In re Anadigics, Inc. Sec. Litig.

IN RE ANADIGICS, INC., SECURITIES LITIGATION.

CIVIL ACTION NO. 08-5572 (MLC)

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

Dated: September 30, 2011

NOT FOR PUBLICATION

MEMORANDUM OPINION

COOPER, District Judge

Plaintiffs bring this putative class action against defendants, Anadigics, Inc. ("Anadigics"), Bamdad Bastani ("Bastani"), and Thomas C. Shields ("Shields" and together with Bastani, "Individual Defendants") (collectively, "Defendants"), on behalf of all buyers of Anadigics's publicly traded securities between February 12, 2008, and August 7, 2008 (the "class period"). (Dkt. entry no. 68, 2d Am. Compl. at ¶ 1.)¹

Plaintiffs allege that Defendants violated Section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. §78j(b), and Securities Exchange Commission Rule 10b-5 ("Rule 10b-5"), 17 C.F.R. § 240.10b-5. (Id. at ¶¶ 202-211, 214-221.) Plaintiffs also allege that the Individual Defendants violated Section 20(b) of the 1934 Act, 15 U.S.C. § 78t(a), as control persons of Anadigics. (2d Am. Compl. at ¶¶ 223-225.) The Second Amended Complaint alleges that Defendants misled investors about Anadigics's capability to meet demand for its products.

Defendants move to dismiss the Second Amended Complaint pursuant to Federal Rule of Civil Procedure ("Rule") 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Section 78u-4 et seq. (Dkt. entry no. 69, Mot. to Dismiss.) Plaintiffs cross-move to strike the Appendices submitted by Defendants in support of Defendants' motions to dismiss the Consolidated Class Action Complaint and the Second Amended Complaint, as well as certain exhibits attached to the affidavits of Robert A. Alessi dated December 3, 2010, and December 23, 2009. (Dkt. entry no. 71, Cross Mot. to Strike; dkt. entry no. 69, Defs. Br., App'x A (discussing 15 sets of Anadigics statements identified in the Second Amended Complaint as "Defendants' Materially False and Misleading Statements and Omissions"); dkt. entry no. 69, 12-3-10 Alessi Aff.; dkt. entry no. 54, 12-23-09 Alessi Aff.) For the reasons stated herein, the Court will grant the motion and deny the cross motion.

BACKGROUND

A. Anadigics's Business

Anadigics designs and manufactures radio frequency integrated circuits, primarily using gallium arsenide semiconductor materials, for the wireless broadband and cable infrastructure markets. (2d Am. Compl. at ¶ 2.) Its main products are power amplifier modules, which are used in wireless handsets, WiFi routers for computers, and cable set-top boxes. (Id.) During the class period, Bastani served as Anadigics's President, Chief Executive Officer, and a director, and Shields served as Anadigics's Chief Financial Officer and Executive Vice President. (Id. at ¶¶ 27-28.)

1. Demand Increase and Manufacturing Capacity "Ramp-Up"

Anadigics's manufacturing operations took place in its Warren, New Jersey, fabrication facility (the "fab"). (Id. at ¶ 2.) Demand for Anadigics's products increased in early 2007, as the wireless handset industry began to transition from second-generation cell phones to third-generation ("3G") technology utilizing compound (as opposed to silicon) semiconductor chips such as those manufactured by Anadigics. (Id. at ¶ 8.) In an effort to meet rising customer demand, Anadigics began to "ramp up" its manufacturing capacity to increase production. The "ramp up" process involved both increasing production at the Warrenfab, which was allegedly not operating at its full capacity, as well as construction of a new fab in China. (Id. at ¶¶ 8, 63-64, 67-69.) The "ramp up" process was initially hindered by the lack of a key manufacturing tool, a "via etcher." (Id. at ¶ 9.) Additional via etchers were not ordered until January 2008, with a delivery time of approximately six months, such that production at the fab was constrained by the limited number of via etchers then on hand (the "via etcher problem"). (Id.)

The Second Amended Complaint alleges a situation in which Anadigics was unable to meet increasing demand for its products, to which customers responded by "dual sourcing" or "double ordering" products, meaning such customers would simultaneously place identical orders with both Anadigics and a competitor in hopes of receiving the products from one of them in a timely fashion. (Id. at ¶¶ 12-13, 81, 101.) Customers also allegedly engaged in "over-ordering" when Anadigics was unable to fill orders completely, in hopes of getting a larger proportion of available inventory. (Id. at ¶¶ 15, 106.) Plaintiffs claim that Defendants were aware of this situation, yet continued to assure the market that Anadigics was poised to capitalize on the increased demand for its products and would continue to gain market share vis-a-vis its competitors. (Id. at ¶ 16.)

2. The Intel Yield Problem

At the beginning of 2008, Anadigics employees discovered a yield problem with respect to wireless devices it was manufacturing for Intel, allegedly one of Anadigics's most important customers: as many as 50% of the devices were failing in late-stage testing, rather than the anticipated failure rate of 10% (the "Intel yield problem"). (Id. at ¶ 10.) Because of the 16-week lead time required for the manufacturing process, this yield problem led to a failure to ship the devices to Intel on time, and Anadigics diverted manufacturing capacity to Intel orders at the expense of other customers. (Id. at ¶¶ 10-11.) This allegedly caused Anadigics to "short" the orders of other important customers, including LG Electronics Inc. ("LG") and Samsung Electronics Co. ("Samsung"). (Id. at ¶¶ 11, 49, 66.) LG and Samsung allegedly began dual sourcing in the first quarter of 2008, whereas prior to that, both had used Anadigics as their sole source. (Id. at ¶ 99.) Plaintiffs complain that even though Defendants were aware of their manufacturing capacity problems, Bastani "repeatedly told customers that Anadigics would be able to fill their orders even when production managers told him there was simply not enough capacity in the fab, given the lack of via etchers and the diversion of capacity to Intel," to support such commitments. (Id. at ¶ 14.) Eventually, even theseassurances did not suffice to retain existing customers after Anadigics failed to fill firm orders on time, and Anadigics lost market share to its competitors by the end of 2008. (Id. at 55 108-114.)

B. The Allegedly Fraudulent or Misleading Statements

1. February 12, 2008 Press Release

The class period relevant to this action began on February 12, 2008, when Anadigics issued a press release touting the growth in demand from its wireless customers and its ability to meet that increased demand. (Id. at ¶ 116.) In that press release, Bastani stated that Anadigics was "working to build further market share with [its] top-tier customers" and "we continue to improve our manufacturing efficiencies and our production capacity plans continue to progress through equipment expansion in our New Jersey fab, qualifying external foundries and building our next fab in China." (Id.; 12-23-09 Alessi Aff., Ex. 23, 2-12-08 Press Release.) The February 12, 2008 Press Release contains the following cautionary language: "The statements regarding outlook are forward looking and actual results may differ materially. Please see safe harbor statement at the end of the press release." (2-12-08 Press Release at 2.)²

Plaintiffs allege that this statement was false and misleading because Bastani allegedly had been informed that Anadigics's most important wireless handset customers were dual sourcing and, as a result, Anadigics was losing market share. (2d Am. Compl. at ¶ 117.)

2. February 12, 2008 Earnings Call

Bastani conducted an earnings call, also on February 12, 2008, to discuss the fourth quarter of 2007, in which he allegedly misleadingly denied that Anadigics's customers were over-ordering product. The transcript of that earnings call shows the following exchange:

John Pitzer [Credit Analyst, Credit Suisse] -Concept[u]ally whenever a key supplier's capacity constrained customers often times order more than theyneed in hopes of getting what they can. How do you manage against that risk? And I guess at what point do you feel your capacity growth starts to meet the expected demand curve that we have to worry about, maybe the demand curve being overheated because of tight capacity?

Bami Bastani - Let me answer that from one or two different angles. In terms of over ordering in our interactions with our customers, we believe they are running very lean in their channels too, in a sense that we have very tight communication between us and between them on [] adjusting time deliveries. So, I do not see where we are today, any of them have over ordered. And now, in terms of would there be a possibility as they look at Q1 or Q2, they would like to build some buffer inventories, they might. And I'm sure they would like to. But again, we have kind of [engaged] our capacity growth to the point that we know what they want and what we can serve and we work very close hand-in-glove with them to meet their demand. At this point in time, based on the visibility I have, I do not see that as an issue.

(Id. at ¶ 18; 12-23-09 Alessi Aff., Ex. 24, 2-12-08 CallStreet Tr. at 18-19; accord dkt. entry no. 72, Gardner Decl., Ex. A, 2-12-08 Thomson Tr. at 24-25.)³ Bastani also made statementsaddressing Anadigics's efforts to increase manufacturing capacity:

We will continue to work directly with our customers on meeting their increased demands for our products and while we continue to operate with very lean inventory levels in finished goods, our increased production capacity plans continue to progress forward through continuous improvement in manufacturing efficiencies, operations of staffing, additions, and equipment expansions in New Jersey fab as well as engaging qualifying external foundries and building our next fab in China.

(2d Am. Compl. at ¶ 120; 2-12-08 CallStreet Tr. at 5; accord 2-12-08 ...