Panther Partners, Inc. v. Ikanos Communications

Decision Date11 March 2008
Docket NumberNo. 06 Civ. 12967(PAC).,06 Civ. 12967(PAC).
PartiesPANTHER PARTNERS, INC., on Behalf of Itself and All Others Similarly Situated, Plaintiff, v. IKANOS COMMUNICATIONS, INC., et al., Defendants.
CourtU.S. District Court — Southern District of New York

David Avi Rosenfeld, Samuel Howard Rudman, Coughlin, Stoia, Geller, Rudman & Robbins, LLP, Melville, NY, for Plaintiff.

James N. Kramer, Michael D. Torpey, Lucy E. Buford, Orrick, Herrington & Sutcliffe LLP, San Francisco, CA, Rishona Fleishman, Orrick, Herrington & Sutcliffe LLP, Daniel Jonathan Kramer, Daniel John Toal, Farrah Robyn Berse, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendants.

OPINION & ORDER

PAUL A. CROTTY, District Judge.

Defendant Ikanos Communications, Inc. ("Ikanos" or the "Company"), and certain individual officers and directors,1 along with its underwriters, Citigroup Global Markets Inc. and Lehman Brothers Inc., (collectively, the "Defendants"), move pursuant to the Private Securities Litigation Reform Act of 1995 (the "PSLRA") and Federal Rules of Civil Procedure 8 and 12(b)(6) to dismiss the amended complaint filed by lead plaintiff Panther Partners ("Plaintiff" or "Panther") in this class action securities suit. Panther alleges that Ikanos misstated or failed to disclose a host of purportedly material facts, which allegedly existed at the time of either Ikanos's Initial Public Offering ("IPO") in September 2005, or its Secondary Offering in March 2006.2 Ikanos's stock performed well subsequent to the IPO and the Secondary Offering, but in Summer 2006, and continuing thereafter, it encountered several difficulties which had an adverse effect on its business and led to a decline in its stock price.

Following the market decline, Panther researched these subsequent events, apparently with an eye toward this litigation, and focused on four pieces of information which they now argue should have been disclosed at the time of the offering documents. Had the information been disclosed, Panther contends that the buying public would have better comprehended the nature of the Ikanos offerings, and more acutely understood the risks involved. The four pieces of information are:

(1) Ikanos's Japanese customers held inflated levels of Ikanos product in their inventory;

(2) Ikanos had faulty quality control processes (3) A latent defect, called "Kirkendall voiding," existed in a particular Ikanos semiconductor chip; and

(4) Ikanos acquired useless inventory as part of a much larger corporate acquisition.

It must be noted that none of these faulty nondisclosures involve financial information or the misrepresentation of financial data. Indeed, there is no challenge to Ikanos's argument that its financials for 2004 through 2006 were audited and received unqualified opinions. Here, the alleged failures deal with future business and technical conditions, events that were either unknown or unknowable at the time of the disclosures. Under these circumstances, Panther's allegation that Ikanos should have disclosed information that it did not (and could not) know must fail.

The purpose of registration statements is to provide accurate and meaningful material information so that investors can make informed decisions about whether or not to purchase stock in a particular offering, and to understand the risks inherent in the investment. See SEC v. Ralston Purina Co., 346 U.S. 119, 124, 73 S.Ct. 981, 97 L.Ed. 1494 (1953) (explaining that the purpose of the registration requirements of the Securities Act of 1933 "is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions.") In its offering statements, Ikanos made specific disclosures about the risks inherent in the semiconductor market, the Company's business model, the Company's design and production processes, and the integration of newly acquired technology. Those disclosures were more than adequate. They are of sufficient precision and clarity to alert prudent investors to the nature of the offerings and the risks entailed. The securities laws do not require clairvoyance in the preparation of offering documents;3 these documents are not guarantees of an offering's subsequent success, nor do they insure investors against the vicissitudes of technology and industry, nor the volatility of the stock market itself. See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1420 (9th Cir.1994) ("There are a number of risks involved whenever one invests in any company.... The securities laws do not insulate investors against stock downturns which are caused by events not foreseeable to the company's management, nor do they provide insurance against risks that were disclosed to investors at the time they purchased the securities.") (quoting the District Court's decision, In re Worlds of Wonder Sec. Litig., 814 F.Supp. 850, 873 (N.D.Cal.1993)). For these reasons and the reasons set forth below, Defendants' motions are granted and the amended class action complaint is dismissed.4

SUMMARY OF FACTS
A. Background

The Complaint alleges the following facts which, for the purposes of this motion, are taken to be true; all reasonable inferences are drawn in favor of Plaintiff, the non-moving party. Bell Atl. Corp. v Twombly, ___ U.S. ___, 127 S.Ct. 1955, 1975, 167 L.Ed.2d 929 (2007). Ikanos is a provider of programmable semiconductors which enable fiber-fast broadband services over telephone companies' existing copper lines. (See Amended Complaint ("Am. Compl.") ¶ 25; Ikanos's IPO Prospectus, Sept. 22, 2005, Exhibit A ("Ex.A") at 1.) Ikanos sells its products to original equipment manufacturers ("OEMs") who incorporate Ikanos components into their own communications products. (Am. Compl. ¶ 26; Ex. A at 1.) The OEM then assembles its product, containing the Ikanos component, and sells it to major telecommunications carriers. As a result, the market for Ikanos products depends on the demand from OEMs, whose demand, in turn, is dictated by the needs of telecommunications companies faced with a multi-faceted and often unpredictable market. The vast majority of Ikanos's sales are made to Japanese and Korean customers. (Am.Compl.¶ 27.)

Ikanos itself is a "fabless" company, meaning that it does not fabricate its own products.5 This fact is prominently featured on the first page in the first paragraph of its IPO Prospectus. (Ex. A. at 1.) Instead of relying on the in-house fabrication of its products for revenue, Ikanos designs and engineers its semiconductor chips, but "outsource[s] all of the manufacturing, assembly, and testing of ... semiconductors to ... outsourcing partners." (Ex. A at 1.) Once designed in-house, Ikanos contracts with overseas entities to produce the chips, and these overseas entities provide quality control testing of the chips. (Ex. A at 1.)

B. The Offerings

Ikanos sold stock in two public offerings: an IPO on September 22, 2005, and a Secondary Offering on March 17, 2006. (Am.Compl.¶ 20.)6 It registered both offerings with the Securities and Exchange Commission, and the registration statements provided information about the company. While exceeding its financial expectations from the first quarter of 2005 (two quarters before the IPO) through the second quarter of 2006 (one quarter after the Secondary Offering), Ikanos experienced an 11% decline in revenue in the third quarter of 2006.7 Panther alleges that the registration statements were deficient in that they failed to disclose the problems which ultimately caused the stock's downturn in the third quarter of 2006.

C. The Allegations

Plaintiff contends that four particular pieces of information should have been disclosed under the mandates of the securities laws as part of the IPO or the Secondary Offering: (1) problems with excess inventory in the Japanese market, (2) deficiencies in Ikanos's quality control processes, (3) "Kirkendall voiding" defects in Ikanos's VDSL (very-high-bit-rate digital subscriber line) Version Four Chip, and (4) potential write-offs in relation to the acquisition of network processing technology from Analog Devices, Inc. (the "NPA Acquisition"). (Am.Compl.¶¶ 31-41, 47-62.)

In connection with the IPO, Plaintiff asserts that despite strong ordering from Japanese customers between 2003 and 2005, Ikanos knew that Japanese orders would be reduced going forward due to over-stocked inventories, but that Ikanos failed to disclose this fact in its registration statement. (Am.Compl.¶ 34.) Plaintiff also contends that Ikanos knew that it had an inadequate quality assurance program at the time of the IPO, but failed to disclose this deficiency in its filings. (Am. Compl.¶ 35.) With respect to the Secondary Offering, Plaintiff alleges that Ikanos failed to disclose information about problems with the VDSL Version Four Chip, problems which Plaintiff contends emerged in January 2006 (two months before the Secondary Offering in March) and therefore should have been revealed. (Am.Compl.¶ 47.) Finally, Plaintiff contends that the failure to disclose the acquisition of potentially obsolete inventory in conjunction with the purchase of NPA is actionable under the securities laws. (Am. Compl.¶ 56.)

D. The Parties' Arguments

Plaintiff argues that even though Ikanos was aware of all of these deficiencies at the time of either the IPO or Secondary Offering, Ikanos did not disclose them as mandated by the federal securities regulations. (Am.Compl.¶ 31-62.) Further, Plaintiff asserts that the ultimate disclosure of the information surrounding these purported deficiencies, and the direct impacts of the deficiencies themselves, prompted the 11% decline in Ikanos's value in the third quarter of 2006, a decline which Panther contends is actionable under the securities laws. (Am.Compl.¶¶ 63-66.)

In response to these allegations, Defendants point to the successful performance of the Company in the nine months following the IPO and the four months following the...

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