portions of Plaintiffs’ Response to Their Statement of Facts
In their Motion to Strike Portions of Plaintiffs’ Response to Defendants’ Statement of Facts and to Deem Certain Facts Admitted (“Motion to Strike”), Defendants first argue that Plaintiffs have provided evasive answers to paragraphs, or portions of paragraphs, 7-8, 14-15, 20-21, 29, 31-33, 35, 37, 38-41, 43, 47-48, 53-55, 64, 66, 68, 70, 73, 79-80, 82, 92 and 102 of Defendants’ Rule 56.1 Statement. (R. 342-1, Defendants’ Motion to Strike, pp. 3-5, Ex. A.) Specifically, Defendants argue that in each of these instances, Plaintiffs fail to admit or deny the facts alleged, and instead provide evasive responses or fail to respond entirely to the facts at issue. Defendants are correct that, in many instances, Plaintiffs have failed to respond to the facts alleged, but instead improperly dispute characterizations in the statement of facts. In response to paragraphs 7-8, for example, in which Defendants assert facts regarding the alleged “bottoms-up” process, Plaintiffs dispute that Tellabs based its guidance on a “bottoms-up” process. Plaintiffs cite facts that they assert demonstrate that Tellabs followed, at least in part, a top-down process and deny that Tellabs employed a “bottoms-up” process. Plaintiffs, however, fail to admit or deny the facts that support Defendants’ contentions regarding the “bottoms-up” process. (R. 336-1, ¶¶ 7-8). While it is clear that Plaintiffs are disputing that Tellabs followed a “bottoms-up” process, Plaintiffs’ response to Defendants’ Rule 56.1 statement is not the proper forum for presenting arguments or additional facts.
See Ciomber,
Defendants also argue that in each instance where Plaintiffs responded to Defendants’ statement of facts without a corresponding record cite, the facts should be deemed admitted. Specifically, in response to a large number of facts, see ¶¶ 13, 28-29, 34, 37-38, 40, 42-M4, 46, 48-49, 53-56, 82, 84-85, 88-89 and 102-104, Plaintiffs, rather than providing a cite to the record in order to dispute a particular fact, instead cite to paragraphs contained in their statement of additional facts. This is contrary to both the letter and spirit of Local Rule 56.1. As the Seventh Circuit has explained:
The requirements of such rules are not onerous, but they are exacting. Local Rule 56.1 makes explicit the responding party’s burden of controverting the movant’s position with adequate citations to the record.... [W]e have often repeated, that a party contesting summary judgment has a responsibility under such rules to “highlight which factual averments are in conflict as well as what record evidence there is to confirm the dispute.” It is reasonable to assume that just as a district court is not required to “scour the record looking for factual disputes,” it is not required to scour the party’s various submissions to piece together appropriate arguments. A court need not make the lawyer’s case.
Little v. Cox’s Supermarkets,
Additionally, Plaintiffs have cited to their own statement of facts where they present improper legal arguments. In paragraph 55 of their statement of facts, for example, Defendants present evidence that as a result of a forecast review, Tel-labs’s finance department recommended to Notebaert that Tellabs revise its public guidance downward for 2001. (R. 354-1, Pl.’s Resp. to ¶ 55.) In response, Plaintiffs argue that the revised guidance was unachievable and unrealistic despite the fact that Defendants do not make any assertions regarding the content of the guidance in ¶ 55 of their statement of facts. Accordingly, in this and many other instances, Plaintiffs’ responses citing to their statement of facts are improper for the further reason that the responses contain improper legal arguments.
See Cady,
Finally, while the deficiencies in Plaintiffs’ response to Defendants’ statement of facts required admission of many of the facts proffered by Defendants, “the court did not turn a blind eye to the facts elsewhere available, though it is permitted to do so by non-compliance with the local rule.”
Little v. Cox’s Supermarkets,
For the foregoing reasons, the Court grants in part and denies in part Defendants’ Motion to Strike.
B. Plaintiffs’ Evidentiary Objections
Plaintiffs similarly raise a series of objections to the evidence submitted by Defendants in support of their motion for summary judgment. Plaintiffs contend that certain documents relied on by Defendants are inadmissible as business records, Defendants’ Exhibits 95-97 are inadmissible hearsay, and portions of the affidavits of both Pfefferle and Notebaert are inadmissible. Because Defendants have demonstrated that each of these materials is proper evidence in support of their motion for summary judgment, the Court will not strike the evidence.
1. Business Records
Plaintiffs first argue that the Court should strike the documents listed in the appendices to the declarations of Charles W.L. Kennedy and Todd Camm because they are not proper business records. Plaintiffs specifically object to the following exhibits as inadmissible as business records: Exs. 2, 3, 12, 18, 20-22, 36-38, 40, 46, 49-50, 55-57, 59-62, 64-67, 69, 75-77, 82-86, 89, 99 and 117. (R. 354-1.)
The Federal Rules of Evidence prohibit the admission of hearsay evidence — statements made out of court that are offered to prove the truth of the matter asserted. Fed.R.Evid. 801-802. Federal Rule of Evidence 803(6) sets out an exception to the rule against hearsay for business records. Under Rule 803(6), the following is excepted from the bar on hearsay:
A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record or data compilation, all as shown by the testimony of the custodian or other qualified witness ..., unless the source of information or the method or circumstances of preparation indicate a lack of trustworthiness.
Fed.R.Evid. 803(6);
United States v. Given,
Plaintiff argues that the Kennedy and Camm declarations fail to demonstrate the procedures under which any of the documents referenced in their affidavits were created. (R. 329-1, Pis.’ Opp’n at 32-34.) “While Rule 803(6) does not require that the qualified witness be the person who prepared the record,
see United States v. Moore,
Defendants, however, have failed to establish that Exhibit 137 is admissible as a business record. Exhibit 137, a document produced by Terra Nova Financial in response to a subpoena, is a third-party document. Defendants have not demonstrated that Exhibit 37 is a business record, including failing to establish that the document was incorporated into Defendants’ business records, and therefore Defendants have not demonstrated that it is admissible under Rule 803(6). 2
Plaintiffs assert that Defendants’ Exhibits 95-97 and 99 are not admissible evidence.
See
R. 354-1, Resp. to ¶ 91. Exhibits 95 and 96 are reports prepared by industry analysts regarding Tellabs’s reported results. (R. 301-15, Exs. 95-96.) Because Plaintiffs fail to offer any argument or cite any legal authority to demonstrate the inadmissibility of these documents, it is unclear why Plaintiffs claim these exhibits are inadmissible. Moreover, if Plaintiffs claim the documents are inadmissible hearsay, Defendants offer the documents not for the truth of the matters asserted, but instead to show how industry analysts used and understood the term “end user.” Exhibit 97 is a March 14, 2001 email from Cathie Kozik to a group of Tellabs’s employees regarding statements made by Sprint executives regarding growth in demand for certain Sprint services. (R. 351-15, Ex. 97.) Plaintiffs claim that Exhibit 97 is inadmissible hearsay. (R. 354-1, Resp. to ¶ 92.) Defendants offer Exhibit 97, however, not for the truth of the matters asserted, but instead for the effect those statements had on Tellabs.
Jewett v. Anders,
Plaintiffs also contend that Exhibit 99 is inadmissible hearsay because Defendants did not properly demonstrate that the document is a business record pursuant to Rule 803(6). (R. 354-1, Resp. to ¶ 46; R. 329-1, pp. 32-34.) Exhibit 99 is a presentation prepared by Robert W. Pullen entitled “The Optical Networking Group.” (R. 301-16, Ex. 99.) As of the date the document was created, Pullen was the Senior Vice President of the Optical Networking Group at Tellabs. (R. 351-1, Ex. 152, ¶ 2). While Plaintiffs contend that the relevant statement in the slide is unsubstantiated and conclusory, Pullen averred that he created the document and had direct personal knowledge of its contents, and asserted that it was the regular practice of Tellabs to create and maintain such documents in the course of its regularly conducted business. Exhibit 99 is therefore admissible.
See
Fed.R.Evid. 803(6);
United States v. Given,
3. Pfefferle and Notebaert Declarations
In a footnote, Plaintiffs argue that the supporting declarations submitted by Pfefferle and Notebaert are self-serving, eon
A supporting or opposing affidavit must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant is competent to testify on the matters stated. If a paper or part of a paper is referred to in an affidavit, a sworn or certified copy must be attached to or served with the affidavit. The court may permit an affidavit to be supplemented or opposed by depositions, answers to interrogatories, or additional affidavits.
Fed.R.Civ.P. 56(e)(1). “While personal knowledge may include inferences and opinions, those inferences must be substantiated by specific facts.”
Vakharia v. Little Co. of Mary Hosp. & Health Care Ctrs.,
Contrary to Plaintiffs’ assertions, neither Pfefferle’s nor Notebaert’s affidavit contains conclusory, unsubstantiated claims. In Pfefferle’s affidavit, she averred that during the relevant time period she was Director of Product Management and Quality of the Optical Networking Group and, beginning in 2001, Director of Global Forecasting. (R. 301-1, Ex. 8, ¶¶ 3-4.) Pfefferle provided detailed information regarding Tellabs’s “bottoms-up” process for collecting information on expected revenues and expenses in 2001. Id. at ¶¶ 6-8. Indeed, she specifically explained that the various product units supplied information to her or the finance department after speaking directly with Tellabs’s sales force and its customers, and that the finance department and employees responsible for forecasting spoke directly with operating unit heads and sales personnel to better understand the bases for the “bottoms-up” projections. Id. at ¶ 9. Because the process she describes is directly within her duties as head of forecasting, Pfefferle has made statements within her personal knowledge and there is no requirement that she cite to other portions of the record to support her affidavit. See Fed.R.Civ.P. 56(e). Notebaert’s declaration is also directly based on his own personal knowledge. (R. 301-1, Ex. 9) Specific cites to evidentiary materials are therefore not mandated.
Finally, Plaintiffs’ argument that the Court should strike the declarations of Pfefferle and Notebaert because they are “self-serving” is without merit. While the Court may strike self-serving affidavits not supported by the record in the context of a motion for summary judgment,
Ozlowski v. Henderson,
IV. Relevant Facts
A. Background
Tellabs is a global supplier of optical networking, broadband access, and voice-quality enhancement solutions to telecommunications carriers and internet service providers. (R. 324-1, ¶ 1.) Throughout the Class Period, Tellabs’s common shares were actively traded on the NASDAQ National Market under the symbol “TLAB.”
Richard C. Notebaert was Chief Executive Officer, President, and a member of Tellabs’s Board of Directors throughout the Class Period. (R. 324-1, ¶ 2.) Defendants Joan Ryan, Chief Financial Officer, Brian Jackman, President of Global Systems and Technology, and other senior executives reported directly to Notebaert on a regular basis. Id. Notebaert kept himself informed about Tellabs’s performance, products, sales, operations, inventory levels, and industry and market conditions. Id. at ¶ 3. Notebaert also attended meetings at which the participants looked at Tellabs’s revenue forecasts, reviewed Tel-labs’s press releases prior to their release, reviewed and signed the 2000 Annual Report to shareholders, spoke on behalf of the company at its investor relations teleconferences, and dealt directly with Tel-labs’s customers. Id. Notebaert left Tel-labs in June 2002. Id. at ¶ 2. A co-founder of Tellabs, Michael J. Birck was President and CEO from 1975 until September 2000, when he became Chairman of the Board of Directors. (R. 324-1, ¶ 4.) Throughout his tenure as Chairman, Birck remained actively involved in the company’s management. Id. After Notebaert resigned, Birck resumed his role as President and CEO. Id. Currently, he is Executive Chairman of Tellabs. Brian Jackman joined Tellabs as Director of Marketing in 1982. (R. 324-1, ¶ 5). During the Class Period, he was President of Global Systems and Technology and was responsible for all product planning, product management, and research and development worldwide. Id. He also was a member of Tellabs’s Board of Directors. Id. Jackman left Tellabs in August 2001, shortly after the end of the Class Period. Id. Joan E. Ryan was Chief Financial Officer of Tellabs during the Class Period until she left the Company in February 2003. (R. 324-1, ¶ 6.) According to Notebaert, he and Ryan “talked a lot ... [ajbout everything.” Id.
The Court appointed Makor Issues & Rights, Ltd. (“Makor Issues”), Richard LeBrun and Nolan Howell as class representatives in this lawsuit. 3 (R. 324-1, ¶ 7.) LeBrun purchased 300 Tellabs shares on February 2, 2001 and sold those shares on March 12, 2001. (R. 330-22, Ex. 1161.) Howell purchased 600 shares on May 30, 2001 and 700 shares on June 11, 2001. Id. Makor Issues bought 1000 shares on March 30, 2001 and sold those shares that same day. The remainder of Makor Issues’ trades in Tellabs stock during the class period occurred after April 18, 2001. Id.
B. Tellabs’s Forecast and Planning Process
Tellabs employed a series of internal methods for forecasting quarterly and yearly sales revenue and tracking Tellabs’s actual sales as compared to those forecasts. Tellabs engaged in an annual bud
To facilitate this process, in January 2001, Tellabs reorganized its marketing department and appointed Christine Pfefferle, previously responsible for forecasting for the Optical Networking Group for two years, Director of Global Forecasting. (R. 336-1, ¶ 9.) As part of the reorganization, Pfefferle became responsible for the newly formed Global Forecasting Organization. Id. Prior to the formation of this organization, the Tellabs employees responsible for forecasting had reported their results to the individual product houses. Id. Under the reorganized group, these employees reported their results directly to Pfefferle. Id.
After the operating units provided the expected sales information to the finance department, the finance department aggregated and reviewed the information. (R. 336-1, ¶ 10.) The finance department and employees responsible for forecasting also had discussions with and made factual inquires of operating unit heads or sales personnel as needed to better understand the “bottoms-up” projection. Id. at ¶ 11. To confirm the accuracy of the projections, the finance department and employees responsible for forecasting also compared the “bottoms-up” information to the historical information, market data, and other available sources of information in order to identify any potential issues and to see whether additional follow up was needed. Id. When new or additional data became available, the employees revised the draft operating plan accordingly. Id. The information provided by the operating units became the foundation for a draft operating plan submitted to the executive leadership team. Id. at ¶ 10. After several drafts, the executive leadership team agreed to a final operating plan and presented the final operating plan to the Board of Directors. Id. at ¶ 10.
In addition to this “bottoms-up” forecasting process, Tellabs employed a series of internal checks called forecast sanity checks to track Tellabs’s actual sales as compared to its forecasts derived from the “bottoms-up” process. Since the mid-1990s, Tellabs’s finance department has issued forecast sanity checks at least weekly. (R. 301-1, ¶ 12.) During the last week of the quarter, updated reports are issued and distributed daily. (R. 301-1, ¶ 12.) Joan Ryan, head of finance, testified that she was responsible for ensuring the accuracy of the checks.
Id.
The weekly forecast sanity checks,
inter alia,
tracked bookings to date for each product line and calculated what percentage of the quarter’s forecasted total bookings needed to be made in order for Tellabs to meet its forecast. (R. 336-1, ¶ 77; R. 301-6, Ex. 48; R. 354-1, Resp. to ¶ 77.) The forecast sanity checks compared the “percent yet to book” with an historical average of the “percent yet to book” for the same week in the quarter over the previous five years.
The parties dispute the usefulness of the forecast sanity checks in predicting sales figures for each quarter. (R. 324-1, ¶ 105; R. 345-1, Resp. ¶ 105.) Notebaert, Jack-man, Ryan and other senior management personnel regularly received and reviewed the reports. (R. 301-1, ¶ 12.) Jackman testified that it was his “standard practice” to review the weekly forecast sanity checks and that he “found the document to be useful in looking at historical trends.... ” Id. Ryan testified that the forecast sanity checks were only one data point that Tellabs considered when addressing sales, and that, during the Class Period, historical trends were becoming less and less predictive of the forecast. (R. 301-3, Ex. 18, p. 318; R. 324-1, ¶ 103.) Rich Tatara, Marketing, testified that his group would rely more heavily on information that they received directly from the sales team and that, as of 2001, Tellabs was seeing its customers holding their business until the end of the quarter. (R. 301-2, Ex. 16, p. 191.) The forecast sanity checks were also presented and discussed at management team meetings in connection with the forecast. (R. 301-1, ¶ 13.) One Tellabs employee explained: “So it was kind of a progress report, if you will, an indicator of where the company stood versus the goal.” Id. According to Birck, the Forecast Sanity Cheek “was done along the way to make sure that there was a correlation between reality and forecast.” Id.
Forecast sanity checks had some limitations. With respect to sales, forecast sanity checks only included information regarding orders that Tellabs had already received. (R. 336-1, ¶ 78; R. 554-1, Resp. to ¶ 78.) Forecast sanity checks did not include any “bottoms-up” information on possible orders that the sales force believed would come in later in the quarter. (R. 336-1, ¶ 78.) In addition, Pfefferle testified that the historical averages reported by the forecast sanity checks did not fully reflect the “hockey stick” trend, discussed in more detail below, which was more pronounced in fourth quarter 2000, and which Ryan testified was becoming more pronounced from the first to the third quarter as well. (R. 336-1, ¶ 79; R. 354-1, Resp. to ¶ 79; R. 301-3, Ex. 18, p. 82.) Because the forecast sanity checks averaged bookings over a five-year period, they did not capture this change in the bookings trend. (R. 336-1, ¶ 79.)
C. Pre-Class Period Events
A number of Tellabs’s employees raised concerns regarding slow sales of the TITAN 5500, the company’s flagship product, prior to the commencement of the Class Period. An internal October 9, 2000 report showed that, “Titan 5500 demand was weak going into the last few weeks of the quarter____” (R. 301-1, Ex. 1056, TEL 291602.) While revenues for the TITAN 5500 for the third quarter 2000-$482.9 million-exceeded the July 13, 2000 forecast of $470 million, they did not meet the September 13, 2000 or September 22, 2000 revised forecasts of $490 million or 487.6 million.
Id.
at TEL 291601. In an October 16, 2000 email, John Brots, Vice President, Global Manufacturing, wrote that, “532L revenues look terrible and the 5500 revenue is not much better.” (R. 301-1, Ex. 1057, TEL 291637.) Brots testified during his deposition that he was referring to first quarter of 2000 and that he was concerned that Tellabs would be back-end loaded that quarter, a strain on manufacturing capacity. (R. 351-1, Ex. 127, p. 115.) In a November 1, 2000 memorandum to the North American Sales organization, Pfefferle also highlighted slow TI
Despite these various concerns, overall sales of optical networking products, which included the TITAN 5500, were up 62.5% over the prior year for third quarter 2000, and up 49% over the prior year for fourth quarter 2000. (R. 301-5, Ex. 38, TEL 657032, R. 301-1, Ex. 2, 671554.) The forecast sanity check for the week ending December 8, 2000, just prior to the beginning of the Class Period, showed the percentage of TITAN 5500 sales yet to book for the quarter was 15.4% below the historical average (25.4% vs. 10.0%). (R. 324-1, ¶ 13.) The percentage of total product sales yet to book was 9.8% below the historical average (19.6% vs. 9.8%). Id.
D. Industry Players and Market Conditions in 2000-2001
Some of Tellabs’s customers were experiencing lessened demand for Tellabs’s products in mid-late 2000. SBC was one of Tellabs’s largest customers during the Class Period. (R. 324-1, ¶ 9.) Jim Joling, the Tellabs’s employee responsible for managing the SBC account, testified that SBC’s planning organization advised him that SBC intended to reduce spending at the end of 2000 and into first quarter 2001. Id. When asked which individual he notified at Tellabs’s of this reduction, Joling responded, “I can’t recall, but I — my history would’ve been to generate an email or memo” to the respective heads of divisions at Tellabs. (R. 301-1, Ex. 1008, p. 142.) Joling also testified that he had conversations with SBC representatives regarding overcapacity concerns on their network during first quarter 2001 and that those discussions “always centered around what particular project would have to be delayed or canceled, what long-term plans would have to be changed because of the lack of funding.” Id. at p. 144. In addition, Nancy Sayer of Verizon, Tellabs’s largest customer, also recounted that Verizon’s demand started leveling out from mid-2000 to the end of 2000. (R. 301-1, Ex. 38, p. 38.) Sayer did not recall if she relayed this information to Tellabs. Id. In fact, for three weeks in fourth quarter 2000 and eleven weeks in first quarter 2001, the forecast sanity checks showed that the percentage of TITAN 5500 sales yet to be booked for the quarter was greater than Tellabs’s historical average. (R. 301-1, Exs. 1214.1171-1211.)
E. Tellabs’s December 11, 2000 Guidance
On the first day of the Class Period, December 11, 2000, Tellabs hosted an analyst conference. (R. 336-1, ¶ 5.) During that conference, Tellabs provided a forecast of 30% growth in revenue and earnings per share for 2001.
Id.
Notebaert does not recall the meeting or making a statement regarding 30% growth at the meeting. (R. 301-1, Ex. 1156, Resp. to
When Notebaert joined Tellabs as its CEO in September 2000, the process for developing the 2001 operating plan was already under way. (R. 336-1, ¶ 14.) At that time, Tellabs’s finance department had the responsibility for coordinating the preparation of the “bottoms-up” forecasts and working with the operating units to consolidate that information. Id. Tellabs employees, however, did keep Notebaert informed as to the progress of the operating plan. Furthermore, once the heads of each of the operating units and the finance department had come to an agreement on the plan for 2001, they presented the plan to Notebaert as the consensus of the other executives. 4 Id. The December 7, 2000 iteration of the 2001 operating plan forecasted 36% revenue growth. Id. at ¶ 12. Accordingly, the guidance figures Tellabs presented on December 11, 2000 were the result of a consensus recommendation presented to Notebaert by his CFO, the finance department, the employees responsible for revenue forecasting for each product line, and his executive team. Id. at ¶ 15. Notebaert testified that he personally believed that the build-up of the operating plan as of December 2000 supported Tellabs’s public guidance for 2001 of 30% growth. Id. Joan Ryan, Tellabs’s CFO, also testified that as of December 11, 2001, based on the result of the planning process, she believed that Tellabs would achieve at least 30% growth in both earnings and revenue in 2001. Id. at ¶ 13.
When distributing the 2001 operating plan targets, Notebaert expressed that the targets were “ ‘expected’, if not minimum,” requirements for the 2001 operating plan. (R. 301-2, Ex. 12.) Indeed, several Tel-labs sales personnel testified that executives informed them of their revenue targets. (R. 325-1, Ex. 1010, p. 234-35; R. 325-1, Ex. 1008, p. 125.)
F. Tellabs’s January 23, 2001 Guidance
Plaintiffs only identify one piece of evidence between Tellabs’s December 11, 2000 guidance and the reiteration of that guidance on January 23, 2001. On January 11, 2001, Birck forwarded to Notebaert, Jackman, and Ryan a UBS Warburg analysis lowering estimates for the telecom equipment sector, commenting: “In our case, I believe they have a reasonable viewpoint — for now. While we may not see as much diminished demand as some of our contemporaries, this is going to be a trying year — for a while, anyway.” (R. 301-1, ¶ 17.)
Tellabs announced its fourth quarter and full year 2000 results in a January 23,
At the January 23, 2001 teleconference, during which Notebaert, Jackman, and Ryan spoke, Tellabs reiterated the 30/30 (revenue/earnings per share) guidance. (R. 336-1, ¶ 17; R. 324-1,¶ 18.) Such teleconferences were open to the public and also could be heard through a simultaneous live webcast at www.tellabs.com, or through a taped replay. (R. 324-1, ¶ 18.) The guidance presented on January 23, 2001 was lower than Tellabs’s 2001 internal operating plan, finalized on January 11, 2001, which forecasted 35% revenue and 31% earnings growth for full year 2001. (R. 336-1, ¶ 17.) Tellabs also reported that it began 2001 with a backlog, orders or letters of intent that had been placed with Tellabs but scheduled to ship in 2001, of $439 million. (R. 336-1, ¶ 18.) The backlog was Tellabs’s largest year-end backlog ever and 70% higher than its backlog entering 2000. Id. In reiterating Tel-labs’s previous forecast of 30% growth in revenues and earnings, Ryan stated: “We are targeting revenue growth slightly higher than our 30/30 financial mantra or approximately $4.4 billion with full year growth by our product group,” “[f]rom an earnings perspective, we expect to deliver another 30% increase in 2001 ...,” and “Tellabs’s 30/30 model is very much intact and we are comfortable with these targets.” Id. Birck also testified that the 30/30 forecast was “realistic, yet aggressive” and that 30 percent growth over the prior year “is a fairly challenging thing to do.” (R. 301-1, Ex. 1003, p. 87.) Plaintiffs’ expert, Professor Linda Allen, found that “[tjhese optimistic statements propped up [Tellabs’s] stock price.” (R. 324-1, ¶ 18.) On January 23, 2001, the price of Tellabs shares rose $5,375 to close at $58,875. Id.
G. Tellabs’s March 7, 2001 Revised Guidance
The day after Tellabs issued its January 23, 2001 guidance, Tellabs’s Board of Directors met. (R. 324-1, ¶ 19.) Notebaert, Birck, Jackman, and Ryan were all present.
Id.
The Audit Commit tee reported: “There are ... a number of items to watch carefully on a going-forward basis as the economy slows. Specifically, the accounts receivables, inventory levels and customer financing arrangements merit special focus.” (R. 301-1, Ex 1063.) Indeed, Birck testified that as early as January 24, 2001, the Board discussed “industry concerns.” (R. 301-1, Ex. 1152, p. 1203, 1209.) Also
As they had in prior quarters, Tellabs executives tracked the progress of sales in first quarter 2001. (R. 336-1, ¶ 19.) Throughout January, Tellabs’s forecasting organization continued to forecast more than 30% year-over-year growth for the quarter, as well as the full year. Id. at ¶ 20. In response to an inquiry from Kohler regarding slow sales, on January 25, 2001, Steve McCarthy, Tellabs’s Senior Vice President of Global Marketing, requested that Tellabs’s Global Forecasting Organization update their first quarter forecast. Id. at ¶20. In response, Pfefferle provided him with an updated forecast using the most recently available information from the product houses. 5 Id. Like the process for developing the initial operating plan, the process for updating the forecast was primarily a “bottoms-up” process. The forecasting group worked with the sales force and product houses, who in turn worked with customers to identify and track potential sales opportunities. Id. Once a sales opportunity was identified, an employee placed the opportunity into a tracking system, referred to as the “pipeline.” Id. For each sales opportunity, the pipeline listed the name of the customer, anticipated product, revenue amount, estimated date for purchase order, and responsible salesperson. Id. The salesperson would also classify the opportunity based on his or her confidence that the opportunity would turn into an actual order by assigning it a confidence level of 80%-100%, 60%-79%, or less than 60%. Id. As additional information became available throughout the quarter, Tellabs’s employees would make changes to the pipeline figures. Id.
At the end of January, it was clear that January sales were slower than Tellabs had hoped. (R. 336-1, ¶ 23.) January, however, was traditionally a slow sales month as Tellabs held its annual meeting which took much of the sales force away from their work and Tellabs’s customers were typically still setting their budgets. Id. On February 6, 2001, commenting to Notebaert, Birck, Jackman, and others on the forecast sanity check for the week ending February 2, 2001, which showed the percentage of TITAN 5500 sales, yet to book was 13.6% below Tellabs’s historical average (52.6% vs. 39.0%) and the percentage of all product sales yet to book was 13.1% below the historical average (48.4% vs. 35.3%), Ryan stated:
For your information, bookings to date that will translate into revenue for Q1 are alarmingly slow, and slower than for any quarter in recent memory. Thescheduled bookings rate for Q1 comes closest to that of 4Q 1998, but is still lower than for that period. That means we are booking at a rate below any of the quarters in 2000, and we know how difficult and hair-raising all those periods were for making our revenue target. I suppose I don’t need to say it (but I will anyway), WE NEED BOOKINGS NOW!!!!
(R. 324-1, ¶ 21.) Notebaert acknowledged “[i]t was a concern” to him, as well, that Tellabs was performing below historical levels. Id. Three days later, on February 9, 2001, Ryan wrote Notebaert:
January results will be available late Monday. First read is that they are not good — slow revenue, high cost of goods. We may have even lost money for the month. There is a formal meeting which you are invited to on Thursday to discuss January results and revised Q1 forecast. At this point, the forecast for revenue looks to be below our Board forecast by about $20-$30M, with various upsides/downsides.
(R. 324-1, ¶ 22.)
While sales were slow in January, Tel-labs’s quarterly sales were typically more heavily concentrated in the last month or few weeks of each quarter. (R. 336-1, ¶ 24.) Tellabs’s employees referred to this trend as the “hockey-stick” effect, referring to the picture created graphically by the timing of sales. Id. Jackman testified that the “hockey stick” trend varied in its severity and timing from quarter to quarter. (R. 330-22, Ex. 1152; R. 324-1, ¶ 103.) In addition to being an intra-quarter phenomenon, the “hockey stick” effect was also a seasonal phenomenon, as sales were slower in first quarter and significantly higher in the fourth quarter. (R. 336-1, ¶ 25.) The “hockey stick” trend had become more pronounced in the periods leading up to fourth quarter 2000. (R. 301-3, Ex. 18.) Nine days before the end of the third quarter 2000, for example, Tellabs had not brought in sufficient sales to meet its sales forecast for the quarter. (R. 336-1, ¶ 26.) Ultimately, however, Tel-labs reached record-breaking sales for the quarter. Id. Similarly, in fourth quarter 2000, midway through the quarter Birck noted that making the fourth quarter’s guidance would require “a scramble” and John Kohler, Senior Vice President of Global Operations, noted that the fourth quarter “presented significant challenges to out team.” Id. Ultimately, however, Tellabs exceeded its fourth quarter forecast with its largest quarter for revenues in its history. Id.
In early 2001, Tellabs scheduled a meeting for February 15 to review January results and the first quarter forecast to “formally discuss how we get back on track.” (R. 336-1, ¶ 27.) At the February 15, 2001 forecast review meeting, which Notebaert attended, the participants discussed several “action items.” Id. The participants tasked Pfefferle and Don Jones, head of North American Sales, to “[ojutline all opportunities for IQ for TITAN 5500.” Id. Notebaert and other Tel-labs executives directed the Tellabs forecasting organization to determine whether Tellabs’s current forecast remained achievable and realistic. Id. at ¶ 28. Notebaert made this request because if the forecast needed to be revised, he wanted to let the market know sooner rather than later, thereby defusing any build up of expectations. Id.
Also on February 15, 2001, Notebaert instituted a hiring freeze as a “preventive action relative to the overall economy.” (R. 336-1, ¶ 29; R. 324-1, ¶ 23.) A “Suggested Spending Optimization Plan,” dated February 19, 2001 assigned “immediate” action tasks to Notebaert, Ryan, Jackman, and others, including: “[fjreeze hiring,”
During this time period, certain portions of the telecommunications industry and the economy in general were beginning to exhibit signs of a slow down. 6 Id. While they paid attention to the economy and reacted with caution to developments in the economy, Tellabs executives also believed that Tellabs was in a product niche that would better protect it from economic difficulties. (R. 336-1, ¶ 29.)
Typically, Tellabs’s finance organization, headed by CFO Ryan, distributed a Monthly Executive Financial Summary to senior management, including Notebaert, Birck, Jackman and Ryan about two weeks after the end of the first and second months of each quarter. (R. 324-1, ¶ 25.) McCarthy confirmed that, “[fit’s one of the documents that we used in the course of doing business.” Id. Among other things, the Monthly Executive Financial Summaries regularly reported inventory turns. Id. Jackman testified that lower inventory turns could have one of several meanings, including ramping up inventories in anticipation of later orders or slow sales. (R. 301-1, Ex. 1007, p. 114.). The January 2001 Financial Summary, which was distributed in mid-February and which Jackman recalled receiving, reported: “Monthly results fall short of forecasts: Soft orders prevented level-loading [ ] of TITAN 5500 ...,” “[rjevenues below plan due primarily to lower than expected optical networking sales,” “January revenue below forecast due to soft bookings (5500) and credit/demand issues,” “78% of revenue required to ship and meet revenue recognition guidelines in February and March — significantly higher than historical levels,” and “TITAN 5500 bookings were at the lowest level since July, 2000.” (R. 324-1, ¶ 25.) Ballatine testified that it was a regular practice to review the results of the period at a meeting with Birck or Notebaert, and that Ryan typically attended those meetings as well. (R. 301-1, Ex. 1002, p. 282.)
On February 19, 2001, Notebaert informed the Tellabs’s Board of Directors, in a letter to Birck, of the disappointing January results. (R. 336-1, ¶ 30.) The letter stated:
Attached to this letter are the financials for January. As you look at them you will note that revenues were very soft, at 58% of plan. This is the whole story for the month and does not portend well for the quarter. Making our revenueplan in the current environment will be a challenge.
Revenues came in at 176 million, down 136 million against our plan of 312 million. Of additional concern is that our product bookings and product backlog are down 142 million and 67 million respectively compared to October of 2000. The area of biggest concern is ONG [Optical Networking Group] with a 97.5 million shortfall against plan. Sales of our Titan 5500 and 532L have been very slow so far in the quarter....
Operating expenses were about on. Of course with revenues off and expenses on, our margin was lower than plan by 3.4% or 34.6 million. We broke even for the month. We have taken aggressive preventative action on expenses in case our sales efforts fall short. Headcount and all discretionary expenses are being constrained.
(R. 324-1, ¶ 26.) Birck testified that, even prior to receiving the letter, he was generally aware that revenues for January were very soft and that the figures did not portend well for the quarter. (R. 324-1, ¶ 26.)
The forecast sanity check for the week ending February 23, 2001 reported that the percentage of total forecasted sales yet to book for the quarter was 18.7% behind Tellabs’s historical average (34.7% vs. 16.0%), while the percentage of forecasted 5500 sales yet to book was 20.2% below the historical average (40.6% vs. 20.4%). (R. 324-1, ¶ 27.) These forecast sanity checks were a catalyst for the “deep” dive into the forecast during late February and early March 2001. (R. 336-1, ¶ 80.) On February 23, 2001 Bro Ballantine, Vice President of Financial Planning and Analysis, wrote to Richard Tatara, Vice President of Product Marketing, Pfefferle, Ryan and others: “As we discussed in today’s meeting there have been many changes in the economic climate, our industry and our business since we completed the ... three year planning exercise last October. In fact there has been so much change that the 3 year projections are in many cases obsolete and require some updating.” (R. 324-1, ¶ 28; R. 351-1, Ex. 142, p. 31.) According to Tatara: “[T]he industry was starting to experience results being reported by various organizations that were shaking the confidence that growth would continue to be as robust as we had expected.” (R. 324-1, ¶ 28.) He also said, “There was, you know, a climate that was suggesting that the robust growth we had seen in the three years prior to this time perhaps wasn’t going to continue with the same vigor that it-that it had in the previous year.” (R. 324-1, ¶ 103.) Three days later, on February 26, 2001, in an email to Don Jones, Vice President, North American Sales, Pfefferle wrote: “We really need to work on trying to get some orders in asap.... We have to book $8.2M a day for the next 25 days and ship $12.1M. It’s looking real tight.” (R. 324-1, ¶ 29.) The next day, February 27, 2001, Anders Gustafsson, President, Global Sales, expressed similar concern: “We are now 2 months into our first quarter and our bookings have not ramped up as expected.... I am getting increasingly concerned that we are going to be cutting it very tight.” Id. In that same email, he also stated that, “I believe we can still make our forecast and further strengthen our credibility with investors.” (R. 330-17, Ex. 1073.)
In connection with Notebaert’s request for a reexamination of the existing forecast, on February 26, 2001, Pfefferle prepared a “gap report” to show how first quarter sales were performing compared to the forecast. (R. 336-1, ¶ 32.) The Global Forecasting Organization typically prepared gap reports on at least a monthly basis to identify bookings that Tellabs had
Pfefferle and her team also calculated an “adjusted gap” which derived from adding actual bookings only to those sales opportunities assigned a confidence level of at least 60%. (R. 336-1, ¶ 33.) The adjusted gap also included $10 million in “pull-ins” from future quarters. (R. 301-6, Ex. 46; R. 324-1, ¶ 99.) The adjusted gap report reflected that Tellabs’s “tactical plan to close the gap” included “[ajggressively canvassing sales & marketing for upside opportunities” and “[ajctively pursuing customer permission to pull in orders from 2Q w/o impacting customer sat [sic].” Id.; R. 324-1, ¶ 99. Ryan testified that the adjusted gap for the TITAN 5500 “looked very reasonable” compared to fourth quarter 2000 and that “looking at what we had achieved in the past, talking with sales, talking with sales management, and talking with marketing, we all felt that the gap would be closed.” (R. 301-3, Ex. 18, p. 340; Ex. 17, p. 1480.)
On February 27, 2001, Birck publicly stated at a Goldman Sachs investors conference that Tellabs “[wajsn’t immune to the overall spending slowdown and that January had been a soft month for orders .... ” Birck’s statement promptly hit the news wires and Tellabs’s stock price dropped 9% over the next three days. (R. 336-1, ¶ 31.) After this announcement, Tellabs continued to track its sales. At the end of February 2001, Brian Jackman contacted sales and marketing personnel and inquired whether they had seen any slowness in demand. (R. 301-2, Ex. 14, p. 386.) Notebaert testified that Jackman went through Don Jones and Anders Gustafsson, sales and marketing executives. (R. 301-3, Ex. 19, p. 968.) The sales personnel told Jackman that they were not experiencing any slowness in demand (R. 301-2, Ex. 14, p. 386), and Jackman passed this information on to Notebaert. (R. 301-3, Ex. 19, p. 481.) In addition to tracking potential future sales, Tellabs also continued to track actual sales booked to date per quarter in the forecast sanity check reports prepared by the finance department. (R. 336-1, ¶ 35.) The March 2, 2001 forecast sanity check indicated that Tellabs had yet to book 30% of its first
On March 2, 2001, Tellabs’s finance department asked Pfefferle to prepare yet another updated forecast for the quarter to give to Notebaert and Ryan on Monday, March 5, 2001 for “decision-making” purposes. (R. 301-2, Ex. 17, p. 1485-86.) Notebaert testified that the executives wanted the forecast “to see where we were on accomplishing the goals for the quarter.” (R. 301-3, Ex. 18, p. 980-81.) Pfefferle accordingly prepared another gap report which identified a gap to forecast for the TITAN 5500 of approximately $183 million, with identified sales opportunities of $194 million. Id. The adjusted gap for the TITAN 5500, which only included potential sales assigned a confidence lever higher than 60%, was $31 million. (R. 301-6, Ex. 50.) The adjusted gap again contained $10 million in “pull-ins” from future quarters. Id. The March 5, 2001 gap report also reflected that Tellabs’s “tactical plan to close [the] gap” still included “[a]ggressively canvassing sales & marketing for upside opportunities” and “[actively pursuing customer permission to pull in orders from 2Q w/o impacting customer sat [sic].” Id.
From February 26, 2001 to March 5, 2001 the adjusted gap for the TITAN 5500 had been reduced $8.4 million. (R. 301-6, Exs. 46, 50.) Due to the reduction in the TITAN 5500 gap in that time period, Pfefferle testified that she was even more confident that, consistent with past experience, all signs indicated that Tellabs would close the remaining gap. (R. 336-1, ¶ 37.) Accordingly, Pfefferle and her team continued to forecast that Tellabs would achieve 30% growth in TITAN 5500 sales in the first quarter of 2001 over the prior year. Id.
With regard to other products, however, with input from the finance department, Pfefferle concluded that the products were not on track to hit their forecasted revenue targets for first quarter 2001. (R. 336-1, ¶ 38.) It was clear, for example, that Tel-labs would not recognize expected revenue from sales of the TITAN 6500 due to Sprint’s requirement for a longer testing period and that sales opportunities for the Cablespan product were not materializing at the expected rate. Id. Nonetheless, as result of the feedback Pfefferle received from speaking with the sales force and others, Pfefferle believed that, as of March 5, 2001, Tellabs would still achieve at least 30% revenue and earnings growth for the full year. Id. Overall, however, because the recognizable revenue for the TITAN 6500 and the Cablespan product were not tracking to plan, the forecasting organization concluded that the overall first quarter revenue projections should be lowered slightly. (R. 336-1, ¶ 39.) The forecasting organization communicated this information to senior management. Id.
Subsequent to this re-analysis, and in order to account for the change in the Cablespan forecast and deferred revenue recognition of TITAN 6500 shipments, Notebaert and his senior executive team decided to hold an analyst call on March 7, 2001 for the purpose of lowering the Company’s guidance for the quarter. (R. 336-1, ¶40.) On March 5, 2001, Brian Jack-man, Joan Ryan, Anders Gustafsson, Vice President of Global Sales, and John Kohler attended a forecast review meeting. (R.
On March 7, 2001, Tellabs lowered its guidance for first quarter revenue from a range of $865 million to $890 million to a range of $830 million to $865 million, and also projected full year guidance in a range of $4.35 billion to $4.4 billion. (R. 301-7, Ex. 51, TEL 669439.) In addition, Tellabs projected earnings per share in the range of 35 cents to 38 cents, compared with prior guidance of 39 cents per share. (R. 324-1, ¶ 31.) According to Tellabs, the new guidance stemmed from continuing below-trend growth in its Cablespan business and a delay in recognizing revenue from the TITAN 6500 series. (R. 330-3, Ex. 1022, TEL 668682.) In the March 7, 2001 press release, Tellabs asserted that, “[g]rowth in Tellabs’ core optical networking business [i.e., the 5500] remains strong.” (R. 324-1, ¶ 31.) The press release quoted Notebaert as stating: “[W]e continue to target 30 percent growth in revenue and earnings for the year.” Id.
That same day, after the close of trading, Tellabs hosted a teleconference regarding the first-quarter guidance. (R. 324-1, ¶ 32.) Notebaert, Jackman, and Ryan met before the call to discuss what they were going to say.
Id.
Notebaert, Jackman, and Ryan presented jointly on behalf of Tellabs. Notebaert opened the call by stating: “Let me start by saying that our business is quite healthy and, in fact, most of the fundamental trends we talked about on our January call are intact. That is, let me be more detailed, demand for our core optical products or core networking products remains strong.... [W]e still expect revenue and EPS growth for the quarter to exceed 30% .... We now project revenue for the year in the $4.3 billion or $4.35 billion to $4.4 billion range and EPS of $2.13 to $2.17. In summary, demand for our products remains strong.... Tellabs will meet the adjusted revenue and earnings targets.”
Id.
Ryan stated: “We expect optical networking to
During the question and answer session of the call, an analyst asked if Tellabs was seeing “any weakness” in the TITAN 5500. (R. 336-1, ¶ 44.) Brian Jackman, Tellabs’s President of Global Operations, responded by saying: “We are not. We’re still seeing that product continue to maintain its growth rate; it’s still experiencing strong acceptance. We are in the process of turning [up] a large number of frames we shipped in the fourth quarter and this is continuing to grow as usual. I think that is pretty much on plan.” (R. 336-1, ¶ 44.) Jackman testified that he based this response on the fact that Tellabs had forecasts from the sales organization that Tel-labs would still make the plan for the 5500. (R. 301-2, Ex. 13, p. 147.) Another analyst asked, “Any concerns relative to the market place in general? We see companies like Nortel and Cisco lowering their expectations. I am assuming you guys are not seeing any of those factors impacting your business that might be impacting those guys.” (R. 330-3, Ex. 1023, TEL 669442.) Notebaert responded that: “We just lowered our expectations. With our customer base and the product niche we have our problems may be different.... We haven’t gotten any indication from any of our major customers of a downturn in this segment we are in and in our niche.” Id.
The next day, March 8, 2001, Tellabs shares rose $2.75 to close at $48.4375. (R. 324-1, ¶ 34.) Dr. Allen opined that the stock price reaction on March 8, 2001 demonstrated “that the market interpreted the net effect of the March 7th news release to be positive information.” (R. 330-14, Ex. 1053, p. 16.) Dr. Lehn, however, opined that the stock price reaction did not demonstrate that the market interpreted the net effect of the March 7, 2001 news release to be positive information. (R. 301-11, Ex. 70, pp. 5, 22-23.) Also on March 8, in a company-wide email, Notebaert announced the company was delaying salary increases scheduled for April 1, 2001 by three months. (R. 324-1, ¶ 35.) 9
H. April 6, 2001 Revised Guidance
After the March 7, 2001 announcement, Tellabs continued to track its sales and revenue. On March 9, 2001, in an email designated “Importance: High” sent to Steve McCarthy, Senior Vice President, Global Marketing, regarding TITAN 5500 sales Pfefferle wrote: “Here is my most important issue in Global Forecasting-need to rapidly increase orders coming in-house from NA for TITAN 5500. We have identified (as of today) $161M in unbooked opportunities for 1Q01. This business
The economy, in general, is not doing as well as it was six months ago. “Hello.” All you have to do is read the paper. Now that means that cable companies are not going to expand into other cities. They are going to flush out what they have. What does that translate to Tel-labs? It translates that we will do about 60 percent of what we expected just in January. In the first quarter, if you look at what customers are saying, that is what is happening. As an organization, we expected to build a certain amount of product, and now the customer is saying about 60 percent, in that range. That is some softness.
(R. 330-17, Ex. 1076, TEL 081954.) The forecast sanity check for the week ending March 9, 2001 showed that the percentage of the total forecast yet to book was above Tellabs’s historical average notwithstanding that Tellabs had just reduced first quarter guidance. (R. 324-1, ¶ 38.) Thus, the percentage of all products yet to book was 20.1% above the historical average (27.0% yet to book vs. 6.9%), while the percentage of the TITAN 5500 yet to book was 22.5% above the historical average (33.5% yet to book vs. 11.0%). Id. Indeed, Tellabs’s March 5, 2001 gap report showed an adjusted gap for the TITAN 5500 of more than $31.6 million, while the March 12, 2001 gap report showed an even larger adjusted gap of almost $41.1 million. (R. 324-1, ¶ 40.)
In a March 13, 20 email to all Tellabs employees, Marc Ugol, Senior Vice President, Human Resources, wrote: “While demand for our new and existing products remains strong, revenue is not developing at the levels we had planned this year. Accordingly, we need to focus on reducing our costs in order to maintain our financial strength.” (R. 324-1, ¶ 39.) Ryan responded: “I was surprised to see in your memo to employees that you included the forward looking statement below: ‘... Revenue is not developing at the levels we had planned this year.’ This is at odds with the external message that was communicated last week on our pre-announcement call, in which we basically re-iterated our 30/30 guidance for the full year. In fact, Dick [Notebaert] opened the call by saying that our ‘business remains quite healthy.’ ” Id.
The Monthly Executive Financial Summary for February 2001, distributed on March 15, 2001 to Notebaert, Birck, Jack-man, Ryan, and other senior management revealed, inter alia: “56% of additional revenues need to meet Q1 forecast,” “P2 [February 2001] revenue shortfall due to across the board weakness in ONG [Optical Networking Group] and BA product sales,” “February revenue continues to be below forecast due to soft bookings (5500/532L) and credit/demand issues for DXX/Cablespan,” “56% of revenue required to ship and meet revenue recognition guidelines in March,” “TITAN 5500 bookings for the 2nd consecutive period continue to be at the lowest level since July, 2000,” “February revenue falls short in NA forecast due to soft orders (TITAN 5500) ...and “ [forecast] reductions due to: 5500 & 532L — slow bookings.” By mid-March 2001, McCarthy testified that there were frequent internal discussions regarding Tellabs’s “soft bookings.” (R. 324-1, ¶ 44.)
While overall sales for the Optical Networking Group increased in first quarter 2001, demand for the TITAN 5500 remained low. For first quarter 2001, Tel-labs reported year-over-year growth for
On March 16, 2001, Anders Gustafsson, Vice President of Global Sales, wrote an email to Notebaert, Ryan, Jackman, Birck, and others giving a “positive update” on first quarter sales and stating, “I am very encouraged with this progress, and I believe we will make the adjusted revenue target.” (R. 336-1, ¶ 45.) Also on March 16, 2001, Don Jones emailed the North American sales force and stated that recent “big wins ... have really put us in the hunt” to meet the first quarter forecast. Id. On March 19, 2001, Notebaert held a staff meeting during which Don Jones presented an updated sales forecast, $835 to $845 million, which was in line with Tel-labs’s revised guidance. (R. 301-9, Ex. 58, p. 1678.) At the same meeting, Joan Ryan presented an updated forecast from Tel-labs’s finance department predicting that the first quarter’s total revenue would come in at between $830 and $860 million, almost precisely the range of the revised guidance provided on March 7, 2001. Id.
There was some evidence in early 2001 that customer demand was decreasing. Rick LaDuea, Vice President for the Verizon account, in an email dated March 21, 2001 with the subject “Revenue Alert” sent to various persons in sales and marketing and copied to Notebaert, reported on a conversation he had had with a representative of Verizon: “When I told him what our expectations were of business from Verizon this year, he laughed and said we’d be lucky to see half of that.” (R. 324-1, ¶ 46; R. 351-1, Ex. 120, pp. 146-47). LaDuea also testified that this response may have been nothing more than the representative’s “gut opinion” and that he did not recall what number he gave to the representative that resulted in this comment. Id. Nancy Sayer of Verizon also testified: “[I]n 2000, our demand started leveling out. So, it was decreased from what it had been previously.” (R. 330-2, Ex. 1017, p. 38.)
Soon thereafter, the picture changed and it became clear that customer demand was decreasing. In the last two weeks of the first quarter, customers began to request that Tellabs push out the shipping dates of approximately $83 million in firm or expected orders for the TITAN 5500 that were originally scheduled to ship in the quarter. (R. 336-1, ¶ 47.) Notebaert, referring to the requests to push out orders, stated that, “it was like somebody threw a switch. Totally unexpected.” Id. Ryan testified that the “push-out” “was more substantial that we’d seen before in the past.” (R. 301-3, Ex. 18, p. 246.) If the $83 million of orders or letters of intent had shipped as expected, Tellabs would have achieved its revised guidance for the quarter. (R. 336-1, ¶ 47.) As first quarter 2001 closed, it became apparent to Tellabs that although revenue had increased significantly year-over-year from the first quarter of 2000, Tellabs would not meet the March 7, 2001 revised guidance. (R. 336-1, ¶ 48.)
Tellabs held a forecast meeting on April 5, 2001 to discuss updating the second quarter and full year forecasts. (R. 336-1, ¶ 82.) As of that date, Tellabs had not settled on a revised forecast for the full year 2001. Id. As a result of the meeting, Tellabs developed a series of forecast scenarios with the most pessimistic scenario forecasting total revenues of $3.6 billion for the year, with $834.8 million in revenues for second quarter 2001. Id. Using a process similar to the one used to develop the original 2001 Operating Plan, Pfefferle and her team then gathered “bottoms-up” information from Tellabs’s sales force concerning expected demand for Tellabs’s products in order to determine the most realistic scenario. Id.
Pfefferle and her organization also conducted a “post-mortem” on the first quarter forecast “to say what happened and what we need to do differently.” (R. 336-1, ¶ 54.) Pfefferle identified that TITAN 5500 revenue had grown 22% year-over-year and that “[a]necdotal information from key accounts indicates that fundamental drivers are still strong.” Id. Pfefferle also noted that Tellabs had shipped a large number of TITAN 5500s in the first quarter and that these systems represented a “great annuity program in 2001 and beyond.” Id. The TITAN 5500s were a “great annuity plan” because an important source of TITAN 5500 revenue was orders of additional port cards from customers who already had purchased the TITAN 5500 system from Tellabs. Id. Shipments of the TITAN 5500 thus created not only revenue from immediate sales, but future revenue streams as well due to customer demand for additional port cards. Id.
As a result of this updated forecast review, and subsequent to approval from each of the officers who were direct reports to the CEO, the finance department recommended to Notebaert that Tellabs revise its public guidance to a range of $3.6 to $3.7 billion for 2001. (R. 336-1, ¶ 55.) Internally, marketing and product houses had set a “stretch target” of $3.9 billion. (R. 301-11, Ex. 67, TEL 804903.) During the time leading up to April 18, 2001, no one expressed any doubts to Notebaert that Tellabs would not achieve its revised guidance or that the revised guidance was
Recognizing that Tellabs would not make its guidance, Notebaert wanted to inform the public of the development as soon as possible, rather than waiting for the scheduled announcement of actual first quarter results. Id. (R. 301-1, Ex. 9, ¶ 9.) Notebaert therefore directed that an investors conference be scheduled for April 6, 2001 in order to pre-announce Tellabs’s estimated first quarter results. Id. On the April 6, 2001 call, Tellabs reduced its guidance for the first quarter to $772 million. (R. 336-1, ¶ 49; R. 324-1, ¶ 48.) According to Tellabs: “The revised guidance stems from reduced and deferred spending by major communications carriers late in the quarter.” (R. 324-1, ¶ 48.) During an analyst teleconference call that Tellabs hosted that same morning, Notebaert also stated: “Clearly, the environment has resulted in near term caution in the pace at which customers are deploying equipment. Our customers are exercising a high degree of prudence over every dollar spent. Let me balance this a bit and say that everything we hear from the customers indicates that our end user demand for services continues to grow.” Id. Notebaert also stated: “The good news there is that the orders weren’t cancelled. It was just do it after the end of the quarter.” Id. During the April 6, 2001 call, Tellabs did not offer any guidance for the second quarter or full year. (R. 336-1, ¶ 50.) In response to a question regarding guidance for future quarters, Ryan responded, “We are currently evaluating that. We just closed the books last night and what we are giving today are flash results but we will be discussing that and full year guidance when we talk on the 18th.” Id.
Also on April 6, 2001, Tellabs shares fell $7 to close at $33.75. (R. 324-1, ¶49.) Dr. Allen opines that previously unrevealed information disclosed on April 6, 2001 constituted a partial disclosure. (R. 330-14, Ex. 1053, p. 19.) Dr. Lehn disputes this characterization and opines that Dr. Allen has not established that Plaintiffs suffered any economic loss. (R. 301-11, Ex. 70, pp. 4-5,16-20.)
I. Tellabs’s April 18, 2001 Revised Guidance
Soon thereafter, in an April 18, 2001 teleconference and press release, Tellabs announced its actual first quarter results, as well as a plan for a reduction in force. (R. 336-1, ¶ 51.) Tellabs also announced first quarter total revenue of $772 million, which matched the April 6, 2001 revised guidance. Id. Tellabs missed its original goal of 30% growth, and the results demonstrated year-over-year revenue growth of 21%. Id. Tellabs’s Optical Networking Group, which housed the TITAN 5500, brought in $482 million worth of revenue in the first quarter, which represented 22% year-over-year growth with respect to that product line. Id.
In its April 18, 2001 press release, Tel-labs also announced that it was lowering its guidance for the full year 2001. (R. 336-1, ¶ 52.) Tellabs forecasted that revenue for the year would fall between $3.6 billion and $3.7 billion, instead of its original expectations for the year of $4.4 billion.
Id.
Tellabs’s new guidance represented a 6% to 9% increase of the full year 2001 revenues. (R. 345-1, Resp. to ¶ 51.) This revised guidance was the re-
J. Period After April 18, 2001 Revised Guidance
During the period after April 18, 2001, Tellabs’s sales showed more pronounced weaknesses. (R. 301-11, Ex. 68, TEL 655218-19.) The April 2001 Monthly Executive Financial Summary, which circulated among Tellabs’s executives in mid-May, reported, inter alia: “[mjonthly results fall short of forecast,” “[continued soft bookings,” “84% of revenues left to go to achieve Q2 expectations,” “P4 [April 2001] Revenue shortfall due to across the board weakness in all product groups,” “Titan 5500 sales only 35% of plan,” “April revenue below forecast due to continued soft bookings,” “[l]owest revenues since October 1998,” “[l]owest bookings since May 1998,” and “75% of revenue required to ship and meet revenue recognition guidelines in May and June-signifieantly higher than historical levels.” (R. 324-1, ¶ 52.) Moreover, in a May 17, 2001 letter to Birck, Notebaert reported:
Revenues are 33% below January and the lowest first month of a quarter since October 1998. We are seeing further revenue softness halfway through May. At this point we will not attain our quarter guidance for revenue or earnings. Revenues are $50 million off forecast and 41% of plan. Bookings are at the lowest level since May of 1998. The primary driver of this shortfall was slow Titan 5500 sales.
Hs * *
Inventory turns at 2.5 were the lowest since the company started. This resulted from low sales and fulfillment of prior parts orders. We are currently running our builds at 30% below forecast to tryto burn off inventory. Cash flow and investment income were positive.
All in all, this quarter is extremely tough for us, however, there is light at the end of the tunnel. Titan 6500 stays strong and Titan 6100 has had a second major customer select it. These revenues will ramp towards the end of the year. Our challenge is the second and third quarter.
(R. 301-1, Ex. 1081, TEL 661353.)
The May 2001 Monthly Executive Summary reported: “[mjonthly results continue to be below forecast,” “[sjoft bookings continue,” “P5 [May 2001] Sales 66% below plan due to reduced spending by major communication carriers and customer returns,” “Optical Networking sales were main driver, down 90% from plan,” “Titan 5500 only 9% of plan,” “[w]eekly bookings of $17.7M for 5500/532L needed to meet revised Q2 forecast (avg. is $12.7M),” “[a]ll regions experienced weakness in May,” and “[forecast] reductions due to: 5500/532L — continued soft bookings and a gap in identified opportunities.... ” (R. 324-1, ¶ 54.)
By the middle of June, Tellabs’s executives realized that Tellabs would not achieve the revised revenue guidance issued during the April 18, 2001 call for the second quarter or the full year. (R. 301-1, Ex. 68, TEL 655218-19.) On June 19, 2001, following a special meeting of Tel-labs’s Board of Directors, Tellabs announced that it now expected second quarter revenue to be around $500 million and refrained from giving any guidance beyond the second quarter because of the unpredictability that Tellabs was encountering. Id.; R. 324-1, ¶87. This revenue reflected a reduction of approximately $300 million. (R. 324-1, ¶ 87.) Tellabs also reduced projected earnings per share from $0.29 to breakeven (before restructuring and other charges). Id. Tellabs further announced that, “[t]he dramatic changes affecting the landscape of the telecommunications marketplace have continued to impact Tellabs.” (R. 324-1, ¶ 87.) 12 In an analyst call that same day, Notebaert stated, in part: “While it is clear that the entire telecom equipment industry has been dealing with the impact of dramatic cutbacks in carrier spending and general economic uncertainty throughout 2001, the impact of these forces on orders for our products has become more pronounced during the second quarter. We have dealt with these issues in the access portion of our product portfolio since late last year.” (R. 330-3, Ex. 1030, TEL 655218.) With respect to the TITAN 5500, Notebaert acknowledged: “there have been a lot of products in our ... industry ... — great products like the 5500 where things have just slowed.” Id. at TEL 655224.
The next day, June 20, 2001, Tellabs shares fell $5.16 to close at $16.04, almost 36 million shares. (R. 324-1, ¶ 89.) According to Dr. Allen:
Analyst reports show the contemporaneous adverse market reaction to the TLAB disclosures. For example, the Raymond James June 20th equity analyst report (on page 1) noted, “The weakness in the quarter can be attributed to the company’s Optical Networking segment performance, driven primarily by disappointing Titan 5500 sales and slower-than-expected rollout of itsnext generation 6000 series product.” Further, WR Hambrecht’s June 20th report (page 1) stated: “Tellabs’s major revenue and earnings shortfall announced yesterday after the market close reflects our well chronicled concerns regarding the erosion of the company’s core Titan 5500 in advance of any new product traction from the company’s acquisitions or internally developed Titan 6000 family of products. While the current carrier-spending environment certainly hastened this transition, we continue to believe this dynamic is central to Tellabs’s long-term prospects.” These material disclosures were new revelations to the market, as evidenced by the Salomon Smith Barney June 19th analyst report (page 1): “Opinion: While the Preannouncement Was Not Shocking, The Severity of Tel-labs Business Erosion Was [.] After the market close, Tellabs pre [-] announced significantly weaker than expected 2Q01 results.... Thus, the news does not come at a complete surprise. What was shocking for us, however, was the degree of the shortfall. We did not anticipate the severity of the fall-off in Tel-labs’s business.”
Id.
On July 18, 2001, Tellabs announced its second quarter 2001 results:
Tellabs today announced second-quarter sales of $516 million ... Revenues were $801 million in the second quarter 2000. Before restructuring and other charges, diluted earnings per share were 2 cents ... Second-quarter net income amounted to $10 million. In the year-ago quarter, diluted earnings per share were 39 cents, and net income was $163 million .... Including restructuring and other charges, Tellabs reported a loss of 43 cents per share for the quarter.
Optical Networking — For the second quarter 2001, sales of optical networking equipment were $221 million.... Last year, second-quarter optical networking sales were $528 million.
(R. 324-1, ¶ 90.) TITAN 5500 sales in second quarter 2001 were only $188.1 million as compared with $467.7 million the previous year — a drop of almost 60%. As a result of second quarter 2001 results, Tellabs changed its forecasting analysis. (R. 330-2, Ex. 1015, p. 348.)
For the full year 2001, Tellabs reported net sales of $2,199.7 million and a net loss of $182 million as compared to net sales of $3,387.4 million and net earnings of $730.8 million for 2000 — a decline of more than 35% in net sales and about 125% in net earnings. (R. 324-1, ¶ 91.) In 2002, Tel-labs reported an even larger net loss of $313.1 million. Id. Tellabs’s 2001 Annual Report, released in early 2002, confirmed that, in April 2001, Tellabs had begun a series of layoffs, ultimately reducing its worldwide workforce by about 27%. Id. Tellabs closed manufacturing plants in Ireland and Texas, consolidated product development and other functions from 30 facilities into 20, and cut expenses dramatically. Id. Notebaert and Birek’s letter to stockholders stated: “Early in 2001, as our customers reduced capital spending and expressed caution about the future, Tellabs began a deep process of self-examination.” Id. 13
K. Tellabs’s Inventory
Inventory turns measure the rate of turnaround of Tellabs’s inventory, with a
Total inventory turns for the TITAN 5500 were lower in fourth quarter 2000 than they were in earlier periods. (R. 330-31, Ex. 1215.) Inventory turns for both the TITAN 5500 and total worldwide inventory turns decreased from first quarter 2001 through third quarter 2001. Id. In addition, inventory turns for the TITAN 5500 dropped during the Class Period. Specifically, inventory turns for the TITAN 5500 were as follows in 2000 and 2001: second quarter 2000 (6.9, 7.3, and 8.5), third quarter 2000 (7.0, 6.4, and 6.7), fourth quarter 2000 (4.9, 4.1, and 6.7), first quarter 2001 (5.4, 5.2, and 4.8), second quarter 2001 (3.5, 2.6, and 1.7), third quarter 2001 (1.5, 1.8 and 1.9), and October of fourth quarter 2001(1.9). (R. 330-17, Ex. 1084, Ex. 1213). According to Tellabs, a “more normal level” of inventory turns is six. (R. 324-1, ¶ 56.)
In a report to the Audit Commit tee dated January 19, 2001, Tellabs’s auditor Ernst & Young stated:
During fiscal 2000, the inventory balance increased approximately 130% over the 1999 inventory balance. While this increase is partially due to required stockpiling of certain parts that are in short supply, inventory buildup for new product introductions and planned increased sales levels, it appears the Company is carrying higher levels of inventory than may be required which increases the risk of inventory obsolescence.
We recommend the Company perform a detailed analysis of its inventory balances by product line against projected sales levels and adjust inventory levels accordingly.
(R. 330-18, Ex. 1085, TEL 011008.) Tel-labs management responded:
We have compared inventory levels against projected sales forecast by product as recommended. We have incorporated this analysis into our monthly reporting process. The recent analysis revealed three areas that need closer review. Formal teams have been created to review Cablespan, SALIX, and Titan 5500 inventory levels---- Recently we have experienced long lead times on certain parts that create a supply pipeline which can be difficult to turn off given actual demand is lower than expected.
Id.
On January 20, 2001, Ryan wrote John Kohler: “[Tjhere has been such a continu
L. Fourth Quarter and Full Year 2000 Financial Statements
With regard to Tellabs’s fourth quarter 2000 and full year 2000 financial statements, Plaintiffs point to a number of transactions to argue that Tellabs engaged in “unnatural” deals and channel stuffing. 14 As general support for these practices, Plaintiffs first point to a November 21, 2000 memorandum from Pfefferle to Tatara, Vice President Product Marketing, regarding “Potential Opportunities to Increase 4Q Revenue” in which Pfefferle made “some suggestions for you to consider to increase 4Q revenue opportunities.” (R. 324-1, ¶ 60.) Pfefferle specifically suggested that marketing personnel offer to help sales push particular products due to abundant supply, offer extended terms to customers facing budgetary constraints as a last resort offer, and offer sales discounts to incentive sales. Id. Plaintiffs also point to the deposition testimony of various Tellabs employees. Edy Norek, Tellabs’s Associate Marketing Manager, testified there was “an edict” from “[u]p-per management” “to try to push modules on the customer, whether they needed it or not.” (R. 330-1, Ex. 1013, pp. 91-92.) Joling also testified that Notebaert suggested selling some of the equipment that SBC was expected to purchase in first quarter 2001 to Telcobuy in fourth quarter 2000 (R. 330-1, Ex. 1008, pp. 114-15.)
A number of Tellabs employees testified that Tellabs did not ship unordered products to customers. Richard LaDuca testified that Verizon would provide a purchase order to Tellabs for every system Verizon purchased before Tellabs shipped the product. (R. 301-4, Ex. 26, p. 104.) John Kohler testified that Tellabs did not ship or invoice any goods that had not yet been ordered. (R. 301-5, Ex. 33, pp. 72-73; see
also
R. 301-3, Ex. 18, p. 509.) Indeed, Tellabs’s guidelines on revenue recognition required a “[p]roperly approved purchase order” or a signed contract before Tellabs could recognize revenue on a sale. (R. 336-1, ¶ 62; R. 301-12, Ex. 75, TEL 362171.) Specifically, Tellabs’s standard revenue recognition policy, issued on February 28, 2001, stated: “Revenue recognition is not dependent upon Customer Acceptance, as the Demonstrated acceptance criteria have been satisfied. Product revenue is recognized upon transfer of title (other than a security interest) and risk of loss to the customer. This usually occurs upon shipment or delivery, depending upon the shipping terms of the contract. Revenue for services is recorded upon completion of the services.” (R. 330-18,
Plaintiffs also highlight that, in first quarter 2001, returns of all products totaled $3.4 million, including $2,158 million returns of the TITAN 5500. (R. 336-1, ¶ 63.) These returns totaled less than the returns in the same quarter during 2000, even though revenue in fourth quarter 2000 was 42% higher than in fourth quarter 1999. Id. Returns of the TITAN 5500 in first quarter 2001 were also lower than returns in the previous two quarters. Id.
Plaintiffs also highlight a series of specific transactions, detailed in the following sections, which they contend reflect “channel stuffing” or unnatural deals. Despite the returns Tellabs accepted and the transactions detailed below, Tellabs’s CFO signed off on its 2000 financial statements. In addition, an independent auditor, Ernst & Young, LLP, issued an opinion that Tellabs’s balance sheets as of December 29, 2000 presented fairly, in all material respects, the consolidated financial position of Tellabs as of December 29, 2000. (R. 301-1, Ex. 3, TEL 258062.)
1. Telcobuy
Telcobuy was a “value added reseller” during the Class Period. (R. 336-1, ¶ 66.) As such, Telcobuy would purchase products from Tellabs and then resell those products to its customer, SBC. Id.
An un-executed letter dated October 16, 2000 documents a draft agreement under which Tellabs would agreed to extend payment terms for Telcobuy on orders that Telcobuy placed on behalf of SBC during fourth quarter 2000. (R. 330-18, Ex. 1094.) Denise Feigh, who supervised sales to value added resellers such as Telcobuy, testified that the draft agreement was a proposal from Tellabs to Telcobuy to purchase TITAN 5500 systems for resale to SBC, not port modules (“PICS”). (R. 351-1, Ex. 122, pp. 181-84, 195-96, 209.) One of the terms of the proposed agreement was that “Telcobuy.com must have a valid purchase order from SBC.” (R. 330-18, Ex. 1094.) Feigh explained that while agreements for TITAN 5500 systems generally required a purchase order from the end-customer (because a large piece of equipment such as a TITAN 5500 system could not be delivered without, for example, specifications as to size, location, and timing of installation), agreements for PICs did not. (R. 351-1, Ex. 122, pp. 181— 84,195-96, 209.)
In addition, on December 19, 2000, Telcobuy placed an order for $50.4 million of TITAN 5500 PICS from Tellabs. (R. 324-1, ¶ 65; R. 336-1, ¶ 68.) As part of that deal, Tellabs gave Telcobuy price discounts totaling 8% and 80-day payment terms. (R. 324-1, ¶ 65; R. 301-14, Ex. 83, TEL 817019.) Telcobuy issued a purchase order for the $50.4 million in products. (R. 301-14, Ex. 83.) The amount ordered by Telcobuy in December 2000, which was intended to fill SBC’s requirements during first quarter 2001, was based on an historical analysis of the amount and mix of modules ordered by SBC in previous years. (R. 336-1, ¶ 68.) Joling testified that he considered “the size of the discounts unusual in the normal course of business.” (R. 324-1, ¶ 65.) He also stated that this was “a major purchase” “that would have been several months worth of product that SBC may have used.” M
15
In 2001, however, the “Southwestern Bell” segment of SBC did not place orders for the modules at the expected rate. (R. 336-1, ¶ 68; R. 324-1, ¶ 69.) Although Tellabs shipped the $51 million order to Telcobuy in December, by February 2001, Telcobuy had shipped less than $2 million of inventory to SBC. (R. 324-1, ¶ 66.) On February 23, 2001, Denise Feigh, Manager Global Sales Operations, wrote Gustafsson, urging him to assist Telcobuy: “Please support our cause on delivering on a promise (we will help Telcobuy move the port modules) that was made to a partner when they helped us at a critical time.” Id. Tellabs attempted to assist Telcobuy to sell these modules, including by working with other geographic portions of SBC that were purchasing the TITAN 5500, in an effort to clean up the accounts receivables. (R. 336-1, ¶ 68.) In May 2001, Tellabs agreed to allow Telcobuy to return $12 million of the $50 million order of mostly TITAN 5500 equipment, despite the fact that Telcobuy’s credit did not allow a right of return. Id.; R. 324-1, ¶ 66, 69. In an email prior to the return, Joling stated that “[i]t is my opinion that we should take back the Telcobuy 6.1 deal. SBC did not come through on this earlier commitment and we should no longer hold Telcobuy to this. Under normal situations we would not have run this through Telcobuy without a firm SBC [purchase] order.” (R. 330-18, Ex. 1097, TEL 654604.) There is no indication in Joling’s email, however, 'that Tellabs violated any contractual provision relating to purchase orders. On May 18, Tellabs accepted return of $12 million of port modules “that were shipped out in December of 2000 that a) [do] not have an SBC purchase order for, or b) [are] outside the SBC forecast through November 2001.” (R. 324-1, ¶ 69.) In addition, on June 1, 2001, Tellabs recorded returns from Telcobuy for full credit, totaling $28,632,968 (one return for $23,338,398 and another for $5,294,570). Id. These returns related to the product shipped to Telcobuy in fourth quarter 2000 (on December 21, 2000) and first and second quarters 2001 (on March 30 and April 4, 2001). Id.
Feigh testified that Tellabs always had a purchase order before shipping product and that the agreements between Telcobuy and Tellabs did not provide Telcobuy a right of return. (R. 336-1, ¶ 69.) Joling testified that Telcobuy did not tell him that Tellabs had shipped Telcobuy product that Telcobuy did not want and that Tellabs gave Telcobuy “enticements,” or discounts, to buy TITAN 5500 modules which Telcobuy intended to resell to SBC. (R. 336-1, ¶ 70.)
In addition, Tellabs gave Telcobuy discounts of
1%
and 3% on certain orders in first quarter 2001 that had the effect of causing revenue that Tellabs had expected from SBC in later quarters of 2001 to be booked in first quarter 2001. (R. 324-1, ¶ 67.) Moreover, on March 27, 2001, Steve McCarthy wrote to Mike Mayszak, Group Manager, Business Management, Regional Bell Operating Companies, about a deal
My opinion is that we are setting a dangerous precedent by cutting another end of quarter deal with Telcobuy. By doing this 2 quarters in a row we now have established a pattern of behavior that will be used against us in the future. Ultimately, if we need this as the last $7M to make the quarter then we go as far as we did last quarter for the $50M which was an additional 6% discount over their contract discount of 2%.
(R. 324-1, ¶ 68.) The same day, during a phone conversation with Mayszak and Jim Roche, Manager of the Telcobuy account, Joling stated he “didn’t think it was appropriate to add an additional 7 million to an inventory that was already swollen.... ” Id. 16
Dawn Pawlowski, Tellabs’s revenue recognition manager, reviewed the December 2000 Telcobuy transaction and found that it was in conformance revenue recognition requirements. She conditioned her approval on a series of statements including that Telcobuy did not have a contractual right to return equipment. (R. 301-14, Ex. 86.) Pawlowski did, however, indicate that a net ninety day payment “seems a little long,” but left the issue to the judgment of Andrea Rebmann and Mark Striepling, Tellabs’s credit managers. Id. Pawlowski was aware that Telcobuy was relying on SBC for resources to pay for the product. Id. Pawlowski and Striepling were responsible for making the determination about revenue recognition, and Notebaert was not involved in any respect in making this determination. Id.
2. Verizon
During a strike at Verizon in the summer of 2000, Verizon asked Tellabs to lend employees to Verizon to help fill out planning documents. (R. 336-1, ¶ 64.) Joling, a former Tellabs employee who was the head of sales for SBC, testified that Tel-labs used channel stuffing as a strategy and that a co-worker who worked under LaDuca on the Verizon account told him that Tellabs employees “went into Verizon and actually wrote the engineering documents and the purchase orders for the Tellabs equipment while they were on strike.” (R. 336-1, ¶65; R. 330-1, Ex. 1008, p. 103.) Joling, however, also testified that he had no connection to the Verizon sales account and that he has no personal knowledge of Tellabs employees writing purchase orders for Verizon. Id. He further testified that he did not necessarily believe that purchase orders were sent to Verizon that Verizon never signed off on. (R. 301-1, Ex. 1008, p. 189.) Indeed, Verizon had authorized the activities of the Tellabs employees assisting Verizon and had approved all purchase orders within Verizon before Verizon sent them to Tellabs to fill. (R. 336-1, ¶ 64.)
In addition, in October 2000, with Notebaert’s knowledge, Tellabs concluded an arrangement with Verizon that allowed Verizon to resubmit as turnkey orders, which were not to be invoiced until 2001, up to $10 million of orders that Verizon had already placed. (R. 324-1, ¶ 72.) Rick LaDuca, Verizon Account Manager, explained that turnkey “is a contract amendment that states that we will not invoice them until 2001.”
Id.
In other words, turnkey is simply an extended payment term.
Id.
In exchange, Verizon committed to place an additional $75 million to $100 million in new, non-turnkey orders, which were to be invoiced in late Decem
In March 2001, Tellabs made a commitment to Verizon to provide a $3 million credit for future services in exchange for Verizon’s placing $20 million of purchase orders for TITAN 5500 products for shipment in first quarter 2001, rather than second or third quarter 2001. (R. 324-1, ¶ 75.) Ultimately, Verizon purchased only $11 million of equipment, and Tellabs reduced the credit to $2 million. Id. This caused revenue that Tellabs had expected from Verizon in later quarters of 2001 to be booked in first quarter 2001. (R. 345-1, RespJ 75.) Tatara wrote: “the actual equipment that was associated with the $11M in IQ orders will now not be installed until 2002 ...” (R. 330-19, Ex. 1125.) In addition, a Special Deal, Credit and Revenue Recognition Authorization Summary for first quarter 2001 listed a $13 million “approved special deal” with Verizon. (R. 330-19, Ex. 1126.) It is unclear whether the special deal, however, is associated with the March 2001 agreement, and McCarthy testified that the document was a list of deals that did not materialize during first quarter 2001, though some materialized later. (R. 351-1, Ex. 118, pp. 151-52.)
Notes from an April 27, 2001 meeting reveal Verizon’s concerns regarding the fact that Tellabs had shipped products to Verizon well before Verizon’s installation dates. (R. 330-19, Ex. 1129.) The meeting notes indicate that Tellabs shipped products to Verizon when there was no connection between the installation date and the ship date, and that in some cases the site was not ready for installation or installation crews were not available. Id. Verizon thus informed Tellabs that it would not accept equipment deliveries without a firm delivery date. Id. In order to rectify the problem, meeting notes reflect that Tellabs intended to discuss speeding up the installation process with Verizon and that Tellabs would develop an internal process to manage Verizon orders and installations. 17 On April 30, 2001, LaDuca emailed a summary of issues impacting Tellabs’s “ability to generate revenue at Verizon.” (R. 324-1, ¶ 78.) LaDuca indicated that one of Verizon’s concerns was Tellabs’s track record of installing systems. (R. 330-19, Ex. 1130, TEL 387546.) Another issue was Tellabs’s strategy of shipping systems in third and fourth quarter 2000 because Verizon “believe[d] that [Tellabs was] too aggressive in shipping systems well in advance of our installation start date. They are reviewing their position on this, but I suspect that in the absence of a compelling win-win deal, we will not be able to duplicate our 4Q00 heroics.” Id.
During the March 7, 2001 analyst call, an analyst asked Tellabs: “The TITAN 5500, can you give us an update on how that flagship product is doing? I am assuming based on the size of number cuts that you are not seeing any weakness there at all.” Brian Jackman responded: “We are not. We are still seeing the product continue to maintain its growth rate and is still experiencing strong acceptance. We are in the process of turning [up] a large number of frames we shipped in the fourth quarter and this is continuing to grow as usual. I think that is pretty much on plan.” (R. 336-1, ¶ 84.) Jack-man testified that he based his statement on forecasts from the sales organization which revealed that Tellabs still expected to make the plan for the TITAN 5500 and “customer’s expectations that they were still to take a fair number of frames.” Id. Indeed, during the second half, of February 2001, Jackman approached the sales and marketing executives to ask if they were seeing any weakness in demand and they responded that they were not. (R. 301-2, Ex. 14, p. 386; R. 301-3, Ex. 19, p. 967-68.) Based on this information, Jack-man testified that he believed that the slowdown in the industry was not affecting Tellabs in the same way as some of its competitors, either because it was in a protected niche or because it was taking market share from competitors. (R. 336— 1, ¶ 85.)
Two weeks later, on March 14, 2001, Tellabs distributed its Annual Report to investors (R. 336-1, ¶ 87.) In the Annual Report, Tellabs included a “Q & A” section in which Birck and Notebaert answered questions that were frequently asked by investors and that Tellabs believed would be of interest to investors. Id. One of the questions asked was, “Your core business is built on the TITAN 5500 — are you worried that this product has peaked?” The Annual Report stated in response:
No. In 2000, TITAN 5500 revenues grew 56%, its best year so far. Although we introduced this product nearly 10 years ago, it’s still going strong because we keep adding new capabilities so it can do more and more for our customers. For example, last year we introduced a new TITAN 5500 system with 50% more capacity — enough to handle 1 million simultaneous Internet sessions. Now customers want an even larger TITAN 5500 system. That’s why we believe there are many years of life ahead for this highly successful product.
Id.; R. 324-1, ¶ 43. Pfefferle asserts that while sales of the TITAN 5500 were slower than hoped for in January, as of mid-February 2001, no one was forecasting a decline in TITAN 5500 sales in 2001 due to the January results alone. (R. 301-1, Ex. 8, ¶ 14.) As of April 18, 2001, when Tel-labs revised downward its full year guidance, it was still predicting 10%-15% year-over-year growth for all optical networking products. (R. 301-10, Ex. 64, TEL 669457.)
Finally, on the April 6, 2001 conference call, Notebaert stated:
In just the last few weeks, however, we experienced a more controlled order flow from our larger customers than we originally anticipated. Clearly the environment has resulted in near term caution in the pace at which customers are deploying equipment. Our customers are exercising a high degree of prudence over every dollar spent. Let me balance this a bit and say that everything we hear from the customers indicates that our end user demand for services continues to grow. Fortunately for Tellabs, our TITAN family of products helps our carrier customers meet this demand in a cost effective way, which is the majorreason we are still able to grow total revenue 20% year-over-year even in this environment.
(R. 336-1, ¶ 90.) Industry analysts used the term “end user” to refer to customers of Tellabs’s service providers, its core customer base. (R. 301-15, Ex. 95, TEL 660322, Ex. 696, TEL 766103.) In mid-March 2001, the Senior Vice President of Large Business Sales reported to Tellabs’s Chief Information Officer that he expected frame relay services provided by Sprint to its customers, i.e. end users, to grow by 25% in 2001, IP by 40%, ATM by 50%, and private line by 5%. (R. 301-15, Ex. 97, TEL 803364-65.) On March 28, 2001, WorldCom filed a Form 8-K in which it also stated that it was continuing to predict growth in its provision of local and long distance private lines, frame relay, ATM, and Internet services, including dial-up. (R. 301-15, Ex. 98, pp. 6-12.) World-corn did not provide forecasts regarding the portion of the market share it could capture with respect to each of these sectors. Id. An Optical Networking Group report dated March 5, 2001 reflects that these services “fuel the growth for Tel-labs’s optical networking products.” (R. 301-16, Ex. 99, TEL 017486.)
In addition, several major service providers reported in their first quarter results at the end of April that end user demand for their services grew over the prior year. (R. 336-1, ¶ 93.) SBC, for example, reported that its “core data transport products, including SONET, DS3s, and ATM, also showed strong first-quarter growth that was driven by enterprise customers whose increased use of sophisticated applications requires significantly more bandwidth.” Id. AT & T reported that its Frame Relay, ATM, and IP services grew approximately 40% in the first quarter over the prior year. Id. Verizon reported that it, “ended the quarter with data circuits in service equivalent [DS0 equivalent] to 49.1 million voice-grade access lines, up 58.7 percent from first quarter 2000. These data circuits combined with 62.9 million voice-grade access lines to give Verizon 112 million total access line equivalents in service at the end of the quarter, 19.8 percent more than at the end of the first quarter 2000.” Id. Qwest stated that demand for its services “remains robust.” Id. Tatara also testified that, as of July 2001, “we believed at that time that the end-user use of the Internet and growth in data would continue in an unrestricted manner, and therefore, the TITAN 5500 revenues would continue in an unrestricted manner.” (R. 301-17, Ex. 104, p. 1119.)
Furthermore, analysts also observed at that time that service providers were indicating that end user demand was continuing to grow. (R. 336-1, ¶ 94.) On January 23, 2001, AG Edwards reported that demand for high-speed TI and DS3 circuits continued to grow at 30-40%. Id. As of April 6, 2001, according to AG Edwards, those growth indications had not changed: “Carriers have indicated that they are still experiencing strong growth for T1 services.” Id. Similarly, on March 8, 2001, Gruntal & Co. noted the existence of “strong end user demand for communications services, namely data networking.” Id.
At the time that Mr. Notebaert made the challenged statements contained in the 2000 Annual Report and on April 6, 2001, he asserts that he fully believed they were entirely accurate, not misleading in any way, and accurately reflected the best information and advice available to him. (R. 301-1, Ex. 9, ¶¶ 8, 10.) Other Tellabs executives prepared the statements in the Annual Report, and other senior executives reviewed and vetted both statements in advance. None of these executives
VI. Statements Not at Issue
Pursuant to the Court’s December 9, 2009 minute order, Plaintiffs are “barred from pursuing the allegations of misrepresentation relating to the following statements concerning the TITAN 6500 under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder”:
a. Tellabs’s December 11, 2000 press release: “The TITAN 6500 system is available now.”
b. Defendant Notebaert’s statement during the March 7, 2001 analyst conference call: “Interest and demand in the 6500 continues to grow.... We continue to ship ... 6500 through the first quarter. We are satisfying very strong demand and growing customer demand.”
c. Defendant Notebaert’s statement during the April 6, 2001 analyst conference call in response to a question whether Tellabs was still on track to recognize 6500 revenue in the second quarter: “[T]he 6500 is showing strength ... we should hit our full manufacturing capacity in May or June to accommodate the demand we are seeing. Everything we can build, we are building and shipping. The demand is very strong.”
(R. 311-1, 12/09/2009 Minute Entry, p. 3.)
VII. Loss Causation
Plaintiffs have retained Professor Linda Allen to render her opinion regarding, in part, loss causation. (R. 336-1, ¶ 58.) Professor Allen opined that the evidence demonstrates loss causation in connection with Tellabs’s disclosures on April 6, 2001 and June 19, 2001. (R. 330-14, Ex. 1053, p. 12.) Defendants’ damages expert, Professor Kenneth Lehn, opined that Plaintiffs’ expert did not established loss causation. (R. 301-11, Ex. 70, ¶ 26.) In formulating his opinion, the materials Professor Lehn relied upon included publicly available information compiled by staff at Cornerstone Research. (R. 330-18, Ex. 1101, p. 34.) Professor Lehn found no indication that it ever became known to the market that Tellabs’s fourth quarter financial statements were misstated or that Tellabs’s stock price declined as a result of such market knowledge. (R. 336-1, ¶ 57.) In addition, Tellabs never restated its fourth quarter or full year 2000 financial statements, or otherwise indicated that its reported financial results were materially misleading. Id.
In forming her opinions regarding loss causation, Professor Allen identified “at least three components to the alleged misstatements,” including statements regarding the TITAN 5500, statements regarding the TITAN 6500, and Tellabs’s 2001 forecasts. (R. 301-12, Ex. 72, pp. 12-13.) Professor Allen also stated that, “[p]art of the alleged misstatements involve inflation of sales figures and forecasts through illegitimate sales practices and ‘channel stuffing’ of [the TITAN 5500].”
Id.
at p. 13, n. 15. Professor Allen does not explicitly assert in her report whether she has taken a fraud-on-the market or a materialization of risk approach to her analysis. (R. 330-14, Ex. 1053.) In her deposition, Professor Allen testified that she was not aware whether Plaintiffs had alleged that any public disclosure would have revealed that there was any accounting issues with
Professor Lehn contends that he did not find any corrective disclosure related to the shipping of unordered goods in fourth quarter 2000 on April 6, 2001 or June 19, 2001, or any other date and that Professor Allen failed to connect the April 6, 2001 and June 19, 2001 disclosures to the allegations before the triers of fact. (R. 301-11, Ex. 70, ¶¶ 29, 49.) He also asserts that Professor Allen’s statements regarding Tellabs’s January 23, 2001 statements, including that the fourth quarter financial results “propped up” Tellabs’s stock price, are without merit because she fails to demonstrate that the fourth quarter 2000 financials were incorrect and she fails to distinguish between analysts’ reactions to Tellabs exceeding expectations in fourth quarter 2000 and reactions to affirmation of the 2001 forecast. Id. at ¶ 55.
VIII. Facts Relating to the Brieger Case
In
Brieger v. Tellabs, Inc.,
One of the plaintiffs’ claims in the
Brieger
action was that Tellabs “engaged in troubling, improper practices in an attempt to conceal the problems with the TITAN 5500,” including “overloading customers with shipments of unwanted products and falsifying purchase orders.” (R. 336-1, ¶ 96) (citing
Brieger v. Tellabs, Inc.,
Case No. 06-1882 (N.D.Ill.), Answer, Docket Entry 82, Ex. 109 at ¶ 129). In a Rule 30(b)(6) deposition, which was later designated for admission at trial, but not admitted, the
Brieger
plaintiffs questioned Verizon regarding whether the company was aware of Tellabs ever “shipping product without having a proper order for that product.” The witness responded: “No, I’m not.” (R. 336-1, ¶ 97) (citing Tyd Dep., Ex. 110 at 57-58.) The
Brieger
plaintiffs argued at trial, based on certain internal Tellabs emails, that Tellabs’s fourth quarter 2000 financial statements were misstated because Tellabs had shipped unordered product to Verizon during the fourth quarter. (R. 336-1, ¶ 97) (citing Defendants’ Proposed Findings of Fact and Conclusions of Law, Ex. Ill, ¶ 96 and
Brieger
Trial Tr., Ex. 112 at 1900-01 (arguing that emails established that Tel-labs’s fourth quarter financial statements were falsely inflated)). In this regard, the
Plaintiffs admit that the plaintiffs in Brieger, like Plaintiffs in this case, also challenged Tellabs’s 2001 guidance as having been false, starting with the guidance given at the analysts conference on December 11, 2000, and continuing through at least June 19, 2001. (R. 336-1, ¶ 98) (citing Brieger v. Tellabs, Inc., Case No. 06-1882 (N.D.Ill.), Docket Entry 82, Ex. 109 at ¶¶ 124-25, 141-42; Defendants’ Proposed Findings of Fact and Conclusions of Law, Ex. 111 at ¶¶ 92-128, 132; Brieger Trial Tr., Ex. 112 at 1903-08).
Finally, the Brieger plaintiffs, again like Plaintiffs in this case, specifically challenged as having been false: (1) Brian Jackman’s March 7, 2001 statement regarding the TITAN 5500 product sales that, “We’re still seeing that product continue to maintain its growth rate; it’s still experiencing strong acceptance,” and (2) the statement in Tellabs’s 2000 Annual Report, in which Notebaert and Birck responded to a frequently asked question, “Are you worried that [the TITAN 5500] has peaked,” by stating, “No.... Although we introduced the product nearly 10 years ago, it’s still going strong.” (R. 336-1, ¶ 99) (citing Brieger v. Tellabs, Inc., Case No. 06-1882 (N.D.Ill.), Docket Entry 82, Ex. 109 at ¶¶ 131, 141; Plaintiffs’ Amended Proposed Findings of Fact and Conclusions of Law, Ex. 113 at ¶¶ 110, 112).
In their second amended consolidated complaint, the Brieger plaintiffs did not specifically challenged Notebaert’s April 6, 2001 statement regarding “end user demand.” (R. 330-21, Ex. 1151.) At trial, however, counsel for the Brieger plaintiffs asked Notebaert whether he made the April 6, 2001 statement, “Everything we hear from our customers indicates that our end user demand for services continues to grow.” (R. 301-3, Ex. 19, pp. 914-15.) In addition, the Brieger plaintiffs alleged that the defendants concealed decreasing demand for the TITAN 5500. (R. 330-21, Ex. 1151, ¶¶ 123-32.)
LEGAL STANDARD
Summary judgment is proper when “the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c);
see Knight v. Wiseman,
ANALYSIS
There are three remaining § 10(b) claims against Notebaert based on three categories of alleged misrepresentations remaining at issue in this lawsuit: (i) statements regarding Tellabs’s financial results for fourth quarter 2000 and full year 2000, (ii) Tellabs’s projections of earnings and revenues during 2001, and (iii) statements regarding the TITAN 5500. There are also § 10(b) claims against Tellabs which are vicariously based on Notebaert and Jackman’s § 10(b) liability.
Makor III,
Section 10(b) of the Securities Exchange Act makes it “unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange ... [t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). Pursuant to Rule 10b-5, promulgated by the SEC, it is unlawful:
(a) To employ any device, scheme, or artifice to defraud,
(b) 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 the light of the circumstances under which they were made, not misleading, or
(c)To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 CFR § 240.10b-5. “In a typical § 10(b) private action a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc.,
I. Fourth Quarter and Full Year 2000 Financial Statements
Plaintiffs’ claims regarding Defendants’ fourth quarter and full year 2000 financial statements derive from allegations that Defendants inflated their revenue by engaging in channel stuffing. The parties dispute, however, which of Plaintiffs’ claims regarding channel stuffing survived Defendants’ initial motion to dismiss. This dispute is easily resolved because the Seventh Circuit made explicit that only Plaintiffs’ channel stuffing claims regarding unordered product survived the motion to dismiss:
Although the amended complaint alleges that Tellabs inflated its fourth quarter numbers through the use of fictitious sales, back-dated orders, and “creative” incentives, the only allegation that the plaintiffs pleaded with sufficient particularity is the charge that Tellabs flooded its downstream customers with unordered TITAN 5500s. This practice, known as channel stuffing, creates a short-term illusion of increased demand between the time when the company sends the extra product down the line and the time when the distributors return the unwanted excess. According to the plaintiffs’ confidential sources, Tellabs had to lease extra storage space in January and February 2001 to accommodate the large number of returns.
While there maybe legitimate reasons for attempting to achieve sales earlier via channel stuffing, providing excess supply to distributors in order to create a misleading impression in the market of the company’s financial health is not one of them. The complaint relies on several confidential sources to support the channel stuffing allegation. For example, one source informed class counsel that Verizon’s chairman had asked Tel-labs to stop providing Verizon, Tellabs’s largest customer, with products that Verizon did not request or require. Given the consistency and specificity of the plaintiffs’ channel stuffing allegations, the district court found, and we agree, that the amended complaint provided sufficient detail of channel stuffing to overcome the PSLRA’s material falsity hurdle.
Makor I,
Plaintiffs attempt to draw a distinction between statements in the Court’s ruling on the motion to dismiss referring to Tel-labs’s “over-inventorying” of customers and the Seventh Circuit’s pronouncement that the only allegations that survived are that Tellabs flooded its customers with “unordered” products. This is a distinction without a difference. The Court made clear that when “Tellabs over-inventoried it[s] customers” it “provided customers with products that the customers did not want.”
Johnson v. Tellabs, Inc.,
Both the Seventh Circuit and this Court’s opinion make clear, however, that the allegations regarding pulling sales forward, accelerating sales, or ineentivizing sales did not withstand the motion to dismiss. The only claims that survived are the detailed claims regarding Tellabs shipping unordered products or products that the customers did not want. With respect to these narrow channel stuffing claims, the Court grants summary judgment for
A. Evidence of Channel Stuffing
Plaintiffs have presented no evidence sufficient to create a genuine issue of material fact as to whether Tellabs was shipping “unwanted” or “unordered” products to its customers. Specifically, Plaintiffs have also failed to point to any evidence supporting that Tellabs shipped unordered or unwanted product to Verizon or Teleobuy. 20
1. Verizon
With regard to Verizon, Plaintiffs highlight a series of incidents to support then-channel stuffing claims: (i) Tellabs’s involvement with Verizon during a Verizon strike in the summer of 2000, (ii) an October 2000 turnkey agreement between Tel-labs and Verizon, (iii) a March 2001 deal regarding credit for future services to Verizon in exchange for purchase orders, and (iv) communications between Tellabs and Verizon regarding the timing of Tellabs’s shipping and installation dates. The Court will address each transaction in turn.
First, Plaintiffs point to a former Tellabs employee who testified that Tellabs used channel stuffing as a strategy. The employee’s testimony derived from his interactions with Verizon during a strike at Verizon in the summer of 2000. Tellabs assisted Verizon during this strike by lending employees to Verizon. While the former Tellabs employee testified that Tel-labs used channel stuffing as a strategy, he also testified that he had no connection to the Verizon sales account and that he has no personal knowledge of Tellabs employees writing purchase orders for Verizon. In fact, he testified that he did not necessarily believe that Tellabs sent purchase orders to Verizon that Verizon did not approve. Moreover, the undisputed record reflects that Verizon had authorized the activities of the Tellabs employees assisting Verizon and had approved all purchase orders within Verizon before Verizon sent them to Tellabs to fill.
Second, in October 2000, Tellabs made an agreement with Verizon involving turnkey orders to bring in additional business in fourth quarter 2000. Specifically, Tel-labs allowed Verizon to resubmit up to $10 million of orders it had already placed as turnkey orders. The record shows that these turnkey orders, however, were simply an extended payment term which provided that Tellabs would not invoice Verizon until 2001. In return for this payment term, Verizon committed to placing additional orders with Tellabs. With regard to these turnkey orders, there is no evidence in the record that Tellabs shipped unordered product to Verizon.
Third, Plaintiffs point to a March 2001 deal in which Tellabs made a commitment to Verizon to provide a $3 million credit for future services. In exchange, Verizon placed $20 million of purchase orders for TITAN 5500 products for shipment in first
Finally, Plaintiffs highlight correspondence between Tellabs and Verizon showing that Verizon was dissatisfied with the timing of Tellabs’s shipping and installation dates. The evidence relied on by Plaintiffs does show that Tellabs had shipped products to Verizon well before the date Verizon intended to install the products and that, as a result, Verizon informed Tellabs that it would not accept equipment deliveries without a firm delivery date. Once again, however, there is no indication in the record that Tellabs shipped unordered product to Verizon, and instead the record reflects that Verizon was dissatisfied with Tellabs’s actions in shipping products that Verizon had ordered from Tellabs prior to Verizon’s installation dates.
In sum, the Verizon transactions referenced by Plaintiffs — even when viewed in the light most favorable to Plaintiffs— merely highlight a series of sales techniques employed by Tellabs during the Class Period that Tellabs hoped would increase sales or move sales forward into earlier quarters. Additionally, and critical to Defendants’ motion, none of the facts presented by Plaintiff with respect to these customers indicate any evidence of Tellabs shipping “unwanted” or “unordered” products to Verizon.
2. Telcobuy
With respect to Telcobuy, Plaintiffs highlight two transactions to support their channel stuffing claims. With respect to the first transaction, there is no evidence in the record that the October 2000 transaction ever occurred. While one of the terms of the proposed October 2000, agreement was that Telcobuy must have a valid purchase order from SBC, Feigh, who supervised sales to Telcobuy, explained that the draft October 2000 agreement was a proposal from Tellabs to Telcobuy to purchase TITAN 5500 systems, not PICS. Indeed, Plaintiffs point to only one executed transaction with Telcobuy, in an attempt to demonstrate that “Defendants actually did ship unordered product.” (R. 329-1, Pis.’ Opp’n, p. 39.) Plaintiffs contend that the evidence in the record demonstrates that Tellabs shipped product to Telcobuy intended for an end-consumer, SBC, even though Telcobuy had no valid purchase order with SBC. The only executed agreement to which Plaintiffs point, however, demonstrates that Defendants offered Telcobuy a series of discounts and extended payment terms to induce sales, and that Tellabs permitted Telcobuy to return software after it learned that, contrary to a verbal representation that it had received from SBC, that SBC would not be upgrading its TITAN 5500 systems with a new feature package. This evidence does not raise an issue of fact regarding the channel stuffing allegations remaining in the case.
Specifically, on December 19, 2000, Telcobuy placed an order for $50.4 million of TITAN 5500 PICS from Tellabs. The evidence shows that Tellabs gave Telcobuy price discounts and extended payment terms as part of that deal. While testimony from Tellabs’s employees reveals that the discounts were “unusual in the normal course of business” (R. 324-1, ¶ 65), there is no evidence that Tellabs shipped unordered or unwanted products to Telcobuy. Instead, the uncontested evidence in the record reflects that after SBC failed to place orders with Telcobuy for the modules at the expected rate in 2001, Tellabs
Thus, there is simply no evidence in the record that would allow a reasonable jury to conclude that Tellabs ever shipped “unwanted” or “unordered” products to its customers. No one at either Verizon or Telcobuy supported Plaintiffs’ allegations in this regard. This reason alone is sufficient to grant summary judgment on Plaintiffs’ fourth quarter and full year 2000 claims, but there is a further reason as well.
B. Loss Causation
In order to survive summary judgment on their fourth quarter and full year 2000 claims, Plaintiffs also must demonstrate loss causation.
Dura Pharms.,
Plaintiffs argue that they can demonstrate loss causation via the materialization of risk standard. Plaintiffs contend that Defendants’ channel stuffing activities masked declining demand and artificially inflated sales at the expense of later reporting periods and that, eventually, Tel-labs’s problems were so pronounced that it was not able to hide them. In support, Plaintiffs point to Dr. Allen’s opinion that Tellabs’s disclosures on April 6, 2001 and June 19, 2001 released information to the market about Defendants’ fraudulent activity. Plaintiffs further contend that “[i]t does not matter that Tellabs’ [April 2001 and June 2001] corrective announcements ... did not admit the Company’s fourth quarter 2000 financial statements were misstated, or that Tellabs never formally restated its financial statements.” (R. 329-1, Pis.’ Opp’n, p. 36.) Relying primarily on a non-controlling
case—In re Motorola Sec. Litig.,
Courts applying the Supreme Court’s analysis in
Dura
at the summary judgment stage have stated that the
Dura
analysis provides “that a disclosure sufficient to satisfy loss causation can occur in
[A] securities fraud plaintiff is not necessarily precluded from establishing loss causation where a corrective disclosure does not, on its face, specifically identify or explicitly correct a previous representation, or expressly disclose the particular fraudulent scheme the plaintiff alleges. In this case, the fact that Motorola’s February 23 Warning did not mention Telsim, or refer on its face to Telsim or vendor financing, is not necessarily fatal. The court acknowledges that the standard cannot be so lax that every announcement of negative news becomes a potential “corrective disclosure.” As Defendants correctly point out, courts have held that an earnings warning, standing alone, is not a “corrective disclosure” because the resulting share price decline does not necessarily dissipate the particular price inflation caused by the alleged fraud.... Nevertheless, if a plaintiff shows, as Lead Plaintiff claims to have done here, that significant aspects of the still-concealed fraud in fact provided the catalyst for an anticipated failure to meet earnings forecasts, then the share price decline following an earnings warning might indeed dissipate the fraudulent price inflation; in such circumstances, there is no good reason why the earnings warning should not serve as a disclosure in which “the relevant truth begins to leak out.” See Dura Pharm.,544 U.S. at 342 ,125 S.Ct. 1627 .
Motorola,
In the court’s view, this evidence does not link the still-concealed Telsim information to the earnings warning and thus to the decline in Motorola share prices on February 23, 2001. The evidence Lead Plaintiff cites shows that Defendants were aware of significant problems with Telsim on February 23.... But absent from the record is any evidence that these concerns actually motivated the February 23 Warning. At most, the evidence indicates that Motorola issued the earnings warning at the same time that Defendants were aware of problems with Telsim that might impact its earnings; there is no evidence suggesting that the earnings warning was issued because of those concerns. The latter is required; mere temporal proximity does not establish causation. See Schiller & Schmidt, Inc. v. Nordisco Corp.,969 F.2d 410 , 415 (7th Cir.1992) (to prove damages, “[p]ost hoc ergo propter hoc will not do”). Despite extensive discovery in this action, Lead Plaintiff has offered no e-mail correspondence, document, or testimony indicating that Motorola or its senior executives issued the earnings warning on February 23, 2001 in anticipation of an earnings shortfall that was due in particular to an expected loss of Telsim-related income, rather than to Motorola’s stated reasons: economic conditions, business weakness, and inventory corrections. Without such evidence, the causal link between the concealed Telsim information and the share price decline on February 23 is simply too tenuous to satisfy loss causation.
Id. at 547. As in Motorola^ Plaintiffs have not pointed to any evidence that Tellabs issued the April 6, 2001 and June 19, 2001 announcements regarding revenue concerns due to the company’s alleged channel stuffing activities.
Similarly, Plaintiffs have pointed to no evidence, either in Dr. Allen’s report or otherwise, to demonstrate that there is a causal connection between the channel stuffing allegations and the decline in share value after Tellabs’s April 6, 2001 and June 19, 2001 announcements. The portions of Dr. Allen’s report cited by Plaintiffs merely express Dr. Allen’s opinion that Tellabs’s April 6, 2001 and June 19, 2001 disclosures released previously undisclosed information regarding declining sales. (R. 330-14, Ex. 1053, pp. 17-21.) Dr. Allen does not connect Tellabs’s alleged channel stuffing activities as related to fourth quarter 2000 revenues with these disclosures. While the Court agrees that Plaintiffs need not demonstrate that the corrective disclosures specifically corrected a previous representation or disclosed the alleged fraudulent scheme, in order to demonstrate loss causation Plaintiffs must show a “link” between the concealed information and the motivation to make the disclosure.
Motorola,
Viewing the evidence in the light most favorable to Plaintiffs, Plaintiffs have not produced evidence from which a reasonable jury could conclude that Defendants’ misrepresentations and omissions regarding its channel stuffing practices caused Plaintiffs’ losses. The Court accordingly grants Defendants’ motion for summary judgment with respect to Plaintiffs’ fourth quarter and full year 2000 claims.
II. Tellabs’s 2001 Guidance
Plaintiffs also challenge the forward-looking guidance that Tellabs issued on December 11, 2000, March 7, 2001, and April 18, 2001. With respect to liability for “forward-looking statements- — predic
While Plaintiffs refer to both Notebaert and “other senior management” when discussing Tellabs’s liability for its 2000 and 2001 guidance, the PSLRA makes clear that, “there is no liability if the plaintiff fails to prove that the statement (i) if made by a natural person, was made with actual knowledge that the statement was false or misleading, or (ii) if made by a business entity, was made by or with the approval of an executive officer of that entity with actual knowledge by that officer that the statement was false or misleading.”
Southland Sec. Corp. v. INSpire Ins. Solutions Inc.,
A. December 11, 2000 Guidance
On the first day of the Class Period, December 11, 2000, Tellabs provided a forecast of 30% growth in revenue and earnings per share for 2001. The Court has stricken the expert report of Dr. Arthur Brody who opined on what conclusions Tellabs should have drawn regarding its guidance based on publicly available information at the time. (R. 373, Memorandum Opinion and Order.) Plaintiffs therefore must rely on other evidence such as Tellabs’s internal documents and communications to establish that Notebaert had actual knowledge that the guidance issued on December 11, 2000 was false or misleading. Plaintiffs, however, do not identify any communications, written or oral, to Notebaert prior to December 11, 2000. Instead, Plaintiffs make broad statements without citing any supporting evidence and argue that Tellabs’s forecasting process was not a true “bottoms-up” process and that therefore, by implication, Notebaert knew that the December 11, 2000 guidance, which Tellabs based on this forecasting process, was false or misleading. Plaintiffs have failed to raise a genuine issue of material fact regarding Notebaert’s actual knowledge.
The uncontroverted testimony from a variety of Tellabs’s employees detailed Tellabs’s “bottoms-up” forecasting process which resulted in Tellabs’s December 11, 2000 guidance. During the “bottoms-up” process, each operating unit gathered information about expected demand for Tel-labs’s products by talking directly to both Tellabs’s sales force and to some of Tel-labs’s major customers. The sales force provided direct information from customers. After gathering this information, each operating unit totaled the data and supplied the information regarding expected revenues and expenses to the finance department or Christine Pfefferle.
Plaintiffs’ objection to the existence of a “true” “bottoms-up” process rests on the deposition testimony of two sales persons and an October 26, 2000 memorandum from Notebaert. One of these employees testified that Tellabs would provide him a sales quota based on his prior year’s performance. The other sales employee, Jim Joling, testified that on one occasion Notebaert pulled him into his office and told him the kinds of numbers he wanted Joling to deliver. Viewing this evidence in the light most favorable to Plaintiffs, the testimony reveals that executives stressed the importance of meeting sales targets to sales personnel but still does not contradict the “bottoms-up” manner in which Tellabs forecasted sales. Rather than testifying regarding Tellabs’s revenue or sales forecast, the sales employees merely
B. January 23, 2001
During a January 23, 2001 teleconference, Tellabs announced its fourth quarter and full year 2000 results and reiterated its 30/30 guidance for 2001. In their response to the motion for summary judgment, Plaintiffs argue that Defendants’ repetition of its 30/30 guidance on January 23, 2001 is at issue in this case. Plaintiffs, however, conceded at oral argument that the Complaint does not refer to the January 23, 2001 forecast. Plaintiffs cannot raise a claim regarding Tellabs’s January 23, 2001 guidance more than eight years since they instituted this lawsuit. Plaintiffs’ claim as to the January 23, 2001 guidance is therefore waived.
Warren v. Solo Cup Co.,
Even if the Court were to reach Plaintiffs’ claim premised on Tellabs’s January 23, 2001 guidance, it fails on the merits as well. Plaintiffs only identify one piece of evidence between Tellabs’s December 11, 2000 guidance and the reiteration of that guidance on January 23, 2001 in support of the actual knowledge requirement. Specifically, on January 11, 2001, Birck forwarded to Notebaert, Jack-
C. March 7, 2001
On March 7, 2001, Tellabs announced downward revised guidance for first quarter 2001, but reiterated its full year 30% growth rate guidance. With regard to this guidance, both parties have adduced significant evidence pertaining to the state of Tellabs’s projections and sales and Notebaert’s knowledge of these figures. Even viewing all of the evidence in the light most favorable to Plaintiffs, as the Court must, the evidence at most demonstrates that there were competing forecasts and figures known by Notebaert at the time that Tellabs issued the March 7, 2001 guidance. The Court first turns to the relevant evidence in the record.
As of January 2001, Tellabs was aware that it needed to consider the impact of the economic downturn on its own performance. Indeed, Tellabs and Notebaert were aware of slow sales in January 2001 and Notebaert acknowledge that these figures were concerning to him. In a February 19, 2001 letter regarding January sales, Notebaert informed Birck that making the revenue plan would be a “challenge.” In the face of slow sales, however, the undisputed evidence also shows that Notebaert tasked the forecasting organization with determining whether Tellabs’s current forecast was achievable and realistic. In connection with Notebaert’s request for a reexamination of the existing forecast, on February 26, 2001, Pfefferle prepared an “adjusted gap report” to show how first quarter sales were performing compared to the forecast. The gap report showed that Tellabs had identified sales sufficient to “close the gap” and meet its forecast, though those opportunities included sales with confidence levels as low as 60% and included “pull-ins” from later quarters. While a number of Tellabs employees testified that some of these deals were “unnatural,” the record also demonstrates that such sales tactics were a routine practice for Tellabs.
After Notebaert assigned the forecasting task, throughout February and into early March, the weekly forecast sanity cheeks continued to demonstrate that “sales yet to book” percentages were often significantly lower than historical averages. The uncontroverted evidence also shows, however, that these forecast sanity checks did not account for the “hockey-stick” effect Tellabs historically experienced at the end of each quarter. Thus,
On March 7, 2001, prior to announcing these results, Notebaert reviewed the gap report with Pfefferle and gauged her confidence in Tellabs’s ability to hit the revised forecast. It is undisputed that Pfefferle told Notebaert that based on her analysis and contact with the sales teams, her department felt confident that Tellabs could reach the forecast. Notebaert also confirmed on March 7, 2001 that Joan Ryan, Brian Jackman, and John Springer all felt comfortable that Tellabs would achieve the revised guidance. Notebaert himself has averred that he believed that the guidance issued on March 7, 2001 was reasonable and based on the best available information.
Viewing the evidence in the light most favorable to Plaintiffs, it is clear that Notebaert was aware that sales of some products, including the TITAN 5500, were slow and that the forecast sanity checks indicated that Tellabs was not performing as well as it had historically. The uncontroverted evidence, however, also shows that these data indicators were among many considerations Tellabs reviewed in revising the forecast. Merely adducing evidence of information contradictory to the statements at issue does not demonstrate that the corporate officer actually knew that the statements were false or misleading. In
In re Bristol-Myers Squibb Sec. Litig.,
Viewing this evidence at its most damaging to Defendants, the most that it proves is that there were individuals at BMS who did not think that Vanlev could be a blockbuster for the treatment of heart failure. When considered in context, alongside Defendants’ evidence that others at BMS thought that Vanlev could be a blockbuster for the treatment of heart failure, this e-mail does not permit the inference that speakers believing one side over the other were reckless in relying upon that belief.
Id. at *60. Despite the fact that internal forecasts reflected both the possibility that Vanlev may or may not achieve blockbuster status, ultimately the court granted the defendants’ motion for summary judgment on those claims. The Court concluded that the “[djefendants have produced evidence sufficient to show that they reasonably believed that Vanlev could be a blockbuster for the treatment of heart failure alone. Plaintiff has failed to show that Defendants had actual knowledge to the contrary.” Id. at *63.
Similarly, as described above, Plaintiffs have been unable to demonstrate that Tel-labs did not routinely rely on its “bottoms-up” forecasting process or that Tellabs had no reason to rely on the historical “hockey-stick” effect that occurred at the end of most quarters. While the evidence demonstrates that Notebaert was aware of conflicting indicators, these conflicting indicators are not enough alone to raise a genuine issue of material fact. The relevant inquiry is not whether Notebaert reasonably assessed these indicators, or even whether Notebaert was reckless in his assessment. The sole question before the Court is whether there is a genuine issue of material fact as to whether Notebaert actually knew that the March 7, 2001 guidance was false.
Makor III,
Additionally, while not decided under the “actual knowledge” standard, the court’s analysis in
In re Oracle Corp. Sec. Litig.,
Indeed, in a district court case where the court denied summary judgment on a forward-looking statement subject to the actual knowledge standard, the evidence the plaintiffs presented was far more damaging than the evidence cited by Plaintiffs in this case. In
Weiss v. Mentor Graphics Corp.,
The evidence in this case is more similar to that in
Oracle
and
Bristol-Myers Squibb
than
Weiss.
Like in
Bristol-Myers Squibb
and Oracle, in the face of competing internal forecasts, including forecast sanity checks, “bottoms-up” forecasting, and gap reports, Defendants chose to rely more heavily on the “bottoms-up” forecasts and gap reports. Plaintiffs have pointed to no evidence that indicates that Notebaert knew that his reliance on the gap reports and “bottoms-up” forecasting would lead to misleading
D. April 18, 2001 Guidance
On April 18, 2001, Tellabs revised its full year 2001 guidance downward. Plaintiffs conclusorily assert that, “[t]here is also much proof from which a jury could find Notebaert and the others knew, by April 18, 2001, even 9% to 12% growth could not be achieved.” (R. 329-1, Defs.’ Opp’n, p. 49). Although Defendants addressed the April 18, 2001 guidance in them opening memorandum, Plaintiffs fail to cite to any evidence in the record or develop any arguments regarding the April 18, 2001 guidance in their response in opposition to the motion for summary judgment. (R. 329-1, Pis.’ Opp’n, pp. 49-52.) Plaintiffs have accordingly waived this argument and the Court grants summary judgment for Defendants on this claim.
See Bryant v. Gardner,
Moreover, even if the Court were to reach the merits of this claim, Plaintiffs have not created a genuine issue of material fact with respect to the April 18, 2001 guidance. The uncontroverted evidence shows that Tellabs’s downward revised April 18, 2001 guidance was the result of an in-depth, “bottoms-up” review of its forecasts. Internal documents subsequent to the March 7, 2001 announcement demonstrate that, as in prior quarters, Tellabs continued to track its sales and revenue. The record also shows that Tellabs was aware of the slowing economy and that revenue was not developing as Tellabs expected during this time period. Indeed, while overall sales for the Optical Networking Group increased in first quarter 2001, demand for the TITAN 5500 remained low. In fact, while sales forecasts in mid-March 2001 demonstrated that Tel-labs could potentially meet the first quarter forecast, there was some evidence in early 2001 that customer demand was de
Once again, however, prior to issuing revised guidance, Pfefferle and other members of the forecasting organization assembled an updated revenue plan. The uncontroverted evidence shows that the team based the updated revenue plan on information gathered from the sales team, product houses, and other operating units, all of which provided the most up-to-date information on expected demand based on what they were hearing from Tellabs’s customers. As a result of this updated forecast review, and subsequent to approval from each of the officers who were direct reports to the CEO, the finance department recommended to Notebaert that Tel-labs revise its public guidance to a range of $3.6 to $3.7 billion for 2001. Plaintiffs have not identified any evidence to contradict Notebaert’s testimony that, during the time leading up to April 18, 2001, no one expressed any doubts to him that Tellabs would not achieve its revised guidance or that the revised guidance was based on incorrect or faulty information.
In short, even if the Court were to reach the merits of Plaintiffs’ claim with respect to Tellabs’s April 18, 2001 guidance, Plaintiffs have failed to present any evidence that Notebaert had any actual knowledge that the downward revised guidance was false or misleading.
See In re Bristol-Myers Squibb Sec. Litig.,
III. TITAN 5500 Statements
Defendants also seek summary judgment on Plaintiffs’ claims that Defendants made three false or misleading statements regarding the TITAN 5500 during the Class Period. “In a typical § 10(b) private action, a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”
Pugh,
Rule 10b-5 forbids a company or an individual “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 the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b). But liability requires proof of the defendant’s “scienter,” which is to say proof that he eitherknew the statement was false or was reckless in disregarding a substantial risk that it was false. A popular definition of recklessness in this context is “an extreme departure from the standards of ordinary care ... to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.” This looks like two criteria — knowledge of the risk and how big the risk is — but as a practical matter it is only one because knowledge is inferable from gravity (“the danger was either known to the defendant or so obvious that the defendant must have been aware of it”). When the facts known to a person place him on notice of a risk, he cannot ignore the facts and plead ignorance of the risk.
Makor III,
Pursuant to the Seventh Circuit’s ruling in
Makor I,
1. Brian Jackman’s March 7, 2001 response to an analyst’s question about whether Tellabs was seeing “any weakness” with the TITAN 5500: “We are not. We are still seeing the product continue to maintain its growth rate and is still experiencing strong acceptance. We are in the process of turning [up] a large number of frames we shipped in the fourth quarter and this is continuing to grow as usual. I think that is pretty much on plan.” (R. 336-1, ¶ 84.)
2. Notebaert and Birek’s March 14, 2010 response in Tellabs’s Annual Report to a question about whether the TITAN 5500 “had peaked”: “No ... it’s still going strong.” (R. 324-1, ¶43.)
3. Notebaert’s statement on the April 6, 2001 conference call: “[E]very-thing we hear from the customers indicates that our end user demand for services continues to grow.” Id.
Defendants argue that the first statement is not actionable and further that none of the three statements were false or misleading or made with the requisite scienter. The Court will address the disputed elements of Plaintiffs’ § 10(b) claims with respect to each of the three statements in turn.
A. March 7, 2001 Statement that the TITAN 5550 Was Not Experiencing Any Weakness
Plaintiffs first challenge Jack-man’s response during a March 7, 2001 teleconference to an analyst’s question about whether Tellabs was seeing “any weakness” with the TITAN 5500 that: “We are not. We are still seeing the product continue to maintain its growth rate and is still experiencing strong acceptance.” (R. 336-1, ¶ 84.) In their briefs, the parties dispute whether this statement is actionable. In their Complaint, Plaintiffs inaccurately attributed this statement to Notebaert. After the appeal of the Court’s ruling on the initial motion to dismiss, the Seventh Circuit held that Plaintiffs had sufficiently pled their § 10(b) claim in this context because Plaintiffs had’ sufficiently alleged that
Notebaert
acted with the requisite scienter.
Makor III,
1. Notebaert’s Liability for Jackman’s March 7, 2001 Statement
With regard to the claim against Notebaert based on Jackman’s statement, the Third Circuit’s recent opinion in Schiff is persuasive. In that ruling, the Third Circuit highlighted that numerous courts have concluded that in order for an officer to be liable for an official statement, the statement must have been actually made by that officer:
[T]he plain language of § 10(b) and corresponding Rule 10b-5 do not contemplate the general failure to rectify misstatements of others. See, e.g., SEC v. Tambone,597 F.3d 436 , [445] (1st Cir.2010) (en banc) (“Reading ‘make’ to include the use of a false statement by one other than the maker would extend primary liability beyond the scope of conduct prohibited by the text of Rule 10b-5(b).”); Wright v. Ernst & Young LLP,152 F.3d 169 , 175 (2d Cir.1998) (“[A] secondary actor cannot incur primary liability under [§ 10(b) ] for a statement not attributed to that actor at the time of its dissemination.”); Shapiro,123 F.3d at 720 (“[A] defendant must actually make a false or misleading statement in order to be held liable under Section 10(b). Anything short of such conduct is merely aiding and abetting, and no matter how substantial that aid may be, it is not enough to trigger liability under Section 10(b).”); see also In re Rent-Way Sec. Litig.,209 F.Supp.2d 493 , 504 (W.D.Pa.2002) (relying on the text of Rule 10b-5(b) to conclude that a defendant that “was not the maker of the ... statements ... cannot be responsible for omissions in statements that it itself did not make”); Wafra Leasing Corp. v. Prime Capital Corp.,192 F.Supp.2d 852 , 867 (N.D.Ill.2002) (explaining that 10b-5(b)’s text “demonstrates that a defendant is liable only for those omissions that make his own statements misleading”) (emphasis in original)). Moreover, in Central Bank, the Supreme Court determined that the scope of § 10(b) does not encompass aiding and abetting liability because the statute “prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act.” Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.,511 U.S. 164 , 177,114 S.Ct. 1439 ,128 L.Ed.2d 119 (1994). Consequently, incorporating into the statute an obligation to rectify others’ misstatements (though lacking even the aiding and abetting mens rea requirement of the initial statement made) would be illogical in light of the Supreme Court’s holding.
U.S. v. Schiff
The First Circuit’s opinion in
S.E.C. v. Tambone,
Conversely, Plaintiffs rely on
In re SmarTalk Teleservices, Inc. Sec. Litig.,
Where it is pled that one defendant knowingly uttered a false statement and the other defendant knowingly failed to correct it, even if it is not alleged which defendant made the statement and which defendant did not correct it, the fraud is sufficiently pleaded as to each defendant. This is not inconsistent with the plain language of subsection (1) of 15 U.S.C. § 78u-4(b), and accords with common sense and the policy considerations underlying the heightened pleading requirements.
The First Circuit’s detailed analysis in
Tambone,
2. Tellabs’s Liability for Jackman’s March 7, 2001 Statement
Plaintiffs also contend that Tellabs may be liable for the March 7, 2001 official statements that Jackman made on its behalf.
22
At oral argument on the motion for summary judgment, counsel for Defendants withdrew their argument that a § 10(b) claim could not go forward against Tellabs on the basis of Jackman’s statement and conceded that, pursuant to principles of agency law, if Jackman made the statement with scienter then Tellabs could be liable for the statement. Indeed, the Seventh Circuit has held that agency law applies in the context of a § 10(b) claim.
See Makor I,
Highlighting conflicting internal forecasts, financial summaries and forecast sanity checks, the parties dispute whether Jackman’s March 7, 2001 was misleading. Jackman testified that he based the March 7, 2001 statement on the “bottoms-up” sales forecast that he received from the sales organization. At this time, Pfefferle and the forecasting organization were forecasting that Tellabs would achieve 30% growth in TITAN 5500 sales in first quarter 2001. Plaintiffs, however, assert that Jackman’s statement was misleading because Jackman knew that demand for the TITAN 5500 was slowing. Indeed, the forecast sanity checks for the period leading up to March 7, 2001, which Jackman testified he regularly reviewed, showed that for eleven weeks in first quarter 2001 the percentage of TITAN 5500 sales yet to be booked for the quarter was greater than Tellabs’s historical average. In addition, the monthly executive financial summary distributed in February, which Jack-man recalled receiving, reported that monthly January results fell short of forecasts and that there were soft bookings of the TITAN 5500. The monthly executive financial summary also showed that bookings for the TITAN 5500 were at the lowest levels since July of 2000 and that sales had been slow for two periods. While Tellabs’s forecasting group was not forecasting a decline in TITAN 5500 sales at this time, viewing the evidence known to Jackman relating to slow sales of the TITAN 5500 in the light most favorable to Plaintiffs, there is genuine question of material fact regarding whether, in light of this information, Jackman’s March 7, 2001 statement was misleading.
See, e.g., In re Bristol-Myers Squibb Sec. Litig.,
B. March 14, 2010 Statement that the TITAN 5500 Business “Was Still Going Strong”
In Tellabs’s Annual report, issued March 14, 2001, one of the questions that Tellabs responded to was: “Your core business is built on the TITAN 5500 — are you worried that this product has peaked?” Notebaert and Birck answered:
No. In 2000, TITAN 5500 revenues grew 56%, its best year so far. Although we introduced this product nearly 10 years ago, it’s still going strong because we keep adding new capabilities so it can do more and more for our customers. For example, last year we introduced a new TITAN 5500 system with 50% more capacity — enough to handle 1 million simultaneous Internet sessions. Now customers want an even larger TITAN 5500 system. That’s why we believe there are many years of life ahead for this highly successful product.
Id.; R. 324-1, ¶ 43. Plaintiffs contend that in light of internal documents showing slow sales early in the quarter as compared to sales predicted by Tellabs’s forecasts, the statement that sales were “still going strong” was misleading. Indeed, in a February 19, 2001 report to Birck, Notebaert acknowledged that sales of the TITAN 5550 had been very slow in the quarter. In addition, the monthly executive financial summary circulated on March 15, 2001 showed that bookings for the TITAN 5500 were at the lowest levels since July of 2000, and that sales had been slow for two periods. Moreover, the forecast sanity checks showed that for eleven weeks in first quarter 2001 the percentage of TITAN 5500 sales yet to be booked for the quarter was greater than Tellabs’s historical average. Defendants maintain that the statement was not misleading because the question was focused on the TITAN 5500’s potential for negative growth rate, and not whether sales were “going strong” relative to Tellabs’s forecast. Pfefferle asserts in her affidavit that while sales of the TITAN 5500 were slower than hoped for in January, as of mid-February 2001, no one was forecasting a decline in TITAN 5500 sales in 2001 due to the January results alone.
While the Court agrees that it is important to consider the context of the answer, the fact that the question asked whether the product had “peaked” necessarily implicates both historical and future sales of the TITAN 5500. There is a genuine issue of material fact, however, as to how much information the question called for, and whether Notebaert acted with scienter in responding that the product was “still going strong.” In other words, while the answer may have addressed the broader issue of whether the TITAN 5500 would see a negative growth rate, there is a question of material fact as to whether Defendants’ failure to disclose recent slow sales of the TITAN 5500 rendered the answer misleading.
23
See Kauf
Defendants’ reliance on
Backman v. Polaroid Corp.,
C. April 6, 2001 Statement That “End-User” Demand Continued to Grow
On the April 6, 2001 conference call, Notebaert stated:
Last month we talked and we highlighted the issues we were seeing in the cable access market. There we saw our MSO customers shifting their focus from expanding their addressable market by building new infrastructure to increase profitability by signing up more customers in the places where they have the infrastructure in place. That trend continued during the whole quarter right down to the end. In just the last few weeks, however, we experienced a more controlled order flow from our larger customers than we originally anticipated.
Clearly the environment has resulted in near term caution in the pace at whichcustomers are deploying equipment. Our customers are exercising a high degree of prudence over every dollar spent. Let me balance this a bit and say that everything we hear from the customers indicates that our end user demand for services continues to grow. Fortunately for Tellabs, our TITAN family of products helps our carrier customers meet this demand in a cost effective way, which is the major reason we are still able to grow total revenue 20% year-over-year even in this environment. While the U.S. market has been challenging we continue to see pockets of strength globally, particularly in Latin America.
(R. 336-1, ¶ 90; R. 301-12, Ex. 73, TEL 669446-47.) Plaintiffs contend that the statement about end user demand “clearly was intended to give cause for optimism” about Tellabs’s performance and that the statement was therefore misleading in light of all that Notebaert knew regarding Tellabs’s performance. Plaintiffs, however, have failed to establish a genuine issue of material fact regarding whether this statement was misleading or made with the requisite scienter.
The undisputed evidence shows that the term “end user” refers to customers of service providers, Tellabs’s core customer base, and that end user demand was in fact growing at the time Tellabs made the statement. Plaintiffs maintain that “even if Internet, telephone, and wireless users’ demand was still growing, it was deceptive for Notebaert to suggest that it would mean additional business for Tellabs.” (R. 329-1, Pis.’ Opp’n, p. 48.) There is no indication in Notebaert’s answer, however, that he intended his comment to reflect the demand of Tellabs’s direct customers. Indeed, the full context of his answer reveals that Notebaert expressly disclosed that Tellabs was experiencing weakened demand from its own customers. There is accordingly no evidence from which a reasonable jury could conclude that Notebaert’s statement was misleading. The Court accordingly grants summary judgment for Defendants with respect to this statement.
IV. Collateral Estoppel With Respect to the Brieger Class
Defendants seek summary judgment on the claims of the members of the class in the companion ERISA case against Tellabs,
Brieger v. Tellabs, Inc.,
Case No. 06-cv-1882 (N.D.Ill.).
24
“Collat eral estoppel (also called ‘issue preclusion’) refers to the simple principle that ‘later courts should honor the first actual decision of a matter that has been actually litigated.’ ”
Chicago Truck Drivers, Helpers & Warehouse Union Pension Fund v. Century Motor Freight,
A. Claims Regarding Shipment of Unordered Products
With respect to Plaintiffs’ fourth quarter and full year 2000 channel stuffing claims, Plaintiffs contend that collateral estoppel is not applicable because (i) Judge Kennelly did not make any express findings with respect to the channel stuffing allegations present in this case that Tellabs over-inventoried customers to falsely portray growing revenues, and (ii) Defendants have not shown that the issue was fully litigated in Brieger. The record from the Bñeger case, however, demonstrates that the issue is the same as that involved in the present litigation and that the issue was fully litigated during the Brieger trial.
The Brieger complaint, as well as the guidance and arguments presented at trial, establish that the issues are the same and were actually litigated. The Brieger complaint alleged that Tellabs “engaged in troubling, improper practices in an attempt to conceal the problems with the TITAN 5500” including “overloading customers with shipments of unwanted products and falsifying purchase orders.” (R. 336-1, ¶ 96) (citing Brieger v. Tellabs, Inc., Case No. 06-1882 (N.D.Ill.), Answer, Docket Entry 82, Ex. 109 at ¶ 129). Indeed, the evidence adduced during discovery in Brieger demonstrates that the plaintiffs relied on some of the same evidence presented by Plaintiffs in the present case, namely internal Tellabs emails regarding Tellabs shipping allegedly unordered products to Verizon, to show that the defendants breached their fiduciary duties by making material misrepresentations and omissions.
Moreover, the
Brieger
plaintiffs argued at trial, based on these emails, that Tel-labs’s fourth quarter 2000 financial statements were misstated because Tellabs had shipped unordered product to Verizon during the fourth quarter. Thus, Defendants have demonstrated that the issue is the same as in the prior action and that the issue was actually litigated. While Plaintiffs have presented evidence of additional transactions in the present case to support their channel stuffing claim, this does not preclude the application of collateral estoppel.
See Perry v. Sheahan,
Although the party asserting estoppel has the burden of showing that the claim was actually litigated and decided, “proof is not limited to the formal record of the prior action, and may involve elaborate processes of inference in order to determine whether a particular issue has been decided.” 18 C. Wright, supra, § 4405, at 38. Although the Texas court did not make findings of fact in support of its decision nor explicitly consider each of the bases for the motion, the court implicitly rejected all four grounds in denying the motion. Had any one of the grounds been sufficient, a contrary result would have been unavoidable. Thus, by denying the dismissal motion the Texas court necessarily decided all four issues in Commerce’s favor.
B. Claims Regarding Tellabs’s 2001 Guidance
Plaintiffs argue that collateral estoppel is not applicable with respect to the claims relating to Tellabs’s 2001 guidance because the Brieger complaint did not specifically address the 30% forecast. Plaintiffs admitted in their response to Defendants’ statement of materials facts that the plaintiffs in Brieger challenged Tellabs’s 2001 guidance as having been false, starting with the guidance given at the analysts conference on December 11, 2000, and continuing through at least June 19, 2001. The Court, however, has reviewed the evidentiary support for Defendants’ contention and Defendants have not met their burden of demonstrating that the issue of Tellabs’s 2001 guidance issued on December 11, 2001, January 23, 2001, March 7, 2001, and April 18, 2001 was actually litigated in Brieger.
Indeed, while the
Brieger
complaint refers to specific examples of statements made by Tellabs when issuing its guidance on some of these dates, the
Brieger
complaint does not specifically address the overall guidance provided by Tellabs on any of these particular dates. While the trial record reflects that the
Brieger
defendants adduced some evidence regarding
More generally, plaintiffs point to a number of statements about Tellabs’ prospects that they claim gave employees a false sense of optimism about Tel-labs’ future. One example is the revised earnings guidance Tellabs provided on March 7, 2001, lowering the first quarter 2001 revenue forecast, but stating that the company would still do well that quarter. This was supported with further statements about growth in 5500 sales. Plaintiffs compare that announcement to the February 19, 2001 letter from Notebaert to Birck, which appeared to paint a gloomier picture, including slow 5500 sales in the early part of 2001, as well as sanity check reports that showed slower sales. Defendants’ statements were not misrepresentations. Though their predictions eventually proved wrong, at the time defendants made them, they were based on a significant backlog of orders, forecasts made by Pfefferle’s department, and communications with customers. These facts, as well as the nature of Tellabs’ products, led defendants to believe that Tellabs was in a unique position to weather the storm and even grow despite general industry and market conditions.
Brieger,
C. March 7 and March 14 Statements Regarding the TITAN 5500
The
Brieger
plaintiffs, again like the plaintiffs in this case, specifically challenged as having been false: (1) Brian Jackman’s March 7, 2001 statement in response to an analyst question about whether Tellabs was experiencing any weakness in TITAN 5500 product sales that, “We’re still seeing that product continue to maintain its growth rate; it’s still experiencing strong acceptance”; and (2) the March 14, 2001 statement in Tellabs’s 2000 Annual Report, in which Notebaert and Birck responded to a frequently asked question “Are you worried that [the TITAN 5500] has peaked,” by stating, “No____Although we introduced the product nearly 10 years ago, it’s still going strong.” (R. 336-1, ¶ 99) (citing
Brieger v. Tellabs, Inc.,
Case No. 06-1882 (N.D.Ill.), Docket Entry 82, Ex. 109 at ¶¶ 131, 141; Plaintiffs’ Amended Proposed Findings of Fact and Conclusions of Law, Ex. 113 at ¶¶ 110, 112)). Once again, Judge Kennelly’s ruling after weighing the evidence from both sides that “defendants did not make any material misrepresentations to plaintiffs” established that the
Brieger
court necessarily determined whether these statements constituted misrepresentations.
Brieger,
Indeed, the only objection Plaintiffs have to Defendants’ argument is that collateral estoppel should not apply because, during the
Brieger
trial, the parties mistakenly proceeded under the assumption that Tellabs’s 2000 Annual Report was issued in mid-February 2001 when it was
V. Section 20(a) Control Person Liability
Claims under § 20(a) of the Securities Exchange Act of 1934 are “derivative, requiring proof of a separate underlying violation of the Exchange Act.”
Tellabs I,
CONCLUSION
For the foregoing reasons, the Court grants in large part and denies in part Defendants’ motion for summary judgment and grants in part and denies in part Defendants’ Motion to Strike.
Notes
. Plaintiffs also "note” that Exhibit 57 is not admissible, but admit the facts supported by Exhibit 57. Given that Exhibit 58 provides support for the same facts and Plaintiffs do not challenge the admissibility of Exhibit 58, the Court need not address Plaintiffs’ objection to the admissibility of Exhibit 57
. A document prepared by a third party may qualify as another business entity’s business record under Rule 803(6) if that entity integrated the third-party record into its records and relied upon it in its day-to-day operations. The proponent also must satisfy the other requirements of Rule 803(6).
See, e.g., Browner v. Allstate Indem. Co.,
. Plaintiffs also assert in their statement of facts that the stock that the class representatives purchased was "artificially inflated by Defendants’ wrongdoing.” (R. 324-1, ¶ 7.) This type of legal argument is not proper in a Rule 56 statement and the Court will accordingly not address it.
See Cady,
. Plaintiffs dispute the allegations regarding Notebaert’s involvement in the forecasting process and dispute that the forecasting process was a "bottoms-up” process. (R. 324-1, V 100.) In each instance where Plaintiffs make this allegation, however, they rely on deposition testimony from sales personnel who testified that more senior employees or executives pushed them to make sales. LaDuca testified that Tellabs would tell him what "his number” or quota was and that Tellabs based this number on his prior year's performance. (R. 330-1, Ex. 1010, pp. 234-25). Joling testified that Notebaert pulled him into his office and told him what kinds of numbers he wanted Joling to deliver. (R. 330-1, Ex. 1008, p. 125.) The cited testimony, however, does not contradict the existence of a "bottoms-up” forecasting process. Instead, the sales personnel merely assert that Tellabs provided them with a sales quota or revenue goal. Id.; see also R. 354-1, Resp. to ¶¶ 8, 14-15, 21, 38 and 53.
. Plaintiffs dispute that Pfefferle provided McCarthy with an updated forecast based on an email in which Pfefferle stated that she was providing McCarthy with a “first cut” for potential first quarter revenue changes based solely on conversations with the products groups. (R. 301-4, Ex. 24.) While the email states that Pfefferle and her team have not reviewed the entire 2001 year forecast, nothing in the email suggests that Pfefferle did not subsequently provide McCarthy with an updated forecast as she asserts in her affidavit. (R. 301-1, Ex. 8, ¶ 13.)
. Plaintiffs dispute that the slowdown was only just beginning citing to Dr. Brody's report in support of their denial. (R. 354-1, Resp. to ¶ 29.) The Court, however, has stricken Dr. Brody's opinion in this regard.
. Some gap reports contained distribution lists, but others did not. (R. 324-1, ¶ 104; R. 351-1, Exs. 147-48.)
. Quoting Pfefferle’s testimony from the Brieger trial, Plaintiffs respond that the gap reports were based on nothing more than a "gut feel.” (R. 354-1, Resp. to p. 32; R. 324-1, ¶ 99). Pfefferle, however, only testified that the assignment of a confidence level to a potential sale was based on a "gut feel,” and did not testify that the entire gap report was derived on this basis. (R. 330-22, Ex. 1152, p. 1480.)
. Plaintiffs also assert that from the forecast sanity checks, Notebaert and the other Defendants knew that “in the remaining weeks of the first quarter 2001, they had much more to sell to meet their forecast, in a dramatically slowing market, than they had to do in previous years when the economy was booming. They also knew the fourth quarter 2000 goals had been met only by offering 'unnatural pricing deals and pulling forward tens of millions of dollars of sales from subsequent quarters.” (R. 324-1, ¶ 103.) In support of these statements, however, Plaintiffs point to Exhibits 1171-1198, all of the forecast sanity checks, and Exhibit 1214, the summary of the forecast sanity checks. Standing alone, these documents do not support Plaintiffs’ contentions. The Court will also not consider Plaintiffs’ statement that "Defendants simply had no basis to believe the Company would continue to enjoy the same 30% growth it had experienced when the telecommunications industry was expanding,” for which Plaintiffs provided no evidentiary support. (R. 324-1, ¶ 103.)
. Plaintiffs improperly dispute this fact with citation to over 70 paragraphs from their statement of additional facts. (R. 354-1, Resp. to ¶ 55.) The Court may disregard statements and responses that do not properly cite to the record.
See Cichon,
. Plaintiffs dispute this proffered fact, but fail to offer any evidentiary support for their denial.
See
R. 354-1, Resp. to V 53. The Court may disregard statements and responses that do not properly cite to the record.
See Cichon,
. Plaintiffs also contend that Tellabs made these announcements "having known the truth for
months”
and that its statement regarding the telecommunications market were contrary to previous statements. Plaintiffs, however, provide no evidentiary support for these contentions and the Court will therefore not consider these statements.
See Cichon,
. Plaintiffs allege that this statement was "belated,'’ but offer no evidentiary support for that contention. The Court will accordingly disregard this characterization.
See Cichon,
. As discussed in more detail below, the Court has not addressed facts regarding some of Tellabs's customers — specifically, Pacific Bell, Sprint, Qwest and Walker — because the Seventh Circuit previously affirmed the district court’s dismissal of Plaintiffs’ channel stuffing claims based on allegations of fictitious sales, back-dated orders, and "creative” incentives.
. Plaintiffs also assert that Joling testified that Tellabs was aware that Telcobuy did not have a valid purchase order, but the deposition testimony Plaintiffs rely on refers to the
. Plaintiffs contend that this deal closed at the end of March 2001, but the evidence cited only reflects that Tellabs was "trying” to get the opportunity to close at that time. (R. 330-18, Ex. 1106.)
. In addition, in two instances, Tellabs also mistakenly shipped products to two other customers who had put holds on their orders. (R. 330-19, Exs. 1127-1128.)
. Plaintiffs improperly dispute this fact with citation to 84 paragraphs from their statement of additional facts. (R. 354-1, Resp. to ¶102.) The Court may disregard statements and responses that do not properly cite to the record.
See Cichon,
. Defendants are not challenging the materiality of any of the statements in the case and admit that the market for Tellabs's common stock was efficient during the Class Period. (R. 324-1, ¶ 97; R. 345-1, Resp. ¶ 97.)
. Plaintiffs rely heavily on evidence regarding sales to Pacific Bell, Sprint, Quest and Walker. The evidence regarding these customers — when viewed in the light most favorable to Plaintiffs — shows that Tellabs merely offered Pacific Bell extended payment terms, pulled-in Sprint orders in fourth quarter 2000, offered discounts to Qwest, and accepted a large return from Walker. Based on the Seventh Circuit’s ruling in this regard and the fact that Plaintiffs do not even argue that Tellabs ever shipped unordered product to these customers, the Court need not address the transactions with these customers.
. Plaintiffs appear to question the actual knowledge requirement set forth by the PSLRA. To support this argument, however, Plaintiffs misleadingly quote a portion of this Court's decision in
Tellabs I.
Contrary to Plaintiffs' representation, the Court's decision also made clear that "[u]nder the PSLRA, a forward-looking statement is actionable against a person only where it 'was made with actual knowledge by that person that the statement was false or misleading.' "
Tellabs I,
. The specific statement made by Jackman on March 7, 2001 subject to Plaintiffs' § 10(b) claim is different than the statements contained in Tellabs’ March 7, 2001 forward-looking guidance.
. Indeed, the parties' contrary characterizations of the context of the question reaffirm that resolution of this issue is not proper at the summary judgment stage. Defendants assert that the question implicated "whether the company expected an absolute decline in sales going forward” and that the response "focused on the fact that sales continued to grow despite the product being ten years old.” (R. 299-1, Defs.’ Mot., p. 46.) Plaintiffs contend that the response was an “assurance [] as to the Company's then-current circum
. While the Court need not add address Defendants' collateral estoppel argument as it applies to the claims on which the Court has granted summary judgment, collateral estoppel provides an independent basis for granting summary judgment against the Brieger plaintiffs with respect to certain claims.