B. Misstatements of Material Fact
Defendants argue that the Nortel Complaint, consisting of 209 paragraphs and 88 pages, fails to identify any (actionable) material misstatements made during the Class Period. Def. Mem. at 5. Defendants contend that the misstatements alleged fall into three categories: (i) factually accurate statements of historical fact, Def. Mem. at 7; (ii) expressions of "soft opinion" and "puffery", Def. Mem. at 7; and (iii) forward looking statements accompanied by suitable cautionary warnings. Def. Mem. at 9. Plaintiffs argue that the Nortel Complaint sufficiently alleges that Defendants' statements of both historical results and predictions of future financial performance were materially misleading. Pl. Mem. at 5. Plaintiffs also claim that some of Nortel's forward looking statements are actionable because they were not accompanied by sufficient cautionary language and Defendants did not have a reasonable basis for believing that Nortel's predictions were accurate. Pl. Mem. at 16.
1. Historical Statements
Plaintiffs allege that the historical results reported in Nortel's October 2000 and January 2001 Announcements and the Third Quarter Form 10-K were materially misstated, among other reasons, because of various "accounting irregularities perpetrated at Nortel." Pl. Mem. at 5. Plaintiffs contend that these irregularities included improper revenue recognition, failure to account for uncollectible receivables, and GAAP violations relating to the impairment of assets and caused Nortel's third quarter, fourth quarter and year-end 2000 results to be materially (over) enhanced and misleading. See, e.g., NC ¶ 163 ("As in the 2000 third quarter, in order to conceal the impact of the significant contraction of the Internet and telecommunications markets on Nortel's business, defendants engaged in a number of accounting improprieties which caused the Company's results for the year-end 2000 (as reported by defendants on January 18 and 19, 2001) to be materially enhanced and misstated in violation of GAAP and SEC reporting rules.").
Defendants argue that because "Nortel's 2000 results were so stellar, and understandably provided the context for its own . . . expectations for 2001, plaintiffs have no choice but to plead that the results were not real." Def. Mem. at 11. That is, Defendants contend that Nortel's results for the third and fourth quarters of 2000 were not misstated and that Plaintiffs' allegation(s) of accounting improprieties must "fail as a matter of law." Id. Defendants argue that Plaintiffs have neither plead the alleged accounting improprieties with the requisite specificity, nor have the Plaintiffs adequately plead the materiality of the alleged misstatements. Def. Mem. at 12; see also Transcript of Dec. 11, 2002 Oral Argument ("Tr.") at 50 ("they plead all of these accounting standards which are the accounting standards and then if you look at it, your Honor, you will not find a single fact, other than Verizon, not a single particularized event other than Verizon, to try to apply those standards").
a. Accounting Allegations are Adequately Specific
"The complaint must identify the statements plaintiff asserts were fraudulent and why, in plaintiffs view, they were fraudulent, specifying who made them, and where and when they were made." In re Scholastic Corp. Secs. Litig., 252 F.3d 63, 69-70 (2d Cir. 2001). "A statement made in violation of GAAP may be found to be misleading or inaccurate under the federal securities laws." SEC v. Caserta, 75 F. Supp.2d 79, 90 (E.D.N.Y. 1999); see also In re Quintel Entertainment Inc. Secs. Litig., 72 F. Supp.2d 283, 293 (S.D.N.Y. 1999) ("Although `allegations of a violation of GAAP provisions, without corresponding fraudulent intent are not sufficient to state a securities fraud claim,' if the Complaint alleges additional evidence of intent, a violation of GAAP may be the basis of a § 10(b) claim.") (citation omitted).
The Nortel Complaint alleges a number accounting practices that may have inflated improperly the Company's (reported) revenues during the third and fourth quarter of 2000 including: improper recognition of revenue from sales based upon letters of intent rather than formal purchase orders, NC ¶ 98; failure properly to reflect (through reserves or charges against income) the risk of "noncollectibility" of unsecured loans extended to uncreditworthy customers, NC ¶ 108; and failure to recognize "billions of dollars" in impairment losses on long-term assets obtained through the Company's acquisitions. NC ¶ 113.*fn13 The Nortel Complaint specifically alleges that the Company improperly reported revenue on sales where Nortel extended 100 percent vendor-financing to customers, with the knowledge that those customers could not pay for the product(s). NC ¶ 92. Plaintiffs contend that revenue from these sales were "known to be materially uncollectible" and that recording that revenue violated Nortel's "internal revenue recognition policies, which, according to Nortel's Form 10-K for the fiscal year ended December 31, 2000, required collection to be `reasonably assured' prior to recognition." NC ¶ 93. Plaintiffs allege that this practice led to recording improperly "hundreds of millions, if not billions, of dollars" in revenue. NC ¶ 92. These allegations, if true, are more than a mere "contention that Nortel extended unwise loans." Def. Mem. at 12. They provide a (sufficiently) detailed account of "why, in plaintiffs view [the challenged statements] were fraudulent." Scholastic, 252 F.3d at 69. See also Quintel Entertainment, 72 F. Supp.2d at 293 ("These allegations sufficiently plead that the financial reports were false or misleading statements, subject to the requirements of materiality and scienter, discussed below.").
b. Accounting Allegations are Material
Defendants contend that the alleged accounting improprieties are (individually) immaterial in light of Nortel's $30 billion in reported revenue for 2000. Def. Mem. at 12 ("In this case the [materiality] bar is high, as Nortel had $30 billion in 2000 revenue."). Plaintiffs respond that the alleged misstatements, taken as a whole, are "plainly material." Pl. Mem. at 20. "In Nortel's press releases, conference calls with analysts and periodic SEC filings, Nortel: (i) reported hundreds of millions, if not billions of dollars in false revenues (¶¶ 88-102); (ii) failed to timely and properly recognize $12.5 billion in impairment losses from certain of its acquisitions (¶¶ 113-18); and (iii) overstated the Company's reported assets by failing to account for hundreds of millions, if not billions, of dollars in wholly uncollectible receivables (¶¶ 103-12)." Id. (emphasis excluded).
"At the pleading stage, a plaintiff satisfies the materiality requirement of Rule 10b-5 by alleging a statement or omission that a reasonable investor would have considered significant in making investment decisions." Ganino, 228 F.3d at 161. "The determination of materiality is a mixed question of law and fact that generally should be presented to a jury." Press v. Chem. Inv. Servs. Corp., 166 F.3d 529, 538 (2d Cir. 1999). A complaint should not be dismissed "on the ground that the alleged misstatements or omissions are not material unless they are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985); see Ganino, 228 F.3d at 162.
"[A]llegations of materiality should not be considered in isolation." Manavazian v. Atec Group, Inc., 160 F. Supp.2d 468, 478 (E.D.N.Y. 2001) Rather, "whether an alleged misrepresentation or omission is material necessarily depends on all relevant circumstances of the particular case." Ganino, 228 F.3d at 162. Looking at all of the alleged accounting improprieties in the Nortel Complaint, the Court cannot conclude, as a matter of law, that they are "so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance." Goldman, 754 F.2d at 1067; see also In re Revlon, Inc. Secs. Litig., 99 Civ. 10192, 2001 WL 293820 at *9 (Mar. 27, 2001) ("A bill and hold transaction here, an improperly delayed customer credit there, `and pretty soon you're talking about real money.'") (citation omitted).
Defendants argue that Nortel's "statements of prediction, hope, opinion or belief about its own future performance are not actionable under Rule 10b-5." Def. Mem. at 7. Plaintiffs respond that the purported statements of "soft-opinion" are actionable because "defendants made specific and consistent misrepresentations, based on purported contemporaneous facts, regarding Nortel's expected revenues, earnings and earnings per share for fiscal year-end 2000 and fiscal 2001, and that each of those statements was made with defendants' actual knowledge or reckless disregard based upon adverse contrary facts." Pl. Mem. at 16-17 (citation omitted).
"Statements regarding projections of future performance may be actionable under Section 10(b) or Rule 10b-5 if they are worded as guarantees or are supported by specific statements of fact, or if the speaker does not genuinely or reasonably believe them" In re International Business Machines Corp. Sec. Litig., 163 F.3d 102, 107 (2d Cir. 1998) (citations omitted). Here, Plaintiffs have alleged that Defendants did not genuinely or reasonably believe that the purportedly "soft" statements were true. The November 2000 Announcement, for example, quoted Roth as saying:
Looking forward to 2001, we continue to expect the
overall market to grow in excess of 20 percent. Given
our strong market position and leadership in high
performance Internet solutions, we continue to expect
to grow significantly faster than the market, with
anticipated growth in revenues and earnings per share
from operations in the 30 to 35 percent range.
NC ¶ 120.*fn14 The Nortel Complaint, however, explicitly alleges; that Defendants did not believe that the market would grow in excess of 20 percent; that the Internet and telecommunications markets experienced a significant contraction in the third quarter of 2000; and that it would be "nearly impossible" for Nortel to achieve 30 to 35 percent revenue growth in 2001, NC ¶ 123. See Gabriel Capital 122 F. Supp.2d at 419 ("Thus, plaintiffs have alleged that SDI did not genuinely or reasonably believe that Mini-Mill was `first class' when it made that statement.").
Several of Nortel's alleged misstatements were not simply "soft" predictions; rather, they contained recitations of (allegedly inaccurate) historical facts. In the October 2000 Announcement, for example, Roth stated: "Based on the momentum we have experienced during the first nine months and the strong order backlog, we continue to expect our percentage growth in 2000 over 1999 will be in the low 40's." NC ¶ 167. Plaintiffs have alleged that there, in fact, was no such momentum and that there was no such strong order backlog. NC ¶ 76. See In re APAC Teleservice, Inc. Secs. Litig., No. 97 Civ. 9145(BSJ), 1999 WL 1052004 at *8 (S.D.N.Y. Nov. 19, 1999) ("Linking future success to present and past performance does not render statements immune from liability.").
3. Bespeaks Caution and Safe Harbor
Defendants argue that Nortel's forward looking statements and expressions of opinion were accompanied by suitable cautionary warnings and, therefore, are not actionable under the bespeaks caution doctrine, and that they enjoy "safe-harbor" protection under the Private Securities Litigation Reform Act ("PSLRA"). Def. Mem. at 9 ("Moreover, the guidance provided by Nortel to the investing public, as well as the expressions of opinion . . . were all qualified with plentiful cautionary language."). Plaintiffs argue that Defendants' "generic warnings" were insufficient and failed to warn investors about the "undisclosed, adverse conditions" Defendants knew existed at the time they made the allegedly misleading statements. Def. Mem at 18-19 ("Defendants' generic warnings about potential negative economic trends `beyond Nortel's control' did not alert investors to the undisclosed, adverse conditions then existing.").
"Under the bespeaks caution doctrine, a misstatement or omission will be considered immaterial if cautionary language is sufficiently specific to render reliance on the false or omitted statement unreasonable." In re Independent Energy Holdings PLC Secs. Litig., 154 F. Supp.2d 741, 755 (S.D.N.Y. 2001). The cautionary language "must precisely address the substance of the specific statement or omission that is challenged." In re Prudential Sec. Inc. Ltd. Partnerships Litig., 930 F. Supp. 68, 72 (S.D.N.Y. 1996). "[N]o degree of cautionary language will protect material misrepresentations or omissions where defendants knew their statements were false when made." Milman v. Box Hill Sys. Corp., 72 F. Supp.2d 220, 231 (S.D.N.Y. 1999).
The warnings that accompanied Nortel's public statements, press releases and SEC filings failed adequately to warn investors about existing conditions described (alleged) in the Nortel Complaint. For example, Nortel's SEC Form 10-K for fiscal year 1999 (also referred to in Nortel's press releases during 2000), talks of "intense competition in the telecommunications industry, the highly volatile nature of the technology sector, and . . . `factors beyond Nortel Networks' control [including] . . . adverse changes in the specific markets for Nortel Networks' products; the conditions in the broader market for communications . . . and the conditions in the domestic or global economy generally.'" Def. Mem. at 10 (citation omitted). Plaintiffs do not complain about Nortel's failure to disclose generic risks. Plaintiffs allege Nortel failed to disclose negative consequences from specific risks that had either already come to pass or were known to be imminent, i.e. that public statements were made with actual knowledge that they were false or misleading. See, e.g., NC ¶ 77 ("defendants had been informed by major customers prior to the close of the 2000 third quarter that their orders in the fourth quarter and throughout 2001 would be significantly reduced"); see also Prudential, 930 F. Supp. at 72 ("The doctrine of bespeaks caution provides no protection to someone who warns his hiking companion to walk slowly because there might be a ditch ahead when he knows with near certainty that the Grand Canyon lies one foot away.").*fn15
Under the safe-harbor provisions of the PSLRA, a statement regarding a forward looking statement generally does not give rise to a securities fraud claim if either: (i) it is accompanied by meaningful cautionary language, or (ii) the plaintiff fails to prove the statement was made with actual knowledge that it was false or misleading. See 15 U.S.C. § 78u-5(c).; see also Independent Energy, 154 F. Supp.2d at 755. However, "it is well recognized that even when an allegedly false statement `has both a forwardlooking aspect and an aspect that encompasses a representation of present fact,' the safe harbor provision of the PSLRA does not apply." APAC Teleservice, 1999 WL 1052004 at *7 (quoting Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1213 (1st Cir. 1996)). As noted supra, many of the allegedly misleading statements identified in the Nortel Complaint included recitations of historical facts. See In re Complete Management Inc. Securities Litigation, 153 F. Supp.2d 314, 340 (S.D.N.Y. 2001) (noting that safe-harbor provisions "apply to forward-looking statements only, and not to material omissions or misstatements of historical fact"). Because the Nortel Complaint alleges that the Defendants had no basis for their optimistic statements and already knew (allegedly) that certain risks had become reality, the misstatements do not fall under the PSLRA's safe harbor provisions. See Independent Energy, 154 F. Supp.2d at 767.
Defendants argue that "plaintiffs have failed to `state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Def. Mem. at 16 (quoting 15 U.S.C. § 78u-4(b)(2)). Plaintiffs respond that the Nortel Complaint alleges both "motive and opportunity" to commit fraud and "facts that constitute strong circumstantial evidence of defendants' conscious misbehavior or recklessness by establishing that they knew facts or recklessly dis regarded information contradicting their public statements," Pl, Mem. at 13.*fn16
1. Motive and Opportunity
Defendants argue that "[f]ar from pleading motive and opportunity to commit fraud, the [Nortel] Complaint manages to negate any such motive." Def. Mem. at 17. Plaintiffs respond by saying: first, that because "Nortel's success was particularly and highly dependent upon making acquisitions to sustain its revenue and growth targets," the Company was "motivated" to maintain the market price of its shares, Pl. Mem. 11, and second, "Nortel could not have completed its February 8, 2001, $1.5 billion bond offering on the terms at which the bonds were sold had defendants first made truthful disclosures about Nortel's adverse financial condition." Pl. Mem. at 12.
Generally, motive "would entail concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged. Opportunity, would entail the means and likely prospect of achieving concrete benefits by the means alleged." Shields, 25 F.3d at 1130. "Motives that are generally possessed by most corporate directors and officers do not suffice; instead, plaintiffs must assert a concrete and personal benefit to the individual defendants resulting from this fraud." Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001).
It is unclear that motive is shown here. See Leventhal v. Tow, 48 F. Supp.2d 104, 115 (Conn. 1999) ("Finally, the complaint alleges that the defendants had a motive to artificially inflate Citizens' stock price during the class period in order to get more favorable terms in the stock-for-stock transactions and in the issuance of the debentures. This motive is also insufficient to establish scienter and is routinely rejected by the courts."); see also San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 814 (2d Cir. 1996) ("We do not agree that a company's desire to maintain a high bond or credit rating qualifies as a sufficient motive for fraud in these circumstances because `[i]f scienter could be pleaded on that basis alone', virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions.") (citation omitted). At the same time, the desire to consummate corporate transactions may in some instances "be a motive for securities fraud." Rothman v. Gregor, 220 F.3d 81, 93 (2d Cir. 2000). In any event, the Court need not reach the question of motive, because Plaintiffs have sufficiently plead that Defendants knew or recklessly disregarded that their public statements were misleading.
2. Conscious Misbehavior or Recklessness
Plaintiffs argue that they have pled scienter by alleging "facts that constitute strong circumstantial evidence of defendants' conscious misbehavior or recklessness." Pl. Mem. at 13. Plaintiffs point, among others, to allegations that "Nortel's problems were fundamental and should have been obvious to the Individual Defendants." Pl. Mem. at 13 citing NC ¶¶ 29-31. The Nortel Complaint alleges that the Defendants knew that many of the Company's largest customers were cancelling orders and were planning to reduce orders in the coming years. See, e.g., NC ¶ 85. Defendants respond that Plaintiffs fail to establish that "the executives responsible for the company's securities disclosures" had knowledge that the alleged misstatements were false. Def. Mem. at 19.
"To survive dismissal under the `conscious misbehavior' theory, the [Plaintiffs] must show that they alleged reckless conduct by the [Defendants], which is at the least, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.'" Carter-Wallace, 220 F.3d at 39 (citation omitted). "The facts alleged to support recklessness must be `strong circumstantial evidence' of that recklessness." Chill, 101 F.3d at 269 (quoting Acito v. IMCERA Group, 47 F.3d 47, 52 (2d Cir. 1995)) "[S]ecurities fraud claims typically have sufficed to state a claim based on recklessness when they have specifically alleged defendants' knowledge of facts or access to information contradicting their public statements. Under such circumstances, defendants knew or, more importantly, should have known that they were misrepresenting material facts related to the corporation." Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000).
Plaintiffs have adequately alleged that the Defendants either had actual knowledge of or ready access to facts that contradicted their public statements. "[P]rior to the close of the third quarter, Nortel senior management had been informed by . . . major clients, including WorldCom and AT & T that orders in 2001 would be significantly reduced," NC ¶ 83; by the end of 2001, it was "common knowledge at Nortel . . . that sales were headed for a `serious decline.'" NC ¶ 143. Despite these negative developments, Plaintiffs allege that Defendants continued to issue positive statements regarding Nortel's outlook for of 2000 and 2001. The October 2000 Announcement stated that based on Nortel's "momentum" and "strong order backlog" the Company expected "percentage growth in 2000 over 1999 will be in the low 40's." NC ¶ 67. The Nortel Complaint alleges that this statement was made despite the fact that "defendants had been informed by major customers prior to the close of the 2000 third quarter that their orders in the fourth quarter and throughout 2001 would be significantly reduced." NC ¶ 77. In the January 2001 Announcement, Roth said that "[o]verall the fourth quarter capped a year of exceptional growth, which was in line with our expectations." NC ¶ 153. The Announcement went on to quote Dunn as saying that Nortel was "projecting growth in revenues and earnings per share from operations in 2001 over 2000 of 30 percent." The Nortel Complaint alleges that these statements were false. See NC ¶ 161 ("the financial results reported for the fourth quarter and full year-end 2000 were materially misstated and presented in violation of GAAP"). "Defendants knew that `30 percent' growth in revenues and earnings per share in 2001 would not be possible because . . . throughout the fourth quarter 2000, they received budgets from numerous customers indicating that their 2001 orders would be substantially below that of 2000. Indeed, Verizon's optical purchases were projected to be less than 10% of the $1.1 billion reported in 2000, and AT & T, WorldCom and other major customers submitted budgets for 2001 that were 20% lower than that of 2000." Id. Plaintiffs sufficiently allege "defendants' knowledge of facts or access to information contradicting their public statements." Carter-Wallace, 220 F.3d at 40 (quotation omitted); see also NC ¶ 85 ("Nortel management were regularly provided with Equipment Inventory Reports for WorldCom and other major Nortel customers"); NC ¶ 84 ("Based on conversations with his customers in September 2000 [the Vice President of Global Sales for Nortel's High Performance Optical Group] submitted to defendant Chandran his group's fourth quarter 2000 sales forecasts, which were significantly lower than previously expected."); ¶ 161 ("throughout the fourth quarter of 2000, they received budgets from numerous customers indicating that their 2001 orders would be substantially below that of 2000"); Chill, 101 F.3d at 269 ("An egregious refusal to see the obvious, or to investigate the doubtful, may . . . give rise to an inference of recklessness.") (internal citations and quotations omitted).
V. Conclusion and Order
Defendants' motion to dismiss  is granted as to the JSDU Complaint  and denied as to the Nortel Complaint.
Counsel are requested to appear at a status/scheduling conference with the Court on January 29, 2003, at 3:00 p.m., in Courtroom 706 of the Thurgood Marshall Courthouse, 40 Centre Street, New York, New York. Any application to replead may be addressed at the conference. The parties are directed to engage in good faith settlement negotiations prior to the conference with the Court.