In re Northern Telecom Ltd. Securities Litigation
| Decision Date | 28 September 2000 |
| Docket Number | No. 93 Civ. 4384.,No. 93 Civ. 4432.,No. 93 Civ. 4397.,93 Civ. 4384.,93 Civ. 4397.,93 Civ. 4432. |
| Citation | 116 F.Supp.2d 446 |
| Parties | In re NORTHERN TELECOM LTD. SECURITIES LITIGATION Max Fecht, Boston International Partners, L.P., Guidance Components Corp., Stephen R. Raab, Leon Shapiro, and Irwin Sternberg, Plaintiffs, v. Northern Telecom Ltd., Jean C. Monty, Martin G. Mand, Edward E. Lucente, Roy Merrills, Alan G. Lutz, Desmond F. Hudson, and Frank A. Dunn, Defendants. Leon Shapiro, Plaintiff, v. Northern Telecom Ltd. and Jean C. Monty, Defendants. Erwin Sternberg, Plaintiff, v. Northern Telecom Ltd. and Jean C. Monty, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Wolf Popper LLP, New York City by Stephen D. Oestreich, Lawrence D. Levit, Abbey Gardy & Squitieri, New York City by Joshua Rubin, Kirby McInerney & Squire, LLP, New York City by Jeffrey H. Squire, Daniel Hume, Berger & Montague, P.C., Philadelphia, PA by Jay Robert Stiefel, Schiffrin & Craig, Ltd., Bala Cynwyd, PA by Richard Schiffrin, Stull Stull & Brody, New York City by Howard T. Longman, Law Offices of James V. Bashian, New York City by James V. Bashian, Oren S. Giskan, Savett Frutkin Podell & Ryan, P.C., Philadelphia, PA by Robert Frutkin, for plaintiffs.
Shearman & Sterling, New York City by Stuart J. Baskin, Kathryn L. Tabner, Amanda J. Gallagher, Richard A. Lingg, Jennifer M. Dehmel, for defendants.
Plaintiffs in these consolidated class action suits assert claims against defendants under §§ 10(b) & 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) & 78t(a), and under Rule 10b-5. The essence of plaintiffs' complaint is that defendants, who were officers of Northern Telecom Ltd. ("Nortel") during the class period, made misleading statements over a period of time concerning the company's business and financial health that artificially inflated the price of Nortel's stock. Extensive discovery has been completed, and defendants move for summary judgment on all claims. For the reasons discussed below, the motion is granted in its entirety.
The following facts are undisputed unless otherwise noted.1
Plaintiffs Max Fecht, Stephen R. Raab, Guidance Components Corp., and Leon Shapiro together purchased 650 shares of Nortel stock from May 19, 1993 through June 24, 1993. Plaintiffs Boston International Partners, L.P. and Irwin Sternberg collectively bought 35 call options on June 18 and June 28, respectively. The class excludes foreign subjects or citizens who purchased Nortel securities outside the United States. The class period runs from January 26, 1993 through July 20, 1993 (the "Class Period").
Nortel is a Canadian corporation. During the Class Period, its principal place of business was located in Mississauga, Ontario, Canada. The company's common stock is traded on the Toronto, Montreal, New York, Vancouver, London, and Tokyo exchanges. Nortel is a major producer of a variety of communications products, including telephone switching systems.
All of the individual defendants were officers of Nortel during all or part of the Class Period. Jean C. Monty was President and a Director of Nortel and became Chief Executive Officer on March 1, 1993. Martin G. Mand was Nortel's Chief Financial Officer. Edward E. Lucente served as Nortel's Executive Vice President for marketing from 1992 until March 15, 1993. Roy G. Merrills served as a Vice President of Nortel, as Chairman of Nortel's United States subsidiary, Northern Telecom Inc. ("NTI"), and, as of July 1, 1993, in a new position entitled "Executive Vice President of the Americas." Alan G. Lutz was a Senior Vice President and President, Switching Networks, of Nortel until July 1, 1993. Desmond F. Hudson was Senior Vice President of Nortel and President of Northern Telecom Europe. Frank A. Dunn was a Vice President and Nortel's Deputy Controller and later Controller. The complaint alleges that all of the individual defendants are controlling persons under § 20(a) of the Securities Exchange Act of 1934.
During the three years preceding the Class Period, Nortel reported revenues of $6.8 billion in 1990, $8.2 billion in 1991, and $8.4 billion in 1992, respectively. Nortel reported research and development investments of $773.7 million, $948.3 million, and $930.5 million during each of those respective years. Nortel reported earnings per share growth from $1.80 to $2.03 in 1991 and to $2.17 in 1992.
As of 1993, Nortel produced a number of products, including central office digital switching and transmission equipment. A central office switch is essentially a large computer used to direct telephone operations. Nortel's switching software was customized for each customer and provided telephone companies with a variety of features, such as call waiting, call forwarding, and voice recognition. Transmission equipment is necessary to carry highspeed transmission of data and voice over optical fiber networks. In 1992 and 1993, Nortel was awarded substantial contracts by a number of Canadian and United States telephone companies to supply equipment for their networks.
In 1992, revenues from the United States accounted for $4.5 billion, or approximately 54% of Nortel's total revenues. Central office switching revenues worldwide accounted for approximately $4.24 billion, or 50%, of total revenues.
Large telephone networks, such as the network operated by Bell Atlantic (now known as Verizon) in New York, are operated using giant switches installed by, among others, Nortel and engineers of the Regional Bell Operating Companies ("RBOCs") in centralized locations. Since all of the RBOCs had been part of AT & T prior to its breakup in the early 1980s, they had "inherited" analog switches from AT & T's equipment subsidiary. After the 1984 divestiture, the RBOCs replaced these analog networks at great cost with higher-capacity digital switches. Nortel had success in penetrating that market, as the RBOCs and long-distance carriers replaced their analog switches with products such as Nortel's DMS 100 or DMS 250 digital switching systems.
Nortel internally estimated its United States market share in switching equipment, excluding AT & T's own internal equipment purchases and including MCI and Sprint, at 51% in 1991 and 53% in 1992. At all relevant times, Nortel's principal competitors included AT & T (now Lucent Technologies), Ericsson, Nokia, and Alcatel.
In 1991-93, the largest telephone companies spent billions of dollars upgrading their networks through what Nortel terms "megadeals." Nortel obtained a number of these contracts. In 1991, for example, Nortel won 75% of a $1 billion contract with Ameritech to upgrade Ameritech's analog switching systems. By 1993, Nortel had captured 53% of BellSouth's switching market share. In 1992, Pacific Bell chose Nortel switches in a multi-million dollar contract to replace its remaining analog switches. Also in 1992, MCI awarded Nortel a $225 million network upgrade supply agreement. On January 25, 1993, the day before the Class Period began, Pacific Bell awarded Nortel almost half of a $1 billion contract to upgrade its analog switches.
In 1993, the only major switching deal was NYNEX's replacement of millions of lines of analog switches. Nortel won over half of that contract.
Unlike AT & T, Nortel's closest competitor in the United States digital switching market, Nortel did not compete with RBOCs for telephone customers.
Nortel solicited customer feedback from the RBOCs. Customers were encouraged to evaluate Nortel through regular surveys and Nortel crafted Customer Satisfaction Improvement Plans and Strategic Plans for Customer Satisfaction and Quality to address customers' concerns.
As phone companies spent billions of dollars on new digital networks, Nortel switches became a substantial component of the phone companies' "embedded base." RBOCs expected central office switches to last from ten to twenty years. Nevertheless, central office switches required constant additions and modifications over that period.
Software was the greatest cause of dissatisfaction among Nortel's customers in the years leading up to the Class Period. The "BCS" software which operated Nortel's digital switches contained over 20 million lines of code. Nortel's customers demanded a high level of reliability in the switching software. One set of performance benchmarks, called the Local Switching Systems Generic Requirements ("LSSGR") standards, provided that there should be no more than one incident per switch every three years or three minutes of switch downtime per system per year. In 1992, Nortel's software releases had approximately one incident per year and 6.54 minutes of downtime per year. Nortel planned improvements to meet the LSSGR standards and exceed them by 1995.
Starting in mid to late 1992, Nortel's switching unit began the process of changing the architecture of its software, a project referred to as the "DMS Evolution." The objective of the project was to create a core layer of software with semi-customized features layered on top. With such a structure, future development could concentrate on the outer layers, which would simplify and accelerate the development process. In 1992, Nortel committed hundreds of software engineers to this effort. The project cost for 1993 was estimated at $71 million of a total research and development budget approximating $1 billion. The DMS Evolution included consultation with Nortel's customers to discuss software problems and how they could be corrected.
Nortel does not publicly disclose its annual or quarterly budgets. In 1992, when the 1993 budget was created, Nortel's senior management developed a set of corporate objectives which were distributed to the business units. Senior management demanded greater budgetary objectives from the...
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