In re Cirrus Logic Securities Litigation

• Decision Date: 01 November 1996
• Docket Number: No. C-93-1591 WHO.,C-93-1591 WHO.
• Parties: In re CIRRUS LOGIC SECURITIES LITIGATION. And All Related Actions.
• Court: U.S. District Court — Northern District of California

946 F.Supp. 1446

In re CIRRUS LOGIC SECURITIES LITIGATION And All Related Actions.

No. C-93-1591 WHO.

United States District Court, N.D. California.

November 1, 1996.

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William S. Lerach, Charles S. Crandall, Milberg Weiss Bershad Hynes & Lerach, San Diego, CA, Edward M. Gergosian, Kirk B. Hulett, Barrack Rodos & Bacine, San Diego, CA, Fredric Goldberg, Ronald Clark, Miki, Meyers, Beckett & Jones, Grand Rapids, MI, for plaintiffs.

David S. Steuer, Steven M. Schatz, Jerome F. Biern, Jr., Wilson Sonsini Goodrich & Rosati, Palo Alto, CA, for defendants.

OPINION AND ORDER

ORRICK, District Judge.

In this class action, plaintiff shareholders of defendant Cirrus Logic, Inc. ("Cirrus") sue Cirrus, and certain of its officers and directors, for securities fraud. At the request of the Court, defendants have filed three separate motions for summary judgment. For the reasons stated hereinafter, the Court grants defendants' motions for summary judgment in part, and denies them in part.

I.

This is a federal securities class action alleging violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934¹, and Rule 10b-5 promulgated thereunder,² by Cirrus, and certain of its officers and directors, during the class period of October 22, 1992 through April 26, 1993. The individual defendants are Michael L. Hackworth ("Hackworth"), Cirrus's founder, President, CEO, and Director; Sam S. Srinivasan ("Srinivasan"), Chief Financial Officer and Vice President of Finance; George N. Alexy ("Alexy"), Vice President of Marketing; Douglas J. Bartek ("Bartek"), Vice-President and General Manager of User Interface Products ("Bartek"); and William D. Caparelli ("Caparelli"), Vice President of Worldwide Sales.

Cirrus was founded in 1984 and designs, develops and manufactures semiconductor chips ("chips"), used in personal computers, that control disk drives, monitors, and fax modems. (Joint Statement of Undisputed Facts ("UF") ¶ 1.) During the class period, Cirrus had three principal divisions. (UF ¶ 2.) The Mass Storage (disk drive) Division made chips for disk drive makers, the User Interface Division made chips for graphics displays, and the Communications Division made chips for computer modems. (UF ¶ 2.)

Plaintiffs allege that by the end of the summer of 1992, Cirrus was aware that its Mass Storage Division was experiencing a decline in demand that would materially worsen. By October 1992, the beginning of the class period, Cirrus was allegedly aware that demand for its Mass Storage products was evaporating, yet defendants publicly stated that its business remained strong. Plaintiffs allege that Cirrus "cooked the books" for the third quarter of fiscal 1993 (ended December 31, 1992) to avoid revealing the fact and extent of the purportedly declining demand for its products. In particular, plaintiffs allege that Cirrus calculated its inventory reserves by a method that violated both its own internal accounting policy and Generally Accepted Accounting Principles ("GAAP"). Plaintiffs also contend that Cirrus improperly failed to recognize a $1.7 million shortfall between physical and book inventory in the third quarter, and that Cirrus improperly pulled in revenue from the fourth quarter to the third quarter. Plaintiffs argue that these allegedly improper accounting manipulations permitted Cirrus fraudulently to report increased revenues and earnings for the third quarter, thus keeping stock prices artificially high.

A number of sales of stock by corporate insiders took place in late October and during the month of November 1992. Between October 26 and November 2, 1992, Srinivasan sold 61,000 shares of his Cirrus stock. (UF ¶ 125.) Caparelli sold 30,000 shares of stock between October 28 and November 9, 1992. (UF ¶ 128.) Between November 6 and 10, 1992, Bartek sold 60,000 shares of stock previously subject to lockup restrictions. (UF ¶ 127.) On November 10, 1992, Alexy sold 10,000 shares of stock (approximately 8.3 percent of his total holdings), retaining thereafter 71,013 shares and 38,625 vested options. (UF ¶ 126.)

In December 1992, Cirrus announced its acquisition of Pacific Communication Sciences, Inc. ("PCSI"), allegedly representing that the acquisition would have no impact on the third quarter results, and only a $.10 to $.15 impact on the company's earnings per share for the fourth quarter.

On April 26, 1993, Cirrus announced that its earnings per share for the fourth quarter would be lower than market expectations. Cirrus also announced that its previously reported third quarter results would be restated downward from $0.46 to $0.28 per share. One of the reasons given for the shortfall in fourth quarter earnings was a $4 million increase in Cirrus's inventory reserves. On April 27, the day after the end of the class period, the price of Cirrus shares dropped $6 to $14.50 per share, representing a drop of almost 30 percent.

Of the three separate summary judgment motions, the first motion concerns plaintiffs' allegations that Cirrus's preparation and issuance of its third quarter financial results constituted accounting fraud. The second motion discusses Cirrus's alleged liability for opinions by third-party securities analysts, and for Cirrus's private statements to one particular analyst. The third motion discusses Cirrus's alleged liability for its own public statements in conference calls, press releases, and filings with the Securities and Exchange Commission ("SEC") during the third and fourth quarters of fiscal 1993.

II.

A.

Rule 56(c) of the Federal Rules of Civil Procedure provides that a court may grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."

The Supreme Court's 1986 "trilogy" of Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986), Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct 2505, 91 L.Ed.2d 202 (1986), and Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) requires that a party seeking summary judgment show the absence of a genuine issue of material fact. Once the moving party has made this showing, the nonmoving party must "designate `specific facts showing that there is a genuine issue for trial.'" Celotex, 477 U.S. at 324, 106 S.Ct. at 2553 (quoting Fed.R.Civ.P. 56(c)). "When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586, 106 S.Ct. at 1356. "If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Liberty Lobby, 477 U.S. at 249-50, 106 S.Ct. at 2511, (citations omitted). When determining whether there is a genuine issue for trial, "inferences to be drawn from the underlying facts ... must be viewed in the light most favorable to the party opposing the motion." Matsushita, 475 U.S. at 587, 106 S.Ct. at 1356 (citation omitted).

B.

Rule 10b-5 of the Securities and Exchange Act of 1934 makes it unlawful 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) (1996). To prove a violation of Rule 10b-5, plaintiffs must show "(1) a misrepresentation or omission of a material fact, (2) reliance, (3) scienter, and (4) resulting damages." Paracor Fin., Inc. v. General Elec. Capital Corp., 96 F.3d 1151, 1157 (9th Cir.1996).

1.

Misrepresentations of material facts within the meaning of Rule 10b-5 typically involve misstatements of historical fact. A material misstatement need not be one of historical fact, however, to be actionable. See In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir.1989), cert. denied, 496 U.S. 943, 110 S.Ct. 3229, 110 L.Ed.2d 676 (1990). Both projections and "general expressions of optimism" may be actionable under the securities laws. Id. (citing Marx v. Computer Sciences Corp., 507 F.2d 485, 489-92 (9th Cir.1974)); see also In re Wells Fargo Sec. Litig., 12 F.3d 922, 930 (9th Cir. 1993), cert. denied, ___ U.S. ___, 115 S.Ct. 295, 130 L.Ed.2d 209 (1994) (quoting Hanon v. Dataproducts Corp., 976 F.2d 497, 501 (9th Cir.1992)) ("[s]tatements of reasons, opinions, or beliefs are `factual' for purposes of the securities laws," and thus may be actionable, unless certain conditions are met).

There are three principal ways to shield forward-looking statements from actionability under Rule 10b-5. First, the statement will not be actionable if all of the following are true: "(1) ... the statement is genuinely believed, (2) ... there is a reasonable basis for that belief, and (3) ... the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement." See id. at 930 (quoting Hanon, 976 F.2d at 501). In order to "seriously undermine" the accuracy of the statement, undisclosed facts must "undermine [its] foundation[s]." Arazie v. Mullane, 2 F.3d 1456, 1467 (7th Cir.1993).

The second way to shield such statements from actionability is through reliance on the precept that statements must be evaluated in context, "in light of all the information then available" (including information available to the market), to determine liability under the securities laws. In re Convergent Technologies Sec. Litig., 948 F.2d 507, 512 (9th Cir. 1991). Pursuant to the "bespeaks caution" doctrine recognized by the Ninth Circuit, typically applied in cases involving a written document, "a court can rule as a matter of law ([for example in] ... a motion...