In re Metawave Communications Corp. Securities

• Decision Date: 20 June 2003
• Docket Number: No. C02-625Z.,C02-625Z.
• Citation: 298 F.Supp.2d 1056
• Parties: In re METAWAVE COMMUNICATIONS CORP. SECURITIES LITIGATION This Document Relates to All Actions
• Court: U.S. District Court — Western District of Washington

298 F.Supp.2d 1056

In re METAWAVE COMMUNICATIONS CORP. SECURITIES LITIGATION

This Document Relates to All Actions

No. C02-625Z.

United States District Court, W.D. Washington, At Seattle.

June 20, 2003.

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Dennis J. Herman, Williams Youle & Koenigs, Denver, CO, Dennis J. Herman,

Milberg Weiss Bershad Hynes & Lerach LLP, Eli R. Greenstein, Milberg Weiss Bershad Hynes & Lerach LLP, San Francisco, CA, Erin K. Flory, Hagens Berman LLP, Seattle, WA, Ira M. Press, Kirby McInerney & Squire, Jeffrey H. Squire, Kirby McInerney & Squire, Pamela E Kulsrud, Kirby McInerney & Squire, New York City, Randi D. Bandman, Milberg Weiss Bershad Hynes & Lerach LLP, San Francisco, CA, Steve W. Berman, Hagens Berman LLP, Seattle, WA, William S. Lerach, Milberg Weiss Bershad Hynes & Lerach, San Diego, CA, for Plaintiffs.

Barry M. Kaplan, Perkins Coie, C. N. Coby Cohen, Perkins Coie, Douglas W. Greene, Perkins Coie, Ronald L. Berenstain, Perkins Coie, Bradley Lloyd Fisher, Davis Wright Tremaine LLP, Seattle, WA, David B. Bayless, Morrison & Foerster, Sandra Hanna, Morrison & Foerster, Tammy Albarran, Morrison & Foerster, San Francisco, CA, for Defendants.

ORDER

ZILLY, District Judge.

This matter comes before the Court on Defendants Hunsberger and Fuhlendorf's motion to dismiss Plaintiffs' consolidated complaint, docket no. 34, and Defendant Liang's motion to dismiss the consolidated complaint, docket no. 37. On May 29, 2003, the Court heard oral argument on these motions to dismiss, and on Defendants Hunsberger and Fuhlendorf's request for judicial notice, docket no. 35.¹

BACKGROUND

Plaintiffs bring this securities fraud class action on behalf of purchasers of the publicly traded securities of Defendant Metawave Communications Corp. ("Metawave") during the period from April 24, 2001 to March 14, 2002 (the "Class Period"). Plaintiffs bring this action against Metawave² and three of its officers Chairman of the Board and Chief Executive Officer ("CEO") Robert Hunsberger; former Chief Financial Officer ("CFO") Stuart Fuhlendorf, and former President of World Trade and Vice President for Worldwide operations Victor Liang (collectively, the "Individual Defendants"). The Consolidated Class Action Complaint ("CCAC"), docket no. 28, alleges that Metawave and the Individual Defendants made material misrepresentations regarding three subjects: (1) the quality of Metawave's SpotLight GSM product, which was a "smart antenna" designed to increase the capacity and quality of cellular phone networks, and the demand for the product in China, (2) Metawave's recognition of revenues from SpotLight GSM sales, and (3) Metawave's accounting for inventory.

Metawave developed, manufactured, marketed, and sold "smart antenna" systems under the SpotLight brand name. Smart antennas are products designed to boost the capacity of existing wireless networks to accommodate additional users without building new cell sites. CCAC ¶¶ 2, 40. In 1998, Metawave began to develop a version of its SpotLight GSM product that was compatible with Global System for Mobile Communications ("GSM") wireless standards. Id. ¶ 41. Metawave initially focused its search for a viable market for the SpotLight GSM product on North America. Id. ¶ 44. However, by 2001, Metawave's domestic sales for the SpotLight GSM product were lagging, and Metawave began to expand the market for its product in Europe and Asia. Id. ¶¶ 45-46. Metawave hired Defendant Liang in September 1998 to lead the development of and to help launch the SpotLight GSM product in the Asian wireless market. Id. ¶ 46. As part of its strategy for selling the SpotLight GSM product, Metawave reported that it had entered into distribution agreements with distribution companies in Asia. Request for Judicial Notice ("RJN"), docket no. 35, 1:15-16. These distributors would sell the products to cellular network operators who were sometimes called "end users."

Metawave reported that it first shipped SpotLight GSM products to distributors in China and Taiwan in the fourth quarter of 2000, generating sales revenue of approximately $1.06 million. RJN 1:14, 1:86. Metawave reported that it shipped these products to China valued at approximately $1.558 million in the first quarter of 2001, $5.587 million in the third quarter of 2001, and $2.5 million in the fourth quarter of 2001. RJN 3:179, 5:208, 16:265.³ By December 2001, Metawave had received roughly $2.245 million in cash payments from its Asian distributors. CCAC ¶ 15.

Plaintiffs allege that statements made in Metawave's Form 10-Q filings with the Securities and Exchange Commission ("SEC") for the first and third quarters of 2001, conversations with analysts in April 2001, July 2001, and January 2002,⁴ and eight press releases were false or misleading regarding demand for the SpotLight GSM product in China, revenue recognition, and inventory accounting. Id. ¶¶ 60-62, 98-103, 118-20, 138, 145, 148. Specifically, Plaintiffs allege that on April 24, 2001, Metawave falsely stated that "the results in this quarter were caused by a deferral of orders and not an overall reduction in demand for our products," and that during the first quarter of 2001 there was "an increase in demand for our GSM products in Asia." RJN 9:249. Plaintiffs allege that on May 15, 2001, Metawave falsely stated that "we've been seeing increased demand for our SpotLight GSM product in the Asian market," and that "given this demand, we anticipate that we will make up this shortfall during the third and fourth quarters of this year." RJN 10:251. Plaintiffs allege that on May 29, 2001, Metawave falsely announced the "successful completion of its GSM ... smart antenna system field trial." RJN 11:252. Plaintiffs allege that on July 24, 2001, Metawave falsely reported that it was "pleased with our progress during the quarter, particularly ... the new GSM orders from Asia," and that "[t]hese GSM orders indicate increasing demand and acceptance for our recently introduced GSM smart antennas. Because of this, we anticipate improved results in the second half of the year." RJN 12:253 Plaintiffs allege that in Metawave's October 2, 2001 and October 23, 2001 press releases, Defendant Hunsberger falsely assured investors that demand for GSM products had not weakened by attributing disappointing revenue results to "parts shortages and manufacturing test issues." RJN 13:257, 14:259. Plaintiffs allege that on January 8, 2002, Metawave falsely announced the results of its "successful GSM ... smart antenna cluster deployment" in Guangzhou, China. RJN 15:263. Plaintiffs allege that the January 8, 2002 press release included false or misleading quotations from one of Metawave's end users who stated that "[w]ireless demand is explosive in the China market," and that "Metawave's smart antennas will enable us to meet these objectives and significantly improve our quality of service." Id. Plaintiffs also allege that the January 8, 2002 press release contained a false statement by Victor Liang who stated that "[o]ur smart antennas are ideal solutions for operators." Id. Plaintiffs allege that the January 29, 2002 press release was false and misleading because although Metawave announced its decision to change its revenue recognition policy after analyzing its "distributor arrangements," Metawave did not reveal that its "distributor arrangements" gave distributors a right to return GSM products, and that defective GSM products were shipped on a consignment basis. RJN 16:265.

Plaintiffs allege that Defendants' statements were false, relying on confidential witnesses who were senior managers or engineers responsible for developing the SpotLight GSM product. Plaintiffs claim that GSM field tests in China failed, and that there were no successful deployments during the Class Period. CCAC ¶¶ 64, 67, 69, 95, 106, 109, 111. Plaintiffs also claim that Metawave had no customers for the GSM product because the product did not function properly. Id. ¶¶ 93-95, 143. Plaintiffs allege that Metawave established a distribution scheme to ship unsold products to Asian distributors and to sell products on consignment. Plaintiffs claim that this scheme created the illusion of increasing demand and sales for the GSM product in the Asian market. Plaintiffs allege that Metawave continued to order shipments of defective products to China although there were already many unsold units in warehouses in China. Id. ¶¶ 106, 108, 110, 112, 131. Plaintiffs allege that the Individual Defendants knew of the shortcomings of the GSM product because they attended regularly scheduled meetings concerning the GSM product. These meetings would include discussions of the actual number of GSM products being built, shipped to distributors, sold to actual customers, and deployed. Id. ¶¶ 74-79, 128, 135. Plaintiffs assert that despite the shortcomings of the GSM product and its limited demand, Metawave made false and misleading statements about the demand for its product in China. Id. ¶¶ 59-63, 98-101, 118-20, 138, 145-47.

Plaintiffs allege that Metawave entered into agreements with distributors that allowed them to return the unsold product. Plaintiffs claim that Defendant Liang had actual knowledge of the improper sales to Chinese distributors because he negotiated the agreements. Id. ¶ 80. Thus, Plaintiffs contend that no real sales occurred in Asia, but that Metawave was consigning its defective product to Asian distributors. Id. ¶¶ 66, 106, 116, 122, 126, 146. Plaintiffs allege that despite these "consignments," Metawave continued to report revenue. Id. ¶¶ 76-77. Plaintiffs claim that the Individual Defendants had knowledge of the inaccurate sales in China because they received monthly "Redbooks" before filing Metawave's financial statements. Id. ¶¶ 80, 129. The Redbooks contained current financial statements, balances, reserves, and any changes in Metawave's financial position. Id. Plaint...