In re Northern Telecom Ltd. Securities Litigation

• Decision Date: 06 May 1998
• Docket Number: No. 93 CIV. 4384(MGC).,93 CIV. 4384(MGC).
• Citation: 42 F.Supp.2d 234
• Parties: In re NORTHERN TELECOM LTD. SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of New York

42 F.Supp.2d 234

In re NORTHERN TELECOM LTD. SECURITIES LITIGATION.

No. 93 CIV. 4384(MGC).

United States District Court, S.D. New York.

May 6, 1998.

COPYRIGHT MATERIAL OMITTED

Stephen D. Oestreich, Wolf Popper Ross Wolf & Jones, L.L.P., New York City for plaintiffs.

Stuart J. Baskin, Shearman & Sterling, New York City, for Northern Telecom Ltd., Jean C. Monty, Edward E. Lucente, Rou Merrills, Alan G. Lutz, Desmond F. Hudson, Frank A. Dunn, defendants.

Richard F. Ziegler, Cleary, Gottlieb, Steen & Hamilton, New York City, for Paul G. Stern, Martin G. Mand, defendants.

MEMORANDUM ORDER

CEDARBAUM, District Judge.

Magistrate Judge Dolinger has recommended that defendants' motion for judgment on the pleadings be denied and that plaintiffs' motion to amend the complaint be granted in part. Defendants filed written objections to the Magistrate Judge's Report and Recommendation in accordance with 28 U.S.C. § 636(b)(1)(C). After carefully examining defendants' objections and the pleadings, I accept the attached Report and Recommendation with respect to defendants' motion for judgment on the pleadings as well as the portion that recommends permitting the filing of an amended complaint. However, I sustain defendants' objections with respect to the new allegations of the proposed amended complaint as specified below.

Plaintiffs seek to add to the complaint the following statements that appeared in reports by independent analysts:

"Today's conference call [with Northern Telecom] was the most upbeat we have heard for some time.... [Northern Telecom] is optimistic that gross margins will improve as the software component increases." (Proposed Third Am. Compl. ¶ 36.)

"[Although orders are down from the prior year, backlog is up which] gives investors some comfort that the second quarter should see growth. Our estimate is 40 cents versus 28 cents a year earlier. Management indicates that the second half should be much stronger than the first, as usual." (Id. ¶ 66.)

"Based on conversations with the company, we believe Northern will record modest top-line growth in the June quarter and could post significantly stronger results in the second half of the year." (Id. ¶ 73.)

"In a conversation with NorTel's management, the company reiterated the view that 1993 earnings will be heavily loaded in the second half of the fiscal year, very much following the seasonal pattern evident over 1992.... Our ongoing discussions with NorTel's management, in addition to the Regional Bell Operating Companies (RBOCs), continues to suggest a 10% earnings advance for all of 1993 is attainable leading to our target of $2.40 per share." (Id. ¶ 75.)

"The second quarter is likely to show only a very small gain, if any, versus 30 cents in the first quarter and 28 cents a year ago. Street consensus on the quarter is fairly broad, 25 cents — 48 cents; our new guidance [32 cents] is in line with current company guidance...." (Id. ¶ 81.)

"We are reducing our second quarter earnings estimate to $0.30 per share from $0.40 to reflect management's comments, versus $0.28 in the second quarter of 1992." (Id. ¶ 83.)

These six separately reported statements do not constitute actionable fraud. Some of the statements insufficiently reflect the actual statements of identifiable Northern Telecom executives, and some are based primarily on analysts' own interpretations or projections of Northern Telecom's results. Fed.R.Civ.P. 9(b); In re Time Warner Inc. Secs. Litig., 9 F.3d 259, 265-66 (2d Cir.1993). In addition, many of these statements — to the extent that statements by Northern Telecom can be identified from the analyst reports — are vague expressions of optimism for the future which add little to the other allegations of the complaint. In re International Bus. Machs. Corp. Secs. Litig., 163 F.3d 102, 108-09 (2d Cir.1998).

I also sustain defendants' objections with respect to the statements of Paul G. Stern, the former Chief Executive Officer and Chairman of the Board of Directors of Northern Telecom. The proposed amended complaint alleges that the following statements by Stern, as quoted in a Dow Jones News Service article, were materially false and misleading. "[I am not as] bullish as the rest of the world in terms of upturn in the economies, although we still expect to have a record year in 1993." "[I]f I'm wrong about the economy this year and it turns up the way economists are saying it will, then, hell, we'll be in great shape." (Proposed Third Am. Compl. ¶ 28.) These predictions are not accompanied by any specific statements of fact. They are general expressions of optimism that are too indefinite to be actionable under the securities laws. In re International Bus. Machs. Corp. Secs. Litig., 163 F.3d 102, 108-09.

Moreover, Stern's statements are quoted in a news article that contains qualifying and balancing information.¹ For instance, the article reports that "Stern acknowledged that 1992 revenue from central office switching systems used by phone companies was flat." (Baskin Aff Ex. I.) Thus, the "total mix of information" in the article is not a basis for a claim of securities fraud. San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 811 (2d Cir.1996).

SO ORDERED.

REPORT & RECOMMENDATION

DOLINGER, United States Magistrate Judge.

Plaintiffs in this class action securities litigation are pursuing claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a). They allege that, during the period from January 26 to July 30, 1993 they purchased shares or call options of Northern Telecom Ltd. ("Nortel"), and in doing so were misled by various statements made by or on behalf of senior management of the company concerning its business and financial health.

In 1993 the court dismissed the original complaint from the bench, but with leave to replead. Plaintiffs filed an amended complaint, and defendants moved to dismiss that version of the complaint for failure to state a claim. In support of the motion, defendants argued principally that the twenty statements itemized by plaintiffs as false or misleading either were the sort of "puffery" or generalized prediction on which no investor could reasonably rely or were simply not false or misleading when read in context. The District Court issued a Memorandum Opinion and Order on August 19, 1994, granting the defendants' motion in part. Specifically, the court ruled that fourteen of the twenty cited statements were not actionable, but it upheld the legal sufficiency of the claims pertaining to the remaining six statements.

Towards the conclusion of pretrial discovery, plaintiffs moved for leave to serve and file another amended complaint. Offered in two forms — one on plaintiff's original motion and the other in their reply papers — the proposed "Third Consolidated Amended Class Action Complaint" contains allegations of additional assertedly fraudulent or reckless statements made by or on behalf of defendants during the class period, all involving comments that are similar in nature to the statements that plaintiffs had originally targeted. The proposed pleading also includes allegations that Nortel had used improper accounting methods in publicly disclosing its financial performance for both 1992 and the first quarter of 1993 and that the effect of this accounting chicanery was to inflate earnings.

Defendants have opposed the motion to amend. Moreover, they have moved to dismiss that part of the current complaint that survived their 1994 motion to dismiss.

In substance, defendants argue that the proposed amendments would be futile because the new allegations are insufficient as a matter of law to plead a cognizable claim with respect to any of the newly cited statements. As for defendants' dismissal motion, they invite the court to revisit its 1994 decision because, they say, the Court of Appeals for the Second Circuit has modified the governing legal standards since the prior decision in this case. According to defendants, the purported new criteria reflect even greater skepticism about the type of allegations invoked by plaintiffs and demonstrate that the previously surviving statements are not actionable. Defendants also appear to argue that the prior decision was simply wrong in sustaining the claims pertaining to the six statements.

For the reasons that follow, I recommend that defendants' motion to dismiss be denied. The court's original dismissal decision is law of the case, and defendants do not demonstrate that there has been any meaningful change or refinement in circuit law that would either call into serious question the correctness of the original ruling or otherwise justify revisiting the issue on a motion addressed to the face of the pleadings. As for plaintiff's motion to amend the complaint, we recommend that the motion be granted in part.

ANALYSIS

We first address defendants' motion to dismiss the current complaint and then turn to plaintiff's motion to amend the complaint.

I. The Motion to Dismiss

Defendants' application to dismiss the balance of the current complaint is concededly an effort to reargue that portion of their 1994 motion that was denied by the District Court. (Tr. 12)¹. Since that decision is law of the case in this litigation, defendants bear the initial burden of justifying why the court should reconsider issues that it had previously decided some years ago in this case. We conclude that defendants have failed to carry their burden in this respect.

A. The Law of the Case Doctrine

The law-of-the-case doctrine "posits that when a court decides upon a rule of law, that decision should continue to govern in subsequent stages of the same case." Sagendorf-Teal v. County of Rensselaer, 100 F.3d 270, 277 (2d Cir.1996). See also Doctor's Assocs., Inc. v. Distajo, 107 F.3d 126, 131 (2d Cir.), cert. denied, ___ U.S. ___, 118 S.Ct. 365, 139 L.Ed.2d 284 (1997); DiLaura v. Power...