The opinion of the court was delivered by: Sidney H. Stein, U.S. District Judge
(This document relates to all actions)
Plaintiffs -- purchasers of securities in Sierra Wireless, Inc ("Sierra") during the period from January 28, 2004 to January 26, 2005 (the "class period") -- bring this action against Sierra and three of its corporate officers pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder. In their consolidated amended class action complaint, plaintiffs claim that defendants artificially inflated the value of Sierra's stock by issuing statements that contained material misrepresentations and omissions regarding various aspects of the company's future performance and business strategy. It does not allege that defendants misstated any past financial results. The complaint further asserts control person liability against three individual corporate officers pursuant to section 20(a) of the Exchange Act.
Defendants have now moved to dismiss the action pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted. They contend that the complaint does not plead securities fraud with the particularity required by Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 (codified in various sections of 15 U.S.C.) ("PSLRA"), and therefore should be dismissed. In addition, defendants claim protection under the PSLRA's "safe harbor" for forward-looking statements, 15 U.S.C. § 78u-5(c).
Defendants' motion to dismiss the complaint is granted for the reasons set forth at length in this Opinion. In sum, the statements that form the basis of this action are broadly optimistic projections of future performance that plaintiffs allege are false or misleading. However, plaintiffs have not specified why or how these statements are false or misleading and therefore have not supplied sufficient facts in their lengthy complaint to support their allegations. The securities laws neither require corporate officers to adopt a crabbed, defeatist view of the company's business prospects nor permit dissatisfied shareholders to assert serious allegations of fraud based on the perfect hindsight afforded by the passage of time.
The complaint alleges the following relevant facts, which the Court assumes to be true for the purposes of this motion to dismiss.
This multidistrict litigation consists of nine separate class actions which were centralized in the Southern District of New York pursuant to 28 U.S.C. § 1407 by the Judicial Panel on Multidistrict Litigation and assigned to this Court for coordinated or consolidated pre-trial proceedings. (See Transfer Order of the Judicial Panel on Multidistrict Litigation dated Aug. 22, 2005.) This Court subsequently consolidated the actions for pretrial purposes pursuant to Fed. R. Civ. P. 42(a), appointed lead plaintiffs, approved their selection of lead counsel, and directed them to file a consolidated amended complaint. (See Order dated Dec. 16, 2005.) Subsequent to the filing of that complaint, defendants moved to dismiss the consolidated action.
Sierra, a Canadian corporation with its principal place of business in British Columbia, is in the business of developing telecommunications products such as wireless data modems and mobile phones. (Am. Compl. ¶ 7.) During the class period, Sierra's "key products" were (1) the AirCard, which is a PC card that enables laptop computers to connect to the internet; (2) embedded modules, which are built into handheld devices made by original equipment manufacturers ("OEMs"); (3) vehicle-mounted modems and software that permits remote wireless access; and (4) the Voq Professional Phone, a multi-functional mobile device similar to a Blackberry or Treo. (Id. ¶ 25.)
David B. Sutcliffe was Sierra's Chairman and Chief Executive Officer during all relevant times. (Id. ¶ 8.) David G. McLennan became the Chief Financial Officer of Sierra in March 2004 and thereafter held that position for the remainder of the class period. (Id. ¶ 9.) Jason W. Cohenour served as Sierra's Senior Vice President for Worldwide Sales until August 2004, at which time he became the company's Chief Operating Officer, a position which he held until October 2005. (Id. ¶ 10.) As Sierra's senior officers, Sutcliffe, McLennan, and Cohenour (the "Sierra Officers") had access to non-public information pertaining to the company's finances, products, markets, and business prospects. (Id. ¶ 12.)
The lead plaintiffs in this multidistrict class action are the National Elevator Industry Pension Plan, Cary Boyko, Andy Hua, John Travan, Roger S. Curry, and James M. Dowd. Each lead plaintiff purchased Sierra securities during the class period and claims to have been injured by defendants' conduct. (Id. ¶ 6.)
Plaintiffs contend that during the class period, Sierra "engaged in a scheme to deceive the market . . . that artificially inflated Sierra Wireless' securities . . . by issuing false and misleading statements" to the investing public about the company's major product lines and largest customers. (Id. ¶ 95.) According to the complaint, Sierra held itself out as a "market leader" with "a reputation in the wireless data industry for creating state-of-the-art, high-quality products." (Id. ¶¶ 24, 26.) However, this carefully cultivated public image was at odds with the alleged truth about Sierra's prospects: the company faced a rapidly eroding market position on several fronts. In time the truth about Sierra's diminished prospects emerged. On January 26, 2005 Sierra announced lackluster fourth quarter 2004 results and projected even worse performance in 2005. (Id. ¶ 83.) This news triggered a major sell-off of Sierra stock, which fell by thirty-eight percent from the prior day's closing price. (Id.)
In support of these allegations, plaintiffs claim that Sierra failed to make adequate disclosures about six significant business events. According to the complaint, Sierra misled the investing public about: (1) its failure to win new business from palmOne, one of its largest customers; (2) the conclusion of its existing business with palmOne at the end of 2004; (3) its excess PC Card inventory, which Sierra planned to "stuff" into its distribution channels; (4) the projected weakness of its PC Card business; (5) the inability of its "smartphone" product to compete successfully in the market; and (6) its decision not to introduce a Universal Mobile Telecommunications System ("UMTS") product in 2005, despite publicly announcing its plans to do so. (Id. ¶¶ 29, 31, 33, 38, 42, 43, 96.) Each of these allegations is analyzed in detail below.
1. Sierra's Failure to Win New Business from palmOne
Sierra -- a self-professed "market leader" in the distribution of embedded modules to OEMs -- purportedly earned twenty percent of its total 2004 revenues from OEM sales to palmOne, which in turn utilized the modules in its popular "Treo 600 smartphone." (Am. Compl. ¶¶ 26-27.) In 2003, palmOne planned to launch a new model of the Treo and was in the process of selecting a supplier to provide the embedded modules for the new version of that device. (Id. ¶ 28.) Citing a "former palmOne new products material manager with personal knowledge of palmOne's business with Sierra Wireless," plaintiffs contend that palmOne informed Sierra executives in late 2003 that Sierra had not been chosen to supply the embedded modules for the new Treo phone. (Id. ¶¶ 29-30, 59.) Thus, prior to the start of the class period, Sierra allegedly knew that its OEM module revenues were likely to decline "after palmOne phased out sales of [the Treo 600] phone to make room for its next generation of phones." (Id. ¶ 29.)
While allegedly aware of this adverse information, Sierra issued the following statements during the class period, which plaintiffs contend were false or misleading:
* On an April 19, 2004 conference call, Sutcliffe stated that he "expect[ed] OEM to continue to be a strong segment," noting that Sierra "spent years investing in building up [its] portfolio of OEM clients and . . . products, and are doing quite well in that area right now." (Id. ¶ 58.) On the same call, Cohenour stated that, due to recent OEM wins, "[w]e expect [OEM] to continue to be a healthy business for the foreseeable future." (Id.)
* On May 4, 2004 -- after an analyst had publicly stated that palmOne "has plans to move away from Sierra Wireless" for future Treo models -- a Sierra press released announced that VeriFone "has joined [its] growing roster of embedded module customers" but did not mention Sierra's business prospects with respect to palmOne. (Id. ¶ 62.)
* In a July 21, 2004 press release, Sierra attributed the company's positive second-quarter performance in part to "[d]emand for our . . . embedded module [lines.]" (Id.)
* On an October 27, 2004 conference call, Cohenour remarked that demand for Sierra's "embedded modules continues to be strong." (Id. ¶ 76.)
Plaintiffs claim that each of these statements is misleading because of Sierra's failure to acknowledge the impact of palmOne's decision not to award its OEM business for the next generation of Treo phones to Sierra.
2. The Completion of the Existing palmOne Contract
In a related claim, plaintiffs contend that Sierra knew its existing OEM business with palmOne would be completed by the end of 2004 and a significant reduction in its OEM sales would follow. (Id. ¶ 70.) Plaintiffs claim that this knowledge made the statements listed in the previous section misleading, as well as Sierra's August 31, 2004 disclosure that it had failed to win the new Treo business, on the theory that Sierra should have also disclosed that all business with palmOne would cease at the end of 2004. (Id. ¶ 69.)
3. Excess PC Card Inventory and Channel Stuffing
Plaintiffs also allege that Sierra engaged in a "scheme to stuff the [c]ompany's distribution channels with PC Cards that was far in excess of end user demand in order to meet quarterly earnings guidance." (Id. ¶ 43.) Plaintiffs contend that such a scheme is itself unlawful and, in addition, caused Sierra's representations about the strength of its PC Card business to be materially false and misleading. (Id. ¶¶ 43, 78.)
4. The Strength of the PC Card Business
Plaintiffs further claim that Sierra made false and misleading statements about the strength of its PC Card business while knowing that this business was plagued with weaknesses. Specifically, plaintiffs point to the following statements:
* On a January 28, 2004 conference call, Cohenour stated that Sierra was well-positioned to benefit from Verizon's national rollout of its CDMA EV-DO service, as Sierra was "already providing EV-DO PC Cards to Verizon in support of their 2-city trial." (Id. ¶ 51.) In response to a question on Sierra's ability to compete in the PC Card market, Sierra responded that "only the paranoids survive" and noted that the company "always anticipate[s] that there will be competition." (Id. ¶ 52.)
* In a July 21, 2004 press release, Sutcliffe commented on Sierra's positive second-quarter results, noting that "[d]emand for our PC Card, embedded module and mobile product ...