Johnaon v. Tellabs, Inc.

• Citation: 262 F.Supp.2d 937
• Decision Date: 19 May 2003
• Docket Number: No. 02 C 4356.,02 C 4356.
• Parties: Thomas JOHNSON, Plaintiff, v. TELLABS, INC., Michael J. Birck, Richard C. Notebaert, John Vaughn, Robert W. Pullen, Joan E. Ryan, Brian Jackman, J. Thomas Gruenwald, Kolher, William F. Souders Catherine Kozik, Defendants.
• Court: U.S. District Court — Northern District of Illinois

Page 937

262 F.Supp.2d 937

Thomas JOHNSON, Plaintiff, v. TELLABS, INC., Michael J. Birck, Richard C. Notebaert, John Vaughn, Robert W. Pullen, Joan E. Ryan, Brian Jackman, J. Thomas Gruenwald, Kolher, William F. Souders Catherine Kozik, Defendants.

No. 02 C 4356.

United States District Court, N.D. Illinois, Eastern Division.

May 19, 2003.

COPYRIGHT MATERIAL OMITTED

MEMORANDUM OPINION AND ORDER

ST. EVE, District Judge.

Plaintiffs allege that Defendants engaged in a scheme to deceive and defraud the investing public as to the true value of Tellabs, Inc.'s ("Tellabs") common stock. Plaintiffs contend that Defendants carried out this scheme, in part, by making misrepresentations about Tellabs' current financial condition and future prospects. According to Plaintiffs, these misrepresentations were false and misleading and resulted in the artificial inflation of Tellabs' stock price. Plaintiffs claim that they were injured when they purchased Tellabs' common stock at these artificially inflated prices.

Defendants seek to dismiss the Consolidated Amended Class Action Complaint (the "Complaint") for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6), for failure to plead fraud with particularity pursuant to Federal Rule of Civil Procedure 9(b), and for failure to meet the pleading standards set forth in the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b) (the "PSLRA"). For the reasons set forth below, Defendants' motion is granted.

ALLEGATIONS

I. The Parties

This putative class action lawsuit is brought by various plaintiffs individually and on behalf of persons who purchased common stock of Defendant Tellabs between December 11, 2000 and June 19, 2001 (the "Class Period"). On September 27, 2002, the Court appointed Makor Issues & Rights ("Makor Issues") Lead Plaintiff pursuant to 15 U.S.C. § 78(u)-4. See Johnson v. Tellabs, Inc., 214 F.R.D. 225 (N.D.IU. 2002).

Tellabs is a Delaware corporation with its principal place of business in Lisle, Illinois. (R. 40-1, Compl.1121.) Tellabs designs, manufactures and markets highly specialized optical network and broadband access equipment as well as other hardware for use in fiber-optic cable networks. (Id. ¶ 50.) It is a global supplier of networking solutions and services that support the Internet. The Tellabs' products that are relevant to this case are the TTAN 5500, the TITAN 6500 and the SALIX 7600. All of these products are complex transmission systems utilixed with optical networkrng systems. The TITAN 5500 is a digital criss-connect product that is utilized by many of the major telecommunications companies. (Id. ¶ 51.) The TITAN 7600 The TITAN 6500 is a multi-service transport switch. (Id. ¶ 53.) The SALIX 7600 is a software control suite that helps carriers increase revenue by bullding low cost networks that deliver innovative new services quickly. (Id. ¶ 62.)

Defendants Michael Brick, J. Thomas Gruenwald, Brian Jackman, John Kohler, Catherine Kozik, Richard Notebaert, Robert Pullen, Joan Ryan and William Souders (collectively, the "Individual Defedants") are all officers and/or directors of Tellabs. Michael Birck was a director and served as chairman of Tellabs' board of directors beginning in 2000. (R. 40-1, Comp.¶ 22.) He also served as chief executive officer and president of Tellabs from 1975 through 2000. (Id.) J. Thomas Gruenwald served as a senior vice president and general manager of the broadband access group since 1999 and as a vice president of strategic resources from 1995 through 1999. (Id.) Brian Jackman was a director of Tellabs and served as president of global systems and technology. He also was president and an executive vice president of business operations from 1990 through 1998. (Id.) John Kohler was a senior vice president of global business operations beginning in 2000 and a vice president of global manufacturing from 1992 through 2000. (Id.)

Beginning in 2000, Catherine Kozik served as chief information officer and as a senior vice president of global information services. (R. 40-1, Compl.1122.) Also that year, Richard Notebaert became a director and served as chief executive officer and president of Tellabs. (Id.) Robert Pullen was a senior vice president and general manager of optical networking starting in 2000. Pullen also served as a vice president feting in the digital systems divison from 1997 through 2000. (Id>) Joan Ryan was an executive vice president and financial officer since (2000) Finally, William Souders a director of Tellabs.¹ (Id.)

II. Stock Sales

Plaintiffs allege that Birck, Gruenwald, Kozik and Souders² sold stock ae purported Class Period at an |y inflated price.³ During this pe^time, Plaintiffs claim that Birck 5,000 shares for $5,183,150; Gruen'sold 1,500 shares for $93,281; Kohler Id 7,500 shares for $484,968; Kozik sold 1,220 shares for $187,766; and Souders sold 16,000 for $560,074. (R. 40-1, Comp. 122.)

III. The Telecommunications Industry

Plaintiffs allege that the telecommunications industry suffered a significant decline in demand for its products in early 2000. (Id. Ml 3, 47.) In addition, Plaintiffs claim that the Internet sector substantially contracted, which "severely constrict[ed] continued access to capital and demand for products to maintain and further develop what had been a rapidly expanding and growing Internet and telecommunications infrastructure." (Id 147.) According to Plaintiffs, many of Tellabs' competitors suffered a dramatic decline in earnings. (Id. 1148.) Plaintiffs maintain that Defendants disguised the impact this decline had on Tellabs and, instead, falsely contended that Tellabs was not affected by the industry slow-down.

IV. Allegedly False Statements by Tellabs

Plaintiffs claim that during the purported Class Period, Defendants made a series of false statements and omissions that resulted in the artificial inflation of Tellabs' stock price. These purported false statements and omissions related to Tellabs' financial condition, its earnings and operations and its future prospects. Specifically, Plaintiffs maintain that Defendants falsely reported Tellabs' financial condition for fourth quarter of 2000, and provided false "guidance" for 2001. According to Plaintiffs, Defendants also communicated regularly and directly with securities analysts and provided them with these misrepresentations so that the security analysts would unknowingly falsely promote Tellabs, resulting in an artificially inflated price of Tellabs' common stock.

A. December 2000

On December 11, 2000—the start of the purported Class Period—Tellabs issued a press release announcing a strategy to deliver an all optical network. The press release noted, "Tellabs is making all-optical networking a reality .... We have the strategy and the products that will enable service providers to deliver and manage all-optical services on demand." (R. 40-1 Compl. ¶ 52.) On that same day, Tellabs also announced a multi-year $100 million sales agreement with Sprint for the Titan 6500 multi-service transport switch. The release reported that "[t]he TITAN 6500 helps carriers manage their SONET and SDH-based broadband networks today and protects their investment as we migrate to packet networks tomorrow. The TITAN 6500 system is available now." (Id. ¶ 53.)

The next day, securities analysts issued positive research reports on Tellabs. UBS Warburg noted, "Tellabs maintained its guidance for 4Q 2000 and all of 2001. In doing so, the company indicated that the demand for its Titan 5500 product line remain [sic] solid in 4Q and there is visibility for at least two years (if not more) of ongoing good growth for the product." (Id. ¶ 55.) It also estimated thirty-percent growth in sales for 2001. ABN AMRO reported that "the TITAN 5500 remains the workhorse of the group and is expected to see strong growth for the next 2-3 years." (Id.) Baird & Co. reported that Tellabs "reiterated its confidence in the telecom-spending environment" and "reconfirmed consensus growth forecasts for fourth quarter 2000 and 2001." (Id.)

B. January 23, 2001 Press Release

On January 23, 2001, Tellabs reported fourth quarter net income of $232 million. (R. 40-1, Compl.1158.) Its press release noted that the "strength in Tellabs' core business drove record sales and earnings in the fourth quarter of 2000. Fourthquarter 2000 sales totaled $1,018 million, up 42% from $716 million in 1999." The press release also stated that fourth quarter net income was up 41% from 1999. (Id.) Notebaert explained, "[t]o keep up with robust growth in communications traffic customers are buying more and more Tellabs equipment-fueling our records [sic] results and our first $1 billion quarter." (Id.)

During a teleconference with securitties analysts that day, Notebaaetrt commented on the TITAN 650. Specifficaly, he said that "[o]n the 6500, demand for that product is exceeding our expectations .... We had spent a large amount of the time working on our ability to create or manufacture enough product to meet customer demand. Demand is just ... huge of this product." (R. 40-1, Compl.¶ 590.In an interview with Eric Schatzker from the Bloomberg News, Notebaert also commented: "I'm a little surprised at the performance of our stock the last few weeks, because last quarter, this quarter, we've been solid and we feel very, very good about the robust growth we're experiening." (Id. 60.)

Following the press release and teleconference, numerous securities analysts issued positive research reports for Tellabs. On January 24, 2001, for example, Morgan Stanley reiterated its "outperform" rating and noted that "sales of the TITAN products continued to fuel growth." (Id. 1161.)

C. January 30, 2001 Press Release

Tellabs issued another press release on January 30, 2001, announcing "a new suite of softswitches, the SALIX 7600 Softswitch control suite." (R. 40-1, Compl.f 62.) The press release noted, ...