In re Scientific-Atlanta, Inc. Securities Litig.

• Decision Date: 23 December 2002
• Docket Number: No. CIV.A.1.01-CV-1950-R.,CIV.A.1.01-CV-1950-R.
• Citation: 239 F.Supp.2d 1351
• Parties: In Re SCIENTIFIC-ATLANTA, INC. SECURITIES LITIGATION,
• Court: U.S. District Court — Northern District of Georgia

239 F.Supp.2d 1351

In Re SCIENTIFIC-ATLANTA, INC. SECURITIES LITIGATION,

No. CIV.A.1.01-CV-1950-R.

United States District Court, N.D. Georgia, Atlanta Division.

December 23, 2002.

COPYRIGHT MATERIAL OMITTED

Martin D. Chitwood, Lauren S. Antonino, David Bain, Chitwood & Harley, Atlanta, Ga, Lynn L. Sarko, Juli E. Farris, Elizabeth A. Leland, Keller Rohrback, LLP, Seattle, WA, Lead Counsel for Plaintiffs.

Kenneth J. Vianale, Robert R. Adler, Milberg, Weiss, Bershad, Hynes & LeRach LLP, Boca Raton, FL, Co-Lead Counsel for Plaintiffs.

Oscar N. Person, Susan E. Hurd, Kathleen D. Zylan, Alston & Bird LLP, Atlanta, GA, for Defendants.

ORDER

STORY, District Judge.

This action was filed as a putative securities fraud class action. Essentially, the Complaint alleges that Plaintiff and others purchased Scientific-Atlanta, Inc. ("S-A") securities at an artificially inflated price as a result of false and misleading representations made by the persons controlling A during the relevant time period. Plaintiffs allege that Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("the Exchange Act"), as amended by the Private Securities Litigation Reform Act of 1995 and Rule 10b-5 promulgated thereunder. Now before the Court for consideration are Defendants' Motion to Dismiss Consolidated Class Action Complaint [37-1] and Plaintiffs' Motion for Oral Argument [45-1]. As a preliminary matter, the Court finds that the issues determined in this Order have been adequately briefed by the parties; therefore, oral argument is unnecessary. Accordingly, Plaintiffs' Motion for Oral Argument [45-1] is hereby DENIED. After reviewing the record and considering the arguments of the parties, the Court enters the following Order.

Background

The facts relied upon in this Order are taken from the Consolidated Class Action Complaint [35-1]. As required on a motion to dismiss, the Court has construed the pleadings broadly, accepted all facts pleaded therein as true, and viewed all inferences in a light most favorable to Plaintiffs. Jackson v. Birmingham Bd. of Educ, 309 F.3d 1333, 1334 (11th Cir.2002).

Plaintiffs purchased S-A common stock during the class period.¹ Defendant S-A is a cable equipment manufacturer which supplies transmission networks for home broadband access and provides digital services like video and high-speed internet access. Defendants James F. McDonald ("McDonald") and Wallace G. Haislip ("Haislip") served during the relevant time period as S-A's Chief Executive Officer and Chief Financial Officer respectively.

The Consolidated Class Action Complaint ("the Complaint") focuses on fiscal year 2001, which began in July 2000 and ended in June 2001. According to the Complaint, during July, August, and September 2000, the first quarter of fiscal year 2001, S-A was performing well, as evidenced by its number-one ranking on the Standard & Poors 500 index. (Compl.¶ 49.) However, analysts projected that the first quarter of fiscal year 2001 would be the last strong quarter for most Standard & Poors 500 companies. (Id. ¶ 50.)

During the second quarter, many telecommunications and cable businesses began tightening their budgets, and cable operators including AT & T reduced purchases. (Id. ¶¶ 51-52.) A November 24, 2000 letter from AT & T to S-A asked S-A to hold pending shipments, stating that AT & T would start purchasing products from S-A again in January 2001. (Id. ¶ 53.) At this time, PRN Newswire reported that AT & T intended to limit product receipts from S-A, but S-A explained that the slowdown would only impact one to two percent of the Company's sales. (Id. ¶¶ 56-57.) In fact, S-A reported accelerating demand for its products. (Id. ¶ 58.) The Company followed these reassurances by announcing new contracts between S-A and Fox, Sony, and Intel, inter alia, and by announcing the introduction of a new Explorer set-top. (Id. ¶¶ 60-64.) By December 2000, the end of the second quarter of fiscal year 2001, more cable operators and fiber infrastructure providers were beginning to cut capital spending, but S-A issued no public statement about the effect such cutbacks would have on its business. (Id. ¶ 67.)

When the third quarter began in January 2001, AT & T and another S-A customer canceled previous orders, but S-A had already produced the products. (Id. ¶ 68.) The Complaint alleges that S-A should have disclosed this information to shareholders because the loss of this business adversely affected the Company's prospects for the third quarter. (Id.) Around this time, S-A issued a press release announcing record financial results for the second quarter, but the report also indicated that sales and bookings for AT & T Broadband were down significantly. (Id. ¶¶ 72-73.) On February 9, 2001, S-A filed Form 10-Q with the Securities Exchange Commission ("SEC"), reporting these second quarter results. (Id. ¶ 95.) According to the Complaint, in February 2001 one of S-A's chief competitors, Motorola, announced that it would fall short of its financial forecasts due to a slowing economy. (Id.¶ 101.) S-A continued to lose business from customers like Cablevision and Charter Communications. (Id. ¶¶ 102-103, 106.) In addition, S-A was having problems in its Juarez, Mexico plant, and the Company began cutting back production. (Id. ¶¶ 105,108.)

The Complaint avers that, because of these issues, management became concerned about the Company's ability to meet market expectations and what effect the declining demand would have on the stock price. (Id. ¶¶ 112-113.) Allegedly because of this concern, S-A sought to induce customers to increase substantially their purchases before they would, in the normal course, otherwise purchase S-A's products. This practice, commonly referred to as "channel stuffing" has the effect of shifting earnings into earlier quarters to the detriment of earnings in later quarters. The Company encouraged sales by giving special discounts, offering longer payment terms, and giving credits to customers who agreed to receive and store excess inventory in warehouses. (Id. ¶¶ 114-124.) According to Plaintiffs, S-A concealed these practices not only by failing to disclose the activity but also by violating the revenue recognition policies outlined in the Generally Accepted Accounting Principles ("GAAP"), notably by invoicing for product the Company had not delivered to the customers. (Id ¶ 129-138.) During this period, S-A did nothing to inform shareholders of the alleged difficulties or the channel stuffing and accounting practices. (Id. ¶ 142.)

In February 2001, S-A announced several new business relationships, including an agreement with an Argentine cable supplier for use of S-A products, a contract with a supplier in Germany, and a new contract with Cox. (Id. ¶¶ 143-45.) By March 2001, news organizations were reporting that S-A did not adjust its earning forecasts and highlighting S-A's worldwide sales. These reports bolstered the optimistic view of the Company's prospects. (Id. ¶¶ 146-47.) During this time, the Company did not disclose the alleged declining demand for its products, the channel stuffing activity, or the recent production cutbacks. (Id. ¶¶ 149,152.)

During the fourth quarter of fiscal year 2001, Plaintiffs allege that S-A continued its pervasive channel stuffing in the face of a slowing economy and postponed orders by customers. (Id ¶¶ 4, 197-202.) In April 2001, the Company's third quarter results were announced, and the press release stated that there had been an increase in bookings, an increase in sales, and an increase in earnings. (Id ¶ 162.) The announced earnings exceeded consensus estimates. (Id ¶ 164.) Plaintiffs allege that the announcement of the third quarter results was misleading because Defendants did not disclose the pervasive channel stuffing or the prematurely recognized revenue during the third quarter. (Id H 165.) In addition, Plaintiffs assert that Defendants should have disclosed the fact that demand for S-A products was declining and that S-A was cutting back production. (Id ¶ 166.) Around the same time, McDonald told a reporter that consumer demand for the Company's digital set-tops was on the rise and emphasized analysts' optimism about S-A's future earning potential. (Id ¶¶ 154-55.) During this same interview, McDonald was asked about the reported growth of the Company, and he explained that it resulted from sales growth. (Id. ¶ 156.) Haislip made similar statements in an interview with an Atlanta Constitution reporter in late March. (Id. ¶¶ 153-54.) Analyst reports following these interviews compared S-A to its competitor Motorola, commenting that S-A's outlook was more favorable since AT & T was not such an important customer and since S-A had not offered the same substantial discounts to pull demand forward. (Id. ¶ 1157.)

On May 11, 2001, S-A filed its third quarter report with the SEC on Form 10-Q. (Id. ¶ 189.) The Form 10-Q repeated the financial information released in April 2001 and stated that S-A was experiencing strong growth in the subscriber business and sales of cable set-top boxes. (Id. ¶ 1190.) According to the Form 10-Q filed with the SEC, the Company's financial results could be explained by strong demand and an increase in manufacturing capacity. (Id. ¶¶ 191, 193.) The Form 10-Q also warned that loss of business from AT & T could have a material adverse effect on S-A's business. (Id. ¶ 192.) Plaintiffs allege that the Form 10-Q was misleading because demand was in fact declining and Defendants were improperly stuffing channels and violating accepted accounting practices to boost its sales figures. (Id. ¶ 194.)

Although the SEC filing had noted the possible adverse effect of the loss of AT & T's business, in a June 4, 2001 interview McDonald minimized the effect of the loss of sales to AT & T, touted the growing demand for digital video, and reported that S-A's customers were doing well. (Id. ¶¶ 206-7.) In early June 2001,...