# Makor Issues & Rights, Ltd. v. Tellabs, Inc.

> District Court, N.D. Illinois · August 13, 2010 · 735 F. Supp. 2d 856

URL: https://www.frixlaw.com/law-library/cases/2477931

## Case

- **Full name:** MAKOR ISSUES & RIGHTS, LTD., Chris Broholm, Richard LeBrun, Et Al., Plaintiffs, v. TELLABS, INC., Michael J. Birck, Richard C. Notebaert, Et Al., Defendants
- **Court:** District Court, N.D. Illinois
- **Decided:** August 13, 2010
- **Citations:** 735 F. Supp. 2d 856; 2010 U.S. Dist. LEXIS 82444; 2010 WL 3275284
- **Precedential status:** Published
- **Opinion:** Opinion by Eve
- **Judges:** Amy J. St. Eve
- **Cited by:** 11 later opinions in the Frix Law Library

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## Opinion text

MEMORANDUM OPINION AND ORDER
AMY J. ST. EVE, District Judge:
Before the Court is Defendants Tellabs, Inc. (“Tellabs”), Michael J. Birck, Brian J. Jackman, Richard C. Notebaert, and Joan A. Ryan’s (collectively “Defendants”) Motion for Summary Judgment. Defendants seek summary judgment on each of the remaining claims set forth in Plaintiffs Makor Issues & Rights, Ltd., Chris Broholm, and Richard Lebrun,
et al.’s
(collectively “Plaintiffs”) Second Amended Consolidated Class Action Complaint (“Complaint”). For the following reasons, the Court grants in large part and denies in part Defendants’ motion for summary judgment and grants in part and denies in part Defendants’ Motion to Strike.
BACKGROUND
I. Procedural History
This case has a long procedural history. In June 2002, Plaintiffs filed a putative class action lawsuit on behalf of various individuals and persons who purchased common stock of Defendant Tellabs between December 11, 2000 and June 19, 2001 pursuant to § 10(b) of the Securities and Exchange Act of 1934 (“Section 10(b)”) and SEC Rule 10b-5, 17 C.F.R. § 240 .10b-5 (“Rule 10b-5”). The Court has jurisdiction over this matter pursuant to 15 U.S.C. § 78aa and 28 U.S.C. §§ 1331 and 1337, and venue is proper in this district pursuant to 28 U.S.C. § 1391 (b). (R. 336-1, ¶ 4.)
Initially, the Court granted Defendants’ motion to dismiss Plaintiffs’ complaint in its entirety, but permitted Plaintiffs to amend.
See Johnson v. Tellabs, Inc.,
262 F.Supp.2d 937, 939 (N.D.Ill.2003)
(Johnson
I). Shortly thereafter, Plaintiffs filed the operative Complaint, which contained additional factual allegations.
{See
R. 63-1;
see also Johnson v. Tellabs, Inc.,
303 F.Supp.2d 941, 945 (N.D.Ill.2004)
(Johnson II)).
After determining that the Complaint failed to properly plead an underlying 10b-5 violation, and reasoning that the remaining allegations were dependent on an underlying 10b-5 violation, the Court granted Defendants’ motion to dismiss each count of the Complaint, with prejudice.
Johnson II,
303 F.Supp.2d at 971 . On appeal, the Seventh Circuit affirmed in
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part and reversed in part, holding that Plaintiffs sufficiently had pled claims under § 10(b) against Defendants Tellabs and Notebaert and properly had pled control person liability claims under § 20(a) against both Notebaert and Birck.
See Makor Issues & Rights, Ltd. v. Tellabs, Inc.,
437 F.3d 588, 603-05 (7th Cir.2006)
(Makor
I). The Court of Appeals took no position on Plaintiffs’ § 20(a) insider trading claim against Defendant Birck.
Id.
at 605 (“No party in this litigation has provided more than cursory briefing of this issue, and therefore we take no position on its resolution, leaving it for further factual and legal development during the course of the litigation.”),
modified by
2006 U.S.App. LEXIS 17252 (7th Cir.2006). The Supreme Court reversed the Seventh Circuit’s interpretation of the
scienter
requirement of a § 10(b) claim and remanded the case for further review consistent with the Supreme Court’s clarifications.
Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308 , 127 S.Ct. 2499, 2509 , 168 L.Ed.2d 179 (2007)
(Makor II).
On remand from the Supreme Court, the Seventh Circuit adhered to its prior decision in
Makor I
and remanded the case to this Court.
Makor Issues & Rights, Ltd. v. Tellabs Inc.,
513 F.3d 702, 705 (7th Cir. 2008)
(Makor III).
On February 25, 2008, the parties filed a Joint Status Report identifying their positions regarding the remaining claims and defenses in the case. The parties reported that, as it currently stood, the Complaint alleged: (i) Section 10(b) and Rule 10b-5 claims against Notebaert and Tellabs, (ii) Section 20(a) control person liability claims against Notebaert, Birck, Jackman, and Ryan, and (iii) Section 20(a) insider trading claims against Birck. The parties agreed that the four categories of alleged misrepresentations that remained at issue in the lawsuit were: (i) statements regarding Tellabs’s financial results for fourth quarter 2000 and full year 2000, (ii) statements regarding the TITAN 5500, (iii) statements regarding the TITAN 6500 system, and (iv) Tellabs’s projections of earnings and revenues during 2001. (R. 149-1, Joint Status Report at
2-4.)
On May 23, 2008, after Defendants filed a renewed motion to dismiss, the Court dismissed Plaintiffs’ § 20(a) claim for insider trading against Birck for failure to state a claim under 15 U.S.C. § 78t-l(a).
See Makor Issues & Rights, Ltd. v. Tellabs Inc.,
2008 WL 2178150 , *2, 2008 U.S. Dist. LEXIS 41539 , *7 (N.D.Ill. May 23, 2008). On June 17, 2008, Defendants filed their answer and defenses to the Complaint. (R. 195-1.) On February 23, 2009, 256 F.R.D. 586 (N.D.Ill.2009), the Court granted Plaintiffs’ motion for class certification, appointment of class representatives, and appointment of class counsel. (R. 256-1, Memorandum Opinion and Order.) The Court entered an order certifying a class consisting of: “All persons who purchased the common stock of Defendant Tellabs during the period from December 11, 2000 through June 19, 2001, inclusive (the ‘Class Period’). Excluded from the Class are Defendants; the subsidiaries and affiliates of Tellabs; the officers and directors of Tellabs or its subsidiaries or affiliates, at all relevant times; members of the immediate family of any excluded person; the legal representatives, heirs, successors, and assigns of any excluded person; and any entity in which any excluded person has or had a controlling interest.”
Id.
at 26. The Court also appointed Makor Issues & Rights, Ltd. Lead Plaintiff pursuant to 15 U.S.C. § 78u-4. Chris Broholm, Richard LeBrun, David Leehey and Patricia Morris (now deceased) are additional named Plaintiffs. The named Defendants are Tellabs, Michael J. Birck, Richard C. Notebaert, Brian Jackman and Joan Ryan.
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On October 16, 2009, Plaintiffs filed a Notice of Intent Not to Pursue Certain Allegations Further in this Action (“Notice of Intent”). (R. 284-1, Notice of Intent.) Plaintiffs indicated their intention not to pursue certain allegations of misrepresentation based on statements concerning the TITAN 6500 under § 10(b) and Rule 10b-5 promulgated thereunder.
Id.
at 1-2. On October 22, 2009, Defendants moved the Court to dismiss all allegations concerning allegedly false or misleading statements regarding the TITAN 6500 and to enter judgment in their favor. (R. 288-1, Motion to Dismiss.) The Court found that Defendants failed to establish that dismissal and judgment were warranted on the TITAN 6500 claims, but held that Plaintiffs were barred from pursuing the § 10(b) allegations of misrepresentation concerning the TITAN 6500. (R. 311-1, Minute Entry, p. 3.)
As a result of this procedural history, three categories of alleged misrepresentations remain at issue in this lawsuit: (i) statements regarding Tellabs’s financial results for fourth quarter 2000 and full year 2000, (ii) statements regarding the TITAN 5500, and (iii) Tellabs’s projections of earnings and revenues during 2001. Defendants now seek summary judgment on each of these claims contained in the Complaint.
II. Northern District of Illinois Local Rule 56.1
When determining summary judgment motions, the Court derives the background facts from the parties’ Local Rule 56.1 statements. Specifically, Local Rule 56.1 assists the Court by “organizing the evidence, identifying undisputed facts, and demonstrating precisely how each side proposefs] to prove a disputed fact with admissible evidence.”
Bordelon v. Chicago Sch. Reform Bd. of Trs.,
233 F.3d 524, 527 (7th Cir.2000). Local Rule 56.1(a)(3) requires the moving party to provide “a statement of material facts as to which the moving party contends there is no genuine issue.”
Cracco v. Vitran Exp., Inc.,
559 F.3d 625, 632 (7th Cir.2009). “The opposing party is required to file ‘a response to each numbered paragraph in the moving party’s statement, including, in the case of any disagreement, specific references to the affidavits, parts of the record, and other supporting materials relied upon.’ ”
Id.
(citing N.D. Ill. R. 56.1(b)(3)(B)). In addition, Local Rule 56.1(b)(3)(C) requires the nonmoving party to present a separate statement of additional facts that require the denial of summary judgment.
See Ciomber v. Cooperative Plus, Inc.,
527 F.3d 635, 643-44 (7th Cir.2008). Pursuant to the Local Rules, the Court will not consider any additional facts proposed in the nonmoving party’s Local Rule 56.1(b)(3)(B) Response, but instead must rely on the nonmovant’s Local Rule 56.1(b)(3)(C) statement of additional facts when making factual determinations.
See id.
at 643 ;
Cichon v. Exelon Generation Co., L.L.C.,
401 F.3d 803, 809 (7th Cir.2005) (“Local Rule 56.1 requires specifically that a litigant seeking to oppose a motion for summary judgment file a response that contains a separate ‘statement ... of any additional facts that require the denial of summary judgment.’ ”) (internal citation omitted).
Moreover, the purpose of Rule 56.1 statements is to identify the relevant evidence supporting the material facts, not to make factual or legal arguments,
see Cady v. Sheahan,
467 F.3d 1057, 1060 (7th Cir.2006), and thus the Court will not address the parties’ arguments made in their Rule 56.1 statements and responses. Also, the requirements for responses under Local Rule 56.1 are “not satisfied by evasive denials that do not fairly meet the substance of the material facts asserted.”
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Bordelon,
233 F.3d at 528 . Further, the Court may disregard statements and responses that do not properly cite to the record.
See Cichon,
401 F.3d at 809-10 . Finally, “hearsay is inadmissible in summary judgment proceedings to the same extent that it is inadmissible in a trial.”
Eisenstadt v. Centel Corp.,
113 F.3d 738, 742 (7th Cir.1997). With these standards in mind, the Court turns to the parties’ Local Rule 56.1 statements.
III. Evidentiary Objections
Both Plaintiffs and Defendants contend that portions of the opposing parties’ statements of material facts are deficient and fail to comply with Local Rule 56.1 The Court will address each of these arguments in turn.
A. Defendants’ Motion to Strike Portions of Plaintiffs’ Response to Their Statement of Facts
In their Motion to Strike Portions of Plaintiffs’ Response to Defendants’ Statement of Facts and to Deem Certain Facts Admitted (“Motion to Strike”), Defendants first argue that Plaintiffs have provided evasive answers to paragraphs, or portions of paragraphs, 7-8, 14-15, 20-21, 29, 31-33, 35, 37, 38-41, 43, 47-48, 53-55, 64, 66, 68, 70, 73, 79-80, 82, 92 and 102 of Defendants’ Rule 56.1 Statement. (R. 342-1, Defendants’ Motion to Strike, pp. 3-5, Ex. A.) Specifically, Defendants argue that in each of these instances, Plaintiffs fail to admit or deny the facts alleged, and instead provide evasive responses or fail to respond entirely to the facts at issue. Defendants are correct that, in many instances, Plaintiffs have failed to respond to the facts alleged, but instead improperly dispute characterizations in the statement of facts. In response to paragraphs 7-8, for example, in which Defendants assert facts regarding the alleged “bottoms-up” process, Plaintiffs dispute that Tellabs based its guidance on a “bottoms-up” process. Plaintiffs cite facts that they assert demonstrate that Tellabs followed, at least in part, a top-down process and deny that Tellabs employed a “bottoms-up” process. Plaintiffs, however, fail to admit or deny the facts that support Defendants’ contentions regarding the “bottoms-up” process. (R. 336-1, ¶¶ 7-8). While it is clear that Plaintiffs are disputing that Tellabs followed a “bottoms-up” process, Plaintiffs’ response to Defendants’ Rule 56.1 statement is not the proper forum for presenting arguments or additional facts.
See Ciomber,
527 F.3d at 643-44 (a court will not consider any additional facts proposed in a nonmoving party’s Local Rule 56.1(b)(3)(B) Response, but instead must rely on the nonmovant’s Local Rule 56.1(b)(3)(C) Statement of Additional Facts when making factual determinations). Although the Court will not belabor a point by point analysis of each of Defendants’ objections, where Plaintiffs failed to specifically admit or deny a particular fact, the Court has deemed the fact admitted.
Defendants also argue that in each instance where Plaintiffs responded to Defendants’ statement of facts without a corresponding record cite, the facts should be deemed admitted. Specifically, in response to a large number of facts,
see
¶¶ 13, 28-29, 34, 37-38, 40, 42-M4, 46, 48-49, 53-56, 82, 84-85, 88-89 and 102-104, Plaintiffs, rather than providing a cite to the record in order to dispute a particular fact, instead cite to paragraphs contained in their statement of additional facts. This is contrary to both the letter and spirit of Local Rule 56.1. As the Seventh Circuit has explained:
The requirements of such rules are not onerous, but they are exacting. Local Rule 56.1 makes explicit the responding party’s burden of controverting the mov
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ant’s position with adequate citations to the record.... [W]e have often repeated, that a party contesting summary judgment has a responsibility under such rules to “highlight which factual averments are in conflict as well as what record evidence there is to confirm the dispute.” It is reasonable to assume that just as a district court is not required to “scour the record looking for factual disputes,” it is not required to scour the party’s various submissions to piece together appropriate arguments. A court need not make the lawyer’s case.
Little v. Cox’s Supermarkets,
71 F.3d 637, 641 (7th Cir.1995) (internal citations omitted). Here, directly contrary to Local Rule 56.1’s requirement that a party make “specific references to the affidavits, parts of the record, and other supporting materials relied upon,” Plaintiffs’ response requires the Court to turn to its statement of facts and take the further step of verifying the citations contained therein. Most problematic, in many instances, Plaintiffs have cited as many as ninety paragraphs of their statement of facts to support a denial of a fact proffered by Defendants.
See, e.g.,
R. 354-1, Pis.’ Resp. to ¶ 55 (citing 75 paragraphs), ¶ 56 (same), ¶ 84 (citing 33 paragraphs), ¶ 85 (same), ¶ 103 (citing 90 paragraphs). Due to the large volume of citations to Plaintiffs’ statement of facts, many of the cited facts do not in fact contradict the facts posed by Defendants. Indeed, it is unclear why Plaintiffs chose not to cite to the evidentiary materials and other parts of the record in support of some of their denials given that, in many instances throughout their response to Defendants’ statement of facts, Plaintiffs appropriately complied with the strictures of Local Rule 56.1. While Plaintiffs argue that Defendants have cited no case law prohibiting a party from cross-referencing its statement of additional facts, the text of Local Rule 56.1(b)(3)(C) is exceedingly clear and requires “specific references to the affidavits, parts of the record, and other supporting materials relied upon.” Plaintiffs have failed to adhere to this Rule. Again, the Court will not belabor a point by point analysis of Plaintiffs’ 104 responses, but has deemed admitted any statements to which Plaintiffs have not appropriately responded with citation to supporting evidentiary materials.
Additionally, Plaintiffs have cited to their own statement of facts where they present improper legal arguments. In paragraph 55 of their statement of facts, for example, Defendants present evidence that as a result of a forecast review, Tel-labs’s finance department recommended to Notebaert that Tellabs revise its public guidance downward for 2001. (R. 354-1, Pl.’s Resp. to ¶ 55.) In response, Plaintiffs argue that the revised guidance was unachievable and unrealistic despite the fact that Defendants do not make any assertions regarding the content of the guidance in ¶ 55 of their statement of facts. Accordingly, in this and many other instances, Plaintiffs’ responses citing to their statement of facts are improper for the further reason that the responses contain improper legal arguments.
See Cady,
467 F.3d at 1060 .
Finally, while the deficiencies in Plaintiffs’ response to Defendants’ statement of facts required admission of many of the facts proffered by Defendants, “the court did not turn a blind eye to the facts elsewhere available, though it is permitted to do so by non-compliance with the local rule.”
Little v. Cox’s Supermarkets,
71 F.3d 637, 641 (7th Cir.1995). Indeed, in many instances it appears that while Plaintiffs failed to provide evidence that would specifically contradict a
fact
proposed by Defendants, in their own statement of additional facts Plaintiffs have presented
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facts that must be considered in conjunction with the facts presented by Defendants. Though while the Court need “not scour the record ... to make [Plaintiffs] arguments,”
Jackson v. Xerox Corp.,
349 F.Supp.2d 1119, 1123 (N.D.Ill.2004), Plaintiffs have cured some of their deficient responses by presenting evidence in their statement of additional facts which is supported by proper evidentiary citations. In addition, while Defendants criticize Plaintiffs’ citations subsequent to multiple sentences, where Plaintiffs’ intention for a single citation to apply to multiple preceding sentences is clear, the Court has not deemed the facts admitted for Plaintiffs’ failure to use string citations.
For the foregoing reasons, the Court grants in part and denies in part Defendants’ Motion to Strike.
B. Plaintiffs’ Evidentiary Objections
Plaintiffs similarly raise a series of objections to the evidence submitted by Defendants in support of their motion for summary judgment. Plaintiffs contend that certain documents relied on by Defendants are inadmissible as business records, Defendants’ Exhibits 95-97 are inadmissible hearsay, and portions of the affidavits of both Pfefferle and Notebaert are inadmissible. Because Defendants have demonstrated that each of these materials is proper evidence in support of their motion for summary judgment, the Court will not strike the evidence.
1. Business Records
Plaintiffs first argue that the Court should strike the documents listed in the appendices to the declarations of Charles W.L. Kennedy and Todd Camm because they are not proper business records. Plaintiffs specifically object to the following exhibits as inadmissible as business records: Exs. 2, 3, 12, 18, 20-22, 36-38, 40, 46, 49-50, 55-57, 59-62, 64-67, 69, 75-77, 82-86, 89, 99 and 117. (R. 354-1.)
The Federal Rules of Evidence prohibit the admission of hearsay evidence — statements made out of court that are offered to prove the truth of the matter asserted. Fed.R.Evid. 801-802. Federal Rule of Evidence 803(6) sets out an exception to the rule against hearsay for business records. Under Rule 803(6), the following is excepted from the bar on hearsay:
A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record or data compilation, all as shown by the testimony of the custodian or other qualified witness ..., unless the source of information or the method or circumstances of preparation indicate a lack of trustworthiness.
Fed.R.Evid. 803(6);
United States v. Given,
164 F.3d 389, 394 (7th Cir.1999) (“A party establishes a foundation for admission of business records when it demonstrates through the testimony of a qualified witness that the records were kept in the course of regularly conducted business activity, and that it was the regular practice of that business to make such records.”).
Plaintiff argues that the Kennedy and Camm declarations fail to demonstrate the procedures under which any of the documents referenced in their affidavits were created. (R. 329-1, Pis.’ Opp’n at 32-34.) “While Rule 803(6) does not require that the qualified witness be the person who prepared the record,
see United States v. Moore,
923 F.2d 910, 915 (1st Cir.1991), or that the witness have person
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al knowledge of the entries in the records,
see United States v. Lawrence,
934 F.2d 868, 870 (7th Cir.1991), the business records exception does require that the witness have knowledge of the procedure under which the records were created.”
Collins v. Kibort,
143 F.3d 331, 337-338 (7th Cir.1998). Plaintiffs are correct that the Kennedy and Camm declarations fail to include any detail regarding the procedure under which the records referenced in the appendices to their declarations were created. (R. 301-1, Exs. 4, 5.) Defendants, however, have supplemented their evidentiary submissions with the affidavits of the individuals who authored the documents in question or have personal knowledge of the creation of the documents and the job responsibilities of the author(s) of the document. (R. 351-1, Exs. 131, 150-58.) The declarations of Christine Pfefferle, Brian Jackman, Michael Birck, Maryangela Daum, Robert Pullen, James Roche, Joan Ryan, Tom Scottino, George Stenitzer, and Mark Striepling contain sufficient information from knowledgeable witnesses regarding the procedures under which the exhibits referenced in the Kennedy and Camm declarations — with the exception of Exhibit 137-were created.
1
Specifically, the following affidavits submitted by Defendants establish that the vast majority of exhibits objected to by Plaintiffs are admissible as business records: (i) Pfefferle: Exs. 20, 24, 27-29, 41, 46-50, 53, 55-56, 59-61, 66, 75-77, 83, 85, 88-90, 128 and 147-148; (ii) Birck: Exs. 30 and 36; (iii) Daum: Ex. 84; (iv) Pullen: Exs. 31, 52 and 99; (v) Roche: Ex. 117; (vi) Ryan: Exs. 12, 21, 37, 39^40, 42, 65, 67 and 82; (vii) Scottino: Exs. 105-107, and various transcripts of Tellabs’s investor relations teleconferences, including Exs. 22 and 64; (viii) Stenitzer: Tellabs’s press releases and annual reports, including Exs. 2-3, 38, 62 and 69; and (ix) Striepling: Ex. 86.
Defendants, however, have failed to establish that Exhibit 137 is admissible as a business record. Exhibit 137, a document produced by Terra Nova Financial in response to a subpoena, is a third-party document. Defendants have not demonstrated that Exhibit 37 is a business record, including failing to establish that the document was incorporated into Defendants’ business records, and therefore Defendants have not demonstrated that it is admissible under Rule 803(6).
2
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2. Hearsay Objections to Exhibits 95-97 and 99
Plaintiffs assert that Defendants’ Exhibits 95-97 and 99 are not admissible evidence.
See
R. 354-1, Resp. to ¶ 91. Exhibits 95 and 96 are reports prepared by industry analysts regarding Tellabs’s reported results. (R. 301-15, Exs. 95-96.) Because Plaintiffs fail to offer any argument or cite any legal authority to demonstrate the inadmissibility of these documents, it is unclear why Plaintiffs claim these exhibits are inadmissible. Moreover, if Plaintiffs claim the documents are inadmissible hearsay, Defendants offer the documents not for the truth of the matters asserted, but instead to show how industry analysts used and understood the term “end user.” Exhibit 97 is a March 14, 2001 email from Cathie Kozik to a group of Tellabs’s employees regarding statements made by Sprint executives regarding growth in demand for certain Sprint services. (R. 351-15, Ex. 97.) Plaintiffs claim that Exhibit 97 is inadmissible hearsay. (R. 354-1, Resp. to ¶ 92.) Defendants offer Exhibit 97, however, not for the truth of the matters asserted, but instead for the effect those statements had on Tellabs.
Jewett v. Anders,
521 F.3d 818, 827 (7th Cir.2008) (statements “offered to demonstrate the effect of [the] information on person who heard statement to explain person’s actions are not inadmissible hearsay”)
Plaintiffs also contend that Exhibit 99 is inadmissible hearsay because Defendants did not properly demonstrate that the document is a business record pursuant to Rule 803(6). (R. 354-1, Resp. to ¶ 46; R. 329-1, pp. 32-34.) Exhibit 99 is a presentation prepared by Robert W. Pullen entitled “The Optical Networking Group.” (R. 301-16, Ex. 99.) As of the date the document was created, Pullen was the Senior Vice President of the Optical Networking Group at Tellabs. (R. 351-1, Ex. 152, ¶ 2). While Plaintiffs contend that the relevant statement in the slide is unsubstantiated and conclusory, Pullen averred that he created the document and had direct personal knowledge of its contents, and asserted that it was the regular practice of Tellabs to create and maintain such documents in the course of its regularly conducted business. Exhibit 99 is therefore admissible.
See
Fed.R.Evid. 803(6);
United States v. Given,
164 F.3d 389, 394 (7th Cir.1999) (“A party establishes a foundation for admission of business records when it demonstrates through the testimony of a qualified witness that the records were kept in the course of regularly conducted business activity, and that it was the regular practice of that business to make such records.”).
3. Pfefferle and Notebaert Declarations
In a footnote, Plaintiffs argue that the supporting declarations submitted by Pfefferle and Notebaert are self-serving, eon
*869
elusory and fail to cite to supporting deposition testimony or documentary evidence, and that the Court should therefore disregard them. Rule 56(e)(1) of the Federal Rules of Civil Procedure sets forth requirements for affidavits submitted at the summary judgment stage:
A supporting or opposing affidavit must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant is competent to testify on the matters stated. If a paper or part of a paper is referred to in an affidavit, a sworn or certified copy must be attached to or served with the affidavit. The court may permit an affidavit to be supplemented or opposed by depositions, answers to interrogatories, or additional affidavits.
Fed.R.Civ.P. 56(e)(1). “While personal knowledge may include inferences and opinions, those inferences must be substantiated by specific facts.”
Vakharia v. Little Co. of Mary Hosp. & Health Care Ctrs.,
62 Fed.Appx. 122, 125 (7th Cir.2003);
Drake v. 3M,
134 F.3d 878, 887 (7th Cir.1998) (“Rule 56 demands something more specific than the bald assertion of the general truth of a particular matter, rather it requires affidavits that cite specific concrete facts establishing the existence of the truth of the matter asserted.”).
Contrary to Plaintiffs’ assertions, neither Pfefferle’s nor Notebaert’s affidavit contains conclusory, unsubstantiated claims. In Pfefferle’s affidavit, she averred that during the relevant time period she was Director of Product Management and Quality of the Optical Networking Group and, beginning in 2001, Director of Global Forecasting. (R. 301-1, Ex. 8, ¶¶ 3-4.) Pfefferle provided detailed information regarding Tellabs’s “bottoms-up” process for collecting information on expected revenues and expenses in 2001.
Id.
at ¶¶ 6-8. Indeed, she specifically explained that the various product units supplied information to her or the finance department after speaking directly with Tellabs’s sales force and its customers, and that the finance department and employees responsible for forecasting spoke directly with operating unit heads and sales personnel to better understand the bases for the “bottoms-up” projections.
Id.
at ¶ 9. Because the process she describes is directly within her duties as head of forecasting, Pfefferle has made statements within her personal knowledge and there is no requirement that she cite to other portions of the record to support her affidavit.
See
Fed.R.Civ.P. 56(e). Notebaert’s declaration is also directly based on his own personal knowledge. (R. 301-1, Ex. 9) Specific cites to evidentiary materials are therefore not mandated.
Finally, Plaintiffs’ argument that the Court should strike the declarations of Pfefferle and Notebaert because they are “self-serving” is without merit. While the Court may strike self-serving affidavits not supported by the record in the context of a motion for summary judgment,
Ozlowski v. Henderson,
237 F.3d 837, 840 (7th Cir.2001), here the record reflects that both Pfefferle’s and Notebaert’s affidavits are based on their personal knowledge. Due to their personal knowledge of the issues, these affidavits are properly before the Court.
See Payne v. Pauley,
337 F.3d 767, 772 (7th Cir.2003).
IV. Relevant Facts
A. Background
Tellabs is a global supplier of optical networking, broadband access, and voice-quality enhancement solutions to telecommunications carriers and internet service providers. (R. 324-1, ¶ 1.) Throughout the Class Period, Tellabs’s common shares were actively traded on the NASDAQ National Market under the symbol “TLAB.”
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Id.
In 2000, Tellabs’s Optical Networking Group accounted for approximately 64% of sales.
Id.
Statements regarding the sales of the Optical Networking Group form the basis for the majority of the allegations contained in the Complaint. The TITAN 5500, Tellabs’s principal seller in this category, was the Company’s “flagship” product.
Id.
Richard C. Notebaert was Chief Executive Officer, President, and a member of Tellabs’s Board of Directors throughout the Class Period. (R. 324-1, ¶ 2.) Defendants Joan Ryan, Chief Financial Officer, Brian Jackman, President of Global Systems and Technology, and other senior executives reported directly to Notebaert on a regular basis.
Id.
Notebaert kept himself informed about Tellabs’s performance, products, sales, operations, inventory levels, and industry and market conditions.
Id.
at ¶ 3. Notebaert also attended meetings at which the participants looked at Tellabs’s revenue forecasts, reviewed Tel-labs’s press releases prior to their release, reviewed and signed the 2000 Annual Report to shareholders, spoke on behalf of the company at its investor relations teleconferences, and dealt directly with Tel-labs’s customers.
Id.
Notebaert left Tel-labs in June 2002.
Id.
at ¶ 2. A co-founder of Tellabs, Michael J. Birck was President and CEO from 1975 until September 2000, when he became Chairman of the Board of Directors. (R. 324-1, ¶ 4.) Throughout his tenure as Chairman, Birck remained actively involved in the company’s management.
Id.
After Notebaert resigned, Birck resumed his role as President and CEO.
Id.
Currently, he is Executive Chairman of Tellabs. Brian Jackman joined Tellabs as Director of Marketing in 1982. (R. 324-1, ¶ 5). During the Class Period, he was President of Global Systems and Technology and was responsible for all product planning, product management, and research and development worldwide.
Id.
He also was a member of Tellabs’s Board of Directors.
Id.
Jackman left Tellabs in August 2001, shortly after the end of the Class Period.
Id.
Joan E. Ryan was Chief Financial Officer of Tellabs during the Class Period until she left the Company in February 2003. (R. 324-1, ¶ 6.) According to Notebaert, he and Ryan “talked a lot ... [ajbout everything.”
Id.
The Court appointed Makor Issues & Rights, Ltd. (“Makor Issues”), Richard LeBrun and Nolan Howell as class representatives in this lawsuit.
3
(R. 324-1, ¶ 7.) LeBrun purchased 300 Tellabs shares on February 2, 2001 and sold those shares on March 12, 2001. (R. 330-22, Ex. 1161.) Howell purchased 600 shares on May 30, 2001 and 700 shares on June 11, 2001.
Id.
Makor Issues bought 1000 shares on March 30, 2001 and sold those shares that same day. The remainder of Makor Issues’ trades in Tellabs stock during the class period occurred after April 18, 2001.
Id.
B. Tellabs’s Forecast and Planning Process
Tellabs employed a series of internal methods for forecasting quarterly and yearly sales revenue and tracking Tellabs’s actual sales as compared to those forecasts. Tellabs engaged in an annual bud
*871
geting and planning process. (R. 336-1, ¶ 7.) As the first step in the process, product houses, sales teams, marketing, finance, and senior executives participated in a strategic planning exercise during which the company set preliminary targets for revenue, margins, and spending for the upcoming year.
Id.
Following the strategic exercise, each operating unit conducted a “bottoms-up” forecasting process. (R. 301-1, Ex. 8, ¶8; R. 301-1, Ex. 10; pp. 123-28.) During the “bottoms-up” process, each operating unit gathered information about expected demand for Tel-labs’s products by talking directly to the members of Tellabs’s sales force about what they had heard from their customers regarding impending sales. (R. 336-1, ¶ 8.) After gathering this information, each operating unit totaled the data and supplied the information regarding expected revenues and expenses to the finance department.
Id.
To facilitate this process, in January 2001, Tellabs reorganized its marketing department and appointed Christine Pfefferle, previously responsible for forecasting for the Optical Networking Group for two years, Director of Global Forecasting. (R. 336-1, ¶ 9.) As part of the reorganization, Pfefferle became responsible for the newly formed Global Forecasting Organization.
Id.
Prior to the formation of this organization, the Tellabs employees responsible for forecasting had reported their results to the individual product houses.
Id.
Under the reorganized group, these employees reported their results directly to Pfefferle.
Id.
After the operating units provided the expected sales information to the finance department, the finance department aggregated and reviewed the information. (R. 336-1, ¶ 10.) The finance department and employees responsible for forecasting also had discussions with and made factual inquires of operating unit heads or sales personnel as needed to better understand the “bottoms-up” projection.
Id.
at ¶ 11. To confirm the accuracy of the projections, the finance department and employees responsible for forecasting also compared the “bottoms-up” information to the historical information, market data, and other available sources of information in order to identify any potential issues and to see whether additional follow up was needed.
Id.
When new or additional data became available, the employees revised the draft operating plan accordingly.
Id.
The information provided by the operating units became the foundation for a draft operating plan submitted to the executive leadership team.
Id.
at ¶ 10. After several drafts, the executive leadership team agreed to a final operating plan and presented the final operating plan to the Board of Directors.
Id.
at ¶ 10.
In addition to this “bottoms-up” forecasting process, Tellabs employed a series of internal checks called forecast sanity checks to track Tellabs’s actual sales as compared to its forecasts derived from the “bottoms-up” process. Since the mid-1990s, Tellabs’s finance department has issued forecast sanity checks at least weekly. (R. 301-1, ¶ 12.) During the last week of the quarter, updated reports are issued and distributed daily. (R. 301-1, ¶ 12.) Joan Ryan, head of finance, testified that she was responsible for ensuring the accuracy of the checks.
Id.
The weekly forecast sanity checks,
inter alia,
tracked bookings to date for each product line and calculated what percentage of the quarter’s forecasted total bookings needed to be made in order for Tellabs to meet its forecast. (R. 336-1, ¶ 77; R. 301-6, Ex. 48; R. 354-1, Resp. to ¶ 77.) The forecast sanity checks compared the “percent yet to book” with an historical average of the “percent yet to book” for the same week in the quarter over the previous five years.
*872
(R. 336-1, ¶ 77; R. 301-1, Ex. 7, p. 76.) Tellabs calculated the historical average based on its performance during the previous three to five years. (R. 301-1, ¶ 12.)
The parties dispute the usefulness of the forecast sanity checks in predicting sales figures for each quarter. (R. 324-1, ¶ 105; R. 345-1, Resp. ¶ 105.) Notebaert, Jack-man, Ryan and other senior management personnel regularly received and reviewed the reports. (R. 301-1, ¶ 12.) Jackman testified that it was his “standard practice” to review the weekly forecast sanity checks and that he “found the document to be useful in looking at historical trends.... ”
Id.
Ryan testified that the forecast sanity checks were only one data point that Tellabs considered when addressing sales, and that, during the Class Period, historical trends were becoming less and less predictive of the forecast. (R. 301-3, Ex. 18, p. 318; R. 324-1, ¶ 103.) Rich Tatara, Marketing, testified that his group would rely more heavily on information that they received directly from the sales team and that, as of 2001, Tellabs was seeing its customers holding their business until the end of the quarter. (R. 301-2, Ex. 16, p. 191.) The forecast sanity checks were also presented and discussed at management team meetings in connection with the forecast. (R. 301-1, ¶ 13.) One Tellabs employee explained: “So it was kind of a progress report, if you will, an indicator of where the company stood versus the goal.”
Id.
According to Birck, the Forecast Sanity Cheek “was done along the way to make sure that there was a correlation between reality and forecast.”
Id.
Forecast sanity checks had some limitations. With respect to sales, forecast sanity checks only included information regarding orders that Tellabs had already received. (R. 336-1, ¶ 78; R. 554-1, Resp. to ¶ 78.) Forecast sanity checks did not include any “bottoms-up” information on possible orders that the sales force believed would come in later in the quarter. (R. 336-1, ¶ 78.) In addition, Pfefferle testified that the historical averages reported by the forecast sanity checks did not fully reflect the “hockey stick” trend, discussed in more detail below, which was more pronounced in fourth quarter 2000, and which Ryan testified was becoming more pronounced from the first to the third quarter as well. (R. 336-1, ¶ 79; R. 354-1, Resp. to ¶ 79; R. 301-3, Ex. 18, p. 82.) Because the forecast sanity checks averaged bookings over a five-year period, they did not capture this change in the bookings trend. (R. 336-1, ¶ 79.)
C. Pre-Class Period Events
A number of Tellabs’s employees raised concerns regarding slow sales of the TITAN 5500, the company’s flagship product, prior to the commencement of the Class Period. An internal October 9, 2000 report showed that, “Titan 5500 demand was weak going into the last few weeks of the quarter____” (R. 301-1, Ex. 1056, TEL 291602.) While revenues for the TITAN 5500 for the third quarter 2000-$482.9 million-exceeded the July 13, 2000 forecast of $470 million, they did not meet the September 13, 2000 or September 22, 2000 revised forecasts of $490 million or 487.6 million.
Id.
at TEL 291601. In an October 16, 2000 email, John Brots, Vice President, Global Manufacturing, wrote that, “532L revenues look terrible and the 5500 revenue is not much better.” (R. 301-1, Ex. 1057, TEL 291637.) Brots testified during his deposition that he was referring to first quarter of 2000 and that he was concerned that Tellabs would be back-end loaded that quarter, a strain on manufacturing capacity. (R. 351-1, Ex. 127, p. 115.) In a November 1, 2000 memorandum to the North American Sales organization, Pfefferle also highlighted slow TI
*873
TAN 5000 sales and stated that, “We had originally forecasted that we would need a large number of 5514DD’s and 5517A’s for the 3Q00. Unfortunately, demand was low and left us with a large inventory position on these key TITAN 5000 modules. It would be good for the corporation if we could move these before year end.” (R. 801-1, Ex. 1058, TEL 346263.) In an email dated December 9, 2000 to Ryan and Jackman, John Kohler, Tellabs’s Senior Vice President, Global Business Operations, stated, “[t]he 4th quarter continues to present significant challenges to our team. As of today ... we need $142.5 million in TITAN 5500 Bookings to reach our goal.” (R. 324-1, ¶ 11.) Finally, Tatara testified that, “in late 2000, 2001 we started to see the start-up telephone operating companies, largely known as competitive local exchange carriers, CLECs, start to run into financial problems, leading us to be concerned about their creditworthiness.”
Id.
Despite these various concerns, overall sales of optical networking products, which included the TITAN 5500, were up 62.5% over the prior year for third quarter 2000, and up 49% over the prior year for fourth quarter 2000. (R. 301-5, Ex. 38, TEL 657032, R. 301-1, Ex. 2, 671554.) The forecast sanity check for the week ending December 8, 2000, just prior to the beginning of the Class Period, showed the percentage of TITAN 5500 sales yet to book for the quarter was 15.4% below the historical average (25.4% vs. 10.0%). (R. 324-1, ¶ 13.) The percentage of total product sales yet to book was 9.8% below the historical average (19.6% vs. 9.8%).
Id.
D. Industry Players and Market Conditions in 2000-2001
Some of Tellabs’s customers were experiencing lessened demand for Tellabs’s products in mid-late 2000. SBC was one of Tellabs’s largest customers during the Class Period. (R. 324-1, ¶ 9.) Jim Joling, the Tellabs’s employee responsible for managing the SBC account, testified that SBC’s planning organization advised him that SBC intended to reduce spending at the end of 2000 and into first quarter 2001.
Id.
When asked which individual he notified at Tellabs’s of this reduction, Joling responded, “I can’t recall, but I — my history would’ve been to generate an email or memo” to the respective heads of divisions at Tellabs. (R. 301-1, Ex. 1008, p. 142.) Joling also testified that he had conversations with SBC representatives regarding overcapacity concerns on their network during first quarter 2001 and that those discussions “always centered around what particular project would have to be delayed or canceled, what long-term plans would have to be changed because of the lack of funding.”
Id.
at p. 144. In addition, Nancy Sayer of Verizon, Tellabs’s largest customer, also recounted that Verizon’s demand started leveling out from mid-2000 to the end of 2000. (R. 301-1, Ex. 38, p. 38.) Sayer did not recall if she relayed this information to Tellabs.
Id.
In fact, for three weeks in fourth quarter 2000 and eleven weeks in first quarter 2001, the forecast sanity checks showed that the percentage of TITAN 5500 sales yet to be booked for the quarter was greater than Tellabs’s historical average. (R. 301-1, Exs. 1214.1171-1211.)
E. Tellabs’s December 11, 2000 Guidance
On the first day of the Class Period, December 11, 2000, Tellabs hosted an analyst conference. (R. 336-1, ¶ 5.) During that conference, Tellabs provided a forecast of 30% growth in revenue and earnings per share for 2001.
Id.
Notebaert does not recall the meeting or making a statement regarding 30% growth at the meeting. (R. 301-1, Ex. 1156, Resp. to
*874
Interrogatory No. 3, p. 19.) Tellabs based this guidance on data that Tellabs had begun assembling in the early fall of 2000 during its annual budgeting and planning process. The guidance was the result of the “bottoms-up” forecasting process. (R. 336-1, ¶¶ 8-13.)
When Notebaert joined Tellabs as its CEO in September 2000, the process for developing the 2001 operating plan was already under way. (R. 336-1, ¶ 14.) At that time, Tellabs’s finance department had the responsibility for coordinating the preparation of the “bottoms-up” forecasts and working with the operating units to consolidate that information.
Id.
Tellabs employees, however, did keep Notebaert informed as to the progress of the operating plan. Furthermore, once the heads of each of the operating units and the finance department had come to an agreement on the plan for 2001, they presented the plan to Notebaert as the consensus of the other executives.
4
Id.
The December 7, 2000 iteration of the 2001 operating plan forecasted 36% revenue growth.
Id.
at ¶ 12. Accordingly, the guidance figures Tellabs presented on December 11, 2000 were the result of a consensus recommendation presented to Notebaert by his CFO, the finance department, the employees responsible for revenue forecasting for each product line, and his executive team.
Id.
at ¶ 15. Notebaert testified that he personally believed that the build-up of the operating plan as of December 2000 supported Tellabs’s public guidance for 2001 of 30% growth.
Id.
Joan Ryan, Tellabs’s CFO, also testified that as of December 11, 2001, based on the result of the planning process, she believed that Tellabs would achieve at least 30% growth in both earnings and revenue in 2001.
Id.
at ¶ 13.
When distributing the 2001 operating plan targets, Notebaert expressed that the targets were “ ‘expected’, if not minimum,” requirements for the 2001 operating plan. (R. 301-2, Ex. 12.) Indeed, several Tel-labs sales personnel testified that executives informed them of their revenue targets. (R. 325-1, Ex. 1010, p. 234-35; R. 325-1, Ex. 1008, p. 125.)
F. Tellabs’s January 23, 2001 Guidance
Plaintiffs only identify one piece of evidence between Tellabs’s December 11, 2000 guidance and the reiteration of that guidance on January 23, 2001. On January 11, 2001, Birck forwarded to Notebaert, Jackman, and Ryan a UBS Warburg analysis lowering estimates for the telecom equipment sector, commenting: “In our case, I believe they have a reasonable viewpoint — for now. While we may not see as much diminished demand as some of our contemporaries, this is going to be a trying year — for a while, anyway.” (R. 301-1, ¶ 17.)
Tellabs announced its fourth quarter and full year 2000 results in a January 23,
*875
2001 press release, issued before the market opened, and an accompanying analyst call later that morning. (R. 336-1, ¶ 16; R. 324-1, ¶ 18.) The earnings release stated that Tellabs had 38 consecutive quarters of year-over-year growth, including fourth quarter 2000, and 30% annual growth in sales and earnings from 1995— 1999. (R. 336-1, ¶ 6.) According to the press release: “Strength in Tellabs’s core business drove record sales and earnings in the fourth quarter of 2000.” (R. 324-1, ¶ 18.) For fourth quarter 2000, Tellabs achieved sales of $1,018 billion, which represented year-over-year growth of 42%. (R. 336-1, ¶ 16.) Tellabs also achieved earnings per share of 56 cents for the quarter, or growth of 44% year-over-year.
Id.
Tellabs’s Optical Networking Group, which housed the TITAN 5500 product line, reported sales of $641 million during the fourth quarter, an increase of 49% year-over year.
Id.
In total, Tellabs’s fourth quarter 2000 represented its best quarter in history.
Id.
For the full fiscal year 2000, Tellabs posted net sales of $3.3 billion, an increase of 43% over 1999.
Id.
Tellabs’s new income grew by 33% to $669 million and its earnings per share also grew by 33%.
Id.
Optical networking products, including the TITAN 5500, accounted for about 63% of all fourth quarter sales. (R. 324-1 ¶ 18.)
At the January 23, 2001 teleconference, during which Notebaert, Jackman, and Ryan spoke, Tellabs reiterated the 30/30 (revenue/earnings per share) guidance. (R. 336-1, ¶ 17; R. 324-1,¶ 18.) Such teleconferences were open to the public and also could be heard through a simultaneous live webcast at www.tellabs.com, or through a taped replay. (R. 324-1, ¶ 18.) The guidance presented on January 23, 2001 was lower than Tellabs’s 2001 internal operating plan, finalized on January 11, 2001, which forecasted 35% revenue and 31% earnings growth for full year 2001. (R. 336-1, ¶ 17.) Tellabs also reported that it began 2001 with a backlog, orders or letters of intent that had been placed with Tellabs but scheduled to ship in 2001, of $439 million. (R. 336-1, ¶ 18.) The backlog was Tellabs’s largest year-end backlog ever and 70% higher than its backlog entering 2000.
Id.
In reiterating Tel-labs’s previous forecast of 30% growth in revenues and earnings, Ryan stated: “We are targeting revenue growth slightly higher than our 30/30 financial mantra or approximately $4.4 billion with full year growth by our product group,” “[f]rom an earnings perspective, we expect to deliver another 30% increase in 2001 ...,” and “Tellabs’s 30/30 model is very much intact and we are comfortable with these targets.”
Id.
Birck also testified that the 30/30 forecast was “realistic, yet aggressive” and that 30 percent growth over the prior year “is a fairly challenging thing to do.” (R. 301-1, Ex. 1003, p. 87.) Plaintiffs’ expert, Professor Linda Allen, found that “[tjhese optimistic statements propped up [Tellabs’s] stock price.” (R. 324-1, ¶ 18.) On January 23, 2001, the price of Tellabs shares rose $5,375 to close at $58,875.
Id.
G. Tellabs’s March 7, 2001 Revised Guidance
The day after Tellabs issued its January 23, 2001 guidance, Tellabs’s Board of Directors met. (R. 324-1, ¶ 19.) Notebaert, Birck, Jackman, and Ryan were all present.
Id.
The Audit Commit tee reported: “There are ... a number of items to watch carefully on a going-forward basis as the economy slows. Specifically, the accounts receivables, inventory levels and customer financing arrangements merit special focus.” (R. 301-1, Ex 1063.) Indeed, Birck testified that as early as January 24, 2001, the Board discussed “industry concerns.” (R. 301-1, Ex. 1152, p. 1203, 1209.) Also
*876
on January 24, 2001, in an email to Notebaert, Birek, Jackman, and Ryan, among others, attaching the most recent weekly forecast sanity check (for the week ending January 19, 2001), Stephanie Glowacki of the finance department reported: “The achievement of the Q1 '01 forecast is dependent on an additional book & ship of $294.0M for TITAN 5500, $56.6M for MAS, $28.0M for Cablespan, and $28.0M for Echo/Coherent OEM. The scheduled shipments as of Week 3 for these products areas are below the historical averages .... ” (R. 301-1, ¶ 19.) The same day, Kohler wrote to Jackman, Ryan, Gustafsson, and McCarthy: “Sales in the current quarter are extremely slow.”
Id.
As they had in prior quarters, Tellabs executives tracked the progress of sales in first quarter 2001. (R. 336-1, ¶ 19.) Throughout January, Tellabs’s forecasting organization continued to forecast more than 30% year-over-year growth for the quarter, as well as the full year.
Id.
at ¶ 20. In response to an inquiry from Kohler regarding slow sales, on January 25, 2001, Steve McCarthy, Tellabs’s Senior Vice President of Global Marketing, requested that Tellabs’s Global Forecasting Organization update their first quarter forecast.
Id.
at ¶20. In response, Pfefferle provided him with an updated forecast using the most recently available information from the product houses.
5
Id.
Like the process for developing the initial operating plan, the process for updating the forecast was primarily a “bottoms-up” process. The forecasting group worked with the sales force and product houses, who in turn worked with customers to identify and track potential sales opportunities.
Id.
Once a sales opportunity was identified, an employee placed the opportunity into a tracking system, referred to as the “pipeline.”
Id.
For each sales opportunity, the pipeline listed the name of the customer, anticipated product, revenue amount, estimated date for purchase order, and responsible salesperson.
Id.
The salesperson would also classify the opportunity based on his or her confidence that the opportunity would turn into an actual order by assigning it a confidence level of 80%-100%, 60%-79%, or less than 60%.
Id.
As additional information became available throughout the quarter, Tellabs’s employees would make changes to the pipeline figures.
Id.
At the end of January, it was clear that January sales were slower than Tellabs had hoped. (R. 336-1, ¶ 23.) January, however, was traditionally a slow sales month as Tellabs held its annual meeting which took much of the sales force away from their work and Tellabs’s customers were typically still setting their budgets.
Id.
On February 6, 2001, commenting to Notebaert, Birck, Jackman, and others on the forecast sanity check for the week ending February 2, 2001, which showed the percentage of TITAN 5500 sales, yet to book was 13.6% below Tellabs’s historical average (52.6% vs. 39.0%) and the percentage of all product sales yet to book was 13.1% below the historical average (48.4% vs. 35.3%), Ryan stated:
For your information, bookings to date that will translate into revenue for Q1 are alarmingly slow, and slower than for any quarter in recent memory. The
*877
scheduled bookings rate for Q1 comes closest to that of 4Q 1998, but is still lower than for that period. That means we are booking at a rate below any of the quarters in 2000, and we know how difficult and hair-raising all those periods were for making our revenue target. I suppose I don’t need to say it (but I will anyway), WE NEED BOOKINGS NOW!!!!
(R. 324-1, ¶ 21.) Notebaert acknowledged “[i]t was a concern” to him, as well, that Tellabs was performing below historical levels.
Id.
Three days later, on February 9, 2001, Ryan wrote Notebaert:
January results will be available late Monday. First read is that they are not good — slow revenue, high cost of goods. We may have even lost money for the month. There is a formal meeting which you are invited to on Thursday to discuss January results and revised Q1 forecast. At this point, the forecast for revenue looks to be below our Board forecast by about $20-$30M, with various upsides/downsides.
(R. 324-1, ¶ 22.)
While sales were slow in January, Tel-labs’s quarterly sales were typically more heavily concentrated in the last month or few weeks of each quarter. (R. 336-1, ¶ 24.) Tellabs’s employees referred to this trend as the “hockey-stick” effect, referring to the picture created graphically by the timing of sales.
Id.
Jackman testified that the “hockey stick” trend varied in its severity and timing from quarter to quarter. (R. 330-22, Ex. 1152; R. 324-1, ¶ 103.) In addition to being an intra-quarter phenomenon, the “hockey stick” effect was also a seasonal phenomenon, as sales were slower in first quarter and significantly higher in the fourth quarter. (R. 336-1, ¶ 25.) The “hockey stick” trend had become more pronounced in the periods leading up to fourth quarter 2000. (R. 301-3, Ex. 18.) Nine days before the end of the third quarter 2000, for example, Tellabs had not brought in sufficient sales to meet its sales forecast for the quarter. (R. 336-1, ¶ 26.) Ultimately, however, Tel-labs reached record-breaking sales for the quarter.
Id.
Similarly, in fourth quarter 2000, midway through the quarter Birck noted that making the fourth quarter’s guidance would require “a scramble” and John Kohler, Senior Vice President of Global Operations, noted that the fourth quarter “presented significant challenges to out team.”
Id.
Ultimately, however, Tellabs exceeded its fourth quarter forecast with its largest quarter for revenues in its history.
Id.
In early 2001, Tellabs scheduled a meeting for February 15 to review January results and the first quarter forecast to “formally discuss how we get back on track.” (R. 336-1, ¶ 27.) At the February 15, 2001 forecast review meeting, which Notebaert attended, the participants discussed several “action items.”
Id.
The participants tasked Pfefferle and Don Jones, head of North American Sales, to “[ojutline all opportunities for IQ for TITAN 5500.”
Id.
Notebaert and other Tel-labs executives directed the Tellabs forecasting organization to determine whether Tellabs’s current forecast remained achievable and realistic.
Id.
at ¶ 28. Notebaert made this request because if the forecast needed to be revised, he wanted to let the market know sooner rather than later, thereby defusing any build up of expectations.
Id.
Also on February 15, 2001, Notebaert instituted a hiring freeze as a “preventive action relative to the overall economy.” (R. 336-1, ¶ 29; R. 324-1, ¶ 23.) A “Suggested Spending Optimization Plan,” dated February 19, 2001 assigned “immediate” action tasks to Notebaert, Ryan, Jackman, and others, including: “[fjreeze hiring,”
*878
“[s]everely restrict temporary employees,” “[sjtretch merit increase from 12 months to 15 months,” “[ejliminate all overtime,” “[mjandate 3% cut across the board,” “[djismiss all special-project consultants,” “[sjeverely reduce travel and entertainment,” “[n]o seminars, non-essential internal training,” “[rjestrict new orders for supplies,” “[r]e-evaluate ‘all-expenses-paid’ cellular phone and pager programs,” “[n]o new PCs or upgrades,” “[rjeview advertising timing and extent,” “STC only critical lab equipment,” and “[cjritically review, then re-justify necessity of $167M facility additions in 2001.” (R. 324-1, ¶ 23.) Notebaert referred to these actions as “preventive costs constraints” and a “triage on the costs.” (R. 301-1, Ex. 1014, p. 218-19.) Furthermore, the forecast sanity check for the week ending February 16, 2001 indicated that the percentage of all product sales yet to book for the quarter had fallen to 21.6% below the historical average (42.9% vs. 21.3%). (R. 324-1, ¶ 24.) The percentage of TITAN 5500 sales yet to book was 21.5% below the historical average (46.0% vs. 24.5%).
Id.
During this time period, certain portions of the telecommunications industry and the economy in general were beginning to exhibit signs of a slow down.
6
Id.
While they paid attention to the economy and reacted with caution to developments in the economy, Tellabs executives also believed that Tellabs was in a product niche that would better protect it from economic difficulties. (R. 336-1, ¶ 29.)
Typically, Tellabs’s finance organization, headed by CFO Ryan, distributed a Monthly Executive Financial Summary to senior management, including Notebaert, Birck, Jackman and Ryan about two weeks after the end of the first and second months of each quarter. (R. 324-1, ¶ 25.) McCarthy confirmed that, “[fit’s one of the documents that we used in the course of doing business.”
Id.
Among other things, the Monthly Executive Financial Summaries regularly reported inventory turns.
Id.
Jackman testified that lower inventory turns could have one of several meanings, including ramping up inventories in anticipation of later orders or slow sales. (R. 301-1, Ex. 1007, p. 114.). The January 2001 Financial Summary, which was distributed in mid-February and which Jackman recalled receiving, reported: “Monthly results fall short of forecasts: Soft orders prevented level-loading [ ] of TITAN 5500 ...,” “[rjevenues below plan due primarily to lower than expected optical networking sales,” “January revenue below forecast due to soft bookings (5500) and credit/demand issues,” “78% of revenue required to ship and meet revenue recognition guidelines in February and March — significantly higher than historical levels,” and “TITAN 5500 bookings were at the lowest level since July, 2000.” (R. 324-1, ¶ 25.) Ballatine testified that it was a regular practice to review the results of the period at a meeting with Birck or Notebaert, and that Ryan typically attended those meetings as well. (R. 301-1, Ex. 1002, p. 282.)
On February 19, 2001, Notebaert informed the Tellabs’s Board of Directors, in a letter to Birck, of the disappointing January results. (R. 336-1, ¶ 30.) The letter stated:
Attached to this letter are the financials for January. As you look at them you will note that revenues were very soft, at 58% of plan. This is the whole story for the month and does not portend well for the quarter. Making our revenue
*879
plan in the current environment will be a challenge.
Revenues came in at 176 million, down 136 million against our plan of 312 million. Of additional concern is that our product bookings and product backlog are down 142 million and 67 million respectively compared to October of 2000. The area of biggest concern is ONG [Optical Networking Group] with a 97.5 million shortfall against plan. Sales of our Titan 5500 and 532L have been very slow so far in the quarter....
Operating expenses were about on. Of course with revenues off and expenses on, our margin was lower than plan by 3.4% or 34.6 million. We broke even for the month. We have taken aggressive preventative action on expenses in case our sales efforts fall short. Headcount and all discretionary expenses are being constrained.
(R. 324-1, ¶ 26.) Birck testified that, even prior to receiving the letter, he was generally aware that revenues for January were very soft and that the figures did not portend well for the quarter. (R. 324-1, ¶ 26.)
The forecast sanity check for the week ending February 23, 2001 reported that the percentage of total forecasted sales yet to book for the quarter was 18.7% behind Tellabs’s historical average (34.7% vs. 16.0%), while the percentage of forecasted 5500 sales yet to book was 20.2% below the historical average (40.6% vs. 20.4%). (R. 324-1, ¶ 27.) These forecast sanity checks were a catalyst for the “deep” dive into the forecast during late February and early March 2001. (R. 336-1, ¶ 80.) On February 23, 2001 Bro Ballantine, Vice President of Financial Planning and Analysis, wrote to Richard Tatara, Vice President of Product Marketing, Pfefferle, Ryan and others: “As we discussed in today’s meeting there have been many changes in the economic climate, our industry and our business since we completed the ... three year planning exercise last October. In fact there has been so much change that the 3 year projections are in many cases obsolete and require some updating.” (R. 324-1, ¶ 28; R. 351-1, Ex. 142, p. 31.) According to Tatara: “[T]he industry was starting to experience results being reported by various organizations that were shaking the confidence that growth would continue to be as robust as we had expected.” (R. 324-1, ¶ 28.) He also said, “There was, you know, a climate that was suggesting that the robust growth we had seen in the three years prior to this time perhaps wasn’t going to continue with the same vigor that it-that it had in the previous year.” (R. 324-1, ¶ 103.) Three days later, on February 26, 2001, in an email to Don Jones, Vice President, North American Sales, Pfefferle wrote: “We really need to work on trying to get some orders in asap.... We have to book $8.2M a day for the next 25 days and ship $12.1M. It’s looking real tight.” (R. 324-1, ¶ 29.) The next day, February 27, 2001, Anders Gustafsson, President, Global Sales, expressed similar concern: “We are now 2 months into our first quarter and our bookings have not ramped up as expected.... I am getting increasingly concerned that we are going to be cutting it very tight.”
Id.
In that same email, he also stated that, “I believe we can still make our forecast and further strengthen our credibility with investors.” (R. 330-17, Ex. 1073.)
In connection with Notebaert’s request for a reexamination of the existing forecast, on February 26, 2001, Pfefferle prepared a “gap report” to show how first quarter sales were performing compared to the forecast. (R. 336-1, ¶ 32.) The Global Forecasting Organization typically prepared gap reports on at least a monthly basis to identify bookings that Tellabs had
*880
achieved to date in the quarter and to calculate the “gap” to achieving the forecast.
Id,.
7
The “gap” represented the revenue that Tellabs needed to book in order for the quarter to meet the forecast.
Id.
The gap reports also aggregated the sales opportunities reported by the sales force as in the “pipeline” and listed this amount as an “upside” to the quarter.
Id.
The February 26, 2001 gap report showed that Tellabs still needed to achieve approximately $205 million in TITAN 5500 sales to meet its internal forecast of $500 million for the quarter.
Id.
The report also showed that the sales force had identified more than $207 million in sales opportunities to “close the gap.”
Id.
8
These opportunities included those with a confidence level lower than 60%, and the report did not weigh opportunities with a level as low as 60% any differently than an opportunity with a confidence level of 80%-100%. (R. 301-6, Ex. 46; R. 324-1, ¶99.) Indeed, $51 million of the identified sales opportunities were assigned a confidence level of less than 60%.
Id.
Pfefferle and her team also calculated an “adjusted gap” which derived from adding actual bookings only to those sales opportunities assigned a confidence level of at least 60%. (R. 336-1, ¶ 33.) The adjusted gap also included $10 million in “pull-ins” from future quarters. (R. 301-6, Ex. 46; R. 324-1, ¶ 99.) The adjusted gap report reflected that Tellabs’s “tactical plan to close the gap” included “[ajggressively canvassing sales & marketing for upside opportunities” and “[ajctively pursuing customer permission to pull in orders from 2Q w/o impacting customer sat [sic].”
Id.;
R. 324-1, ¶ 99. Ryan testified that the adjusted gap for the TITAN 5500 “looked very reasonable” compared to fourth quarter 2000 and that “looking at what we had achieved in the past, talking with sales, talking with sales management, and talking with marketing, we all felt that the gap would be closed.” (R. 301-3, Ex. 18, p. 340; Ex. 17, p. 1480.)
On February 27, 2001, Birck publicly stated at a Goldman Sachs investors conference that Tellabs “[wajsn’t immune to the overall spending slowdown and that January had been a soft month for orders .... ” Birck’s statement promptly hit the news wires and Tellabs’s stock price dropped 9% over the next three days. (R. 336-1, ¶ 31.) After this announcement, Tellabs continued to track its sales. At the end of February 2001, Brian Jackman contacted sales and marketing personnel and inquired whether they had seen any slowness in demand. (R. 301-2, Ex. 14, p. 386.) Notebaert testified that Jackman went through Don Jones and Anders Gustafsson, sales and marketing executives. (R. 301-3, Ex. 19, p. 968.) The sales personnel told Jackman that they were not experiencing any slowness in demand (R. 301-2, Ex. 14, p. 386), and Jackman passed this information on to Notebaert. (R. 301-3, Ex. 19, p. 481.) In addition to tracking potential future sales, Tellabs also continued to track actual sales booked to date per quarter in the forecast sanity check reports prepared by the finance department. (R. 336-1, ¶ 35.) The March 2, 2001 forecast sanity check indicated that Tellabs had yet to book 30% of its first
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quarter forecast, 19.4% below the historical average of 10.6%.
Id.;
R. 324-1, ¶ 30. The percentage of projected TITAN 5500 sales yet to book for the quarter was 37.9%, 23.5% below Tellabs’s historical average of 14.4%.
Id.
As a point of comparison, the December 1, 2001 forecast sanity check indicated that Tellabs had yet to book 27.2% of its fourth quarter forecast, a quarter in which Tellabs ultimately exceeded its fourth quarter bookings necessary to meet its fourth quarter plan.
Id.
On March 2, 2001, Tellabs’s finance department asked Pfefferle to prepare yet another updated forecast for the quarter to give to Notebaert and Ryan on Monday, March 5, 2001 for “decision-making” purposes. (R. 301-2, Ex. 17, p. 1485-86.) Notebaert testified that the executives wanted the forecast “to see where we were on accomplishing the goals for the quarter.” (R. 301-3, Ex. 18, p. 980-81.) Pfefferle accordingly prepared another gap report which identified a gap to forecast for the TITAN 5500 of approximately $183 million, with identified sales opportunities of $194 million.
Id.
The adjusted gap for the TITAN 5500, which only included potential sales assigned a confidence lever higher than 60%, was $31 million. (R. 301-6, Ex. 50.) The adjusted gap again contained $10 million in “pull-ins” from future quarters.
Id.
The March 5, 2001 gap report also reflected that Tellabs’s “tactical plan to close [the] gap” still included “[a]ggressively canvassing sales & marketing for upside opportunities” and “[actively pursuing customer permission to pull in orders from 2Q w/o impacting customer sat [sic].”
Id.
From February 26, 2001 to March 5, 2001 the adjusted gap for the TITAN 5500 had been reduced $8.4 million. (R. 301-6, Exs. 46, 50.) Due to the reduction in the TITAN 5500 gap in that time period, Pfefferle testified that she was even more confident that, consistent with past experience, all signs indicated that Tellabs would close the remaining gap. (R. 336-1, ¶ 37.) Accordingly, Pfefferle and her team continued to forecast that Tellabs would achieve 30% growth in TITAN 5500 sales in the first quarter of 2001 over the prior year.
Id.
With regard to other products, however, with input from the finance department, Pfefferle concluded that the products were not on track to hit their forecasted revenue targets for first quarter 2001. (R. 336-1, ¶ 38.) It was clear, for example, that Tel-labs would not recognize expected revenue from sales of the TITAN 6500 due to Sprint’s requirement for a longer testing period and that sales opportunities for the Cablespan product were not materializing at the expected rate.
Id.
Nonetheless, as result of the feedback Pfefferle received from speaking with the sales force and others, Pfefferle believed that, as of March 5, 2001, Tellabs would still achieve at least 30% revenue and earnings growth for the full year.
Id.
Overall, however, because the recognizable revenue for the TITAN 6500 and the Cablespan product were not tracking to plan, the forecasting organization concluded that the overall first quarter revenue projections should be lowered slightly. (R. 336-1, ¶ 39.) The forecasting organization communicated this information to senior management.
Id.
Subsequent to this re-analysis, and in order to account for the change in the Cablespan forecast and deferred revenue recognition of TITAN 6500 shipments, Notebaert and his senior executive team decided to hold an analyst call on March 7, 2001 for the purpose of lowering the Company’s guidance for the quarter. (R. 336-1, ¶40.) On March 5, 2001, Brian Jack-man, Joan Ryan, Anders Gustafsson, Vice President of Global Sales, and John Kohler attended a forecast review meeting. (R.
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336-1, ¶41.) The same day, Notebaert held a staff meeting for all of the senior executives.
Id.
Also prior to the March 7, 2001 call, Notebaert went to Pfefferle’s office to review the March 5, 2001 gap report with her and to gauge her confidence in the data and in Tellabs’s ability to hit the revised forecast. (R. 336-1, ¶ 42.) Pfefferle told Notebaert that, based on her analysis and “conversations with the salespeople, the marketing people, the product house, all of us felt comfortable we could achieve the objective.”
Id.
Then, on March 7, 2001, prior to the conference call, Notebaert held a meeting with Joan Ryan, Brian Jackman, and John Springer, Tel-labs’s Director of Investor Relations, to discuss the upcoming press release and conference call. (R. 336-1, ¶ 43.) During the meeting, Notebaert confirmed that everyone felt comfortable that Tellabs would achieve the revised guidance figures that Tellabs planned to announce later that day.
Id.
Based on the thorough re-examination of the forecast conducted by Pfefferle and his conversations with Pfefferle, Jackman, Ryan and others, Notebaert believed that the guidance issued on March 7, 2001 was reasonable and based on the best available information.
Id.
Birck testified that, by March 7, 2001, he was “less confident than I had been at the beginning of the year” that Tellabs could meet the 30% growth target, but that he “wouldn’t say that by any means it was an impossible sort of thing.” (R. 330-1, Ex. 1003, p. 218.) He also testified that he believed that “everybody realized that [the guidance] represented the best information that we had at that time, but it ... involved some — some forecasting or judgment with regard to the future.... I don’t know of anyone who thought this wasn’t, at that time, a fair appraisal of prospects of the company.” (R. 351-1, Ex. 125, p. 357.)
On March 7, 2001, Tellabs lowered its guidance for first quarter revenue from a range of $865 million to $890 million to a range of $830 million to $865 million, and also projected full year guidance in a range of $4.35 billion to $4.4 billion. (R. 301-7, Ex. 51, TEL 669439.) In addition, Tellabs projected earnings per share in the range of 35 cents to 38 cents, compared with prior guidance of 39 cents per share. (R. 324-1, ¶ 31.) According to Tellabs, the new guidance stemmed from continuing below-trend growth in its Cablespan business and a delay in recognizing revenue from the TITAN 6500 series. (R. 330-3, Ex. 1022, TEL 668682.) In the March 7, 2001 press release, Tellabs asserted that, “[g]rowth in Tellabs’ core optical networking business [i.e., the 5500] remains strong.” (R. 324-1, ¶ 31.) The press release quoted Notebaert as stating: “[W]e continue to target 30 percent growth in revenue and earnings for the year.”
Id.
That same day, after the close of trading, Tellabs hosted a teleconference regarding the first-quarter guidance. (R. 324-1, ¶ 32.) Notebaert, Jackman, and Ryan met before the call to discuss what they were going to say.
Id.
Notebaert, Jackman, and Ryan presented jointly on behalf of Tellabs. Notebaert opened the call by stating: “Let me start by saying that our business is quite healthy and, in fact, most of the fundamental trends we talked about on our January call are intact. That is, let me be more detailed, demand for our core optical products or core networking products remains strong.... [W]e still expect revenue and EPS growth for the quarter to exceed 30% .... We now project revenue for the year in the $4.3 billion or $4.35 billion to $4.4 billion range and EPS of $2.13 to $2.17. In summary, demand for our products remains strong.... Tellabs will meet the adjusted revenue and earnings targets.”
Id.
Ryan stated: “We expect optical networking to
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grow 35-40% [in the first quarter compared to the previous year].”
Id.
In addition, reflecting Notebaert’s comments, Ryan projected for the full year: “Hence, our new range for 2001 EPS is $2.13 to $2.17 on revenue of $4.35 billion to $4.4 billion.”
Id.
During the question and answer session of the call, an analyst asked if Tellabs was seeing “any weakness” in the TITAN 5500. (R. 336-1, ¶ 44.) Brian Jackman, Tellabs’s President of Global Operations, responded by saying: “We are not. We’re still seeing that product continue to maintain its growth rate; it’s still experiencing strong acceptance. We are in the process of turning [up] a large number of frames we shipped in the fourth quarter and this is continuing to grow as usual. I think that is pretty much on plan.” (R. 336-1, ¶ 44.) Jackman testified that he based this response on the fact that Tellabs had forecasts from the sales organization that Tel-labs would still make the plan for the 5500. (R. 301-2, Ex. 13, p. 147.) Another analyst asked, “Any concerns relative to the market place in general? We see companies like Nortel and Cisco lowering their expectations. I am assuming you guys are not seeing any of those factors impacting your business that might be impacting those guys.” (R. 330-3, Ex. 1023, TEL 669442.) Notebaert responded that: “We just lowered our expectations. With our customer base and the product niche we have our problems may be different.... We haven’t gotten any indication from any of our major customers of a downturn in this segment we are in and in our niche.”
Id.
The next day, March 8, 2001, Tellabs shares rose $2.75 to close at $48.4375. (R. 324-1, ¶ 34.) Dr. Allen opined that the stock price reaction on March 8, 2001 demonstrated “that the market interpreted the net effect of the March 7th news release to be positive information.” (R. 330-14, Ex. 1053, p. 16.) Dr. Lehn, however, opined that the stock price reaction did not demonstrate that the market interpreted the net effect of the March 7, 2001 news release to be positive information. (R. 301-11, Ex. 70, pp. 5, 22-23.) Also on March 8, in a company-wide email, Notebaert announced the company was delaying salary increases scheduled for April 1, 2001 by three months. (R. 324-1, ¶ 35.)
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H. April 6, 2001 Revised Guidance
After the March 7, 2001 announcement, Tellabs continued to track its sales and revenue. On March 9, 2001, in an email designated “Importance: High” sent to Steve McCarthy, Senior Vice President, Global Marketing, regarding TITAN 5500 sales Pfefferle wrote: “Here is my most important issue in Global Forecasting-need to rapidly increase orders coming in-house from NA for TITAN 5500. We have identified (as of today) $161M in unbooked opportunities for 1Q01. This business
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needs to happen for us to meet our revised expectations to Wall Street!” (R. 324-1, ¶ 36.) That same day, at an internal corporate overview meeting with employees, Notebaert, focusing on Tellabs’s CABLES-PAN product, explained:
The economy, in general, is not doing as well as it was six months ago. “Hello.” All you have to do is read the paper. Now that means that cable companies are not going to expand into other cities. They are going to flush out what they have. What does that translate to Tel-labs? It translates that we will do about 60 percent of what we expected just in January. In the first quarter, if you look at what customers are saying, that is what is happening. As an organization, we expected to build a certain amount of product, and now the customer is saying about 60 percent, in that range. That is some softness.
(R. 330-17, Ex. 1076, TEL 081954.) The forecast sanity check for the week ending March 9, 2001 showed that the percentage of the total forecast yet to book was above Tellabs’s historical average notwithstanding that Tellabs had just reduced first quarter guidance. (R. 324-1, ¶ 38.) Thus, the percentage of all products yet to book was 20.1% above the historical average (27.0% yet to book vs. 6.9%), while the percentage of the TITAN 5500 yet to book was 22.5% above the historical average (33.5% yet to book vs. 11.0%).
Id.
Indeed, Tellabs’s March 5, 2001 gap report showed an adjusted gap for the TITAN 5500 of more than $31.6 million, while the March 12, 2001 gap report showed an even larger adjusted gap of almost $41.1 million. (R. 324-1, ¶ 40.)
In a March 13, 20 email to all Tellabs employees, Marc Ugol, Senior Vice President, Human Resources, wrote: “While demand for our new and existing products remains strong, revenue is not developing at the levels we had planned this year. Accordingly, we need to focus on reducing our costs in order to maintain our financial strength.” (R. 324-1, ¶ 39.) Ryan responded: “I was surprised to see in your memo to employees that you included the forward looking statement below: ‘... Revenue is not developing at the levels we had planned this year.’ This is at odds with the external message that was communicated last week on our pre-announcement call, in which we basically re-iterated our 30/30 guidance for the full year. In fact, Dick [Notebaert] opened the call by saying that our ‘business remains quite healthy.’ ”
Id.
The Monthly Executive Financial Summary for February 2001, distributed on March 15, 2001 to Notebaert, Birck, Jack-man, Ryan, and other senior management revealed,
inter
alia: “56% of additional revenues need to meet Q1 forecast,” “P2 [February 2001] revenue shortfall due to across the board weakness in ONG [Optical Networking Group] and BA product sales,” “February revenue continues to be below forecast due to soft bookings (5500/532L) and credit/demand issues for DXX/Cablespan,” “56% of revenue required to ship and meet revenue recognition guidelines in March,” “TITAN 5500 bookings for the 2nd consecutive period continue to be at the lowest level since July, 2000,” “February revenue falls short in NA forecast due to soft orders (TITAN 5500) ...and “ [forecast] reductions due to: 5500 & 532L — slow bookings.” By mid-March 2001, McCarthy testified that there were frequent internal discussions regarding Tellabs’s “soft bookings.” (R. 324-1, ¶ 44.)
While overall sales for the Optical Networking Group increased in first quarter 2001, demand for the TITAN 5500 remained low. For first quarter 2001, Tel-labs reported year-over-year growth for
*885
the Optical Networking Group, which included the TITAN 5500, of 22%. (R. 330-31, Ex. 1214.) For the week ending March 9, 2001 (Week 10 of the quarter), TITAN 5500 sales were 27% less than they were for the same week in 2000 ($19.2 million vs. $26.5 million). (R. 324-1, ¶ 41.) For the week ending March 16, 2001 (Week 11 of the quarter), TITAN 5500 sales were 21% less than they were for the same week in 2000 ($24.1 million vs. $30.5 million).
Id.
The March 16, 2001 forecast sanity check also showed that the percentage of all sales yet to book (15.3%) remained 11.8% above the historical average and the TITAN 5500 sales yet to book to achieve the forecast (20.4%) were 13.3% above the historical average. (R. 324-1, ¶ 45.)
On March 16, 2001, Anders Gustafsson, Vice President of Global Sales, wrote an email to Notebaert, Ryan, Jackman, Birck, and others giving a “positive update” on first quarter sales and stating, “I am very encouraged with this progress, and I believe we will make the adjusted revenue target.” (R. 336-1, ¶ 45.) Also on March 16, 2001, Don Jones emailed the North American sales force and stated that recent “big wins ... have really put us in the hunt” to meet the first quarter forecast.
Id.
On March 19, 2001, Notebaert held a staff meeting during which Don Jones presented an updated sales forecast, $835 to $845 million, which was in line with Tel-labs’s revised guidance. (R. 301-9, Ex. 58, p. 1678.) At the same meeting, Joan Ryan presented an updated forecast from Tel-labs’s finance department predicting that the first quarter’s total revenue would come in at between $830 and $860 million, almost precisely the range of the revised guidance provided on March 7, 2001.
Id.
There was some evidence in early 2001 that customer demand was decreasing. Rick LaDuea, Vice President for the Verizon account, in an email dated March 21, 2001 with the subject “Revenue Alert” sent to various persons in sales and marketing and copied to Notebaert, reported on a conversation he had had with a representative of Verizon: “When I told him what our expectations were of business from Verizon this year, he laughed and said we’d be lucky to see half of that.” (R. 324-1, ¶ 46; R. 351-1, Ex. 120, pp. 146-47). LaDuea also testified that this response may have been nothing more than the representative’s “gut opinion” and that he did not recall what number he gave to the representative that resulted in this comment.
Id.
Nancy Sayer of Verizon also testified: “[I]n 2000, our demand started leveling out. So, it was decreased from what it had been previously.” (R. 330-2, Ex. 1017, p. 38.)
Soon thereafter, the picture changed and it became clear that customer demand was decreasing. In the last two weeks of the first quarter, customers began to request that Tellabs push out the shipping dates of approximately $83 million in firm or expected orders for the TITAN 5500 that were originally scheduled to ship in the quarter. (R. 336-1, ¶ 47.) Notebaert, referring to the requests to push out orders, stated that, “it was like somebody threw a switch. Totally unexpected.”
Id.
Ryan testified that the “push-out” “was more substantial that we’d seen before in the past.” (R. 301-3, Ex. 18, p. 246.) If the $83 million of orders or letters of intent had shipped as expected, Tellabs would have achieved its revised guidance for the quarter. (R. 336-1, ¶ 47.) As first quarter 2001 closed, it became apparent to Tellabs that although revenue had increased significantly year-over-year from the first quarter of 2000, Tellabs would not meet the March 7, 2001 revised guidance. (R. 336-1, ¶ 48.)
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Tellabs’s “Period 3, 2001 Close Highlights,” prepared in early April after the period closed at the end of March, reported, for the last four weeks of first quarter 2001,
inter alia:
“Total revenue is $380.9M which is $68.9M below forecasV$222.5M below P12 [December 2000]. Revenues are down due to slow down in customer spending specifically for the 5500, revenue deferrals for TITAN 5500 & Echo, and delayed Cablespan sales” and that “ONG [Optical Networking Group] is below forecast by $63.4M ($68.8M TITAN 5500 offset by $5.4M 53X/532L) primarily due to soft orders and install revenue deferrals.” (R. 324-1, ¶ 47.) As a result, on April 4, 2001, Notebaert’s direct reports met to discuss the steps necessary to align expenses with revenues. (R. 336-1, ¶ 53.) At the meeting, Steve McCarthy was assigned to oversee the compilation of a new “2Q and Full Year Product-Level Revenue Plan” upon which all direct reports to the CEO would agree.
Id.
Pfefferle and other members of the forecasting organization, under the direction of McCarthy, assembled the updated revenue plan.
Id.
Similar to the process that took place in the fall of 2000, the team based the updated revenue plan on information gathered from the sales teams, product houses, and other operating units, all of which provided the most up-to-date information on expected demand based on what they were hearing from Tellabs’s customers.
Id.
Tellabs held a forecast meeting on April 5, 2001 to discuss updating the second quarter and full year forecasts. (R. 336-1, ¶ 82.) As of that date, Tellabs had not settled on a revised forecast for the full year 2001.
Id.
As a result of the meeting, Tellabs developed a series of forecast scenarios with the most pessimistic scenario forecasting total revenues of $3.6 billion for the year, with $834.8 million in revenues for second quarter 2001.
Id.
Using a process similar to the one used to develop the original 2001 Operating Plan, Pfefferle and her team then gathered “bottoms-up” information from Tellabs’s sales force concerning expected demand for Tellabs’s products in order to determine the most realistic scenario.
Id.
Pfefferle and her organization also conducted a “post-mortem” on the first quarter forecast “to say what happened and what we need to do differently.” (R. 336-1, ¶ 54.) Pfefferle identified that TITAN 5500 revenue had grown 22% year-over-year and that “[a]necdotal information from key accounts indicates that fundamental drivers are still strong.”
Id.
Pfefferle also noted that Tellabs had shipped a large number of TITAN 5500s in the first quarter and that these systems represented a “great annuity program in 2001 and beyond.”
Id.
The TITAN 5500s were a “great annuity plan” because an important source of TITAN 5500 revenue was orders of additional port cards from customers who already had purchased the TITAN 5500 system from Tellabs.
Id.
Shipments of the TITAN 5500 thus created not only revenue from immediate sales, but future revenue streams as well due to customer demand for additional port cards.
Id.
As a result of this updated forecast review, and subsequent to approval from each of the officers who were direct reports to the CEO, the finance department recommended to Notebaert that Tellabs revise its public guidance to a range of $3.6 to $3.7 billion for 2001. (R. 336-1, ¶ 55.) Internally, marketing and product houses had set a “stretch target” of $3.9 billion. (R. 301-11, Ex. 67, TEL 804903.) During the time leading up to April 18, 2001, no one expressed any doubts to Notebaert that Tellabs would not achieve its revised guidance or that the revised guidance was
*887
based on incorrect of faulty information.
10
(R. 336-1, ¶ 55.)
Recognizing that Tellabs would not make its guidance, Notebaert wanted to inform the public of the development as soon as possible, rather than waiting for the scheduled announcement of actual first quarter results.
Id.
(R. 301-1, Ex. 9, ¶ 9.) Notebaert therefore directed that an investors conference be scheduled for April 6, 2001 in order to pre-announce Tellabs’s estimated first quarter results.
Id. On
the April 6, 2001 call, Tellabs reduced its guidance for the first quarter to $772 million. (R. 336-1, ¶ 49; R. 324-1, ¶ 48.) According to Tellabs: “The revised guidance stems from reduced and deferred spending by major communications carriers late in the quarter.” (R. 324-1, ¶ 48.) During an analyst teleconference call that Tellabs hosted that same morning, Notebaert also stated: “Clearly, the environment has resulted in near term caution in the pace at which customers are deploying equipment. Our customers are exercising a high degree of prudence over every dollar spent. Let me balance this a bit and say that everything we hear from the customers indicates that our end user demand for services continues to grow.”
Id.
Notebaert also stated: “The good news there is that the orders weren’t cancelled. It was just do it after the end of the quarter.”
Id.
During the April 6, 2001 call, Tellabs did not offer any guidance for the second quarter or full year. (R. 336-1, ¶ 50.) In response to a question regarding guidance for future quarters, Ryan responded, “We are currently evaluating that. We just closed the books last night and what we are giving today are flash results but we will be discussing that and full year guidance when we talk on the 18th.”
Id.
Also on April 6, 2001, Tellabs shares fell $7 to close at $33.75. (R. 324-1, ¶49.) Dr. Allen opines that previously unrevealed information disclosed on April 6, 2001 constituted a partial disclosure. (R. 330-14, Ex. 1053, p. 19.) Dr. Lehn disputes this characterization and opines that Dr. Allen has not established that Plaintiffs suffered any economic loss. (R. 301-11, Ex. 70, pp. 4-5,16-20.)
I. Tellabs’s April 18, 2001 Revised Guidance
Soon thereafter, in an April 18, 2001 teleconference and press release, Tellabs announced its actual first quarter results, as well as a plan for a reduction in force. (R. 336-1, ¶ 51.) Tellabs also announced first quarter total revenue of $772 million, which matched the April 6, 2001 revised guidance.
Id.
Tellabs missed its original goal of 30% growth, and the results demonstrated year-over-year revenue growth of 21%.
Id.
Tellabs’s Optical Networking Group, which housed the TITAN 5500, brought in $482 million worth of revenue in the first quarter, which represented 22% year-over-year growth with respect to that product line.
Id.
In its April 18, 2001 press release, Tel-labs also announced that it was lowering its guidance for the full year 2001. (R. 336-1, ¶ 52.) Tellabs forecasted that revenue for the year would fall between $3.6 billion and $3.7 billion, instead of its original expectations for the year of $4.4 billion.
Id.
Tellabs’s new guidance represented a 6% to 9% increase of the full year 2001 revenues. (R. 345-1, Resp. to ¶ 51.) This revised guidance was the re-
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suit of another “bottoms-up” review of Tellabs’s quarterly and full year forecasts. (R. 336-1, ¶ 53.)
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In the press release, Tellabs stated that, “[i]n light of reduced and deferred spending by major telecommunications carriers,” the company was eliminating salary increases for the year, instituting a pay-cut for all corporate officers, “align[ing] manufacturing capability with demand expectations,” terminating the SALIX next-generation-switching product effort, and consolidating “excess” facilities. (R. 324-1, ¶ 50.) Tellabs also announced that it would reduce its workforce by about 550 people, or 6% of its total workforce, that it had eliminated 450 temporary or contract positions, and that it would not fill 1,100 open positions.
Id.
Tellabs also indicated that it planned to restructure and make other one-time charges in the second quarter in the range of $150 million to $225 million for costs associated with reducing its workforce, consolidation of excess facilities, related fixed asset disposals, asset impairment, and excess inventory.
Id.
The actual charges Tellabs eventually recorded in second quarter 2001 were larger, totaling approximately $262 million, an amount Ryan characterized as “huge.”
Id.
Also during the analyst teleconference, with regard to sales of the TITAN 5500, Jackman stated: “What we did see was in the absolute number of brand new systems a slight decrease against the comparable quarter. We are also seeing another kind of mix because of the fact that we now have these 2000 and 3000 port systems available. We are seeing a very, very large increase on a comparable basis in the number of what we refer to as core expansions, which is almost like selling a new system.” (R. 330-3, Ex. 1027, TEL 669464.)
J. Period After April 18, 2001 Revised Guidance
During the period after April 18, 2001, Tellabs’s sales showed more pronounced weaknesses. (R. 301-11, Ex. 68, TEL 655218-19.) The April 2001 Monthly Executive Financial Summary, which circulated among Tellabs’s executives in mid-May, reported,
inter alia:
“[mjonthly results fall short of forecast,” “[continued soft bookings,” “84% of revenues left to go to achieve Q2 expectations,” “P4 [April 2001] Revenue shortfall due to across the board weakness in all product groups,” “Titan 5500 sales only 35% of plan,” “April revenue below forecast due to continued soft bookings,” “[l]owest revenues since October 1998,” “[l]owest bookings since May 1998,” and “75% of revenue required to ship and meet revenue recognition guidelines in May and June-signifieantly higher than historical levels.” (R. 324-1, ¶ 52.) Moreover, in a May 17, 2001 letter to Birck, Notebaert reported:
Revenues are 33% below January and the lowest first month of a quarter since October 1998. We are seeing further revenue softness halfway through May. At this point we will not attain our quarter guidance for revenue or earnings. Revenues are $50 million off forecast and 41% of plan. Bookings are at the lowest level since May of 1998. The primary driver of this shortfall was slow Titan 5500 sales.
Hs * *
Inventory turns at 2.5 were the lowest since the company started. This resulted from low sales and fulfillment of prior parts orders. We are currently running our builds at 30% below forecast to try
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to burn off inventory. Cash flow and investment income were positive.
All in all, this quarter is extremely tough for us, however, there is light at the end of the tunnel. Titan 6500 stays strong and Titan 6100 has had a second major customer select it. These revenues will ramp towards the end of the year. Our challenge is the second and third quarter.
(R. 301-1, Ex. 1081, TEL 661353.)
The May 2001 Monthly Executive Summary reported: “[mjonthly results continue to be below forecast,” “[sjoft bookings continue,” “P5 [May 2001] Sales 66% below plan due to reduced spending by major communication carriers and customer returns,” “Optical Networking sales were main driver, down 90% from plan,” “Titan 5500 only 9% of plan,” “[w]eekly bookings of $17.7M for 5500/532L needed to meet revised Q2 forecast (avg. is $12.7M),” “[a]ll regions experienced weakness in May,” and “[forecast] reductions due to: 5500/532L — continued soft bookings and a gap in identified opportunities.... ” (R. 324-1, ¶ 54.)
By the middle of June, Tellabs’s executives realized that Tellabs would not achieve the revised revenue guidance issued during the April 18, 2001 call for the second quarter or the full year. (R. 301-1, Ex. 68, TEL 655218-19.) On June 19, 2001, following a special meeting of Tel-labs’s Board of Directors, Tellabs announced that it now expected second quarter revenue to be around $500 million and refrained from giving any guidance beyond the second quarter because of the unpredictability that Tellabs was encountering.
Id.;
R. 324-1, ¶87. This revenue reflected a reduction of approximately $300 million. (R. 324-1, ¶ 87.) Tellabs also reduced projected earnings per share from $0.29 to breakeven (before restructuring and other charges).
Id.
Tellabs further announced that, “[t]he dramatic changes affecting the landscape of the telecommunications marketplace have continued to impact Tellabs.” (R. 324-1, ¶ 87.)
12
In an analyst call that same day, Notebaert stated, in part: “While it is clear that the entire telecom equipment industry has been dealing with the impact of dramatic cutbacks in carrier spending and general economic uncertainty throughout 2001, the impact of these forces on orders for our products has become more pronounced during the second quarter. We have dealt with these issues in the access portion of our product portfolio since late last year.” (R. 330-3, Ex. 1030, TEL 655218.) With respect to the TITAN 5500, Notebaert acknowledged: “there have been a lot of products in our ... industry ... — great products like the 5500 where things have just slowed.”
Id.
at TEL 655224.
The next day, June 20, 2001, Tellabs shares fell $5.16 to close at $16.04, almost 36 million shares. (R. 324-1, ¶ 89.) According to Dr. Allen:
Analyst reports show the contemporaneous adverse market reaction to the TLAB disclosures. For example, the Raymond James June 20th equity analyst report (on page 1) noted, “The weakness in the quarter can be attributed to the company’s Optical Networking segment performance, driven primarily by disappointing Titan 5500 sales and slower-than-expected rollout of its
*890
next generation 6000 series product.” Further, WR Hambrecht’s June 20th report (page 1) stated: “Tellabs’s major revenue and earnings shortfall announced yesterday after the market close reflects our well chronicled concerns regarding the erosion of the company’s core Titan 5500 in advance of any new product traction from the company’s acquisitions or internally developed Titan 6000 family of products. While the current carrier-spending environment certainly hastened this transition, we continue to believe this dynamic is central to Tellabs’s long-term prospects.” These material disclosures were new revelations to the market, as evidenced by the Salomon Smith Barney June 19th analyst report (page 1): “Opinion: While the Preannouncement Was Not Shocking, The Severity of Tel-labs Business Erosion Was [.] After the market close, Tellabs pre [-] announced significantly weaker than expected 2Q01 results.... Thus, the news does not come at a complete surprise. What was shocking for us, however, was the degree of the shortfall. We did not anticipate the severity of the fall-off in Tel-labs’s business.”
Id.
On July 18, 2001, Tellabs announced its second quarter 2001 results:
Tellabs today announced second-quarter sales of $516 million ... Revenues were $801 million in the second quarter 2000. Before restructuring and other charges, diluted earnings per share were 2 cents ... Second-quarter net income amounted to $10 million. In the year-ago quarter, diluted earnings per share were 39 cents, and net income was $163 million .... Including restructuring and other charges, Tellabs reported a loss of 43 cents per share for the quarter.
Optical Networking — For the second quarter 2001, sales of optical networking equipment were $221 million.... Last year, second-quarter optical networking sales were $528 million.
(R. 324-1, ¶ 90.) TITAN 5500 sales in second quarter 2001 were only $188.1 million as compared with $467.7 million the previous year — a drop of almost 60%. As a result of second quarter 2001 results, Tellabs changed its forecasting analysis. (R. 330-2, Ex. 1015, p. 348.)
For the full year 2001, Tellabs reported net sales of $2,199.7 million and a net loss of $182 million as compared to net sales of $3,387.4 million and net earnings of $730.8 million for 2000 — a decline of more than 35% in net sales and about 125% in net earnings. (R. 324-1, ¶ 91.) In 2002, Tel-labs reported an even larger net loss of $313.1 million.
Id.
Tellabs’s 2001 Annual Report, released in early 2002, confirmed that, in April 2001, Tellabs had begun a series of layoffs, ultimately reducing its worldwide workforce by about 27%.
Id.
Tellabs closed manufacturing plants in Ireland and Texas, consolidated product development and other functions from 30 facilities into 20, and cut expenses dramatically.
Id.
Notebaert and Birek’s letter to stockholders stated: “Early in 2001, as our customers reduced capital spending and expressed caution about the future, Tellabs began a deep process of self-examination.”
Id.
13
K. Tellabs’s Inventory
Inventory turns measure the rate of turnaround of Tellabs’s inventory, with a
*891
lower number signifying slower turnaround. (R. 324-1, ¶ 55.) Notebaert testified that “[i]nventory turns are an important facet of the financials of the company” and that in May 2001 he was concerned that inventory turns were low.
(Id.;
R. 345-1, Resp. ¶ 55.) Tellabs’s Senior Vice President, Global Business Operations, John Kohler explained: “Consume the inventory, the inventory turns go up. If the inventory is not consumed, the inventory turns will go down.” (R. 324-1, ¶ 55.) Inventory turns were among the “Trended Key Management Ratios” that the Monthly Executive Financial Summary, circulated among senior management, regularly reported. (R. 324-1, ¶ 56.) In addition to declining sales, however, inventory turns may decrease due to a variety of factors. Jackman testified that lower inventory turn numbers could mean that the company is “ramping up inventories in anticipation of later orders” or that sales are low. (R. 330-1, Ex. 1007, p. 114.) Ryan testified that declining inventory turns could be a good or bad sign, and that declining inventory turns in late 2000 and early 2001 were due to “new product introduction” and “field trial activities,” as well as build up of TITAN 6500 and 6100 inventory (R. 351-1, Ex. 119, p. 71-72, 133-34). Ryan also testified that Tellabs increased its supply of certain parts due to shortages in first quarter 2000.
Id.
Total inventory turns for the TITAN 5500 were lower in fourth quarter 2000 than they were in earlier periods. (R. 330-31, Ex. 1215.) Inventory turns for both the TITAN 5500 and total worldwide inventory turns decreased from first quarter 2001 through third quarter 2001.
Id.
In addition, inventory turns for the TITAN 5500 dropped during the Class Period. Specifically, inventory turns for the TITAN 5500 were as follows in 2000 and 2001: second quarter 2000 (6.9, 7.3, and 8.5), third quarter 2000 (7.0, 6.4, and 6.7), fourth quarter 2000 (4.9, 4.1, and 6.7), first quarter 2001 (5.4, 5.2, and 4.8), second quarter 2001 (3.5, 2.6, and 1.7), third quarter 2001 (1.5, 1.8 and 1.9), and October of fourth quarter 2001(1.9). (R. 330-17, Ex. 1084, Ex. 1213). According to Tellabs, a “more normal level” of inventory turns is six. (R. 324-1, ¶ 56.)
In a report to the Audit Commit tee dated January 19, 2001, Tellabs’s auditor Ernst & Young stated:
During fiscal 2000, the inventory balance increased approximately 130% over the 1999 inventory balance. While this increase is partially due to required stockpiling of certain parts that are in short supply, inventory buildup for new product introductions and planned increased sales levels, it appears the Company is carrying higher levels of inventory than may be required which increases the risk of inventory obsolescence.
We recommend the Company perform a detailed analysis of its inventory balances by product line against projected sales levels and adjust inventory levels accordingly.
(R. 330-18, Ex. 1085, TEL 011008.) Tel-labs management responded:
We have compared inventory levels against projected sales forecast by product as recommended. We have incorporated this analysis into our monthly reporting process. The recent analysis revealed three areas that need closer review. Formal teams have been created to review Cablespan, SALIX, and Titan 5500 inventory levels---- Recently we have experienced long lead times on certain parts that create a supply pipeline which can be difficult to turn off given actual demand is lower than expected.
Id.
On January 20, 2001, Ryan wrote John Kohler: “[Tjhere has been such a continu
*892
eras sharp increase in inventories (and decrease in turnover) in each quarter this year [i.e., 2000].” (R. 324-1, ¶58.) On March 4, 2001, Ryan wrote Notebaert, Jackman, and others, referring to “higher ‘investments’ in inventories (which increased by 500% in 2000, and 300% in January 2001).” And, in an April 22, 2001 email to McCarthy, Pfefferle, Tatara, Kohler, and others, Ryan commented: “our inventory has multiplied faster than rabbits” and “we are potentially facing a $90-160M excess inventory write-off.”
Id.
In a May 17, 2001 letter to Birck regarding April 2001 financial results, Notebaert wrote, “[inventory turns at 2.5 [for April 2001] were the lowest since the company started. This resulted from low sales and fulfillment of prior parts orders.”
Id.
L. Fourth Quarter and Full Year 2000 Financial Statements
With regard to Tellabs’s fourth quarter 2000 and full year 2000 financial statements, Plaintiffs point to a number of transactions to argue that Tellabs engaged in “unnatural” deals and channel stuffing.
14
As general support for these practices, Plaintiffs first point to a November 21, 2000 memorandum from Pfefferle to Tatara, Vice President Product Marketing, regarding “Potential Opportunities to Increase 4Q Revenue” in which Pfefferle made “some suggestions for you to consider to increase 4Q revenue opportunities.” (R. 324-1, ¶ 60.) Pfefferle specifically suggested that marketing personnel offer to help sales push particular products due to abundant supply, offer extended terms to customers facing budgetary constraints as a last resort offer, and offer sales discounts to incentive sales.
Id.
Plaintiffs also point to the deposition testimony of various Tellabs employees. Edy Norek, Tellabs’s Associate Marketing Manager, testified there was “an edict” from “[u]p-per management” “to try to push modules on the customer, whether they needed it or not.” (R. 330-1, Ex. 1013, pp. 91-92.) Joling also testified that Notebaert suggested selling some of the equipment that SBC was expected to purchase in first quarter 2001 to Telcobuy in fourth quarter 2000 (R. 330-1, Ex. 1008, pp. 114-15.)
A number of Tellabs employees testified that Tellabs did not ship unordered products to customers. Richard LaDuca testified that Verizon would provide a purchase order to Tellabs for every system Verizon purchased before Tellabs shipped the product. (R. 301-4, Ex. 26, p. 104.) John Kohler testified that Tellabs did not ship or invoice any goods that had not yet been ordered. (R. 301-5, Ex. 33, pp. 72-73; see
also
R. 301-3, Ex. 18, p. 509.) Indeed, Tellabs’s guidelines on revenue recognition required a “[p]roperly approved purchase order” or a signed contract before Tellabs could recognize revenue on a sale. (R. 336-1, ¶ 62; R. 301-12, Ex. 75, TEL 362171.) Specifically, Tellabs’s standard revenue recognition policy, issued on February 28, 2001, stated: “Revenue recognition is not dependent upon Customer Acceptance, as the Demonstrated acceptance criteria have been satisfied. Product revenue is recognized upon transfer of title (other than a security interest) and risk of loss to the customer. This usually occurs upon shipment or delivery, depending upon the shipping terms of the contract. Revenue for services is recorded upon completion of the services.” (R. 330-18,
*893
Ex. 1090.) Tellabs’s 2000 Annual Report also explains: “Product revenue is recognized when all significant contractual obligations have been met, including the terms of the shipment, and collection of the resulting receivable is reasonably assured.” (R. 324-1, ¶ 62.)
Plaintiffs also highlight that, in first quarter 2001, returns of all products totaled $3.4 million, including $2,158 million returns of the TITAN 5500. (R. 336-1, ¶ 63.) These returns totaled less than the returns in the same quarter during 2000, even though revenue in fourth quarter 2000 was 42% higher than in fourth quarter 1999.
Id.
Returns of the TITAN 5500 in first quarter 2001 were also lower than returns in the previous two quarters.
Id.
Plaintiffs also highlight a series of specific transactions, detailed in the following sections, which they contend reflect “channel stuffing” or unnatural deals. Despite the returns Tellabs accepted and the transactions detailed below, Tellabs’s CFO signed off on its 2000 financial statements. In addition, an independent auditor, Ernst & Young, LLP, issued an opinion that Tellabs’s balance sheets as of December 29, 2000 presented fairly, in all material respects, the consolidated financial position of Tellabs as of December 29, 2000. (R. 301-1, Ex. 3, TEL 258062.)
1. Telcobuy
Telcobuy was a “value added reseller” during the Class Period. (R. 336-1, ¶ 66.) As such, Telcobuy would purchase products from Tellabs and then resell those products to its customer, SBC.
Id.
An un-executed letter dated October 16, 2000 documents a draft agreement under which Tellabs would agreed to extend payment terms for Telcobuy on orders that Telcobuy placed on behalf of SBC during fourth quarter 2000. (R. 330-18, Ex. 1094.) Denise Feigh, who supervised sales to value added resellers such as Telcobuy, testified that the draft agreement was a proposal from Tellabs to Telcobuy to purchase TITAN 5500
systems
for resale to SBC, not port modules (“PICS”). (R. 351-1, Ex. 122, pp. 181-84, 195-96, 209.) One of the terms of the proposed agreement was that “Telcobuy.com must have a valid purchase order from SBC.” (R. 330-18, Ex. 1094.) Feigh explained that while agreements for TITAN 5500
systems
generally required a purchase order from the end-customer (because a large piece of equipment such as a TITAN 5500 system could not be delivered without, for example, specifications as to size, location, and timing of installation), agreements for PICs did not. (R. 351-1, Ex. 122, pp. 181— 84,195-96, 209.)
In addition, on December 19, 2000, Telcobuy placed an order for $50.4 million of TITAN 5500 PICS from Tellabs. (R. 324-1, ¶ 65; R. 336-1, ¶ 68.) As part of that deal, Tellabs gave Telcobuy price discounts totaling 8% and 80-day payment terms. (R. 324-1, ¶ 65; R. 301-14, Ex. 83, TEL 817019.) Telcobuy issued a purchase order for the $50.4 million in products. (R. 301-14, Ex. 83.) The amount ordered by Telcobuy in December 2000, which was intended to fill SBC’s requirements during first quarter 2001, was based on an historical analysis of the amount and mix of modules ordered by SBC in previous years. (R. 336-1, ¶ 68.) Joling testified that he considered “the size of the discounts unusual in the normal course of business.” (R. 324-1, ¶ 65.) He also stated that this was “a major purchase” “that would have been several months worth of product that SBC may have used.” M
15
*894
He further explained that “Tellabs gave them [Telcobuy] enticements to take a large amount of inventory based on historical usage patterns from SBC under the hope that it would be sold.” (R. 324-1, ¶ 65.) According to Joling, Notebaert personally “directed” him to proceed with the order so that Tellabs could recognize additional revenue in 2000.
Id.
At the time it made the deal, Tellabs was aware that SBC was deferring spending until 2001. (R. 330-18, Ex. 1099.)
In 2001, however, the “Southwestern Bell” segment of SBC did not place orders for the modules at the expected rate. (R. 336-1, ¶ 68; R. 324-1, ¶ 69.) Although Tellabs shipped the $51 million order to Telcobuy in December, by February 2001, Telcobuy had shipped less than $2 million of inventory to SBC. (R. 324-1, ¶ 66.) On February 23, 2001, Denise Feigh, Manager Global Sales Operations, wrote Gustafsson, urging him to assist Telcobuy: “Please support our cause on delivering on a promise (we will help Telcobuy move the port modules) that was made to a partner when they helped us at a critical time.”
Id.
Tellabs attempted to assist Telcobuy to sell these modules, including by working with other geographic portions of SBC that were purchasing the TITAN 5500, in an effort to clean up the accounts receivables. (R. 336-1, ¶ 68.) In May 2001, Tellabs agreed to allow Telcobuy to return $12 million of the $50 million order of mostly TITAN 5500 equipment, despite the fact that Telcobuy’s credit did not allow a right of return.
Id.;
R. 324-1, ¶ 66, 69. In an email prior to the return, Joling stated that “[i]t is my opinion that we should take back the Telcobuy 6.1 deal. SBC did not come through on this earlier commitment and we should no longer hold Telcobuy to this. Under normal situations we would not have run this through Telcobuy without a firm SBC [purchase] order.” (R. 330-18, Ex. 1097, TEL 654604.) There is no indication in Joling’s email, however, 'that Tellabs violated any contractual provision relating to purchase orders. On May 18, Tellabs accepted return of $12 million of port modules “that were shipped out in December of 2000 that a) [do] not have an SBC purchase order for, or b) [are] outside the SBC forecast through November 2001.” (R. 324-1, ¶ 69.) In addition, on June 1, 2001, Tellabs recorded returns from Telcobuy for full credit, totaling $28,632,968 (one return for $23,338,398 and another for $5,294,570).
Id.
These returns related to the product shipped to Telcobuy in fourth quarter 2000 (on December 21, 2000) and first and second quarters 2001 (on March 30 and April 4, 2001).
Id.
Feigh testified that Tellabs always had a purchase order before shipping product and that the agreements between Telcobuy and Tellabs did not provide Telcobuy a right of return. (R. 336-1, ¶ 69.) Joling testified that Telcobuy did not tell him that Tellabs had shipped Telcobuy product that Telcobuy did not want and that Tellabs gave Telcobuy “enticements,” or discounts, to buy TITAN 5500 modules which Telcobuy intended to resell to SBC. (R. 336-1, ¶ 70.)
In addition, Tellabs gave Telcobuy discounts of
1%
and 3% on certain orders in first quarter 2001 that had the effect of causing revenue that Tellabs had expected from SBC in later quarters of 2001 to be booked in first quarter 2001. (R. 324-1, ¶ 67.) Moreover, on March 27, 2001, Steve McCarthy wrote to Mike Mayszak, Group Manager, Business Management, Regional Bell Operating Companies, about a deal
*895
with Telcobuy for a $7 million TITAN modules order. He cautioned:
My opinion is that we are setting a dangerous precedent by cutting another end of quarter deal with Telcobuy. By doing this
2
quarters in a row we now have established a pattern of behavior that will be used against us in the future. Ultimately, if we need this as the last $7M to make the quarter then we go as far as we did last quarter for the $50M which was an additional 6% discount over their contract discount of
2%.
(R. 324-1, ¶ 68.) The same day, during a phone conversation with Mayszak and Jim Roche, Manager of the Telcobuy account, Joling stated he “didn’t think it was appropriate to add an additional 7 million to an inventory that was already swollen.... ” Id.
16
Dawn Pawlowski, Tellabs’s revenue recognition
manager,
reviewed the December 2000 Telcobuy transaction and found that it was in conformance revenue recognition requirements. She conditioned her approval on a series of statements including that Telcobuy did not have a contractual right to return equipment. (R. 301-14, Ex. 86.) Pawlowski did, however, indicate that a net ninety day payment “seems a little long,” but left the issue to the judgment of Andrea Rebmann and Mark Striepling, Tellabs’s credit managers.
Id.
Pawlowski was aware that Telcobuy was relying on SBC for resources to pay for the product.
Id.
Pawlowski and Striepling were responsible for making the determination about revenue recognition, and Notebaert was not involved in any respect in making this determination.
Id.
2. Verizon
During a strike at Verizon in the summer of 2000, Verizon asked Tellabs to lend employees to Verizon to help fill out planning documents. (R. 336-1, ¶ 64.) Joling, a former Tellabs employee who was the head of sales for SBC, testified that Tel-labs used channel stuffing as a strategy and that a co-worker who worked under LaDuca on the Verizon account told him that Tellabs employees “went into Verizon and actually wrote the engineering documents and the purchase orders for the Tellabs equipment while they were on strike.” (R. 336-1, ¶65; R. 330-1, Ex. 1008, p. 103.) Joling, however, also testified that he had no connection to the Verizon sales account and that he has no personal knowledge of Tellabs employees writing purchase orders for Verizon.
Id.
He further testified that he did not necessarily believe that purchase orders were sent to Verizon that Verizon never signed off on. (R. 301-1, Ex. 1008, p. 189.) Indeed, Verizon had authorized the activities of the Tellabs employees assisting Verizon and had approved all purchase orders within Verizon before Verizon sent them to Tellabs to fill. (R. 336-1, ¶ 64.)
In addition, in October 2000, with Notebaert’s knowledge, Tellabs concluded an arrangement with Verizon that allowed Verizon to resubmit as turnkey orders, which were not to be invoiced until 2001, up to $10 million of orders that Verizon had already placed. (R. 324-1, ¶ 72.) Rick LaDuca, Verizon Account Manager, explained that turnkey “is a contract amendment that states that we will not invoice them until 2001.”
Id.
In other words, turnkey is simply an extended payment term.
Id.
In exchange, Verizon committed to place an additional $75 million to $100 million in new, non-turnkey orders, which were to be invoiced in late Decem
*896
ber 2000 “SO THAT VERIZON ISN’T REQUIRED TO PAY UNTIL NEXT YEAR,” although Tellabs would recognize the revenue in fourth quarter 2000.
Id.
In an October 23, 2000 email, LaDuca acknowledged: “THE AGREEMENT TO INVOICE LATE IN DECEMBER WAS A VERBAL AGREEMENT BETWEEN MYSELF AND CHUCK DUNSEY [Verizon] AS A VEHICLE TO GET ADDITIONAL BUSINESS IN 4Q. OTHERWISE VERIZON WOULD WAIT UNTIL 2001 TO PLACE THE ORDERS!!”
Id.
Tellabs sought to avoid pushing out sales slated for shipment in September to fourth quarter 2000 to avoid those sales becoming part of the turnkey deal. (R. 330-19, Ex. 1113.) Tellabs and Verizon also discussed a November 2000 deal, but there is no evidence that the deal ever occurred. (R. 330-19, Ex. 1119.)
In March 2001, Tellabs made a commitment to Verizon to provide a $3 million credit for future services in exchange for Verizon’s placing $20 million of purchase orders for TITAN 5500 products for shipment in first quarter 2001, rather than second or third quarter 2001. (R. 324-1, ¶ 75.) Ultimately, Verizon purchased only $11 million of equipment, and Tellabs reduced the credit to $2 million.
Id.
This caused revenue that Tellabs had expected from Verizon in later quarters of 2001 to be booked in first quarter 2001. (R. 345-1, RespJ 75.) Tatara wrote: “the actual equipment that was associated with the $11M in IQ orders will now not be installed until 2002 ...” (R. 330-19, Ex. 1125.) In addition, a Special Deal, Credit and Revenue Recognition Authorization Summary for first quarter 2001 listed a $13 million “approved special deal” with Verizon. (R. 330-19, Ex. 1126.) It is unclear whether the special deal, however, is associated with the March 2001 agreement, and McCarthy testified that the document was a list of deals that did not materialize during first quarter 2001, though some materialized later. (R. 351-1, Ex. 118, pp. 151-52.)
Notes from an April 27, 2001 meeting reveal Verizon’s concerns regarding the fact that Tellabs had shipped products to Verizon well before Verizon’s installation dates. (R. 330-19, Ex. 1129.) The meeting notes indicate that Tellabs shipped products to Verizon when there was no connection between the installation date and the ship date, and that in some cases the site was not ready for installation or installation crews were not available.
Id.
Verizon thus informed Tellabs that it would not accept equipment del

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2477931. Public record. Not legal advice.