The opinion of the court was delivered by: Berman, District Judge.
This Decision and Order resolves Nortel Networks Corporation's ("Nortel" or "Company") motion(s) to dismiss, pursuant to Rules 12(b) and 9(a) of the Federal Rules of Civil Procedure, a series of purported class actions alleging violations of the federal securities laws, particularly Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). The litigation was initiated following the precipitous decline in the value of Nortel's common stock on and after February 16, 2001.*fn1 In this (consolidated) action, purchasers of Nortel common stock and call options ("Nortel Plaintiffs") during the period October 24, 2000 through February 15, 2001 ("Class Period"), filed a Second Consolidated Amended Class Action Complaint ("Nortel Complaint" or "NC") against Nortel as well as John Andrew Roth, Nortel's Chief Executive Officer and President during the Class Period ("Roth"), Clarence Chandran, Nortel's Chief Operating Officer during the Class Period ("Chandran"), and Nortel's Chief Financial Officer during the Class Period, Frank Dunn ("Dunn"). (Roth, Chandran, and Dunn will be referred to as "Individual Defendants." The Individual Defendants, together with Nortel, collectively will be referred to as "Defendants.")
In a second purported class action, individuals who purchased the common stock of JDS Uniphase Corporation ("JDSU") during the period January 18, 2001 through February 15, 2001 ("JDSU Plaintiffs" and, collectively with the Nortel Plaintiffs, "Plaintiffs"), allege, as against Nortel and the Individual Defendants, violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 ("JDSU Complaint" or "JC").*fn2
Defendants filed their Joint Motion to Dismiss the Nortel and JDSU Complaints on August 15, 2002 ("Def.Mem."). On September 15, 2002, Plaintiffs filed a Joint Memorandum of Law opposing Defendants' motion ("Pl.Mem."). On September 30, 2002, Defendants filed a Reply Memorandum ("Def.Reply"). The Court heard (very helpful) oral argument on December 11, 2002. For the reasons set forth below, the Court grants Defendants' motion to dismiss the JDSU Complaint and denies Defendants' motion to dismiss the Nortel Complaint.
For the purposes of this motion, the allegations of the Nortel Complaint and the JDSU Complaint are taken as true. Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998).
Defendant Nortel is a Canadian corporation and one of the world's largest suppliers of "networking solutions and other services that support the Internet and other public and private data, voice, and video networks using wireless and wireline technologies." NC ¶ 28. Nortel is among the leaders of the Internet and telecommunications industry, which, particularly from 1999 through early 2000, became "very hot" and experienced substantial and rapid growth. NC ¶ 44. During 2000, the Internet and telecommunications sectors began a severe contraction. NC 45. By the start of the Nortel Plaintiffs' Class Period in October 2000, several of Nortel's largest customers were reducing orders for Nortel products and indicating to Nortel salespeople that orders for 2001 would be (even) lower. NC ¶ 5.
Factors which could cause results or events to differ
from current expectations include among other things:
. . . the impact of rapid technological and market
change; . . . general industry and market conditions
and growth rates; international growth and global
economics conditions, . . . the uncertainties of the
Internet; . . . and the impact of increased provision
of customer financing by Nortel Networks.
October 2000 Announcement; Attached as Exhibit C to Affidavit of Stuart J. Baskin, dated Aug. 15, 2002 ("Baskin Aff.").*fn4
According to the Nortel Complaint, the results reported in the October 2000 Announcement were materially false and misleading. NC ¶ 76. Specifically, Plaintiffs allege that Nortel did not experience "strong growth" and did not have a "strong order backlog" during the third quarter of 2000, "but rather experienced a material decline in the demand for its products" and "suffered a steady deterioration of sales and revenues in its Enterprise Solutions Group, which historically ha accounted for a significant portion of the Company's business," Id. Plaintiffs further allege that Defendants' "guidance for 2001 (30-35% revenue growth) would be nearly impossible to achieve in light of contracting Internet and telecommunications sectors and the fact that defendants planned to improperly sacrifice a substantial portion of Nortel's 2001 revenues by pulling those revenues into 2000." NC 77.
Plaintiffs allege that Nortel's third quarter results were also materially misstated in the Company's third quarter 2000 Form 10-Q, filed with the Securities and Exchange Commission ("SEC") on November 7, 2000 ("Third Quarter Form 10-Q"). NC ¶ 86. In order, allegedly, to "conceal and temper the impact of the negative market changes on Nortel's business, defendants engaged in a variety of practices which caused Nortel's financial results for the third quarter to be materially enhanced and misstated in violation of Generally Accepted Accounting Principles (`GAAP') and SEC reporting rules." Id. For example, Plaintiffs allege that the Third Quarter Form 10-Q overstated the Company's results improperly by recording and reporting revenues from shipments of products, even though Nortel "vendor financed" these shipments by extending credit on 100 percent of the sale price to its customers. NC ¶ 88. According to Plaintiffs, vendor financing allowed customers to make purchases that they could not otherwise have made. "Without the extension of credit and/or infusions of cash from Nortel, these companies would not have had the funds sufficient to make the purchases of Nortel products that they did, and, in many cases, were so cash-poor that they were on the brink of insolvency at the time they purchased Nortel products." NC ¶ 55. Plaintiffs allege that by recognizing revenue from these transactions, Nortel violated GAAP and the Company's own internal revenue recognition guideline policies, presumably because Defendants knew that the customers were unable to pay for the products. NC ¶¶ 89-93.
Another practice that allegedly was used improperly to increase reported revenues, involved "pulling forward" revenue into the third and fourth quarters of 2000. NC ¶ 82. "According to former Nortel employees `pulling forward' is the practice of recording and reporting revenues from the anticipated sales of products in later quarters in an earlier quarter," i.e., in this case, recognizing in 2000 revenue for anticipated sales in 2001 to 2003. Id. Plaintiffs also allege that Nortel improperly recognized revenue based on "letters of intent" rather than formal purchase orders.*fn5 NC ¶ 98.
Plaintiffs allege that by September 2000 major Nortel clients, such as Verizon, WorldCom and AT & T, were (significantly) scaling back their business with Nortel and indicating that orders in 2001 would also be significantly reduced. NC ¶ 83-85. Despite these dramatic business difficulties, Plaintiffs allege that on November 1, 2000, Nortel issued another materially false and misleading press release, reiterating its positive outlook for 2000 and 2001 ("November 2000 Announcement"). NC ¶ 119. The November 2000 Announcement quoted Roth as saying that Nortel expected its "percentage growth in revenue and earnings per share from operations in 2000 over 1999 will be in the low 40's." Id. Roth further indicated that "[l]ooking forward to 2001, we continue to expect the overall market to grow in excess of 20 percent," and that Nortel expected "to grow significantly faster than the market, with expected growth in revenues and earnings per share from operations in the 30 to 35 percent range" for 2001. NC ¶ 120.
At Nortel's Annual Investor Conference on November 21, 2000, the Individual Defendants continued to offer positive, but allegedly false and misleading, reassurances regarding Nortel's prospects for the fourth quarter of 2000 and for 2001. NC ¶ 125. Roth reiterated that the Company's sales and profits from operations (excluding costs of acquisitions) would grow 30 to 35 percent in 2001. Id. Dunn reaffirmed that Nortel expected to meet its revenue projections for the first quarter of 2001. Chandran described the demand for fiber-optics as "inevitable and unstoppable," and predicted 40 percent growth in the optical networking market. NC ¶ 126.
Purchase of JDSU's Zurich Business
By December 2000, the Company was engaged in talks with JDSU regarding Nortel's purchase of JDSU's Zurich, Switzerland pump laser business ("Zurich Business") for approximately $3 billion in Nortel stock. JC ¶ 7. JDSU's Zurich Business "was one of two facilities in the world that manufactured pump lasers, a key component of the most advanced fiber-optic networks." JC ¶ 192. Plaintiffs allege that the Zurich Business purchase was part of Nortel's strategy of acquiring other telecommunications companies using Nortel's "highly-priced shares as currency." NC ¶ 14. The JDSU Plaintiffs allege that during negotiations between Nortel and JDSU, Nortel provided JDSU with false and misleading information regarding the value of Nortel's stock. JC ¶ 132. On February 6, 2001, JDSU announced the sale of its Zurich Business to Nortel for $2.5 billion worth of Nortel common stock in addition to another $500 million in Nortel stock payable to JDSU if Nortel did not meet certain purchase commitments.*fn6 JC ¶¶ 135-36.
Nortel issued another allegedly false and misleading press release on January 18, 2001, reporting the Company's results for the fourth quarter and full-year 2000 ("January 2001 Announcement"). Nortel reported that, for the fourth quarter, revenues increased 34 percent, while earnings per share from operations grew 24 percent. NC ¶ 152. Roth was quoted as saying that "the ...