EDWARD M. CHEN, District Judge.
Plaintiffs have filed a class action against Oclaro, Inc. and two of its officers, Alain Couder and Jerry Turin, for violations of the federal securities laws. In
In their SAC, Plaintiffs allege as follows.
Oclaro is a company that manufactures and distributes core optical network components and subsystems to global telecom equipment manufacturers. See SAC at 1 n. 1; see also SAC ¶ 20. During the class period, Mr. Couder was Oclaro's CEO and a member of the board of directors. See SAC ¶ 21. During the class period, Mr. Turin was Oclaro's CFO. See SAC ¶ 22. The putative class consists of persons who purchased or otherwise acquired Oclaro common stock between May 6 and October 28, 2010. See SAC ¶ 1.
According to Plaintiffs, from May to August 2010, Defendants made false statements that, e.g., (1) current customer demand for Oclaro's products was strong and that (2) revenues and earnings for 1Q11 would increase. See SAC ¶ 1.
On May 6, 2010, Oclaro filed a Form 424(b)(5) Prospectus Supplement with the SEC for a secondary offering of 6.9 million shares of common stock to the public. See SAC ¶¶ 2, 4, 40. In the SEC filing, Oclaro stated that: (1) "We are currently seeing a return of customer demand which had decreased as a result of economic conditions in the preceding 18 to 24 months"; and (2) "customer demand has recently increased in our markets." SAC ¶ 40.
Plaintiffs allege that the above statements were false because, in fact, Oclaro "had experienced a material decline in customer order trends in [April 2010]." SAC ¶ 45. Plaintiffs claim that, as a result of the April 2010 decline, Oclaro's book-to-bill ratio declined from 1.35 (in March 2010) to just over 1 (in June 2010). See SAC ¶¶ 6-7. A book-to-bill ratio is the ratio of orders taken (booked) to products shipped and bills sent (billed). It is used as a tool in determining whether demand for a product is rising or falling. "`A ratio of above 1 implies that more orders were received than filled, indicating strong demand, while a ratio below 1 implies weaker demand.'" SAC at 3 n. 4.
In June 2010, Mr. Turin made statements at a conference (the RBC conference), indicating that (1) Oclaro was experiencing a surge in customer demand and that (2) customer demand was true customer demand — i.e., not just a reflection of customers building up their inventories — which Oclaro knew because (a) it was close to its customers and therefore had visibility into what their needs were
On July 29, 2010, Oclaro issued a press release announcing its 4Q10 and FY10 financial results. See SAC ¶ 52. In the same press release, Oclaro reported "accelerated and increasing financial forecasts," in particular, for 1Q11.
On July 29, 2010, Oclaro also held a conference call to discuss the 4Q10 and FY10 financial results. During the call, Mr. Turin made statements about Oclaro's current strong customer demand. See SAC ¶ 54. He also made statements about how Oclaro was expected to perform in 1Q11, consistent with the press release described above, and even beyond. See SAC ¶¶ 56-57. Similar to above, Mr. Turin attributed the customer demand to true customer demand and not inventory buildup by customers. See SAC ¶ 58.
Finally, during the July 29, 2010, conference call, Mr. Turin suggested that Oclaro would meet its 1Q11 forecast because, as of that date, "85% to 90% of orders needed to meet [the] 1Q11 outlook were already secured," with these "order figures represent[ing] end user demand, rather than customers stocking up on inventory." SAC ¶ 11; see also SAC ¶¶ 58-59. Mr. Turin declined to answer analyst questions about whether the absolute level of orders had declined.
Shortly thereafter, on August 11, 2010, Mr. Turin made comments during a conference (the Morgan Keegan conference), during which he reiterated that (1) Oclaro
Plaintiffs maintain that the above statements were false because, as noted above, a confidential witness — a former Oclaro vice president of sales — has reported that Oclaro does not in fact have visibility into customer needs. See generally SAC ¶ 76.
As alleged in the SAC, the truth was partially disclosed on July 29, 2010, and subsequently on October 28, 2010.
Plaintiffs allege that there was a partial disclosure on July 29, 2010, because, during the conference call on that day, Mr. Turin admitted that there was "`a little bit of a slowdown in early April [2010] as people digested the huge order flow in March.'" SAC ¶ 59. Plaintiffs allege that, although there was a decrease in Oclaro's stock price as a result of this disclosure in July, see, e.g., SAC ¶¶ 66-67; SAC at 26 n. 7 (pointing to analyst reports suggesting a link between the decrease in the book-to-bill ratio to the decline in stock price), the stock price remained artificially inflated because of Defendants' "continued misleading statements concerning increasingly strong customer demand, claims of significant visibility into customer needs, and [claims] that the Company already had 85% to 90% of the order coverage ... needed to meet its increased 2Q11 forecasts." SAC ¶ 70.
According to Plaintiffs, the final disclosure took place on October 28, 2010, when Oclaro issued a press release in which it reported, inter alia, its 1Q11 financial results (ending October 2, 2010). See SAC ¶ 82. Previously, Oclaro had predicted — for 1Q11 — revenues in the range of $120 to $126 million and non-GAAP gross margins in the range of 31 to 33%. See SAC ¶ 53. As it turned out, Oclaro's revenues were on the low end of the range for 1Q11 ($121 million) and it missed its gross margins (29%). See SAC ¶ 82. Apparently, these results were due to a decrease in customer demand, with customer cancellations beginning in at least the second week of September 2010. See SAC ¶¶ 82(d), 84, 87-88. During a conference call on October 28, 2010, Mr. Couder admitted to customer cancellations in September 2010 (inventory corrections) and to limited visibility into customer needs. See SAC ¶ 84.
Based on, inter alia, the above allegations, Plaintiffs have asserted two federal securities claims against Oclaro and its executives Mr. Couder and Mr. Turin:
(1) Violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
(2) Violation of § 20(a) of the Act.
In the pending motion to dismiss, Defendants seek dismissal of both claims.
Under Federal Rule of Civil Procedure 12(b)(6), a party may move to dismiss based on the failure to state a claim upon which relief may be granted. See Fed. R.Civ.P. 12(b)(6). A motion to dismiss based on Rule 12(b)(6) challenges the legal sufficiency of the claims alleged. See
In ruling on a motion to dismiss, a court may consider not only the complaint itself but also documents incorporated into the complaint by reference and matters of which a court may take judicial notice. See Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir.2009). In the instant case, Defendants have filed a request for judicial notice. Plaintiffs have made a partial objection to the request. Where it is necessary for the Court to make a ruling, it has so indicated in this order. In essence, the Court may take judicial notice of everything except for the presentations/handouts given at conferences. (This would not include the July 2010 conference call headed up by Oclaro itself.)
As noted above, Plaintiffs have asserted two claims against Defendants: (1) a § 10(b)/10b-5 claim and (2) a § 20(a) claim. Section 10(b) and Rule 10b-5 essentially impose liability for securities fraud. There are five elements that must be proven to establish a violation of Rule 10b-5. More specifically, a plaintiff must show "`(1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss.'" Id. at 990. As for § 20(a), it essentially provides for derivative liability; that is, it "makes certain `controlling' individuals also liable for violations of section 10(b) and its underlying regulations." Id.
Because Plaintiffs have brought securities fraud claims, Rule 12(b)(6) is not the only governing legal standard; so too are Rule 9(b) and the Private Securities Litigation Reform Act ("PSLRA"). Rule 9(b) provides that, "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed.R.Civ.P. 9(b). As for the PSLRA, it requires that a plaintiff alleging securities fraud
In the instant case, Defendants challenge Plaintiffs' securities fraud claims on the ground that Plaintiffs have failed to adequately plead both falsity and scienter. Defendants also argue that Plaintiffs have inadequately pled loss causation.
Plaintiffs assert that Defendants made false and misleading statements in May and June 2010 by referring to strong current customer demand when, in fact, just in April 2010, Oclaro had experienced a slowdown in such demand. Previously, the Court held that there were insufficient allegations that the slowdown was material:
Docket No. 58 (Order at 3).
In their papers, Defendants argue that Plaintiffs have still failed to establish that the April 2010 slowdown was material. Defendants emphasize that the huge customer demand in March was the anomaly and suggest that the April slowdown was just part of a trend back to more normal or rational numbers by June. See Mot. at 5. Moreover, there is no dispute that Oclaro had a strong quarter, exceeding its guidance. See Mot. at 6.
Defendants' argument is not without force. While this is a close question, the Court concludes that given the inferences that must be drawn in Plaintiffs' favor and the applicable standard of materiality, a dismissal under Rule 12(b)(6) is not warranted. "For purposes of securities fraud, `materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information.' A statement is material if `a reasonable investor would have considered it useful or significant.'" United States v. Jenkins, 633 F.3d 788, 802 (9th Cir.2011). Even if March was the anomaly, that does not necessarily mean that a reasonable investor would deem a subsequent decline — even if to more regular levels — unimportant. As a point of comparison, in Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167 (9th Cir.2009), aff'd ___ U.S. ___, 131 S.Ct. 1309, 179 L.Ed.2d 398 (2011), the Ninth Circuit disagreed with the district court's conclusion that the plaintiffs had failed to adequately allege materiality because the number of complaints of which the defendants were aware was not statistically significant. The court emphasized: "In relying on the statistical significance standard to determine materiality, the district court made a decision that should have been left to the trier of fact." Id. at 1179. "Questions of materiality ... involv[e] assessments peculiarly within the province of the trier of fact. Thus, the ultimate issue of materiality [is] appropriately resolved as a matter of law only where the omissions are so obviously important to an investor, that reasonable minds cannot differ on the question of materiality." Id. at 1178 (emphasis added; internal quotation marks omitted); see also Matrixx, 131 S.Ct. at 1318-19 (rejecting "a bright-line rule that reports of adverse event associated with a pharmaceutical company's products cannot be material absent a sufficient number of
That a reasonable investor might deem the decline in the instant case important is supported by allegations in Plaintiffs' complaint — in particular, allegations that (1) the April 2010 downturn was responsible for the decline in the book-to-bill ratio from 1.35 in March 2010 to just over 1 in June 2010, see SAC ¶ 63, and that (2) the July 2010 disclosure of the decline in the book-to-bill ratio led to an immediate decline in the stock price. See SAC ¶ 65; No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Corp., 320 F.3d 920, 935 (9th Cir. 2003) (noting that even if slightly delayed decline in stock price after a disclosure supports a finding of materiality). The fact that several securities analysts posited the stock price drop was due, at least in part, to the decline in the book-to-bill ratio also supports a finding of materiality. See SAC ¶ 66 (noting that the Bloomberg report stated: "Some investors may be disappointed in the deceleration in [Oclaro] book-to-bill"); SAC ¶ 67 (noting that the Auriga report stated: "[T]his deceleration may disappoint certain class of investors"; although adding that "the steady growth prospects should be seen as a positive by longer-term shareholders"); SAC at 26 n. 7 (noting that Stifel report noted: "The undue weakness in the stock and sector was likely due to investors interpreting a sharp fall in the book-to-bill ... as a sign that the optical cycle was ending and the industry would return to a trend of declining profitability as supply exceeds demand after several quarters of the industry being supply constrained").
In their papers, Defendants argue that there were other reasons for the decline in the stock price, see, e.g., Reply at 4, 14-15, but this is really a loss causation argument rather than one of materiality. As noted above, Defendants also suggest that the April 2010 slowdown was not material because Oclaro actually exceeded its guidance for the quarter that covered the May and June 2010 statements. See Mot. at 6. While this is certainly a significant fact that favors Defendants, it does not establish as a matter of law that the April 2010 decline was not material. As Plaintiffs point out, in Litwin v. Blackstone Group, L.P., 634 F.3d 706 (2d Cir.2011), the Second Circuit found the lower court's materiality analysis problematic precisely because it
Id. at 719. Furthermore, in Fecht v. Price Co., 70 F.3d 1078 (9th Cir.1995), the Ninth Circuit implicitly rejected the lower court's reasoning that, as a matter of law, "the defendants' failure to disclose the losses sustained by the warehouses opened in the expansion program was not a material omission because it is the profitability of the Company as a whole, not any one particular aspect of the Company's operations,
For the reasons stated above, the Court holds that Plaintiffs have alleged enough facts which, while not very compelling, suffice to support a finding of materiality for purposes of Rule 12(b)(6) where all reasonable inferences are drawn in Plaintiffs' favor. To the extent Plaintiffs claim that there were statements in June 2010 about good customer visibility which were false, that is, in essence, addressed in the next section below.
For the July and August statements, Plaintiffs seem to arguing falsity with respect to statements that Oclaro already had 85-90% order coverage for 1Q11; statements that orders represented true end-user demand and not an inventory buildup; and statements that Defendants had "a great deal of visibility" into what their customer needs are. SAC ¶ 76(a). Plaintiffs also argue that forecasts about 1Q11 and beyond were false and misleading in that they were premised on purported visibility into customer demand and purported order coverage of 85-90%. These statements are all related. In other words, Plaintiffs seem to be taking the position that: (1) statements about 85-90% coverage were false and misleading because Defendants did not adequately disclose the risk that these orders could be cancelled and in fact suggested that the orders were firm by touting good customer visibility; and (2) statements about true end-user demand were false and misleading because Defendants did not actually know this to be the case because they lacked good customer visibility although they claimed to the contrary. Thus, this claim of falsity turns on Defendants' claims of good customer visibility. According to Plaintiffs, Defendants lacked good customer visibility; in support of this allegation, Plaintiffs rely on a confidential witness known as FE1.
As pled in the complaint, "FE1 is a former Oclaro Senior Vice President of Sales who worked at the Company between 2007 and 2011. FE1 was responsible for sales of all Oclaro's products...." SAC ¶ 76(b). According to FE1, "Oclaro's customers were often reluctant to provide detailed information about their own needs so that suppliers like Oclaro would not dedicate manufacturing capacity to other customer's needs." SAC ¶ 76(c). Furthermore, according to FE1, even though Mr. Turin "regularly met with top executives at Oclaro's key customer accounts," and even though there were "good relationships with customers," Defendants "only had good visibility or a `good grip' into customer demand for about two weeks forward"; "the Company was not likely to receive cancellations of orders scheduled to be delivered less than a couple weeks out." SAC ¶ 76(d). "[B]eyond a couple [of] weeks, ... visibility into what customers might do with orders scheduled for even 30 days out was `a reach' and beyond that was `a crap shoot.'" SAC ¶ 76(d).
Defendants challenge Plaintiffs' reliance on FE1 in three way. First, they argue that FE1's statements lack foundation. Second, they argue that the statements are lacking in factual particularity. Finally, they argue that FE1's explanation of Oclaro's visibility into customer demand is consistent with Defendants' contemporaneous statements about customer visibility.
As to the first argument, Defendants fail in any substantive way to establish why FE's statements are lacking in foundation. In fact, Ninth Circuit case law indicates that a court's concern with respect to a confidential witness is whether he or she is "described with sufficient particularity to establish [his or her] reliability and personal knowledge" — i.e., "`with
As for the second argument, Defendants seem to contend that FE1's statements are lacking in particularity because he or she fails to allege any specific information regarding customer orders and/or cancellations. See Mot. at 8; Reply at 6. This argument is not particularly persuasive because it is not clear why FE1 would have to point to specific customers orders and/or cancellations simply to establish the falsity of a claim that Defendants had good customer visibility.
Finally, with respect to the third argument, it is hard to say, as a matter of law, that Defendants' public statements about customer visibility are entirely consistent with FE1's statements. As alleged in the complaint, Mr. Turin stated the following at the Morgan Keegan conference in August 2010:
FAC ¶ 75 (emphasis added). There were no real qualifications about customer visibility — e.g., that visibility was only short-term at best, as FE1 contends.
Admittedly, Defendants did make other public statements about customer orders. For example, in an SEC filing, Oclaro stated:
Skola Decl., Ex. 5, at 40(10Q). These statements go more toward the issue of whether Defendants are immune from liability based on the safe harbor provision of the PSLRA or the bespeaks caution doctrine discussed below. To the extent Defendants rely on Mr. Couder's statement, in the July 2010 conference call that "our customers have a very short visibility into carrier orders [a]nd, therefore, we get very short-term orders," Skola Decl., Ex. 3, at 9, that statement is more along the lines of what FE1 asserts. However, short-term orders do not necessarily preclude visibility into customer needs on a longer-term basis. Even if there were only short-term orders, that does not mean customers could not still give guidance to Defendants about what their needs would be on a longer-term basis. Thus, again, it is hard to say, as a matter of law, that this statement is consistent with what FE1 contends.
Defendants argue that, even if there is enough in the SAC to establish falsity, the safe harbor provision of the PSLRA and/or the bespeaks caution doctrine immunize them from liability.
Under the PSLRA's safe harbor provision:
15 U.S.C. § 78u-5(c)(1). Because the bespeaks caution doctrine provides for immunity in essentially the same circumstances as does the safe harbor provision, see Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 948 (9th Cir.2005) (noting that the PSLRA safe harbor provision codifies the bespeaks caution doctrine for forward-looking statements); Employers Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Clorox Co., 353 F.3d 1125, 1132 (9th Cir.2004) (noting that "[t]he PSLRA created a statutory version of [the bespeaks caution] doctrine by providing a safe harbor for forward-looking statements identified as such, which are accompanied by meaningful cautionary statements"), the Court addresses the two protections simultaneously and without differentiation. See, e.g., In re Copper Mt. Secs. Litig., 311 F.Supp.2d 857, 876 (N.D.Cal.2004) (stating that "it is appropriate to consider the two protections simultaneously").
As noted above, Plaintiffs claim that the comments in May and June 2010 about strong current demand were materially false or misleading because of the April 2010 slowdown. Defendants admit that the safe harbor provision and the bespeaks caution doctrine apply to forward-looking statements only, and here Plaintiffs are challenging as false or misleading statements about strong current customer demand. See Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 990 (9th Cir. 2008) (noting that "descriptions of the present aren't forward-looking"). Defendants argue that, nevertheless, the safe harbor provision and bespeaks caution doctrine are applicable because, even though the statements may be about current or present demand, that demand is being
Defendants do have case authority to support their position, namely, Hockey v. Medhekar, No. C-96-0815 (MHP), 1997 WL 203704 (N.D.Cal. Apr. 15, 1997) (Patel, J.), and In re Metawave Communications Corp. Securities Litigation, 298 F.Supp.2d 1056 (W.D.Wash.2003). In Hockey, a company's predictions of increasing earnings were based on past or present facts, including robust product demand. According to Judge Patel, statements about these past or present facts were covered by the safe harbor provision because they were "`assumptions underlying or relating to' statements of future economic performance." Id. at *5. Similarly, in In re Metawave Communications Corp. Securities Litigation, 298 F.Supp.2d 1056 (W.D.Wash.2003), the company projected favorable results in the future based on existing demand. According to the court, the statements about existing demand "are forward-looking statements because they are `assumptions underlying or relating to' a financial projection or future economic performance." Id. at 1085.
While Hockey and Metawave support Defendants' position, they are in this Court's view problematic. Most notably, neither case explains how a past or present fact can be deemed an "assumption." Only assumptions underlying a prediction about the future are protected by the safe harbor provision. See Harris v. Ivax Corp., 182 F.3d 799, 806 (11th Cir.1999) (noting that "[o]bserved facts [about, e.g., depressed customer orders] are not `assumptions,' and they are not any kind of prediction, either, that would put them within the definition of a forward looking statement").
Moreover, there are a number of cases which expressly hold that statements about past or present demand are not covered by the safe harbor provision. For example, in Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d 702 (7th Cir.2008), the Seventh Circuit noted that, when the company
Id. at 705; see also Sgalambo v. McKenzie, 739 F.Supp.2d 453, 478 (S.D.N.Y.2010) (noting that "[m]any of the alleged misstatements are not forward-looking because they either state a present or historical fact alone or incorporate forward-looking aspects into statements of present or historical fact" — e.g., "[s]tatements reporting test results from the wells and predicting future well performance based on those results"); Backe v. Novatel Wireless, Inc., 607 F.Supp.2d 1145, 1160 (S.D.Cal.2009) (noting that "[p]laintiff alleges statements other than forward-looking statements that were false and misleading, such as financial results and statements concerning present product demand").
The Court finds these cases persuasive. The fact remains that a statement about a past or current fact can demonstrably be proven false. That is what distinguishes such facts from forward-looking predictions. The Court rejects Defendants' contention that the safe harbor provision or
As above, Defendants argue that, even if they made any false or misleading statements in July and August 2010, those statements are protected by the safe harbor provision in the PSLRA or the bespeaks caution doctrine.
Similar to above, Plaintiffs contend that statements about current or present demand are not covered by either the safe harbor provision or the bespeaks caution doctrine as they are not forward looking. As to the forecast for 1Q11 and beyond, Plaintiffs do not dispute that they are, in essence, forward looking, thus putting the safe harbor provision and bespeaks caution doctrine into play. Plaintiffs argue, however, that any purported warnings were inadequate — at the very least, the Court cannot rule on their adequacy as a matter of law.
As a general matter, "boilerplate language warning that investments are risky or general language not pointing to specific risks is insufficient to constitute a meaningful cautionary warning. The cautionary warning ought to be precise and relate directly to the forward-looking statements at issue." In re Copper Mt. Secs. Litig., 311 F.Supp.2d 857, 882 (N.D.Cal.2004); see also Institutional Investors Group v. Avaya, Inc., 564 F.3d 242, 256 (3d Cir.2009) (stating that, "[t]o suffice, the cautionary statements must be substantive and tailored to the specific future projections, estimates or opinions in the prospectus which the plaintiffs challenge'"); Harris, 182 F.3d at 807 (stating that, "when an investor has been warned of risks of a significance similar to that actually realized, she is sufficiently on notice of the danger of the investment to make an intelligent decision about it according to her own preferences for risk and reward").
The statements at issue in July and August 2010 can be broken down into three groups: (1) statements made in Oclaro's press release of July 29, 2010; (2) statements made during Oclaro's conference call with analysts and investors, also on July 29, 2010; and (3) statements made during the Morgan Keegan conference in August 2010.
A copy of the July 29, 2010, press release can be found in Oclaro's 8K filed on July 29, 2010. See Skola Decl., Ex. 2 (press release). In the press release, Oclaro made predictions about how it would fare in 1Q11. With respect to those predictions, Oclaro noted:
Skola Decl., Ex. 2, at 2. The Safe Harbor Statement in the press release provided as follows:
Skola Decl., Ex. 2, at 3.
Oclaro's 10Q filed on May 4, 2010, identified multiple risks related to its business, including the following:
Skola Decl., Ex. 4, at 40(10Q).
It is a close call as to whether the language above constitutes meaningful cautionary language such that the safe harbor and/or bespeaks caution protection should apply. Notably, the warnings include "references to specific factors that were either the same or of similar significance to the actual causes of [Oclaro's] downturn." Copper Mt., 311 F.Supp.2d at 882. However, arguably, the warnings were not sufficient because they were not enough to counter Oclaro's more specific professed visibility into customer demand resulting from its close relationships with its customers. Cf. SEC v. Tecumseh Holdings Corp., 765 F.Supp.2d 340, 353 (S.D.N.Y.2011) (noting that "adequate cautionary language would have disclosed that — in September 2001, when the multi-million dollar profit projections were made — [the company was] operating at a loss"; adding that "[e]ven the statement `[t]he Company ... has not yet generated any operating profit' fails to adequately caution how unrealistic [company's] profit projections were because ... it fails to disclose that the Company was currently losing money") (emphasis in original). At least a reasonable jury could so find.
Under Ninth Circuit law, if there is a legitimate factual dispute as to whether that cautionary language is sufficient, then dismissal is not warranted. See, e.g., Livid Holdings, 416 F.3d at 947 (stating that "[d]ismissal on the pleadings under the bespeaks caution doctrine ... requires a stringent showing: There must be sufficient `cautionary language or risk disclosure [such] that reasonable minds could not disagree that the challenged statements were not misleading'"); Fecht, 70 F.3d at 1082 (in discussing bespeaks caution doctrine, stating that "[a] motion to dismiss for failure to state a claim will succeed only when the documents containing defendants' challenged statements include `enough cautionary language or risk disclosure' that `reasonable minds' could not disagree that the challenged statements were not misleading") (emphasis in original); see also In re UTStarcom, Inc. Secs. Litig., 617 F.Supp.2d 964, 972 n. 12 (N.D.Cal.2009) ("find[ing] that the application of the PLSRA safe harbor to any purely forward-looking statements involves a factual dispute that is not appropriately resolved at the pleading stage"). The Court therefore cannot dismiss the claims based on the statements made in the press release.
Similar to above, Oclaro made predictions about 1Q11 in the July 29, 2010, conference call with analysts and investors. During the conference call, the following cautionary statements were made:
Skola Decl., Ex. 3, at 1-2 (conference call). As noted above, Oclaro's 10Q filed on May 4, 2010 identified risks related to customer demand.
The published transcript of the conference call included an additional warning
Skola Decl., Ex. 3, at 15.
The analysis above with respect to the July 29, 2010, press release is largely applicable here as well. In fact, the above statements appear, if anything, more akin to non-specific boilerplate warnings insufficient to confer immunity. See In re Copper Mt. Secs. Litig., 311 F.Supp.2d at 882. At the very least, reasonable minds could disagree as to the adequacy of the warnings (in particular, those warnings incorporated by reference from the 10Q), and so dismissal is not warranted with respect to the claims based on the conference call.
As noted above, the August 2010 statements were statements made by Oclaro at the Morgan Keegan conference. The cautionary language to which Defendants point is contained in a document which appears to be a slide presentation. See Skola Decl., Ex. 9 (Morgan Keegan conference transcript); Skola Decl., Attachment C, at 16 (chart on cautionary language). Defendants have asked the Court to take judicial notice of the document but the document does not meet the standards of Federal Rule of Evidence 201. See Fed. R.Evid. 201(b) (providing that "[t]he court may judicially notice a fact that is not subject to reasonable dispute because it: (1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned"). The Court therefore declines
In addition to the element of falsity, Defendants challenge the adequacy of Plaintiffs' pleading of the element of scienter. As noted above, "[t]o adequately plead scienter, the complaint must now `state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Zucco, 552 F.3d at 991 (emphasis added). "[W]hen `determining whether the pleaded facts give rise to a `strong' inference of scienter, the court must take into account plausible opposing inferences.'" Id. "[A] securities fraud complaint will survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) `only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.'" Id. (emphasis in original). "The court must determine whether `all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.'" Id. Hence, the element scienter under the PSLRA is subject to a more rigorous review than falsity or materiality.
The basic issue here is whether there are allegations supporting a strong inference that Defendants knew of the April 2010 slowdown and that the April 2010 slowdown belied Oclaro's claim of a "return to customer demand" and a recent increase and "surge" in customer demand. Based on the SAC, Plaintiffs seem to take the position that Defendants knew of the slowdown because, as Mr. Turin admitted during the July 2010 conference call, "we get weekly bookings reports." SAC ¶ 45 & Ex. 1, at 16 (conference call). Plaintiffs further argue that scienter can be inferred — at least with respect to the May 2010 statements — based on Defendants' motive to make misleading statements about strong current customer demand, i.e., to ensure that the stock offering in May 2010 would be profitable, thus "enabl[ing] Oclaro to spend $19.5 million of the cash proceeds to make strategic investments [e.g., an alliance with ClariPhy] and to acquire Mintera," both critical to Oclaro's future success. SAC ¶ 30.
Plaintiffs' reliance on the weekly bookings reports as a basis to establish knowledge is problematic in light of Ninth Circuit case law.
The Ninth Circuit has noted that
Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1230-31 (9th Cir.2004) (emphasis added).
In the instant case, even if the Court were to assume that the weekly
In In re Silicon Graphics Securities Litigation, 183 F.3d 970 (9th Cir.1999), abrogated on other grounds as stated in South Ferry LP v. Killinger, 542 F.3d 776, 784 (9th Cir.2008), the plaintiff argued that the company's officers made positive statements about the company even though they knew from internal reports that there were problems. See id. at 984. The plaintiff identified three specific internal reports and even identified the specific problems that the reports exposed. See id. at 984 (noting that, according to the plaintiff, "the Flash reports, Financial Statements/Packages and Stop Ship reports announced that: (1) SGI was not shipping the Indigo2 workstation in volume; (2) North American and European sales remained slow; and (3) SGI would not meet its revenue and growth targets for FY96"). According to the plaintiff, "the officers conducted several meetings during which they entered into a `conspiracy of silence' whereby they agreed to downplay the seriousness of the company's problems." Id. at 985.
The Ninth Circuit held that the plaintiff had failed to "plead facts to corroborate her allegations." Id.
Id. (emphasis added).
Similarly, in Lipton v. Pathogenesis Corp., 284 F.3d 1027 (9th Cir.2002), the Ninth Circuit concluded that there were insufficient allegations establishing a strong inference of scienter. The plaintiff in Lipton claimed that the company "knew that patient demand [for a drug manufactured by the company] was flat because the company had access to (1) internal reports on sales data and (2) ... patient demand data [provided by IMS, an information vendor]. According to plaintiffs, both types of data informed the defendants that 1Q99 sales would be lower than investors were led to believe." Id. at 1035.
Id. at 1035-36 (emphasis added).
In contrast to Silicon Graphics and Lipton, the Ninth Circuit did in Nursing Home, 380 F.3d at 1226, conclude that the scienter requirement had been met. There, the plaintiffs alleged that the company maintained a database with sales information and that, because "the top executives admit to having monitored the database, Oracle must have been aware that it was not going to meet its sales projections earlier in the third quarter, and that its statements to the contrary were therefore made with scienter." Id. at 1231. The court acknowledged that,
Id. at 1231-32. The court went on to take note of, inter alia, suspicious insider trading by Mr. Ellison and improper revenue accounting records which also contributed to its conclusion that the knowledge requirement had been met. See id. at 1232-33.
The instant case is closer to Silicon Graphics and Lipton rather than Nursing Home. Here, Plaintiffs present no specific evidence as to the content of the weekly booking reports. There is no evidence what those reports disclosed of actual sales, absolute numbers of bookings, or anything else. There is no evidence that the reports actually revealed the decline in book-to-bill ratio from March to April 2010. Even if the reports did reveal that decline, that would not establish a strong inference of scienter because there is no evidence that Defendants' awareness of a one-month decline in that statistic, particularly when viewed in the context of strong March sales and a good quarter, negated in Defendants' mind the accuracy of Oclaro's more general claim of a recent increase in consumer demand. Indeed, not only were sales for the relevant quarter consistent with Defendants' expectations, the book-to-bill ratio for April 2010 was still 1, a generally positive indicator of demand.
The instant case stands in contrast to Nursing Home, where there were many factors other than a decline in sales that led the Ninth Circuit's to find that the allegations of scienter were adequate. The sales decline in Nursing Home was likely known by top executives because: (1) there was a major drop in sales and (2) Mr. Ellison's admitted that he had personal involvement in those sales. Here, the drop in a one-month indicator for April 2010 was not demonstrated to be within Defendants' knowledge under the allegations in the complaint and in any event, even if it was, that does not establish a strong indicator that Oclaro's general statements about a recent increase in consumer demand were knowingly or recklessly false.
As noted above, Plaintiffs seem to have argued scienter on the part of Defendants based on the weekly bookings reports alone. However, to the extent Plaintiffs have suggested — or might suggest — that knowledge may be inferred because key officers would be aware of facts critical to Oclaro's core operations, such as sales volume, that argument has problems as well.
The Ninth Circuit has held that the core-operations theory by itself is usually not enough to establish a strong inference of scienter. That is, "[w]here a complaint relies on allegations that management had an important role in the company but does not contain additional detailed allegations about the defendants' actual exposure to information, it will usually
Id. at 785 n. 3.
In the instant case, Plaintiffs have claimed "actual exposure" based on the weekly bookings reports but, for the reasons discussed above, that position is problematic. There is no allegation that there was such a major decline in Oclaro's sales that it would be "absurd" for management not to know. Indeed, while we know there was a one-month decline in book-to-bill ratio, Plaintiffs made no allegation about the magnitude of any decline in sales in April 2010. Nor have Plaintiffs alleged there was a significant downward trend negating an otherwise strong quarter and which would have clearly signaled to management a problem of the magnitude in Berson.
With respect to the statements in May 2010, Plaintiffs also argue that there was a clear motive for Oclaro representing that customer demand was strong — i.e., Oclaro wanted to characterize itself as a strong company in order to have its May 2010 stock offering succeed. The problem for Plaintiffs is that motive by itself is not enough to establish a strong inference of scienter, at least in the Ninth Circuit. In Silicon Graphics, 183 F.3d at 970, the Ninth Circuit stated:
Id. at 974 (emphasis added); see also In re Terayon Communs. Sys., No. C 00-01967 MHP, 2002 WL 989480, at *8, 2002 U.S. Dist. LEXIS 5502, at *28, *33-34 (N.D.Cal. Mar. 29, 2002) (stating that "[f]acts showing mere recklessness or a motive to commit fraud and an opportunity to do so may provide some reasonable inference of intent, but they are not sufficient to establish a strong inference of deliberate recklessness"; adding that "facts showing motive and opportunity to
In re Rigel Pharms., Inc. Secs. Litig., 697 F.3d 869, 884 (9th Cir.2012). While Plaintiffs claim there was a more specific motive here beyond routine corporate objectives in that Oclaro was planning a May, 2010 stock offering, that only provides a marginally stronger case for motive. It is, however, not as strong as where those charged with misstatements stood to gain personally, such as through insider trading. See Silicon Graphics, 183 F.3d at 986 (noting that "`unusual' or `suspicious' stock sales by corporate insiders may constitute circumstantial evidence of scienter"). Moreover, the May stock offering provides no motive for the subsequent June 2010 statement challenged herein.
The Court concludes that, even taking into consideration the facts alleged in the complaint collectively, Plaintiffs have failed to plead enough allegations to give rise to a strong inference of scienter for the May and June 2010 statements.
As noted above, the July and August 2010 statements turn on the alleged falsity of Defendants' claim that they had good visibility into customers' needs. Thus, the issue here is whether there are allegations giving rise to a strong inference that Defendants knew, in fact, that they did not have such visibility. Plaintiffs assert that Defendants had knowledge based on representations made by the confidential witness, FE1.
In Zucco, the Ninth Circuit noted that
Zucco, 552 F.3d at 995. Ultimately, the court held that, in the case before it, "the SAC describes the confidential witnesses' job titles and employment information with ample detail to satisfy [the] requirement that a complaint make apparent a confidential witnesses' position within the defendant corporation, [but] the SAC fails to allege with particularity facts supporting its assumptions that the confidential witnesses were in a position to be personally knowledgeable of the information alleged." Id. "Some of the confidential witnesses were simply not positioned to know the information alleged, many report only unreliable hearsay, and others allege conclusory assertions of scienter. These allegations are not sufficient to raise a strong inference of scienter because they demonstrate that the confidential witnesses are not reliable." Id. at 996.
Here, Plaintiffs have alleged enough to establish that FE1 was in a position within Oclaro with knowledge of Oclaro's sales experience and practices. However, some of FE1's assertions of knowledge of the part of Defendants are wholly conclusory. For example, in ¶ 76(d), Plaintiffs allege that "[D]efendants knew that the Company
Plaintiffs' strongest allegation on scienter is in ¶ 76(c). Here, Plaintiffs allege that, according to FE1, "Oclaro's customers were often reluctant to provide detailed information about their own needs so that suppliers like Oclaro would not dedicate manufacturing capacity to other customer's needs," and "these nuances are known to those who are experienced in the industry, and were known to [Mr.] Turin and [Mr.] Couder." SAC ¶ 76(c). Although the claim that Mr. Turin and Mr. Couder had knowledge of "these nuances" is in and of itself conclusory, presumably, Plaintiffs are making the point that, as executives of Oclaro, Mr. Turin and Mr. Couder were likely experienced in the industry, and therefore had the knowledge of customers' tendencies.
While this is Plaintiffs' best allegation in the SAC, the Court does not find that it is sufficient to give rise to a strong inference of scienter. First, Plaintiffs have essentially assumed that the individual defendants were experienced in the industry by virtue of their position alone. While it is a fair inference that an executive would know of certain facts related to a company, e.g., a major loss to the company (see discussion, supra, discussing the core operations theory), it is not clear that an executive would necessarily know details such as precisely how far out in advance Oclaro knew of customer needs. Second, while Defendants' statements about good customer visibility were misleading — at least a reasonable jury could so find based on the allegations in the SAC — they were not so dramatically misleading or outright false that the only reasonable inference is that Defendants must have possessed the requisite intent in making them. The statements were somewhat general and, if they were misleading, they were not starkly so. Given the generality and fluidity of the statements regarding visibility, a strong inference of scienter requires more specific allegations than made herein. Finally, it is notable that there does not appear to be any motive for Defendants to make the false or misleading statements about good customer visibility. By this point in time, the May 2010 stock offering had already been completed. Furthermore, as Defendants point out, there is no allegation or evidence of any suspicious insider trading by the individual defendants.
In their opposition, Plaintiffs argue that the Court should not take into account the lack of any motive allegations because motive is not "required to allege scienter." Opp'n at 19. While the Court agrees that the absence of a motive allegation is not "dispositive," it is still a "relevant" fact, as the Supreme Court has expressly stated. Matrixx, 131 S.Ct. at 1324; see also Cutsforth v. Renschler, 235 F.Supp.2d 1216, 1250 (M.D.Fla.2002) (stating that, "if a motive to commit fraud can be a relevant [although not dispositive] circumstance supporting a claim of scienter, it would seem that an inability to show motive can be a relevant circumstance indicating the lack of scienter"); accord In re Acterna Corp. Secs. Litig., 378 F.Supp.2d 561, 576-77 (D.Md.2005).
Plaintiffs assert that, even if the absence of a motive allegation is considered, the Court still should not take into account the lack of any suspicious insider trading as a fact weighing against scienter. Plaintiffs maintain that, "because the SAC does not rely on insider trading allegations to demonstrate scienter, ... the absence of such allegations is irrelevant to the scienter analysis." Opp'n at 19 (emphasis
The Court also notes that Plaintiffs' position is in some tension with the Ninth Circuit's recent decision in Rigel. In Rigel, the plaintiffs did not allege that the individual defendants had actually engaged in insider trading in their complaint; rather, they simply alleged that the "individual defendants knew that the value of their stock options would increase if [the company] reported positive results from the clinical trial." Rigel, 697 F.3d at 884. Even though the plaintiffs did not allege actual insider trading, the Ninth Circuit still took into account the lack of insider trading. The Ninth Circuit noted: "[B]ecause none of the defendants [actually] sold stock during the period between the allegedly fraudulent statements and the subsequent public disclosure of the detailed data, which is the period during which they would have benefitted from any allegedly fraudulent statements, the value of the stock and stock options does not support an inference of scienter." Id. at 884-85.
In sum, taking a "holistic approach" in evaluating scienter, id. at 884, the Court finds that there are insufficient allegations to give rise to a strong inference of scienter with respect to the allegedly misleading
Because Plaintiffs have failed to make an adequate showing on scienter in their SAC, dismissal of the complaint is warranted. The Court, however, still provides some analysis on the issue of loss causation as that has some bearing on whether Plaintiffs should be given leave to amend their complaint.
Loss causation is the "causal connection between the material misrepresentation and the loss." Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). According to Defendants, Plaintiffs have failed to adequately plead loss causation because (1) the partial disclosure on July 29, 2010, and the final disclosure on October 28, 2010, did not actually correct anything that Oclaro had said previously, and (2) Plaintiffs have failed to demonstrate that the decline in the stock price was not due to other reasons — for example, that the decline was part of a sector-wide downturn or due to other negative news about Oclaro that was disclosed on the same date.
Defendants' first argument is not persuasive. As discussed above, Plaintiffs allege that, on July 29, 2010, Oclaro disclosed for the first time the slowdown in April; this was plausibly contradictory to its statements in May and June that there was a current increase or surge in customer demand. At the very least, a reasonable jury could find the comments about current customer demand to be misleading given what had taken place in April
As for the disclosure on October 28, 2010, the most notable correction was that 1Q11 results were not as strong as predicted (there was a miss on gross margin and adjusted EBITDA, even though revenues were met). There was also arguably a correction through Oclaro's disclosure that it had limited visibility into customer demand and that the decline in orders was due to an inventory correction (i.e., demand was not based in fact on true end-user demand).
As for Defendants' second argument, it too is not convincing. Defendants correctly point out that, in Dura, 544 U.S. at 336, 125 S.Ct. 1627, the Supreme Court noted that a decline in stock price may be due to reasons other than fraud — e.g., "changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events." Dura, 544 U.S. at 343, 125 S.Ct. 1627. However, this statement must be taken in the proper context.
In Dura, the Supreme Court characterized the Ninth Circuit decision under review
Id. at 342-43, 125 S.Ct. 1627 (emphasis added). The Court's explanation as to why it was rejecting the Ninth Circuit's holding cannot be equated with a requirement that a plaintiff must plead that a stock price did not decline for reasons other than fraud.
Moreover, in Dura, the Supreme Court agreed with the principle that loss causation is established where a plaintiff alleges that, after the truth becomes known, the price of the stock falls. As the Court stated in Dura, "the Restatement of Torts, in setting forth the judicial consensus, says that a person who `misrepresents the financial condition of a corporation in order to sell its stock' becomes liable to a relying purchaser `for the loss' the purchaser sustains `when the facts ... become generally known' and `as a result' share value `depreciate[s].'" Id. at 344, 125 S.Ct. 1627; see also id. at 347, 125 S.Ct. 1627 (stating that "[t]he complaint's failure to claim that Dura['s] share price fell significantly after the truth became known suggests that the plaintiffs considered the allegation of purchase price inflation alone sufficient"). The Ninth Circuit has confirmed that this is all that is required post Dura. See, e.g., Berson, 527 F.3d at 990 (indicating that, "where defendants overstated the firm's revenues, and where stock prices dropped immediately after defendants revealed the firm's `true financial condition,' plaintiffs adequately pled loss causation"); In re Daou Sys., 411 F.3d 1006, 1027 (9th Cir. 2005) (concluding that "the TAC's assertions of a steep drop in Daou's stock price following the revelation of Daou's true financial situation are sufficient to enable the complaint to survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6)").
At the end of the day, all that Plaintiffs have to do at this juncture of the proceedings is "plausibly establish loss causation," not definitively establish it. In re Gilead Scis. Secs. Litig., 536 F.3d 1049, 1057 (9th Cir.2008) (emphasis added). "[Any] skepticism is best reserved for later stages of the proceedings when the plaintiff's case can be rejected on evidentiary grounds." Id. Because, as discussed above, Plaintiffs have tied a decline in the stock price to a revelation of the "truth" on July 29, 2010, and October 28, 2010, the motion to dismiss on the ground that loss causation has not been adequately pled is without merit.
Furthermore, Plaintiffs alleged that the July 2010 drop in stock price was attributed, at least by some analysts, to the decline in the book-to-bill ratio, which was a result of the April 2010 slowdown. Therefore, even if there was other negative news about Oclaro that was disclosed in July 2010, see Reply at 14-15, the particular disclosure about the April 2010 slowdown is alleged to have had some significance. Even with an industry downturn, or even with other negative news about Oclaro, that does not preclude the possibility that a decline in stock price was attributable at least in part to a securities fraud. The Ninth Circuit has noted that
Daou, 411 F.3d at 1025 (emphasis in original).
For the foregoing reasons, the Court rejects Defendants' arguments that Plaintiffs' SAC is lacking with respect to allegations of falsity and loss causation and that, as a matter of law, Defendants' conduct is immunized by the safe harbor provision or bespeaks caution doctrine. The Court, however, agrees with Defendants that Plaintiffs have failed to make sufficient allegations to give rise to a strong inference of scienter and, on that basis, grants Defendants' motion to dismiss.
The only question remaining is whether Plaintiffs should be given leave to amend. Because the Court cannot say at this juncture that amendment would be futile (the Court's prior order granting Defendants' motion to dismiss addressed only the issue of falsity, not scienter), the Court shall allow Plaintiffs one final opportunity to amend their complaint.
Plaintiffs shall have thirty (30) days from the date of this order to file their third amended complaint. If no amended complaint is timely filed, then the Clerk of the Court shall enter judgment in favor of Defendants and close the file in this case.
This order disposes of Docket No. 63.
IT IS SO ORDERED.
Plaintiffs have filed suit against Oclaro, Inc. and two if its officers (Alain Couder and Jerry Turin) for violations of the federal securities laws, more specifically, § 10(b), Rule 10b-5, and § 20(a) of the Securities Exchange Act of 1934. Previously, the Court granted Defendants' motion to dismiss Plaintiffs' second amended complaint ("SAC"). While the Court rejected
Having considered the parties' briefs, as well as the oral argument of counsel, the Court hereby
Civil Local Rule 7-9(b) provides as follows:
Civ. L.R. 7-9(b). In the instant case, Plaintiffs seem to rely on (3) as the basis for their motion. According to Plaintiffs, the Court's dismissal order "contains a number of manifestly erroneous inconsistencies of law and fact that justify the Court's grant of the requested leave and reconsideration." Mot. at 2.
Most, though not all, of Plaintiffs' arguments focus on a claimed error by the Court with respect to its analysis of the May/June 2010 statements instead of the July/August 2010 statements. Before the Court turns to the May/June 2010 statements, it addresses briefly the arguments presented with respect to the July/August 2010 statements.
As stated in the Court's dismissal order, "the July and August 2010 statements turn on the alleged falsity of Defendants' claim that they had good visibility into customers' needs." Docket No. 76 (Order at 28). With respect to the scienter requirement for the July/August statements, Plaintiffs make limited arguments. First, they criticize the Court's statement that "Plaintiffs have essentially assumed that the individual defendants were experienced in the industry by virtue of their position alone." Docket No. 76 (Order at 29). Second, they criticize the Court's statement that Defendants' statements in July/August "were not so dramatically misleading or outright false that the only reasonable inference is that Defendants must have possessed the requisite intent in making them. The statements were somewhat general and, if
Neither of Plaintiffs' positions is persuasive — especially given that Plaintiffs must establish manifest error in order for their motion for leave to file a motion for reconsideration to be granted. First, even if Mr. Couder was a director and CEO since 2007 and Oclaro's chief spokesperson, see Mot. at 14, that does not necessarily show that he knowingly or recklessly misrepresented that Defendants had good visibility into customer needs. As the Court noted in its order: "While it is a fair inference that an executive would know of certain facts related to a company, e.g., a major loss to the company ..., it is not clear that an executive would necessarily know details such as precisely how far out in advance Oclaro knew of customer needs." Docket No. 76 (Order at 29). As for the Court's statement that the July/August statements were not obviously false, that is a fair consideration under Ninth Circuit law. The Ninth Circuit has expressly noted that "reporting false information will only be indicative of scienter where the falsity is patently obvious." Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1001 (9th Cir.2009) (emphasis added). Although Zucco involved a different situation,
Accordingly, to the extent Plaintiffs ask for leave to file a motion for reconsideration on the July/August 2010 statements, the motion is denied.
As noted in the Court's dismissal order, "Plaintiffs assert that Defendants made false and misleading statements in May and June 2010 by referring to strong current customer demand when, in fact, just in April 2010, Oclaro had experienced a slowdown in such demand." Docket No. 79 (Order at 7-8).
As to the May/June 2010 statements, Plaintiffs argue that the Court made a number of errors in analyzing the scienter requirement. Many of Plaintiffs' arguments are without merit. For example, nowhere in its dismissal order did the Court require Plaintiffs to prove actual knowledge rather than mere recklessness in support of scienter. See, e.g., Docket No. 79 (Order at 22) (stating that "it is not clear whether, e.g., the information about bookings [in the weekly reports] would be presented in such a way that Defendants would recognize a monthly decline or, more to the point, a trend significant enough such that Defendants' representation of a recent increase or surge in customer demand was likely knowingly or recklessly false and misleading") (emphasis added). Nor did the Court state anywhere in its order that Plaintiffs were relying on motive alone to establish scienter. See, e.g., Docket No. 79 (Order at 21) (taking note of Plaintiffs' contention that Defendants had the requisite scienter based on not only motive but also weekly bookings reports). And as yet another example, just because falsity and scienter may often be found based on the same set of facts, see Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir.2001) (noting that "falsity and scienter in private securities fraud cases are generally strongly inferred from the same set of facts"), that does not mean that, in each and every case, allegations of falsity are enough to establish a strong inference of scienter.
First, there is no dispute that there was a slowdown in April 2010. Defendants have admitted such, e.g., in an analyst conference call. See, e.g., SAC, Ex. 1 (Tr. at 13) (in July 2010 conference call, Mr. Couder admitting that "April [2010] in terms of orders was a little slow").
Second, although Plaintiffs did not expressly allege that the April 2010 downturn was massive in their SAC, they implicitly did so, as Plaintiffs explain in their pending motion:
Mot. at 7 (emphasis in original); see also Reply at 5-6. The Court thus concludes that it is plausible inference that the April downturn must have been quantitatively significant in order for the book-to-bill ratio to have declined from the quarter ending in March to the quarter ending in June, particularly given the representation that there were very strong sales in May and June. And if the April downturn was quantitatively significant, then it is also a plausible inference that upper management was likely aware of that fact at or about the time of the downturn.
There are additional allegations by Plaintiffs which, while insufficient on their own to establish scienter, do lend support to Plaintiffs' assertion. For example, during an analyst conference call, Mr. Turin stated: "[W]e, and from what I gather, a lot of folks in this space and similar spaces maybe saw a little bit of a slowdown in early April as people digested the huge order flow in March." SAC ¶ 9. This statement is an acknowledgment that there was, in fact, a slowdown in April. In their papers, Plaintiffs also argue that this statement is direct evidence of scienter because it shows management's awareness of the April slowdown at the time of the downturn. However, this statement by Mr. Turin is equivocal — i.e., the statement is far from a clear admission that Mr. Turin had knowledge of the April 2010 downturn in April.
There are also allegations in the SAC that Defendants received weekly bookings reports, which again would indicate contemporaneous knowledge of any slowdown in April. Here, as above, the Court emphasizes that these allegations are insufficient on their own to establish scienter, particularly because Plaintiffs made no concrete allegations in their SAC about the contents of those reports. See In re Silicon Graphics Secs. Litig., 183 F.3d 970, 985 (9th Cir.1999) (stating that "[w]e would expect that a proper complaint which purports to rely on the existence of internal reports would contain at least some specifics from those reports as well as such facts as may indicate their reliability"),
Taking a holistic approach in assessing Plaintiffs' scienter allegations, see In re VeriFone Holdings, Inc. Secs. Litig., 704 F.3d 694, 703 (9th Cir.2012) (noting that scienter allegations must be reviewed holistically, although adding that this does not preclude a court from first looking at the allegations individually and then as a whole "so long as [the court] does not unduly focus on the weakness of individual allegations to the exclusion of the whole picture"); In re Rigel Pharms., Inc. Secs. Litig., 697 F.3d 869, 884 (9th Cir.2012) (taking note that there is a "holistic approach to assessing scienter"), the Court concludes that it is reasonable to infer that Defendants were aware of the downturn in April 2010 in April, i.e., prior to the May/June 2010 statements about strong customer demand. Most significantly it may reasonably be inferred that the downturn in April was so quantitatively substantial that upper management was likely aware of that fact. Furthermore, such a substantial downturn would have made the falsity of statements asserting a "current" increase
Of course, "[t]o determine whether the plaintiff has alleged facts that give rise to the requisite `strong inference' of scienter, a court must consider" not only inferences favoring the plaintiff but also "plausible, nonculpable explanations for the defendant's conduct." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 323-24, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) (emphasis added). "[T]he inference of scienter must be more than merely `reasonable' or `permissible.'" Id. at 324, 127 S.Ct. 2499. Ultimately, the question is whether "a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Id.; see also Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir.2002) (stating that, "when determining whether plaintiffs have shown a strong inference of scienter, the court must consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs") (emphasis added).
In their opposition papers, Defendants did not provide much substantive briefing on this issue. See Mehr Decl., Ex. A (chart) (entry addressing argument that "[t]he April 2010 slowdown was so `quantitatively' significant that it reduced Oclaro's book-to-bill ratio from 1.35 to just above 1.0"; simply stating that the argument is that it is a "Repeated Argument"). However, at the hearing on the motion, Defendants articulated for the first time an opposing inference that could be made. "That opposing inference is that Oclaro was expanding its capacity to fulfill orders, and that the decline in Oclaro's book-to-bill ratio was caused at least in part by an increase in fulfillment of orders — the denominator in the book-to-bill ratio." Docket No. 100 (Defs.' Letter Br. at 1). Defendants argued that this inference could be made based on statements made by Mr. Couder and Mr. Turin during an analyst conference call in July 2010 — an exhibit that Plaintiffs attached to their SAC.
The Court has reviewed the transcript of the analyst conference call. During the call, Oclaro's officers did make statements about the company's fulfillment of customer demand. For example:
• Mr. Turin: "Our inventories were up $2.5 million this quarter.... We've intentionally increased our material stocks and are strategically staging more of this stock to be positioned to executed on the strong demand we continue to see out there." SAC, Ex. 1 (Tr. at 3).
• Mr. Turin: "Fixed assets were $37.5 million compared to $34.7 million last quarter. Our CapEx this quarter was approximately $6.2 million, up from $3.7 million last quarter. This is a reflection of our continuing investment towards executing on more of the strong demand we see out there." SAC, Ex. 1 (Tr. at 3).
• Mr. Turin (addressing a question about capacity component availability issues that inhibited sales in the prior quarter): "Well, in the big picture, since certainly very similar to March — very similar to the March quarter. In the June quarter we had more demand and we delivered to, probably in similar proportions, even though we were able to increase from just over $100 million in March of $113 million, roughly, in revenue in June with all of that scale added in telecom. So
• Mr. Turin: "And as far as having the capacity in place, we continue to invest significantly. We almost doubled our CapEx this quarter. We certain[ly] have significant CapEx in the pipeline. We spent $6.2 million this quarter. I'd be very surprised if we didn't spend at least a million more than that in the next quarter. And we've built up some of the inventory stocks as well. So we're definitely investing toward the increased demand and we believe we'll have the capacity to deliver growing revenues in September and most likely into December too." SAC, Ex. 1 (Tr. at 10).
• Mr. Couder: "We have invested more in CapEx the June quarter in such a way that income of capacity we are catching up.... [W]e are clearly investing in CapEx and also increasing the capital efficiency, some better testing technology and better manufacturing processes in such a way that in terms of capacity that by the end of the year we should have catch up with the demand." SAC, Ex. 1 (Tr. at 11).
But these statements about fulfillment of customer demand are general; they do not indicate with any concreteness that, e.g., fulfillment was outstripping bookings (thus making the denominator in the book-to-bill ratio bigger). Furthermore, the bulk of the statements concern Oclaro's positioning itself in the future to be able to fulfill customer demand; the statements do not focus on fulfillment of customer demand either in April 2010 or for the June 2010 quarter generally. Given the above, the Court concludes that the inferences of scienter in favor of Plaintiffs are "cogent and at least as compelling as any opposing inference," Tellabs, 551 U.S. at 324, 127 S.Ct. 2499, and thus satisfies the requirement of a strong inference of scienter.
For the foregoing reasons, Plaintiffs' motion for leave to file a motion for reconsideration is granted in part and denied in part. The motion is granted with respect to the May/June statements and denied with respect to the July/August statements. As for Plaintiffs' motion to reconsider with respect to the May/June statements, the motion is granted. Plaintiffs have adequately pled scienter based in large part on the plausible inference that the April 2010 downturn was significant such that Oclaro management likely knew of it at the time of the May/June statements. This inference in favor of Plaintiffs is as cogent and at least as compelling as the opposing inference proffered by Defendants.
A status conference shall be held on January 29, 2013, at 10:30 a.m. (The status conference set for March 21, 2013, is vacated.) A joint status conference statement shall be filed by January 22, 2013. In the statement, the parties shall address the possibility of limited and focused discovery on the issue of scienter (including the size of the April slowdown), leading to an early motion for summary judgement.
This order disposes of Docket No. 81.
IT IS SO ORDERED.
Mr. Turin and Mr. Couder also suggested that the customer demand was actually based on true end user need "in part because of the short lead times associated with customer demand requirements." SAC ¶ 34 (quoting a statement by Mr. Turin that "`I don't think ultra short lead times are consistent with an inventory rebuild'").
