In re Cree, Inc. Securities Litigation

• Decision Date: 27 August 2004
• Docket Number: No. 1:03 CV 00549.,1:03 CV 00549.
• Citation: 333 F.Supp.2d 461
• Court: U.S. District Court — Middle District of North Carolina
• Parties: In re CREE, INC. SECURITIES LITIGATION

333 F.Supp.2d 461

In re CREE, INC. SECURITIES LITIGATION

No. 1:03 CV 00549.

United States District Court, M.D. North Carolina.

August 27, 2004.

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Jeffrey Dean Patton, Reginald F. Combs, Blanco, Tackabery, Combs & Matamoros, P.A., Winston-Salem, NC, Jay W. Eisenhofer, Sidney S. Liebesman, Grant & Eisenhofer, P.A., Wilmington, DE, J. David James, Smith James Rowlett & Cohen, Greensboro, NC, Sherrie R. Savett, Berger & Montague, P.C., Philadelphia, PA, David Garrett Schiller, Schiller & Schiller, PLLC, Raleigh, NC, Kenneth J. Vianale, Julie Prag Vianale, Vianale & Vianale, LLP, Boca Raton, FL, Marvin Schiller, Raleigh, NC, Deborah R. Gross, Office Of Bernard M. Gross, Philadelphia, PA, Christine M. Fox, Kaplan Fox & Kilsheimer, LLP, New York City, Edward G. Connette, III, Lesesne and Connette, Charlotte, NC, Samuel H. Rudman, David A. Rosenfeld, Mario Alba, Jr., Cauley, Geller, Bowman, Coates & Rudman, LLP Melville, NY, S. Gene Cauley, Darrin L. Williams, Randall K. Pulliam, Cauley, Geller, Bowman & Rudman, LLP, Little Rock, AR, for Plaintiffs.

Carl N. Patterson, Jr., Donald Hugh Tucker, Jr., Michael W. Mitchell, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, Raleigh, NC, Bruce G. Vanyo, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, CA, Gregory A. Harris, Nicholas I. Porritt, Wilson, Sonsini, Goodrich & Rosati, P.C., Reston, VA, Lyle Roberts, for Defendants.

MEMORANDUM OPINION

BULLOCK, District Judge.

Plaintiffs bring this consolidated class action lawsuit against Defendant corporation Cree, Inc. ("Cree") and various Cree officers and directors, including F. Neal Hunter, Cynthia B. Merrell, John W. Palmour, Charles Swoboda, Calvin H. Carter, James E. Dykes, Dolph W. Von Arx, and Walter L. Robb (collectively "Defendants"). Plaintiffs allege that Defendants engaged in fraudulent business practices designed to artificially inflate Cree's stock price. Plaintiffs bring claims for securities fraud pursuant to Sections 10(b), 18, 20(a), and 20(A) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78r, 78t(a), and 78t-1(a), Rule 10b-5 promulgated under Section 10 of the Exchange Act, 17 C.F.R. § 240.10b-5, and Section 304 of the Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7243. Before the court is Defendants' motion to dismiss the complaint as untimely and deficient under the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 et seq. ("PSLRA"). Also before the court is Plaintiffs' motion to strike certain of Defendants' exhibits submitted in support of their motion to dismiss. For the following reasons, the court will grant Defendants' motion to dismiss without prejudice. The court also will grant Plaintiffs' motion to strike Defendants' Exhibits 8, 21-25, 30, and 47 attached to the Declaration of Nicholas I. Porritt in Support of Defendants' Motion to Dismiss. Plaintiffs' motion to strike Defendants' Exhibit 18 will be denied.

FACTS

Cree, a North Carolina company headquartered in Durham, North Carolina, develops and markets products made from silicon carbide. The company is a leading manufacturer of semiconductors, transistors, and light-emitting diodes ("LEDs"). On June 12, 2003, Eric Hunter, a former Chief Executive Officer ("CEO") and co-founder of Cree, filed suit against Cree and various Cree executives, including his brother and co-founder, F. Neal Hunter ("Neal Hunter").¹ In his brief initial complaint, Eric Hunter sued Cree for securities fraud, violations of the whistle-blower provisions of Section 806 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1514A, and defamation. Cree's stock price fell 18.5% upon announcement of the suit.²

Four days after Eric Hunter filed his complaint, the first of nineteen securities fraud class action suits were filed against Cree. On November 25, 2003, the court held a hearing to consolidate the cases and name a lead plaintiff for the putative class. Louisiana Teachers' Retirement System was selected as lead plaintiff. The class has not been certified.

On January 16, 2004, Plaintiffs filed a Consolidated Class Action Complaint ("the complaint"). Plaintiffs seek to represent purchasers of Cree stock during an approximately four-year period from August 12, 1999 to June 13, 2003 (the proposed "class period"). The complaint alleges that throughout this period Defendants made numerous omissions and misleading statements in Cree's press releases and public filings. These allegations center on Cree's business relationships with six companies, some of which were owned or operated by other members of the Hunter family.

Round-Trip Transactions

Plaintiffs' round-trip allegations concern Cree's business dealings with Microvision, Inc. ("Microvision"), Spectrian Corporation ("Spectrian"), World Theatre, Inc. ("WTI"), Xemod, Inc. ("Xemod"), and Lighthouse Technologies Ltd. ("Lighthouse"). According to Cree's disclosures, Cree invested in these companies and entered into agreements to receive research and development ("R & D") funding from them. Plaintiffs contend that these agreements were in fact a method by which Cree "round-tripped" its own funds, improperly improving its financial performance by purchasing its own revenue and earnings.

For example, during the class period, Cree invested $12.5 million in Microvision, and Microvision agreed to fund $10 million worth of Cree R & D. Plaintiffs allege that Cree overpaid for its investment in Microvision pursuant to a secret agreement requiring Microvision to return the funds to Cree for R & D that Cree never performed. Plaintiffs support this claim with statements by an unnamed Microvision vice president primarily responsible for Microvision's R & D and a former Microvision project manager.

In addition to alleging round-trip transactions involving Microvision, Plaintiffs claim that Cree used its relationship with Spectrian to inflate its stock price and financial outlook. In December 2000, Cree acquired UltraRF, a subsidiary of Spectrian, for $100 million. Cree allocated $81.6 million of the purchase price to goodwill and the remainder to UltraRF's tangible and specific intangible assets. At the time of purchase, Cree and Spectrian also entered into a development agreement for $2.4 million in R & D funding and a Purchase and Supply Agreement under which Spectrian would buy $58 million worth of Cree products over two years. In October 2001 and again in March 2002, the parties modified the Purchase and Supply Agreement to reduce Spectrian's obligations. Subsequently, Cree wrote down $76.5 million of UltraRF's assets and goodwill as impaired. The Purchase and Supply Agreement ultimately terminated in November 2002 upon a $5 million payment from Spectrian.

According to Plaintiffs, Cree's deal with Spectrian was secretly designed as another way to round-trip Cree's funds. The complaint alleges that Cree overpaid to acquire UltraRF and that the development and supply agreements were phony because "Cree had no experience manufacturing" products for Spectrian, "knew it did not have the ability to perform the R & D contemplated in Cree's agreements with Spectrian," and never actually conducted R & D for Spectrian. (Compl.¶ 168.) To support these assertions, Plaintiffs reference several sources, including two employees and Eric Hunter.

Plaintiffs allege that Cree continued to manipulate its financials by engaging in comparable round-trip schemes with WTI, Xemod, and Lighthouse. In its public filings, Cree disclosed its investments in these companies and identified them as sources of R & D funding. Cree also subsequently disclosed substantial write-downs of each of these investments. However, Plaintiffs maintain that Cree failed to disclose facts showing that these business ventures were undertaken to perpetuate the recycling of Cree's revenue and earnings. The complaint identifies no documents or sources to support Plaintiffs' claims regarding WTI, Xemod, or Lighthouse.

Channel-Stuffing and Fake Equipment Sales to C3

Finally, Plaintiffs aver that Cree engaged in improper business practices with respect to C3. C3 manufactures artificial gemstones made of silicon carbide crystals. The company was founded by Eric and Jeff Hunter, brothers of Cree CEO Neal Hunter, and Cree and its directors have invested in C3.³

Plaintiffs base their allegations regarding C3 largely on information gleaned from Eric Hunter's complaint. Plaintiffs claim that Neal Hunter contracted to supply C3 with all the crystals Cree could manufacture, regardless of C3's needs, subject to an undisclosed right of return. Under the alleged scheme, Cree shipped C3 crystals far in excess of C3's demand, and C3 could reject the crystals even if they conformed to C3's specifications. However, to prevent Cree from taking a reserve or impairment charge on sales it already had booked, the companies allegedly agreed that the rejected product would be stored in C3's facilities. Plaintiffs contend that a former Cree process engineer who worked as the lead manager on the C3 product line and a former C3 vice president of marketing can substantiate these "channel stuffing" allegations.

Plaintiffs also aver that Cree exploited its relationship with C3 by booking a phony sale of crystal-growing equipment. In its 1998 and 1999 10-Ks, Cree disclosed that C3 purchased crystal growers from Cree for $6.2 million. Cree indicated that the growers would remain at Cree under C3's ownership and that title to the growers would be transferred to Cree when the machines had fully depreciated. In 2000, Cree disclosed that it had repurchased the growers, the price of which would be offset by existing amounts due from C3 and $3.9 million in credit from Cree to C3. Plaintiffs claim that this transaction was fraudulent because a true sale was never effectuated. Instead, according to Plaintiffs, at the time of the supposed sale, Cree secretly agreed to...