Alizadeh v. Tellabs, Inc.

MAHMOOD ALIZADEH, on behalf of himselfand all others similarly situated, Plaintiff, v. TELLABS, INC., TIMOTHY J. WIGGINS,and THOMAS P. MINICHIELLO Defendants.

No. 13 C 537

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

Dated: June 16, 2014

Judge Sara L. Ellis

OPINION AND ORDER

Lead Plaintiffs Brian Jensen and Alfredo Acosta bring this case on behalf of themselves and a putative class of similarly situated individuals who purchased securities in Tellabs, Inc. ("Tellabs"). Plaintiffs allege that Tellabs and two of its officers, Timothy Wiggins and Thomas Minichiello, made false or misleading representations with regard to Tellabs' business operations which caused Tellabs' stock price to be artificially inflated. Specifically, Plaintiffs allege that Defendants misrepresented the viability of Tellabs' products and failed to promptly disclose that Tellabs had lost the business of its primary customer, AT&T. In doing so, Plaintiffs contend that Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, codified as 15 U.S.C. § 78j(b) and t(a), and SEC Rule 10b-5, 17 U.S.C. § 240.10b-5. Now before the Court are Defendants' motion to dismiss the Amended Complaint for failure to comply with the heightened pleading standards that govern claims for securities fraud. [42] Because Plaintiffs fail to specify which of Defendants' statements were false or misleading and fail to connect each alleged misstatement with a contrary allegation of fact, the Amended Complaint is dismissed without prejudice.

BACKGROUND¹

Tellabs designs and develops telecommunications network products, which it sells primarily to telecommunications service providers. Tellabs stock is traded publicly on the National Association of Securities Dealers Automated Quotations Market ("NASDAQ"). Plaintiffs seek to represent a class of individuals who purchased Tellabs stock between June 9, 2010 and April 26, 2011 (the "Class Period"). Defendant Timothy Wiggins served as Tellabs' Chief Financial Officer and Defendant Thomas Minichiello was Tellabs' Chief Accounting Officer during the Class Period.

At the beginning of the Class Period, AT&T was Tellabs' largest customer. But this was likely to change, as AT&T announced in 2009 that it intended to buy its telecommunications products from "domain suppliers," rather than from Tellabs. But as the iPhone was introduced and the mobile internet market ballooned, AT&T experienced "an explosion of demand for bandwith in 2010." Doc. 36 ¶ 70. To satisfy demand, AT&T purchased large quantities of Tellabs products, including the 5500 Digital Cross-Connect (the "5500"). By 2010, the 5500 was nearing obsolescence, but AT&T purchased $120 million worth of the devices in 2010 in order to meet this high demand. In light of AT&T's earlier announcement and the benefit of hindsight, these sales constituted a temporary fix for AT&T rather than an emerging trend. Tellabs acknowledged as much during the Class Period. In October of 2010, when asked on an earnings conference call whether sales of 5500s would continue to grow in 2011, Wigginsresponded, "lightning probably won't strike twice. I don't think so." Doc. 41-2, Ex. 8 at 18.² But Tellabs also asserted that as of June of 2010, AT&T continued to purchase its products at a steady rate.

With the 5500 nearing obsolescence, Tellabs sought to develop a product to satisfy AT&T's demand in its next generation network—known as "4G." Tellabs initially invested in developing the 8900, which was intended to replace the 8800, its "bread and butter" product. Doc. 36 ¶ 7. But Tellabs switched focus, cutting its research and development budget in the 8900 and investing instead in products first developed by WiChorus, Inc., a company Tellabs acquired in December of 2009. But Tellabs' WiChorus product was slow to roll-out and ultimately did not succeed in recapturing Tellabs' market share, resulting in the stock price losing its value. Exacerbating Tellabs' problems, a new competitor, Alcatel-Lucent, emerged during the first half of 2010 and began offering AT&T a pure ethernet product to support its network. Alcatel-Lucent ultimately won AT&T's business and took market share from Tellabs.

Plaintiffs allege that Tellabs made several material misstatements with regard to the viability of its products and the likelihood that it could retain AT&T as a customer. Plaintiffs allege that these misstatements began on June 9, 2010, when a representative from Tellabs told analysts and investors, "[w]e continue to compete for future business at AT&T and other companies. . . . The solution we're providing AT&T has a longer life and a longer runway in the network than the market has given it credit for." Doc. 36 ¶ 101. The following day, Wiggins stated, "[w]hat we're seeing in the current term is no degradation of the orders from the customer, but in fact we're seeing stronger orders than we expect so." Doc. 36 ¶ 103. But Tellabs simultaneously warned that it could lose business to Alcatel-Lucent in the long termbecause AT&T "would prefer over time to put a pure Ethernet system in because . . . pure Ethernet is probably a third less expensive." Doc. 36 ¶ 103. On this June of 2010 earnings call, Tellabs also projected that its WiChorus product would be available in 2011.

In July of 2010, Tellabs' CEO Robert Pullen stated on an investor conference call, "[w]hile I can't speak for our customer, we do know that AT&T is trialing a third vendor in its mobile back-haul networks. At the same time, Tellabs sees good demand from AT&T. We're in the network now. We're seeing growth on the embedded base. And we believe we offer the lowest risk and the least cost evolution to the long-term evolution in the mobile backhaul." Doc. 36 ¶ 113. In August of 2010, Pullen reiterated, "[o]ur orders still remain very good and we are approved in their mobile backhaul and obviously, it's growing demand there. As I shared on the earnings call, we do know that they are about to introduce a new vendor into the mix, but we continue to be deployed in their current business and it's a big and growing marketplace. We will continue to do well there." Doc. 36 ¶ 116. In October of 2010, Tellabs announced its third quarter earnings, including total revenue of $429 million, within the guidance range it had predicted three months earlier. Tellabs simultaneously released guidance for the fourth quarter of 2010, estimating revenue between $410 and $430 million.

Plaintiffs allege that "[t]he house of cards began to crumble" on January 25, 2011. Doc. 36 }} 125. On this date, Tellabs reported $410 million in earnings for the fourth quarter of 2010, at the low end of its guidance range. But Tellabs explained that this total included an accounting change that resulted in Tellabs recognizing $20.8 million in revenue that it otherwise would not have recognized until the first quarter of 2011. Wiggins acknowledged on January 25, 2011, "when we set the guidance and provided it to you in October, we did anticipate the change in this distribution arrangement with the customer." Doc. 36 ¶ 128. That same day, Tellabs alsoreleased disappointing guidance for the first quarter of 2011, estimating revenues between $315 and $335 million. Tellabs' stock price declined by almost twenty percent on that day.

On April 26, 2011, the last day of the Class Period, Tellabs revealed that it collected $322 million in revenues during the first quarter of 2011, again within the guidance range. Tellabs announced that its declining revenues were driven largely by decreasing sales in North America, specifically to AT&T. Tellabs' stock price dropped by nine percent on April 26, 2011.

Plaintiffs contend that Tellabs also misrepresented its relationship with a company called Juniper. A Tellabs representative stated in August of 2010, "[a]lso recently I was speaking with Kevin Johnson at Juniper and we have our products interoperating around the world for customers as well. And so our equipment's in their lab, we're doing interoperability testing with them for customers around the world, including AT&T." Doc. 36 ¶ 117. Plaintiffs allege that this statement "was clearly false and misleading" because Tellabs never formalized a business relationship with Juniper. Doc. 36 ¶ 118.

LEGAL STANDARD

A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint, not its merits. Fed. R. Civ. P. 12(b)(6); Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). In considering a Rule 12(b)(6) motion to dismiss, the Court accepts as true all well-pleaded facts in the complaint and draws all reasonable inferences from those facts in the plaintiff's favor. AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th Cir. 2011). To survive a Rule 12(b)(6) motion, the complaint must not only provide the defendant with fair notice of a claim's basis but must also be facially plausible. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009); see also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). "A claim has facial plausibility when the plaintiff pleadsfactual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678.

Rule 9(b) requires a party alleging fraud to "state with particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b). This "ordinarily requires describing the 'who, what, when, where, and how' of the fraud, although the exact level of particularity that is required will necessarily differ based on the facts of the case." AnchorBank, 649 F.3d at 615 (citation omitted). Rule 9(b) applies to "all averments of fraud, not claims of fraud." Borsellino v. Goldman Sachs Grp., Inc., 477 F.3d 502, 507 (7th Cir. 2007). "A claim that 'sounds in fraud'—in other words, one that is premised upon a course of fraudulent conduct—can implicate Rule 9(b)'s heightened pleading...