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NINA F. LOCKER, State Bar No. 123838 STEVEN GUGGENHEIM, State Bar No. 201386 GREGORY L. WATTS, State Bar No. 197126 WILSON SONSINI GOODRICH & ROSATI Professional Corporation 650 Page Mill Road Palo Alto, CA 94304-1050 Telephone: [phone] Facsimile: [phone] Attorneys for Defendants JUNIPER NETWORKS, INC., SCOTT KRIENS, MARCEL GANI, STEVEN HALEY and PETER L. WEXLER
UNITED STATES DISTRICT COURT 10 NORTHERN DISTRICT OF CALIFORNIA 11 12 In re JUNIPER NETWORKS, INC. 13 SECURITIES LITIGATION 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
This Document Relates to: ALL ACTIONS
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Master File No. C 02-0749-SI CLASS ACTION MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT DATE: TIME: COURTROOM: January 10, 2003 9:00 a.m. The Honorable Susan Illston
1 2 3 4 5 6 7 8 9 II. 10 11 12 13 14 15 a. 16 b. 17 c. 18 d. 19 B. 20 1. 21 2. 22 3. 23 4. 24 25 26 A. 27 28 B. IV. III.
TABLE OF CONTENTS Page NOTICE OF MOTION AND MOTION .....................................................................................1 ISSUES TO BE DECIDED (Civil Local Rule 7-4(a)(3)) ............................................................1 INTRODUCTION ......................................................................................................................2 BACKGROUND AND PROCEDURAL HISTORY .................................................................. 4 ARGUMENT .............................................................................................................................7 I. THE REFORM ACT IMPOSES STRICT REQUIREMENTS FOR PLEADING SECURITIES FRAUD....................................................................................................7 THE COMPLAINT DOES NOT SATISFY THE REFORM ACT' S REQUIREMENTS FOR PLEADING ON INFORMATION AND BELIEF ...................7 PLAINTIFFS DO NOT ALLEGE AN ACTIONABLE FALSE STATEMENT ............ 12 A. Plaintiffs Do Not Plead a False Forecast ............................................................ 12 1. 2. What Juniper Said .................................................................................. 12 Plaintiffs Do Not Plead Facts Showing Why Juniper' Revenue s Guidance Was False When Made ........................................................... 13 The "Slowdown" in Juniper' Business ...................................... 13 s Problems with the M160 Router ................................................. 15 Cuts in Forecast to Contract Manufacturers ................................ 16 The Q2 ` "Pull-ins"................................................................. 17 01
Plaintiffs'Claim Regarding False Financial Results Should Be Dismissed......... 18 Recognition of Deferred Revenue .......................................................... 18 "Bogus Swap" Transaction with Qwest.................................................. 20 The "Excess Inventory" Charge ............................................................. 21 Defendants'Statement that Deferred Revenue Declined in Q1 ' 01 Due to Shorter Acceptance Cycles Was Not False or Misleading ........... 22
PLAINTIFFS FAIL TO ALLEGE FACTS SUPPORTING A STRONG INFERENCE OF FRAUDULENT INTENT ................................................................. 24 Plaintiffs Do Not Raise a Strong Inference of Scienter Concerning Juniper' s Forecasting ........................................................................................................ 24 Plaintiffs Do Not Raise a Strong Inference of Revenue Recognition Fraud ........ 27 -i-
MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
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C.
Stock Sales Do Not Support a Strong Inference of Scienter ............................... 30 1. 2. 3. Percentages and Amounts ...................................................................... 30 Prior Trading History ............................................................................. 31 Timing ................................................................................................... 32
"NON-SPEAKING" DEFENDANTS CANNOT BE LIABLE UNDER RULE 10B-5............................................................................................................................ 32
CONCLUSION ........................................................................................................................ 33 7 CERTIFICATION OF INTERESTED ENTITIES OR PERSONS (Local Rule 3-16) ... ... ... ... 34 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
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TABLE OF AUTHORITIES Page(s) CASES Blackin v. Red Brick Systems, Inc., No. C-98-1206-MJJ, slip op. (N.D. Cal. Apr. 20, 1999)........................................................................................18, 33 Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 177 (1994)......................................................................................................32 Coble v. Broadvision, No. C01-01969, 2002 WL 31093589 (N.D. Cal. Sept. 11, 2002)................................................................................... 9, 11, 19 Copperstone v. TCSI Corp., No. C97-3495-SBA, 1999 U.S. Dist. LEXIS 20978 (N.D. Cal. Jan. 19, 1999)...............................................................................................19 DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385 (9th Cir. 2002) ......................27 DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir. 1990) .......................................................22, 23 Gaylinn v. 3Com Corp., No. C-99-2185 MMC, 2000 WL 33598337 (N.D. Cal. June 9, 2000)................................................................................................31 Gilford Partners, L.P. v. Sensormatic Elecs. Corp., No. 96 C 4072, 1997 WL 757495 (N.D. Ill. Nov. 24, 1997) ..................................................................16 Gompper v. VISX, Inc., 298 F.3d 893 (9th Cir. 2002)..........................................................24, 28 Greebel v. FTP Software, Inc,., 194 F.3d 185 (1st Cir. 1999)....................................................19 Hayley v. Parker, No. 01-0069, 2002 WL 925322 (C.D. Cal. Mar. 15, 2002)............................22 Head v. NetManage, Inc., [1999 Tr. Binder], Fed. Sec. L. Rep. (CCH) 90,412 (N.D. Cal. Dec. 30, 1998)........................................................................................30, 32 Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971 (9th Cir. 1999)..................... 8, 13, 24, 33
20 Helwig v. Vencor, Inc., 251 F.3d 540 (6th Cir. 2001) ................................................................24 21 In re Advanta Corp. Sec Litig., 180 F. 3d 525 (3d. Cir. 1999) ...................................................31 22 In re Autodesk, Inc. Sec. Litig., 132 F. Supp. 2d 833 (N.D. Cal. 2000) ................................26, 33 23 24 25 26 27 28 In re Commtouch Software Ltd. Sec. Litig., No. C 01-00719-WHA, 2002 U.S. Dist. LEXIS 13742 (N.D. Cal. July 24, 2002) .................................................................. 11, 28 In re FVC.com Sec. Litig., 136 F. Supp. 2d 1031 (N.D. Cal. 2000), aff'd, 2002 WL 465161 (9th Cir. 2002)..................................................................................................31 MOTION TO DISMISS [CORRECTED] -iiiCONSOLIDATED COMPLAINT
MASTER FILE NO.: C 02-0749-SI
In re Autodesk, Inc. Sec. Litig., No. C-00-1285-PJH, slip op. (N.D. Cal. Nov. 21, 2001) .......................................................................................12, 15 In re CBT Group PLC Sec. Litig., [1999 Tr. Binder], Fed. Sec. L. Rep. (CCH) 90,604 (N.D. Cal. July 21, 1999) .................................................................................27
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In re Hall, Kinion & Assocs. Sec. Litig., [2000-2001 Tr. Binder], Fed. Sec. L. Rep. (CCH) 91,251 (N.D. Cal. Oct. 27, 2000)......................................................................14 In re Hi/Fn, Inc. Sec. Litig., No. C-99-4531-SI, 2000 WL 33775286 (N.D. Cal. Aug. 9, 2000) .........................................................................................32, 33 In re MCI WorldCom, Inc. Sec. Litig., 191 F. Supp. 2d 778 (S.D. Miss. 2002) ..........................22 In re Northpoint Communications Group, Inc. Sec. Litig., 184 F. Supp. 2d 991 (N.D. Cal. 2001)........................................................................................................9, 19 In re Oak Tech. Sec. Litig., No. 96-20552, 1997 WL 448168 (N.D. Cal. Aug. 1, 1997) ................................................................................... 19, 22, 33 In re Read-Rite Corp. Sec. Litig., 115 F. Supp. 2d 1181 (N.D. Cal. 2000) .................................27 In re Sagent Tech. Inc. Sec. Litig., No. C-01-4637-PJH, slip op. (N.D. Cal. Sept. 11, 2002).......................................................................................10, 19 In re Sec. Litig. BMC Software, Inc., 183 F. Supp. 2d 860 (S.D. Tex. 2001)........................16, 19
11 In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999) ................................. passim 12 In re Splash Tech. Holdings Inc. Sec. Litig., 160 F. Supp. 2d 1059 (N.D. Cal. 2001).................26 13 In re Vantive Corp. Sec. Litig., 283 F.3d 1079 (9th Cir. 2002) ........................................... passim 14 15 16 17 Lipton v. Pathogenesis Corp., 284 F.3d 1027 (9th Cir. 2002)................................................8, 26 18 19 20 21 22 23 24 25 26 27 28 Nursing Home Pension Fund v. Oracle Corp., No. C01-0988, slip op. (N.D. Cal. Sept. 11, 2002)...................................................................................... passim Paracor Fin., Inc. v. General Elec. Capital Corp., 96 F.3d 1151 (9th Cir. 1996).................32, 33 Plevy v. Haggerty, 38 F. Supp. 2d 816 (C.D. Cal. 1998) ...........................................................22 Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001) ................................................................ passim Stack v. Lobo, No. 95-20049-SW, 1995 WL 241448 (N.D. Cal. Apr. 20, 1995) ........................18 Wilson v. CKS Group, Inc., No. C98-4229, slip op. (N.D. Cal. Mar. 21, 2000)..........................27 Yourish v. California Amplifier, 191 F.3d 983 (9th Cir. 1999).............................................12, 23 STATUTES 15 U.S.C. 78u-4.......................................................................................................................1 15 U.S.C. 78u-4(b)(1)(B).........................................................................................................7
MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
In re Versant Object Tech. Corp. Sec. Litig., No. C 98-00299 CW, slip op. (N.D. Cal. May 18, 2000).................................................................................... 8, 10, 20 Lemmer v. Nu-Kote Holding, Inc., No. 398CV0161L, 2001 WL 1112577 (N.D. Tex. Sept. 6, 2001) ..............................................................................................22
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15 U.S.C. 78u-4(b)(2) ..............................................................................................................7 15 U.S.C. 78u-4(b)(3)(A).........................................................................................................7 RULES Civil Local Rule 7-4(a)(3)...........................................................................................................1 Federal Rule of Civil Procedure 12(b)(6) ....................................................................................1
MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
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MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
NOTICE OF MOTION AND MOTION TO PLAINTIFFS AND THEIR ATTORNEYS OF RECORD: NOTICE IS HEREBY GIVEN PURSUANT TO THE STIPULATION AND ORDER DATED SEPTEMBER 10, 2002, that on January 10, 2003, at 9:00 a.m., or as soon thereafter as the matter may be heard, in the courtroom of the Honorable Susan Illston, United States District Court, San Francisco, California, defendant Juniper Networks, Inc. and Individual Defendants Scott Kriens, Marcel Gani, Steven Haley and Peter Wexler (collectively "defendants"), will, and hereby do, move the Court pursuant to the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), 15 U.S.C. 78u-4 et seq., and Federal Rule of Civil Procedure 12(b)(6) for an order dismissing plaintiffs'corrected consolidated complaint (the "Complaint" or "CC"). This Motion is based on this Notice of Motion and Motion; the Memorandum of Points of Authorities; the Request for Judicial Notice; the Declaration of Gregory L. Watts, together with accompanying exhibits; the [Proposed] Order; all pleadings and papers filed herein; oral argument of counsel; and any other matter which may be submitted at the hearing. ISSUES TO BE DECIDED (Civil Local Rule 7-4(a)(3)) 1. Have plaintiffs pled with the "great detail" and particularity "all facts" forming
the basis of their allegations as required by the Reform Act? 2. 3. Have plaintiffs alleged an actionable false statement? Have plaintiffs alleged with particularity facts giving rise to a strong inference
that the historical statements challenged in the Complaint were made with "deliberate recklessness" and that the challenged forward-looking statements were actually known to be false by each defendant? 4. Have plaintiffs stated a claim against defendants who are not alleged to have
made any false or misleading statements? 5. Have plaintiffs stated a claim for "controlling person" liability under Section
20(a) of the Securities Exchange Act of 1934?
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MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
INTRODUCTION Despite its length, plaintiffs'Complaint fundamentally asserts two claims. First, plaintiffs claim that in April 2001, defendants knowingly issued false revenue guidance for Q2 ' and fiscal year 2001. Second, plaintiffs claim that Juniper' financial results for Q1 ' were 01 s 01 misstated because of an alleged "pull-in" of deferred revenue, an alleged "swap" transaction with one of Juniper' customers, and because Juniper allegedly should have taken "at least" a $20 s million charge to earnings for "excess inventory" held by one of its contract manufacturers. The forecasting claim is easily disposed of. The facts alleged in the Complaint, when viewed most charitably to plaintiffs, say nothing more than there was a slowdown in Juniper' s business and, as a result, Juniper customers cancelled and/or reduced their orders. These allegations are, however, entirely consistent with Juniper' April 2001 revenue guidance. In s April 2001, Juniper said that the substantial quarter-over-quarter revenue growth that it had experienced throughout all of 2000 would not continue. Juniper said that, instead, for the first time in the Company' history, projected quarterly revenues would be flat compared to the prior s quarter and might even decline. At the same time, Juniper lowered its revenue guidance for fiscal year 2001 by 20%. Juniper' April 2001 guidance thus acknowledged that the downturn in s the economy was negatively impacting the Company' business. The Complaint simply does not s allege specific facts showing how the slowdown translated into the need for Juniper to reduce its guidance even more than it did. Since the facts alleged in the Complaint are not at odds with Juniper' guidance, plaintiffs'forecasting claim should be dismissed. s Plaintiffs'claim that Juniper' reported results for Q1 ' were false should also be s 01 dismissed. The Complaint' allegations do not come close to meeting the particularity s requirements of the Reform Act. Plaintiffs'claim that Juniper "pulled-in" deferred revenue, i.e. that Juniper recognized revenue prior to customer acceptance of product, rests upon a single boilerplate paragraph in the Complaint. The paragraph does not purport to describe a specific transaction in which Juniper recognized revenue before customer acceptance, does not purport to identify a single customer or Juniper employee involved in any such transaction, and does not
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state the terms, approximate amount or date of any such transaction. The "countless details" required by the Reform Act are strikingly absent. Plaintiffs'claim that Juniper "delayed" in taking a charge to earnings for "excess inventory" held by its contract manufacturers is equally flawed. The basic premise of this claim is plaintiffs'allegation that "the contract" between Juniper and one of its contract manufacturers made Juniper financially and legally responsible for the contract manufacturer' "excess s inventory." There is not, however, a single allegation regarding the terms of "the contract." Thus, plaintiffs have no basis for saying when Juniper' "legal and financial responsibility" was s purportedly triggered, much less that it was triggered in Q1 ' and amounted to "at least" $20 01 million. Because the Complaint is silent as to the terms of "the contract" that is alleged to govern Juniper' responsibility for excess inventory held by its contract manufacturer, plaintiffs' s claim amounts to nothing more than the assertion that the charge Juniper took in Q3 ' "should 01 have" been taken in Q1 ' 01. This is classic, inactionable, fraud by hindsight. That leaves plaintiffs'allegation that Juniper improperly recognized revenue on a "swap" transaction with one of its customers, i.e. on a sale of Juniper routers in exchange for fiber optic capacity. Plaintiffs do not allege that they have seen any documents that support this claim. Instead, the allegation of a "swap" depends upon plaintiffs'assertion that a "regional sales hiring manager" "personally witnessed" other sales people "arrange" the "swap." Plaintiffs'claim that they have based their allegations upon a witness with personal knowledge is belied by their inability to allege any specific facts about the purported "swap." Plaintiffs do not say where the witness purportedly saw the "swap" being "arranged." They do not say whether the "swap" was "arranged" in a meeting or over the phone. They do not identify any individuals from Juniper' s Denver office who were present when this "swap" was "arranged." They do not identify any individuals from the customer who were involved. They do not purport to quote or describe anything anyone said regarding the "swap." They do not say how the "swap" agreement was supposedly documented, if it was documented at all. In short, plaintiffs'claim regarding the "swap" transaction contains none of the "corroborating details" required to survive a motion to dismiss under the Reform Act.
MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
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Finally, plaintiffs'theory of scienter rests principally on the notion that defendants artificially inflated the price of Juniper' stock in order to sell their shares at that inflated price. s Two key points negate plaintiffs'theory of scienter. First, in April 2001, defendants did not tell the stock market that Juniper' outlook for the year had improved; rather, they told the market s that Juniper' outlook had worsened. This is fundamentally at odds with plaintiffs'theory that s defendants sought to inflate the price of Juniper' stock. Second, defendants'stock sales are s inconsistent with plaintiffs'theory. Juniper' CEO, the defendant most quoted in the Complaint, s sold only 2.1% of his Juniper stock. Juniper' CFO, the defendant plaintiffs would likely say s knew the most about any "scheme" to improperly recognize revenue, sold nothing. Given these facts, plaintiffs cannot establish the required strong inference of scienter. The Complaint should be dismissed. BACKGROUND AND PROCEDURAL HISTORY Juniper Networks, Inc. ("Juniper" or the "Company") is a provider of high-performance networking equipment, primarily routers, that essentially direct the flow of Internet traffic in various core, edge, mobile and cable networks. CC 16. The Company' products "include the s M series Internet routers . . . the M5, M10, M20, M40, M40e and M160 . . . ." CC 22. Juniper is headquartered in Sunnyvale, California, and has offices in over thirty locations around the world. CC 16; Juniper 10-K filed March 27, 2001, at 18 (Ex. 1).1 Defendant Scott Kriens is the Company' Chairman, President and Chief Executive Officer. Defendant Marcel Gani is the s Company' Chief Financial Officer. Defendant Peter Wexler is the Company' Vice President s s of Engineering. Defendant Steven Haley was, during the class period, Juniper' Vice President s of Worldwide Sales. CC 17. Between 1999 and 2000, Juniper experienced substantial year-over-year growth in reported revenues: revenues increased 556%, from $102.6 million to $673.5 million. See Juniper
References to "Ex. _" are to the exhibits attached to the Declaration of Gregory L. Watts in Support of Defendants' Motion to Dismiss the [Corrected] Consolidated Complaint ("Watts Decl.").
MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
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10-K filed March 27, 2001, Ex. 13.1, at 7 (Ex. 1). During fiscal year 2000, Juniper also experienced substantial quarter-over-quarter growth: 76% from Q1 to Q2 (from $64 million to $113 million); 78% from Q2 to Q3 (from $113 million to $201 million); and 47% from Q3 to Q4 (from $201 million to $295 million). See Juniper 10-K filed April 1, 2002, Ex. 13.1, at 29 (Ex. 2). The quarter-over-quarter growth from Q4 ' to Q1 ' shortly prior to the beginning of the 00 01, class period, was much more modest: revenues grew only 13% from Q4 to Q1 (from $295 million to $332 million). See id.2 On April 12, 2001, Juniper provided guidance for Q2 ' and for fiscal year 2001. See 01 CC 33-34. Juniper did not predict that there would be any quarter over quarter growth. Instead, Juniper told the market that, for the first time in the Company' history, revenues for Q2 s would be flat and possibly even down from Q1. See Juniper' April 12, 2001 Conf. Call s Transcript, at 7 (Watts Decl., 14, Ex. 14) (stating that for Q2 ` Juniper expected "similar 01 revenue to what we reported for the first quarter [i.e. similar to $332.1 million] . . . However, we also believe that there is as much as a 10% macro risk in our ability to repeat these results."); Steve Kamman, Juniper Networks, CIBC World Markets, April 12, 2001, at 3 (Ex.11) ("management noted they see a 10% chance that numbers could fall below guidance"); Truc Do, First Quarter Results-Reducing Estimates, Lazard Freres & Co. LLC, April 16, 2001, at 2 (Ex. 12) ("management. . .expects 2Q01 to be flat sequentially"). Juniper also significantly reduced its annual guidance. The Company projected year-over-year revenue growth of 85% to 100% down from its projection in January 2001 of revenue growth of 120% to 140%. CC 39; CIBC World Markets Report at 1 (Ex. 11); Lazard Freres Report at 2 (Ex. 12); McDonald Investments Morning Call Daily Report at 3 (Ex. 13). In other words, Juniper reduced its annual guidance by $250 to $300 million (or as much as 20%) to between $1.2 to $1.35 billion.3
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Attachment A illustrates this quarterly growth in graphical form.
The $300 million reduction in guidance is calculated as follows: Juniper' annual revenues s for fiscal year 2000 were $673.5 million. See Juniper 10-K filed March 27, 2001, at 20 (Ex. 1). Juniper' initial guidance for fiscal year 2001 of an increase in revenues of 120%-140% over the s prior year translates into projected revenues for 2001 of $1.5 billion-$1.6 billion. Juniper' s (continued...)
MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
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On June 8, 2001, Juniper voluntarily pre-announced that it expected revenues for the second quarter to be $200-$210 million. See Juniper Press Release dated June 8, 2001, at 1 (Ex. 8). Juniper met this lowered guidance and reported revenue of $202 million for Q2 ` 01. See Juniper 10-Q filed on August 6, 2001, at 4, 10-11 (Ex. 4). Like many companies, Juniper was surprised by the severity of the economic downturn in 2001 and did not have the year for which it had hoped. On August 1, 2002, plaintiffs filed a Consolidated Class Action Complaint for Violation of Federal Securities Laws. The Complaint alleges that defendants knew that Juniper' April s 2001 guidance was false when made. CC 37. The Complaint also alleges that Juniper' s reported results for Q1 ' were false because the Company had improperly pulled-in $65 01 million of deferred revenue, recognized $20 million of revenue on a bogus "swap" transaction and failed to take a charge of $20 million to earnings for excess inventory held by its contract manufacturers. CC 36. The Complaint asserts violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated there under against Juniper, Kriens, Gani, Haley and Wexler. CC 160-66. The purported class period runs from April 12, 2001 through June 7, 2001. CC 1.
reduced guidance for fiscal year 2001 of an increase in revenue of only 85%-100% over the prior year translates into projected revenues for 2001 of $1.2 billion-$1.35 billion. Thus, Juniper was projecting that its revenues for 2001 would be between $250 million to $300 million lower than its earlier guidance. Projected earnings per share were also substantially reduced. Based on Juniper' earlier 2001 guidance, analysts were expecting per share profits of $1.05. See s Bloomberg News Transcript for April 12, 2001 Interview, at 1 (Ex. 9). Juniper' April guidance s projected that earnings per share would be as much as 14% lower than analyst expectations (from 90 cents to $1.00). See id. As one of the analyst reports quoted by plaintiffs in the Complaint observed: Juniper' lowered annual guidance actually meant that the Company was s forecasting "3Q01 . . . revenues to be down sequentially over 2Q01' 0% growth. We are s modeling 3Q01 to be down 7% sequentially." Nikos Theodosopoulos, JNPR: Reports an InLine Quarter, Lowers Guidance, UBS Warburg, April 12, 2001, at 2 (Ex. 10).
MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
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MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
ARGUMENT I. THE REFORM ACT IMPOSES STRICT REQUIREMENTS FOR PLEADING SECURITIES FRAUD In order to "eliminate abusive securities litigation" and "the practice of pleading fraud by hindsight," the Reform Act "significantly altered pleading requirement in private securities fraud litigation . . . ." In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1084-85 (9th Cir. 2002) (citations omitted) ("Vantive"); Ronconi v. Larkin, 253 F.3d 423, 428 (9th Cir. 2001) ("Ronconi") (purpose of the Reform Act is to "filter out" meritless claims). The Act "erect[s] procedural barriers to prevent plaintiffs from asserting baseless securities fraud claims." In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 977 (9th Cir. 1999) ("SGI"). These barriers include the requirement that the complaint "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading." 15 U.S.C. 78u-4(b)(1)(B). For allegations pled on information and belief, the complaint must "state with particularity all facts on which [the plaintiffs' belief is formed." Id. The Reform Act also ] establishes a stringent standard for pleading scienter, or intent. The complaint must "state with particularity facts giving rise to a strong inference" that each defendant acted with fraudulent intent. 15 U.S.C. 78u-4(b)(2). Finally, the Reform Act provides that if the complaint does not comply with these pleading requirements it "shall" be terminated at the pleading stage. 15 U.S.C. 78u-4(b)(3)(A). II. THE COMPLAINT DOES NOT SATISFY THE REFORM ACT' S REQUIREMENTS FOR PLEADING ON INFORMATION AND BELIEF The "statutory command" that a plaintiff plead all facts with particularity means "that a plaintiff must provide, in great detail, all the relevant facts forming the basis of her belief." SGI, 183 F.3d at 984-85. Thus, a plaintiff must "plead facts to corroborate her allegations." Id. (emphasis added). Such particularity is required so that the court can tell whether the allegations of the complaint differ "from the countless ` fishing expeditions'which the [Reform Act] was designed to deter." Id. at 988.
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In this instance, the Complaint stands or falls entirely upon the information alleged in plaintiffs' "confidential witness summaries." See CC 60-122. The Complaint does not purport to identify any "negative internal reports" that are at odds with what the defendants said publicly. SGI, 183 F.3d at 984-85. That "confidential witnesses" are alleged to be the basis for plaintiffs' beliefs does not excuse the failure of the "witness summaries" to provide, in critical instances, answers to the most basic questions posited by the Reform Act the "corroborating details" of "who, what, when, where and how." Id. at 985, 998. Conclusory and unsupported allegations of "confidential witnesses" are no better than the boilerplate allegations of negative internal documents that the Ninth Circuit has, time and again, rejected as insufficient under the Reform Act. See Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1036 (9th Cir. 2002); Vantive, 283 F.3d at 1088; Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 979 (9th Cir. 1999). For example, a central theme of plaintiffs'complaint is that Juniper' M160 router was s "[f]rom the very beginning . . . riddled with functionality problems." CC 59(a). Despite the fact that Juniper has been selling the M160 router for more than two years (CC 60 n.3), plaintiffs cite no trade reports, newspaper articles, or analyst reports in which a Juniper customer was reported to have complained about the "functionality problems" with which the M160 router was allegedly "riddled." In fact, plaintiffs'lengthy quotation from an article regarding the M160 router' OC-192c processor omits the part of the article that states: "Juniper customers s Metromedia Fiber Networks ("MFN") and MCI Worldcom report no problems with their OC192c products." See CC 26 and Plaintiffs'Ex. 1.4 The sole basis for plaintiffs'allegation that the M160 was "riddled with functionality problems" from "the very beginning" is a "regional sales hiring manager" identified as "CW1." CC 59(a). The Complaint offers no explanation of why the knowledge of a "regional sales hiring manager" regarding a technical engineering issue would be reliable. See In re Versant
Plaintiffs themselves alleged that several months before Metromedia reported "no problems" with its M160s, Metromedia had purchased 170 of the M160 routers (at an average price of $400,000 each). CC 25 and Plaintiffs'Ex.6.
MOTION TO DISMISS [CORRECTED] CONSOLIDATED COMPLAINT MASTER FILE NO.: C 02-0749-SI
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Object Tech. Corp. Sec. Litig., No. C 98-00299 CW, slip op. at 12 (N.D. Cal. May 18, 2000) ("the plaintiff must reveal all facts about that witness that were material to the formation of their belief that the witness'statement is accurate."). Moreover, the Complaint offers no information as to how CW1 purportedly learned that Juniper' M160 routers were "riddled with" packets processing performance issues, who, if anyone, told CW1 of the alleged performance issues, what they said, or when CW1 allegedly learned of these issues. See Vantive, 283 F.3d at 1091 (allegations that "contain no specifics or corroborating details of time, persons, places and subjects" are insufficient under the Reform Act); Coble v. Broadvision, No. C01-01969, 2002 WL 31093589, at *6 (N.D. Cal. Sept. 11, 2002) (an allegation that "is silent" as to the basis for a witness'knowledge is "entitled to little weight"); In re Northpoint Communications Group, Inc. Sec. Litig., 184 F. Supp. 2d 991, 1000 (N.D. Cal. 2001) (confidential witness summaries must be "pled with substantial specificity" including "how [they] came to learn of the information they provide in the complaint"). Indeed, it appears that none of the "numerous" customers for whom CW1 supposedly had account management responsibilities ever complained about this "extremely serious problem." CC 44, 60-62. The Complaint does not purport to identify any such customers, let alone to describe any conversations that CW1 allegedly had with them. CC 44 and 60.5
While plaintiffs allege that that "[n]umerous [other] confidential witnesses" confirmed these "serious functionality problems" (CC 26), that is not the case. The other witnesses who discuss the M160 are CW5, CW10 and CW12. See CC 59(a). CW5, a "quality assurance supervisor" is alleged to have said nothing more than that he or she "was aware of the packet sequence/ordering problems." CC 81. There is no indication of what those "problems" were, how, when or where CW5 became aware of them or whether CW5 considered them to be "serious." Despite CW5' "customer service responsibilities" there are, again, no CW5 s customers identified who supposedly complained about the M160' "serious functionality s problems." CC 81. CW10, a "systems engineer" was not even certain as to what the "problem" was and says nothing to suggest it was "serious" as opposed to "complex." CC 107 (alleging that CW10 "believed" that "if the OC-192c ` blade' in the M160 encountered contiguous video data at a ` certain rate and size' that large streams of video could fail under those circumstances.") (emphasis added). In fact, a "Solectron test engineer" (CW12) is alleged to have told plaintiffs nothing more than that the M160 was "not ` perfectly reliable' and that a backup system "did not " always work." CC 113. (emphasis added).
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Likewise, although plaintiffs claim that Juniper' April 12, 2001 revenue guidance was s materially false, not one of the confidential witnesses purports to have personal knowledge of what Juniper was internally forecasting for company-wide revenues. The only mention in the Complaint of what Juniper was internally forecasting for any region other than Latin America (see infra at 14 n.8) is something plaintiffs say they were told not by an employee from either the sales or finance organization, but rather by a Juniper "systems engineer," CW10. CC 53, 104. CW10 says nothing more than he or she "considered the Denver sales personnel quota of $150$200 million for the first half of 2001 to be ` astronomical.' CC 104. The Complaint fails to " allege how, from whom, or when CW10 allegedly learned what this "quota" was, or how there could be a sales quota with a $50 million spread. Did CW10 have some responsibility for achieving this sales "quota"? Was CW10 in meetings where the "quota" was discussed? When did those meetings occur? Who was present? The Complaint never says. Like the conclusory allegations of "negative internal reports" rejected by the Ninth Circuit in SGI, the allegation regarding a "quota" simply gives no basis for believing that it "exist[ed]." SGI, 183 F.3d at 98485; see In re Sagent Tech. Inc. Sec. Litig., No. C-01-4637-PJH, slip op. at 16 (N.D. Cal. Sept. 11, 2002) (plaintiffs must "state how the witnesses obtained the information they purportedly communicated to plaintiffs" to survive a motion to dismiss); Versant, slip op. at 18-19 ("to the extent that [plaintiffs] rely on other sources [than internal reports], they must plead those sources with similar particularity").6 Other "witness summaries" are even more vague. For example, CW2 is alleged to have been a "customer briefing center specialist" who sat near the offices of defendants Kriens and
The allegation regarding a "Denver sales personnel" quota is, in fact, entirely uncorroborated. Thus, although the Complaint alleges that CW10 "worked with" CW7 (CC 104) and that CW7 was a sales representative "responsible for six states in the Rocky Mountain region" (CC 50), CW7 never mentions the alleged sales quota. CC 94-97. CW7 does not even say what his or her own quota was.
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Haley.7 CC 45. According to the Complaint, CW2 remembers getting a "sense of ` imminent doom' in "March/April 2001." CC 74. This sense of "imminent doom" is not, however, based " on anything CW2 is alleged to have known or heard, but rather upon what CW2 did not know and could not hear "when [Juniper CEO] Kriens began having regular closed-door meetings with the other Juniper executives . . . ." Id. Moreover, while CW2 allegedly "organized customer briefings and attended sales meetings" (CC 45), plaintiffs do not identify any of these "customer briefings or sales meetings" as the basis for what plaintiffs later allege about CW2, let alone the "corroborating details of time, persons, places and subjects." Vantive, 283 F.3d at 1091. Nonetheless, CW2 purportedly said that it was "known" that there was a "marked decrease" in Juniper' product s orders in 2001; that "order placement delays" were having a "devastating" effect on the sales staff; that CW2 "heard ` grumblings' that Lucent had "canceled hundreds of millions of dollars " of orders" due to financial problems; and that it was "common knowledge" that Juniper' s customers were "increasingly frugal" with their spending. CC 73. Such conclusory allegations do not satisfy the Reform Act. First, "gossip and innuendo" are no substitute for "personal knowledge." In re Commtouch Software Ltd. Sec. Litig., No. C 01-00719-WHA, 2002 U.S. Dist. LEXIS 13742, at *10 (N.D. Cal. July 24, 2002); see also In re Autodesk, Inc. Sec. Litig., No. C-00-1285-PJH, slip op. at 44 (N.D. Cal. Nov. 21, 2001) ("allegations that a particular subject... was ` well-known'do not provide the specificity required by the PSLRA."). Second, "adjectives" like ""marked decrease," "devastating" and "increasingly frugal" are not "substitute[s] for allegations of fact." Coble, 2002 WL 31093589, at *4 (allegations that company implemented "dramatic" cost controls and was "slashing" funds for corporate events too conclusory for Reform Act); Ronconi, 253 F.3d at 434 (complaint that failed to "explain what the ` serious operational problems'were . . .[did] not meet the level of
CW2' alleged "proximity" to the offices of both "Kriens and Haley" is interesting to the s say the least. CC 45. Kriens was located in Sunnyvale. Haley was located in Boston, Massachusetts.
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specificity required by the [Reform Act] and our case law interpreting it.") (citation omitted); Vantive, 283 F.3d at 1086 (complaint must give an "indication of what it means for a sales cycle to lengthen ` substantially,'[and] what the actual length of the [sales] cycle was at the time of the statement.") (citation omitted). In short, the Complaint simply does not allege "in great detail, all of the relevant facts forming the basis" of plaintiffs'beliefs. SGI, 183 F.3d at 985. For that reason alone, it should be dismissed. III. PLAINTIFFS DO NOT ALLEGE AN ACTIONABLE FALSE STATEMENT Plaintiffs also do not allege specific facts showing that any of the statements they challenge were "false when made." Yourish v. California Amplifier, 191 F.3d 983, 993 (9th Cir. 1999). As noted above, the Complaint challenges essentially two statements as false and misleading: (1) the revenue guidance that Juniper gave on April 12, 2001; and (2) the Company' s report of revenues for Q1 ` 01. These are addressed in turn. A. Plaintiffs Do Not Plead a False Forecast 1. What Juniper Said
At the outset, plaintiffs'attempt to characterize Juniper' April 12, 2001 revenue s guidance as "optimistic" (see e.g. CC 94, 99) depends largely upon ignoring the guidance that Juniper gave and the statements that accompanied that guidance. In characterizing Juniper' s April 12 guidance as "optimistic" plaintiffs necessarily ignore that (1) the quarterly guidance projected no growth (and possibly a decline) in revenues for the first time in the Company' s history; and (2) the guidance for fiscal year 2001 was 20% lower than the annual guidance Juniper had given just three months earlier. See supra at 5-6. Instead, plaintiffs quote an interview that Kriens gave to Bloomberg News on April 12, 2001 and boldface a statement by Kriens that there was "significant growth in new customers this quarter [Q1 ` and we expect that to continue. So we' pretty confident." CC 39. 01] re Plaintiffs then assert that this statement was overly optimistic because "defendants were not expecting significant growth . . . ." CC 40. The quoted statement, however, does not say that defendants were expecting "significant growth." Rather, it says that Juniper was expecting
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"significant growth in new customers." CC 39 (emphasis added); Ex. 9. Moreover, in their zeal to portray Juniper' guidance as "optimistic," plaintiffs have simply deleted from their lengthy s quotation of that interview both the fact that Juniper told the market that its customers had cut spending and that it would not meet analyst expectations for 2001. Here is what plaintiffs have left out of their Bloomberg News quotation: Hopkins: Juniper says its earning[s] this year will not meet estimates because customers have trimmed spending. The company figures on a per share profit of 90 cents to $1. Analysts were looking for $1.05. Ex. 9 (emphasis added). Plaintiffs also omitted the part of the interview where Kriens refused to predict that "spending by big telecom providers and large companies will rebound in the second half of [2001]." Id. Thus, far from being "optimistic," Juniper' guidance expressly s acknowledged that the economic slowdown had impacted its expectations for growth. 2. Plaintiffs Do Not Plead Facts Showing Why Juniper' Revenue s Guidance Was False When Made
The Complaint identifies no internal documents that contradict Juniper' publicly stated s guidance for the year. See Heliotrope, 189 F.3d at 979 (complaint insufficient to plead falsity where plaintiff failed to "identify any documents, ` including their contents, who prepared them, which officers reviewed them and from whom [plaintiff] obtained the information' showing that " negative information alleged by plaintiff existed at defendant company) (citation omitted). Rather, plaintiffs' "false forecasting" claim stands or falls entirely upon information plaintiffs allege that their confidential witnesses provided regarding a "slowdown in business," "functionality problems" with the M160 router, reductions in Juniper' forecasts to its contract s manufacturers, and "pull-ins" of Q2 ' sales. CC 36-43. These allegations, however, do not 01 provide the details from which the Court can conclude that Juniper' guidance regarding revenue s for the quarter and the year were false when made. a. The "Slowdown" in Juniper' Business s
Plaintiffs allege that many of their "confidential witnesses" told them that Juniper began to experience a slowdown in its business beginning in Q4 ' or Q1 ' 00 01. CC 65, 80, 118. The "slowdown" relates principally to customers of Juniper' Denver office. CC 94-95. This was, s
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as noted above, but one of Juniper' 30 offices worldwide. See supra at 4. Plaintiffs do not s explain why other offices and other regions could not make up any shortfall in anticipated revenues from the Denver office. See Nursing Home Pension Fund v. Oracle Corp., No. C010988, slip op. at 14 (N.D. Cal. Sept. 11, 2002) ("Oracle") (falsity of forecast not alleged where "[p]laintiffs'witnesses shed light on only limited sectors of Oracle' business."); In re Hall, s Kinion & Assocs. Sec. Litig., [2000-2001 Tr. Binder] Fed. Sec. L. Rep. (CCH) 91,251, at 95,377 (N.D. Cal. Oct. 27, 2000) (failure to identify percentage of business affected by allegedly under performing businesses "leaves one guessing at how the under-performance would impede the bottom line and the ` aggressive growth plan.' 8 "). Further, the allegations, for the most part, contain nothing that quantifies the "slowdown." See e.g., CC 94 (allegation that unnamed "colleagues" in the Denver area told CW7 that "major Denver-area customers, including Verio, Qwest, Level 3, ICG, Rhythms, and others, were reducing orders as of the February/March 2001 time frame."). Even those allegations that purport to quantify order cancellations or reductions in projected purchases fail to explain whether and to what extent Juniper was counting upon those orders and projected purchases to achieve its forecasted revenues. See e.g. CC 63 (alleging that MFN purportedly canceled $70 million of a $100 million order placed in July 2000); CC 62 (alleging that Level 3 reduced its projected purchases by $90 million).9 Without this explanation, the Complaint
The only other region even discussed in the Complaint is Latin America. The "Director of Latin American Sales" (CW8) allegedly said that his or her quota of $30 million for 2001 was "ambitious." CC 98. At the outset, the allegations regarding CW8 provided no explanation of the relationship between his or her individual sales quota and the revenue target that Juniper provided to the market. There is no reason to assume that the Company' revenue guidance was s simply the sum of the quotas for each director of sales. Even if this were the case (it was not), $30 million amounts to only 2.5% of Juniper' annual revenue guidance of $1.2 billion. Thus, s CW8' view that his or her quota was "ambitious" hardly constitutes the kind of "specific s contemporaneous" information that demonstrates that Juniper' guidance was false when made. s Ronconi, 253 F.3d at 432. 9 The allegations regarding MFN and Level 3 suffer from additional flaws. The only purported source of plaintiffs' allegations regarding these customers is CW1. CC 37. In addition, with respect to MFN, plaintiffs do not say how CW1 purportedly learned of the "cancellation." CC 63. The assertion that this "cancellation" was "common knowledge" (id.) gives this Court no reason to believe that it ever happened, particularly when none of the 14 (continued...)
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provides no basis to say that plaintiffs'allegations of a slowdown were, in any way, inconsistent with Juniper' April 2001 guidance. See Vantive, 283 F.3d at 1089-90 (allegations that "sales s cycle" was "lengthening substantially" do not show that statements about the "strength" of sales cycle would have been misleading "at the several points at which it was alleged to have been made."); Oracle, slip op. at 17 (allegations that "deals did not close within the class period" do not show that a company' projections were false when made if the allegations "do not go on to s elucidate how many deals remained in the pipeline" or "how much of the revenue from any of these thwarted deals was forecast to be recognized" during the period in question). Indeed, plaintiffs do not allege any facts from which it could be inferred that the Company did not take these order cancellations or reductions in projected purchases account into when it lowered its guidance in April. Thus, plaintiffs allegations that customers had reduced and/or cancelled orders do not show that Juniper' revenue guidance was false when made. s Fundamentally, a slowdown in business is entirely consistent with Juniper' guidance in s April 2001. As noted above, Juniper explicitly stated that both quarterly and annual revenue growth had slowed from prior quarters and the prior fiscal year. Juniper lowered its annual guidance. And, Juniper expressly acknowledged that customers had trimmed spending. See supra at 13; April 12, 2001 Transcript, at 5 ("As we have stated in the past, our customers have shortened their buying horizon and are reluctant to purchase more than what they need in the short term") (Ex. 14); Bloomberg News Interview ("customers have trimmed spending") (Ex.9). b. Problems with the M160 Router
Although plaintiffs likewise say that problems with Juniper' M160 routers impacted s Juniper' sales to customers (e.g. CC 59(a)), the "confidential witnesses summaries" again do s not quantify the amount of revenue that Juniper was expecting in April 2001 from sales of these routers either for Q2 ` or for the entire year. The "confidential witnesses summaries" do not 01
other confidential witnesses seem to have been aware of it. See In re Autodesk, Inc. Sec. Litig., slip op. at 44.
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allege what portion of Juniper' forecasted revenues were expected to come from sales of its s other products, including the M5 and M10 routers that were introduced after the M160. CC 22.10 One is simply left to guess as to the extent to which Juniper was counting upon sales of M160 routers, as opposed to sales of the M5, M10, M20, M40, and M40e routers, in order to achieve its revenue projections, and why the alleged problems with the M160 would mean that Juniper' guidance could not be achieved. See Ronconi, 253 F.3d at 434 ("Plaintiff' complaint s s was required to allege specific facts that show how" the "problems" and "difficulties" that plaintiff alleged "translated into decreased revenues."); In re Sec. Litig. BMC Software, Inc., 183 F. Supp. 2d 860, 890 (S.D. Tex. 2001) (plaintiffs failed to show "what effect, if any, the alleged inability to effect sales would have on [the Company' revenues."); Gilford Partners, L.P. v. s] Sensormatic Elecs. Corp., No. 96 C 4072, 1997 WL 757495, at *16 (N.D. Ill. Nov. 24, 1997) (plaintiffs must allege problems' "concrete effect on revenues").11 c. Cuts in Forecast to Contract Manufacturers
Nor is there anything inconsistent between Juniper' reduced guidance in April 2001 and s plaintiffs'vague allegations of "drastic[]" or "massive[]" cuts in forecasts to contract manufacturers. See e.g., CC 77, 83, 108. Plaintiffs acknowledge that Juniper provided its contract manufacturers with forecasts of demand up to six months prior to scheduled delivery of products. CC 148. Given, as they also allege, that Juniper had originally forecast substantial demand to its contract manufacturers in "mid-to late 2000" (id.) (at a time when Juniper was experiencing between 47% to 78% quarter-over-quarter revenue growth), there is no basis alleged in the Complaint to conclude that the unquantified cuts in those forecasts were anything
10
As Juniper reported in its 10-K for fiscal year 2000, the M40 router began shipping in October 1998, the M20 in December 1999, the M160 in March 2000 and the M5 and M10 product platforms in September 2000. See Juniper 10-K filed March 27, 2001, Ex. 13.1, at 1 (Ex.1). 11 Although plaintiffs allege that "UUNet, PSINET, Nortel, Lucent . . . and SoluNet" had problems with the M160 router "resulting in . . .order cancellations" (CC 37) the two paragraphs cited by plaintiffs as support for this allegation refer only to unquantified "significant" returns at some unspecified time. See CC 64, 82. The Complaint offers no explanation as to why such returns meant that Juniper' April guidance could not be achieved. s See id.
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more than an effort to bring Juniper' orders from its contract manufacturers in line with the flat s or declining quarterly revenues that Juniper was projecting in April 2001. d. The Q2 ` "Pull-ins" 01
Finally, plaintiffs seem to assert that Juniper' revenue guidance was false when made s because Juniper allegedly "pulled in revenues on deals that should have been booked in 2Q01 by offering customers discounts to close transactions in 1Q01, essentially depleting 2Q01 and 2001 revenue sources." CC 40. The only two alleged "pull-ins" identified in the Complaint relate to Qwest and Global Crossing. See CC 96, 119. With respect to Qwest, CW7 is alleged to have said that Juniper offered an "almost 55% discount" to close a $20 million deal with Qwest in Q1 ' 01. CC 96. There is, however, no allegation as to whether (or by how much) this discount differed from the volume-based discount off of list price to which Qwest was contractually entitled. With respect to Global Crossing, CW15 is alleged to have said that Juniper paid the duty and freight to close a $14 million deal with Global Crossing. CC 119. Even if this duty and freight cost $10,000, it would translate into a 0.07% discount. This hardly constitutes evidence of the "deep discounts" plaintiffs allege were given to "pull-in" revenue. Id. In any event, the premise underlying plaintiffs'allegations regarding Global Crossing and Qwest is that the transactions in Q1 ' "depleted" business from these customers. Yet the Complaint says 01 nothing about what either Global Crossing or Qwest purchased for the remainder of the year.12 * * *
In sum, the Complaint says nothing about what customers, products and regions Juniper was counting upon to achieve its April 12, 2001 guidance, let alone the specific revenues that Juniper expected from those customers, products and regions, or the reasons why those expectations were not reasonable. The Complaint identifies no documents that were at odds with what Juniper stated publicly, and the "witness summaries" wholly apart from the lack of
In fact, Qwest was an 11% customer of Juniper in 2001. See Juniper 10-K filed April 1, 2002, at 8 (Ex. 2). Based upon Juniper' reported annual revenues for 2001, this would equate to s $97.5 million in sales for the year. See id. at 20 (reporting 2001 net revenues of $887 million).
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"corroborating details" contain nothing demonstrably at odds with Juniper' lowered guidance. s The Complaint simply does not allege "specific facts" showing how the "problems" and "difficulties" purportedly described by the confidential witnesses "translated into" the need for Juniper to reduce its guidance even more than it did in April 2001. See Ronconi, 253 F.3d at 434; Oracle, slip op. at 15 (the failure to "place in context the significance" of the statements of confidential witnesses with Juniper' "overall financial picture" cannot plead a false forecast s with the particularity required by the Reform Act). The forecasting claim should be dismissed. B. Plaintiffs' Claim Regarding False Financial Results Should Be Dismissed
Plaintiffs'remaining contention is that Juniper' Q1 ' revenues were artificially inflated s 01 due to an alleged pull-in of $65 million in deferred revenue, a "$20 million bogus revenue ` swap' with Qwest," and the alleged failure to take a $20 million charge in earnings for "excess inventory." CC 36. This claim is also deficient.13 1. Recognition of Deferred Revenue
On April 12, 2001, Juniper reported Q1 ' net revenue of $332.1 million and earnings 01 per share ("EPS") of $0.25. CC 2. Plaintiffs allege that this net revenue was "overstated . . . by at least $65 million" because of the improper recognition of deferred revenues. CC 133, 140. However, the only factual support in the Complaint for the claim that Juniper improperly recognized $65 million in deferred revenue is in paragraph 72.14 Here is that paragraph:
Plaintiffs allege that Juniper "routinely granted its customers return rights and, in fact accepted significant returns from Nortel, SoluNet, Lucent, UUNet, PSINet and CutThroat during and subsequent to the Class Period." CC 136. However, plaintiffs do not allege that the financial results they challenge those for Q1 ' were misstated as a result of those returns. 01 See CC 3, 31, 128. Therefore, plaintiffs' allegations regarding returns and rights of returns are simply irrelevant. The fact that Juniper' deferred revenue balance declined from Q1 ' to Q1 ' s 00 01 (CC 139) says nothing about whether Juniper improperly pulled-in deferred revenue in Q1 ` 01. "[R]eliance on statistics, which are easily manipulated and could be indicative of many things, is clearly insufficient to support allegations of fraud." Blackin v. Red Brick Systems, Inc., No. C98-1206-MJJ, slip op. at 6 (N.D. Cal. Apr. 20, 1999); Stack v. Lobo, No. 95-20049-SW, 1995 WL 241448, at *5 (N.D. Cal. Apr. 20, 1995) (reliance on "an increase in the ratio of receivables to revenue, without more, does not warrant an inference of fraud.").
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Finally, according to CW1 [the Denver sales hiring manager], out of "total desperation" to maintain the appearance of financial health, at the end of 1Q01, Juniper' executive management secretly "converted" (pulled in) Juniper' $65 s s million deferred revenue balance from pending product orders that had yet to be formally accepted or authorized by customers. This was done in order to meet Juniper' 1Q01 numbers. s There are many problems with this allegation, not the least of which is its complete lack of
5 specificity. See e.g., Vantive, 283 F.3d at 1091. 6 To plead financial fraud for improper revenue recognition under the Reform Act, plaintiffs 7 must allege "particular transactions where revenues were improperly recorded, including the 8 names of the customers, the terms of specific transactions, when the transactions occurred, and the 9 approximate amount of the fraudulent transactions." In re Oak Tech. Sec. Litig., No. 96-20552, 10 1997 WL 448168, at *8 (N.D. Cal. Aug. 1, 1997). The Complaint is devoid of any of these 11 particulars. The Complaint does not allege a single transaction in which Juniper improperly 12 "pulled-in" deferred revenue, any particular customer involved in such transactions, when any 13 such transactions occurred, the size or terms of any such transactions, the identity of any Juniper 14 employees involved in such transactions, or who among Juniper' "executive management" was s 15 responsible for the alleged "pull-in." The claim regarding deferred revenue should therefore be 16 17 The claim should be dismissed for an independent reason. Once again, the Complaint does 18 not say from whom, when or how CW1, a "sales hiring manager" in Juniper' Denver regional s 19 office, learned about the alleged "pull-in" of deferred revenue. See e.g. In re Sagent Tech. Inc. 20 Sec. Litig., slip op. at 16; Coble v. Broadvision, 2002 WL 31093589, at *4; In re Northpoint, 184 21 22 23 24 25 26 27 28
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dismissed.15
See Copperstone v. TCSI Corp., No. C97-3495-SBA, 1999 U.S. Dist. LEXIS 20978, at *35 (N.D. Cal. Jan. 19, 1999) (dismissing claim that defendants improperly recognized revenue prior to customer acceptance where complaint failed to identify a single transaction, the dates of any transactions, or the "approximate amounts involved in each transaction"); Greebel v. FTP Software, Inc,. 194 F.3d 185, 204 (1st Cir. 1999) (dismissing accounting allegations that "do not include such basic details as . . . the products involved in the contingent transactions . . . the dates of any of the transactions; or the identities of any of the customers or FTP employees involved in the transactions"); BMC Software, Inc., 183 F. Supp. 2d at 877 (allegation that defendant drew down "deferred revenue to make current revenue more attractive" was "conclusory" and "pled without any supporting facts"). -19-
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F. Supp. 2d at 1000. How does CW1 know on which contracts Juniper recognized revenue or deferred revenue in Q1 ` 01? How does CW1 know which contracts had acceptance clauses and on which of these contracts acceptance had not occurred prior to the end of Q1 ' 01? The Complaint gives no answers to these critical questions. 2. "Bogus Swap" Transaction with Qwest
Plaintiffs allege that Juniper engaged in a "questionable" $20 million swap of Juniper routers for Qwest fiber optic capacity at the end of Q1 ' to prop up revenue. See CC 59(d). 01 As is true with everything else in the Complaint, no documents are identified to support this claim. Likewise, although "three witnesses" (specifically, a Director of Latin American Sales (CW8), a Technical/Product Marketing Director (CW9), and another Technical/Product Marketing Manager (CW13)) allegedly offered their opinions that such a transaction would make no sense, of the three, only CW13 the "Technical/Product Marketing Manager" is alleged to have any "knowledge" about the purported "swap." See CC 100, 102, 116. However, plaintiffs do not allege that CW13 actually had any personal knowledge that a swap occurred. CC 116. Instead, plaintiffs say that he "heard" about the swap from "Denver office sales personnel." Id. Plaintiffs do not allege who CW13 spoke with, when these "conversations" occurred, what the "Denver office sales personnel" said, or any facts to show that the information purportedly conveyed to him by these unnamed individuals was reliable. See Versant, slip op. at 12. Only CW1 [the Denver Sales Hiring Manager] is alleged to have "personally witnessed the Denver-office sales team" arrange the transaction. CC 71. Apart from the fact that plaintiffs do not allege that CW1 "personally witnessed" most of the other things they attribute to CW1 (raising even further questions about the basis for plaintiffs'beliefs), the Complaint does not allege, as required, the "countless specifics" of such a claim. SGI, 183 F.3d at 984-85. It does not even allege the basic details. Who from the "Denver-office" negotiated the "swap?" Who from Qwest? What was said during the negotiations? Where did CW1 "witness" the deal? Was the alleged swap reflected in a written contract? What were the terms of the alleged swap? How does CW1 know that "[n]o money was exchanged?" CC 71. How does CW1 know that
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Kriens was "fully informed" about the transaction? Id. Who informed Kriens? When? What did he or she say to Kriens? None of this would be hard to plead if CW1 actually "witnessed" an alleged "swap." The allegations are entirely nonspecific: they contain nothing of the who, what, when, where and how required by the Reform Act. See SGI, 183 F.3d at 989. 3. The "Excess Inventory" Charge
Plaintiffs also claim that Juniper' financial results for Q1 ' were false because it s 01 should have recorded in Q1 ' "at least $20 million" of a charge that the Company took in Q3 01 ' for "excess inventory" held by its contract manufacturers. CC 3, 147. Although the 01 Complaint alleges that "the contract" between Juniper and Solectron made Juniper, in some fashion, "legally and financially responsible for the raw materials that Solectron had purchased in reliance upon Juniper' forecasts," the Complaint is wholly silent as to the terms of that s contract. See CC 83, 149. What was the nature of Juniper' "legal and financial" responsibility for excess inventory s held by Solectron?16 In particular, how did "the contract" define "excess inventory?" Did "the contract" require the "excess inventory" to reach a specific level before any financial obligation of Juniper was triggered? Did "the contract" require that the inventory be "excess" for a specified period of time before any financial obligation of Juniper was triggered? Did "the contract" require Solectron to attempt to sell the "excess inventory" to another customer before any financial obligation of Juniper was triggered? Did "the contract" permit Juniper to pay a quarterly finance charge in lieu of making a one-time payment for the "excess inventory?" Did "the contract" obligate Juniper to pay 100% of cost of the "excess inventory" or only some portion thereof? Did the "contract" set forth circumstances under which Juniper would have no financial responsibility for the excess inventory held by Solectron? How can plaintiffs say anything about the charge that Juniper took in Q3 ' when they do not know any of the terms of 01 "the contract" that governed Juniper' legal and financial responsibility for Solectron' excess s s
Plaintiffs do not allege that Juniper had any financial or legal responsibility for Celestica inventory. See CC 110, 117.
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inventory? Without this information, plaintiffs'allegations as to the timing and amount of the charge Juniper "should have taken" cannot possibly be based on anything other than rank speculation. Given the absence of any allegations regarding the terms governing Juniper' financial s responsibility, plaintiffs have alleged nothing more than that a charge taken in one period should have been taken earlier. This does not plead fraud. See Plevy v. Haggerty, 38 F. Supp. 2d 816, 826 (C.D. Cal. 1998) (pointing to "write-down" of inventory and saying it should have been done earlier is nothing more than taking the "role of Monday morning quarterback," a "tactic [] grossly insufficient under Ninth Circuit authority."); DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990) ("If all that is involved is a dispute about the timing of the writeoff, . . . we do not have fraud; we may not even have negligence."); In re MCI WorldCom, Inc. Sec. Litig., 191 F. Supp. 2d 778, 790 (S.D. Miss. 2002) (same).17 4. Defendants' Statement that Deferred Revenue Declined in Q1 ' Due 01 to Shorter Acceptance Cycles Was Not False or Misleading
Finally, plaintiffs attempt to manufacture a misleading statement by confusing the difference between a sales cycle and what they term an "acceptance cycle by customers." CC 33. In particular, they claim that defendants misrepresented the reason for Juniper' 1Q ` s 01 decline in deferred revenue in the Company' April 12, 2001 conference call when "Kriens and s Gani" stated that "[d]eferred revenue had declined . . . due to a shorter acceptance cycle by customers." CC 33. Plaintiffs claim that this statement was false because "customer acceptance cycles were lengthening." CC 40. To support this claim, plaintiffs point to paragraphs in their complaint labeled "Customer Acceptance Lengthening Prior to Class Period," or the like. See
17
See also Hayley v. Parker, No. 01-0069, 2002 WL 925322, at *5 (C.D. Cal. Mar. 15, 2002) ("The allegation that Defendants belatedly recorded losses on excess inventory is essentially an attack on Defendants' business judgment and an allegation of mismanagement."); Oak, 1997 WL 448168, at *8-9 (issue of when a charge for "excess inventory" presents a "claim of financial fraud regarding excess [inventory] attempts to impose liability for a difficult business decision: when to recognize a loss on inventory that a company may not use."); Lemmer v. Nu-Kote Holding, Inc., No. 398CV0161L, 2001 WL 1112577, at *10 (N.D. Tex. Sept. 6, 2001) ("That circumstances may have dictated a write off at one date has little if any probative value in determining whether circumstances at an earlier date would also have dictated a write-off.")
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CC 73, 79, 97. But these paragraphs say absolutely nothing about customer acceptance. See e.g., CC 73. The paragraphs actually relate to Juniper' sales cycle, i.e. how long it was taking s for Juniper customers to place orders, and not to its customer acceptance cycle, i.e. the length of time following an order and shipment before product was deemed accepted. See CC 73 ("the typical order placement time frame increased from ` weeks'to ` months' 79 (alleging that a "); customer "had 30 days to test Juniper product on its premises and was under no obligation to purchase it"); 97 ("a period of three months was typical for a customer to test Juniper routers before placing an order."). The fact that customers were taking longer to place orders in the first instance says nothing about the time in which customers were actually deemed to have "accepted" product after shipment. The difference between the sales cycle on the one hand, and a customer acceptance cycle on the other is clear from Juniper' 1Q ' Form 10-Q. As Juniper disclosed, s 01 "[t]he decrease in deferred revenue from December 31, 2000 of $9.1 million reflects a shortening of the product acceptance cycle as products have become more mature." Juniper 10-Q filed on May 8, 2001, at 9 (Ex. 3) (emphasis added). That same document explains that Juniper' s quarterly results might be impacted by the "long sales and implementation cycle and the reduced visibility into customers'spending plans and associated revenues." Id. at 13 (emphasis added).18 In other words, it is entirely consistent that customers might take longer to decide whether to purchase Juniper product, even though acceptance periods after actual purchase were declining as Juniper' products became more mature, and thus more stable. Because there is no s inconsistency, plaintiffs have failed to allege that the challenged statement was false when made. Yourish, 191 F.3d at 994 (falsity not alleged without "inconsistent contemporaneous statements or information") (citation omitted).
See also Juniper 10-K filed on March 27, 2001, at 13 (Ex. 1) ("A customer's decision to purchase our products involves a significant commitment of its resources and a lengthy evaluation and product qualification process. As a result, our sales cycle may be lengthy.")
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IV.
PLAINTIFFS FAIL TO ALLEGE FACTS SUPPORTING A STRONG INFERENCE OF FRAUDULENT INTENT The Reform Act requires a plaintiff' scienter allegations to be both particularized and s
compelling. For non-forward looking statements, a plaintiff must "plead in great detail facts demonstrating, at a minimum, a degree of recklessness that strongly suggests the required degree of intent." SGI, 183 F.3d at 985 (emphasis added). For forward looking statements such as a forecast, the standard is even higher: plaintiffs must allege "facts that would create a strong inference that the defendants made the forecasts with ` actual knowledge . . . that the statement[s were] false or misleading'at the time made." Vantive, 283 F.3d at 1091. The "strong inference" requirement means what it says: "It is not enough for [plaintiff] to state facts giving rise to a . . . a reasonable inference" of the required intent. SGI, 183 F.3d at 985; see also Heliotrope, 189 F.3d at 979 ("speculative" allegations do not give rise to a "strong inference of intent"). Moreover, while all reasonable inferences must be drawn in plaintiffs' favor on a motion to dismiss, when deciding whether plaintiffs have pled facts giving rise to a "strong inference" of fraudulent intent, "the court must consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to plaintiffs." Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir. 2002) ("Visx") (emphasis added); Helwig v. Vencor, Inc., 251 F.3d 540, 553 (6th Cir. 2001) (the inference of fraud to be drawn from the particularized facts alleged in a plaintiff' complaint must be "the most plausible of competing inferences.") (cited in s Gompper, 298 F.3d at 897). A. Plaintiffs Do Not Raise a Strong Inference of Scienter Concerning Juniper' s Forecasting
As set forth above, plaintiffs have not pleaded sufficient facts to show that Juniper' s April 2001 guidance was false when made. It necessarily follows that plaintiffs have not pleaded a strong inference that defendants actually knew the guidance was false. As the Ninth Circuit recently explained, where "the alleged problems upon which [false forecasting allegations] relies have themselves not been pleaded successfully," there is no basis upon which to say that "the
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defendants knew that their forecasts could not possibly be accurate." Vantive, 283 F.3d at 10911092. Even if plaintiffs had adequately alleged falsity, nothing in the Complaint gives rise to the requisite strong inference of actual knowledge. For example, while plaintiffs allege, under the heading "Defendants'Knowledge of Slowdown in Sales," that Harry Sangha told CW15 that Marcel Gani (Juniper' CFO) informed him in "early 2001" that "Juniper was going to reduce its s forecast" (CC 120), Juniper did reduce its forecast on April 12, 2001. The allegations that confidential witnesses thought sales were "rapidly deteriorating," "evaporating" or that there were "cancellations left and right," do not establish that defendants "knew of this information or thought the same thoughts." Oracle, slip op. at 13. Similarly, plaintiffs'allegations that problems with Juniper' "flagship" M160 routers s (CC 60) were impacting sales do not give rise to a strong inference that any of the defendants knew this to be the case. Plaintiffs'allegations in this regard are striking similar to allegations made in Oracle, a case involving 45 "confidential witnesses." See First Amended Consolidated Class Action Complaint at 14, filed in In re Oracle Corp. Sec. Litig., No. C-01-0988 MJJ (N.D. Cal. Apr. 10, 2002) (Ex. 25). In Oracle, plaintiffs alleged that product defects in Oracle' 11i s In rejecting these
Suite "led to Oracle' third quarter shortfall." Oracle, slip op. at 18. s
allegations, the Court noted that the complaint failed to explain the "two successful quarters which followed the . . . introduction [of the 111 Suite]." Id. at 18. The Court therefore concluded that plaintiffs had failed to plead "anything that would have made it unreasonable for Oracle to expect that the financial success it enjoyed during the two quarters following the product' release (despite the alleged product defect claims) would also obtain in 3Q01." Id. at s 19. The Court' reasoning in Oracle is equally applicable here. The plaintiffs offer no s explanation that would have made it unreasonable for defendants to expect that the financial
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success Juniper enjoyed during the four quarters following the introduction of the M160 router in March 2000 (despite its alleged functionality problems) would continue in Q2 ' 19 01. The only other allegation offered to show that the defendants purportedly knew that the April 2001 guidance was a lie (apart from a truly vague statement about "internal knowledge by Juniper senior management to the contrary" CC 105), is plaintiffs'allegation that Juniper had a "sophisticated and efficient internal forecasting system that was reviewed on a weekly basis during the quarter." CC 99. According to plaintiffs, any Juniper employee could review the sales forecast "of junior employees" and defendant Kriens could review the forecast "for the entire company." Id. (emphasis added). This begs the question. Plaintiffs allege nothing about what those "internal forecast[s]" were, let alone facts that would show that Juniper' internal forecasts were at odds with Juniper' s s announced revenue guidance. In re Autodesk, Inc. Sec. Litig., 132 F. Supp. 2d 833, 843 (N.D. Cal. 2000) (plaintiffs failed to plead a strong inference of scienter where there was no factual basis alleged to "support their assertion that defendants received or possessed information that was at odds with the statements they are alleged to have made publicly"); In re Splash Tech. Holdings Inc. Sec. Litig., 160 F. Supp. 2d 1059, 1070-71 (N.D. Cal. 200...