Johnson v. Tellabs, Inc.

• Decision Date: 19 February 2004
• Docket Number: No. 02 C 4356.,02 C 4356.
• Parties: Thomas JOHNSON, Plaintiff, v. TELLABS, INC., Michael J. Birck, Richard C. Notebaert, Robert W. Pullen, Joan E. Ryan, Brian Jackman and John C. Kolher, Defendants.
• Court: U.S. District Court — Northern District of Illinois

303 F.Supp.2d 941

Thomas JOHNSON, Plaintiff, v. TELLABS, INC., Michael J. Birck, Richard C. Notebaert, Robert W. Pullen, Joan E. Ryan, Brian Jackman and John C. Kolher, Defendants.

No. 02 C 4356.

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

February 19, 2004.

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Marvin Alan Miller, Jennifer Winter Sprengel, Lori Ann Fanning, Miller Faucher and Cafferty LLP, Chicago, IL,

Keith M Fleischman, Richard H Weiss, Steven G Schulman, Elizabeth A Berney, Milberg, Weiss, Bershad, Hynes & Lerach LLP, Stephanie M Beige, Bernstein, Liebhard & Lipshitz, LLP, Nadeem Faruqi, Faruqi & Faruqi, LLP, New York, NY, Guri Ademi, Ademi & O'Reilly, Cudahy, WI, Samuel H Rudman, Cauley, Geller, Bowman, Coates & Rudman LLP, Melville, NY, for Plaintiff.

Kathleen Lynn Roach, David F. Graham, Kyle David Rettberg, Sidley Austin Brown & Wood LLP, Chicago, IL, for Defendants.

MEMORANDUM OPINION AND ORDER

ST. EVE, District Judge.

Defendants have moved to dismiss the Second Amended Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. Their motion is granted.

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"). Plaintiffs¹ brought this purported class action alleging that Defendants engaged in a scheme to deceive and defraud investors as to the true value of Tellabs, Inc.'s ("Tellabs") common stock during the Class Period. Plaintiffs contend that Defendants carried out this scheme, in part, by falsely assuring investors about Tellabs' performance and prospects, engaging in fraudulent practices to artificially boost Tellabs' revenues and conceal the rapidly falling demand for Tellabs' products, selling shares of Tellabs' common stock at artificially inflated prices, and making false and misleading misrepresentations about Tellabs' current financial condition. Plaintiffs allege that these deceptive actions resulted in the artificial inflation of Tellabs' stock price which reached a high of $67.125 per share on February 5, 2001. Plaintiffs claim that they were injured when they purchased Tellabs' common stock at these artificially inflated prices.

On May 19, 2003, this Court granted Defendants' motion to dismiss Plaintiffs' Consolidated Amended Complaint in its entirely. See Johnson v. Tellabs, Inc., 262 F.Supp.2d 937 (N.D.Ill.2003) (the "May 19, 2003 Opinion"). Plaintiffs filed their Second Amended Class Action Complaint (the "SAC") on July 11, 2003. Unlike their Amended Complaint, Plaintiffs' SAC identifies 27 confidential sources ("CS") who support various allegations.

In their SAC, Plaintiffs did not name the following individuals who were named in the Consolidated Amended Complaint: J. Thomas Gruenwald, Catherine Kozik, William F. Souders, and John Vaughn. Defendants now seek to dismiss the SAC in its entirety 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"). Given the additional detail added to the SAC and the extended analysis necessary to address this detail, the Court will repeat some of the facts set forth in its May 19, 2003 Opinion.

ALLEGATIONS

I. The Parties

Defendant Tellabs is a Delaware corporation with its principal place of business in Lisle, Illinois. (R. 63-1, SAC ¶ 16.) Tellabs designs, manufactures, markets, and services highly specialized optical networking, broadband access, and voice quality enhancement solutions. (Id. ¶ 2.) It is a global supplier of networking solutions and services that support the Internet. Tellabs' customers included exchange carriers, telephone companies, local telephone administrations, original equipment manufacturers, cellular and other wireless service companies, cable operators, alternate service providers, internet service providers, system integrators, government agencies, and business end-users. (Id. ¶ 2.) SBC Communications, Inc. ("SBC") and Verizon Communications, Inc. ("Verizon") were two of Tellabs' large customers. (Id. ¶ 2.)

The individual Defendants include: Michael Birck, Brian Jackman, John Kohler, Richard Notebaert, Robert Pullen and Joan Ryan (collectively, the "Individual Defendants"). Each of the Individual Defendants was an officer and/or director of Tellabs. Michael Birck, a founder of the company, was a director and served as chairman of Tellabs' board of directors since September 18, 2000. (Id. ¶ 17.) He also served as chief executive officer and president of Tellabs from 1975 through 2000. (Id.) Brian Jackman was a director of Tellabs and served as president of global systems and technology and executive vice president from 1998 through 2001. (Id. ¶ 18.) John Kohler was a senior vice president of global business operations from February 2000 to March 10, 2003, and a vice president of global manufacturing from 1992 through 2000. (Id. ¶ 19.)

Richard Notebaert served as a Tellabs' director from April 19, 2000 to June 17, 2002, and served as chief executive officer and president of Tellabs from September 18, 2000 to June 17, 2002. (Id. ¶ 20.) Robert Pullen was a senior vice president and general manager of optical networking from August 2000 to February 2, 2002. (Id. ¶ 21.) Joan Ryan served as Tellabs' executive vice president and chief financial officer from February 2, 2000 to February 7, 2003. (Id. ¶ 22.)

Plaintiffs' SAC focuses on three of Tellabs' products: the TITAN 5500, the TTAN 6500 and the SALIX 7600. All of these products are complex transmission systems utilized with optical networking systems. The TITAN 5500, Tellabs'"flagship" optical networking system, is a digital cross-connect system that "help[s] direct different types of communications traffic across wired and wireless networks." (Id. ¶ 30.) The TITAN 6500 is a multi-service transport switch which is "capable of simultaneously transporting a variety of signal types." (Id. ¶ 31.) The SALIX 7600 is a switch "that enables service providers to move voice traffic seamlessly onto data networks while supporting voice services such as there-way calling and messaging." (Id. ¶ 32.)

II. Alleged Problems with Specific Products

Plaintiffs allege that the internet and telecommunications sectors suffered a significant decline in demand for their products in mid-2000. (Id. ¶ 3.) As a result, Tellabs' customers "were suffering from a severe deterioration and consolidation of their businesses." (Id. ¶ 4.) Given this decline, Plaintiffs allege that demand for Tellabs' products decreased. (Id. ¶¶ 3, 4.) Plaintiffs contend, however, that Defendants disguised the impact this decline had on Tellabs and falsely assured investors that Tellabs' performance was strong.

Plaintiffs allege that contrary to Defendants' public representations during the Class Period, the demand for the TITAN 5500 — Tellabs'"best seller" — substantially slowed. (Id. ¶¶ 34-45.) Verizon and other clients significantly reduced their orders for the product. (Id. ¶¶ 35, 37.) As a result, in late 2000 and early 2001, Tellabs had "tons" of excess TITAN 5500s stored in a warehouse. (Id. ¶ 45.)

Similarly, Plaintiffs allege that the TTAN 6500 failed to sell as Tellabs had represented. (Id. ¶ 46-53.) They contend that Defendants touted a $100 million Sprint deal for the TITAN 6500 in order to foster a false impression that there was a demand for the product. (Id. ¶ 54.) Plaintiffs allege that Sprint entered this contract to satisfy an existing $100 million commitment to Tellabs, and that Sprint did not intend to purchase any TITAN 6500s beyond those in the agreement. (Id. ¶ 55.) Plaintiffs further contend that the TITAN 6500 was far behind schedule and not ready for release during the Class Period, was failing customer lab evaluations, and was inferior to other products offered by Tellabs' customers. (Id. ¶ 74.)

Plaintiffs also allege that the SALIX technology had serious technical defects and thus Tellabs could not commercialize it. (Id. ¶ 56-61.) They allege that Defendants "glowingly portrayed Tellabs' supposed `launch' of its new `leading edge' SALIX technology in 2000 when, in fact, the SALIX technology was both unfinished and outmoded." (Id. ¶ 56.) Plaintiffs contend that Defendants' statements regarding the prospects for the SALIX technology were false and misleading because they knew the SALIX technology was outmoded and could not be commercialized.

III. Allegedly False Statements by Tellabs

Plaintiffs claim that beginning on December 11, 2000 through the purported Class Period, Defendants made a series of false statements and omissions regarding Tellabs' fourth quarter 2000 financials, Tellabs' products, and its future prospects that resulted in the artificial inflation of Tellabs' stock price. Plaintiffs allege that the Individual Defendants are responsible for each of the statements.

A. December 2000

Tellabs issued a press release on December 11, 2000 — the start of the purported Class Period — announcing a multi-year sales agreement with Sprint for the TTAN 6500. "The agreement is expected to be valued at more than $100 million over the life of the contract." (Id. ¶ 73.) The press release noted that the "TITAN 6500 system is available now." On December 11, 2000, Tellabs also held a conference with securities analysts. On December 12, 2000, securities analysts summarized the conference and issued positive research reports on Tellabs. According to UBS Warburg, "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...