Appendix — Visnic v. Nortel Networks Corp.

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OPINION OF THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT, DATED AND DECIDED MAY

19, 2004

;

2a

United States Court of Appeals,

Second Circuit.

ONTARIO PUBLIC SERVICE EMPLOYEES UNION

PENSION TRUST FUND, Lead Plaintiff,

Eli Weinstein, on behalf of himself and all others

similarly situated, M & G

Investment Management Limited and Axa Investment

Managers U.K. Ltd.,

Plaintiffs,

Peter S. Visnic, Michael Grynberg, Leroy Hibbitts, Said

Kaleem and

Philip Weisburgh Ira, Plaintiffs-Appellants,

v.

NORTEL NETWORKS CORPORATION, John Andrew

Roth, William F. Connor, Chahram

Bolouri and Frank Dunn, Defendants-Appellants.

Docket No. 03-7608.

Argued: Nov. 19, 2003.

Decided: May 19, 2004.

Background: Investors in fiber optic supplier brought

securities fraud action against telecommunications

service provider, which had business relationship with

supplier, for misstatements made by provider. The United

States District Court for the Southern District of New

York, Richard M. Berman, J., dismissed complaint.

Investors appealed.

Holding: The Court of Appeals, Pooler, Circuit Judge,

held that: investors lacked standing.

Affirmed.

Stockholders do not have standing to sue under Section

10(b) and Rule 10b-5 when company whose stock they

purchased is negatively impacted by material

misstatement of another company, whose stock they do

not purchase. Securities Exchange Act of 1934, § 10(b), 15

U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5.

*28 Dennis J. Johnson, Johnson & Perkison (Jacob B.

Perkison and James P. Bonner, Shalov Stone & Bonner

3a

LLP, New York, NY, on the brief), South Burlington, VT,

for Plaintiffs-Appellants.

Stuart J. Baskin, Shearman & Sterling LLP (Tai H. Park,

on the brief), New York, NY, for Defendants-Appellees.

Before: OAKES, POOLER, and WESLEY, Circuit Judges.

POOLER, Circuit Judge.

This case requires us to decide whether an individual has

standing to sue a company pursuant to Section 10(b) of

the Securities Exchange Act of 1934 and Rule 10b-5, for

making a material misstatement when the individual

purchased the security of a company other than the one

that made the misstatement. Plaintiffs Peter S. Visnic,

Michael Grynberg, Leroy Hibbits, Sajid Kaleem and

Philip Weisburgh IRA appeal from the May 14, 2003,

judgment of the United States District Court for the

Southern District of New York (Richard M. Berman,

Judge ), dismissing their complaint *29 with prejudice,

pursuant to Fed.R.Civ.P. 12(b)(6). We hold that plaintiffs

lack standing under these circumstances and affirm.

BACKGROUND

This is an appeal from a dismissal pursuant to

Fed.R.Civ.P. 12(b)(6). The facts that follow are not

disputed or are taken from the complaint. See Scheuer v.

Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90

(1974). Nortel Networks Corporation ("Nortel") is a global

supplier of telecommunications services while JDS

Uniphase Corporation ("JDS") manufactures and supplies

fiber optic components. Nortel and JDS had been involved

in a number of business relationships, and in January,

2001, Nortel was JDS's largest customer, accounting for

10-15% of JDS's revenues. Both companies are publicly

traded and, while they appear to have maintained a

healthy business relationship, nothing in the record

indicates that the companies shared any management

structures.

4a

On January 16, 2001, market analysts and news agencies

began reporting that Nortel and JDS were on the verge of

consummating a transaction that would transfer JDS's

laser business to Nortel, in exchange for Nortel stock. On

February 6, 2001, Nortel and JDS confirmed that JDS

was selling their laser business to Nortel in exchange for

$2.5 billion in Nortel stock and a promise of increased

fiber optic component purchases. This announcement,

plaintiffs contend, caused the price of JDS shares to

increase, as market analysts determined that this

transaction would make it more likely that JDS would

meet its 2001 financial projections. On February 12, 2001,

the transaction closed, and Nortel filed a Form 8-K with

the SEC, informing the public that it had completed the

deal for $2.5 billion in stock.

Meanwhile, from January 18, 2001, to February 15, 2001,

Nortel publicly indicated that it saw strong demand for its

fiber optics products and expected 30% growth in revenue

and earnings for 2001. Plaintiffs claim that these

assertions not only improved the value of Nortel's stock,

but that because JDS made optimistic projections for its

own business based on Nortel's claims, JDS's stock price

reacted positively as well. However, on February 15, 2001,

Nortel announced that it was cutting revenue estimates

for the quarter by $1.7 billion and that revenue growth

would be closer to 15% than 30%. Following this

announcement, the value of both Nortel and JDS shares

tumbled in heavy trading.

Plaintiffs allege that Nortel had known since at least the

third quarter of 2000 that the demand for its products

was falling and that it had booked revenue from 2001

during the third and fourth quarters of 2000 in order to

meet analyst expectations for 2000. The need to resort to

these radical tactics in 2000 did not prevent Nortel from

setting lofty goals for 2001 and making representations

that the demand for its products was growing. Thus,

plaintiffs contend that all of the financial filings and press

releases regarding earnings made by Nortel from January

18, 2001, to February 15, 2001, were materially

misleading because they incorporated inaccurate

accounting results and unfounded projections.

5a

District Court Proceedings

After the dust from Nortel's revenue adjustment settled, a

number of Nortel shareholders filed class action lawsuits

against the company pursuant to Section 10(b) of the

Securities Exchange Act of 1934 (the "Exchange Act") and

Rule 10b-5. These lawsuits were consolidated into a single

class action lawsuit (the "Nortel Complaint"). In addition,

several JDS shareholders filed a class action complaint

*30 against Nortel under the same securities laws (the

"JDS Complaint"). The JDS Complaint was routed to the

judge handling the Nortel Complaint, who consolidated

the two actions for motion practice and discovery only.

On April 1, 2002, Nortel moved to dismiss the JDS

Complaint for lack of standing pursuant to Fed.R.Civ.P.

12(b)(6). [FN1] After briefing, on January 3, 2003, the

district court granted Nortel's motion. Citing Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct.

1917, 44 L.Ed.2d 539 (1975) and Birnbaum v. Newport

Steel Corp., 193 F.2d 461 (2d Cir.1952), the court held

that the JDS shareholders did not have standing because

they did not purchase or sell any Nortel stock. In addition,

the district court concluded that plaintiffs did not satisfy

the "in connection with" requirement of Section 10(b) and

Rule 10b-5 as Nortel's statements concerned only its own

financial state, not that of JDS.

FN1. Nortel also moved to dismiss both the JDS

Complaint and Nortel Complaint on the basis that

neither adequately alleged that Nortel made any

actionable misstatements of material fact, or that

Nortel acted with the requisite scienter. The

district court held that the Nortel Complaint

satisfied these requirements and dismissed the

JDS Complaint on other grounds.

On May 14, 2003, the district court entered a Final

Judgment Order, dismissing the JDS Complaint with

prejudice. Plaintiffs now appeal.

6a

DISCUSSION

This Court reviews de novo a district court's Rule 12(b)(6)

dismissal of a complaint. Ganino v. Citizens Utilities Co.,

228 F.3d 154, 161 (2d Cir.2000). In doing so, we must

"{accept] all factual allegations in the complaint as true

and [draw] all reasonable inferences in the plaintiffs'

favor." Id.

Section 10(b) of the Securities Exchange Act of 1934, 15

U.S.C. § 78a et seq., provides that:

It shall be unlawful for any person, directly or

indirectly, by the use of any means or instrumentality

of interstate commerce or of the mails, or of any

facility of any national securities exchange ... (b) [t]o

use or employ, in connection with the purchase or sale

of any security registered on a national securities

exchange or any security not so registered, any

manipulative or deceptive device or contrivance in

contravention of such rules and regulations as the

Commission may prescribe as necessary or

appropriate in the public interest or for the protection

of investors.

15 U.S.C. § 78).

In accordance with this mandate, the U.S. Securities and

Exchange Commission (the "SEC") adopted a number of

rules, most notably Rule 10b-5. 17 C.F.R. § 240.10b-5.

Rule 10b-5 provides that it is unlawful "(a) [t]o employ

any device, scheme or artifice to defraud, (b) [tlo make

any untrue statement of a material fact or to omit to state

a material fact necessary in order to make the statements

made, in the light of the circumstances under which they

were made, not misleading, or (c) [tlo engage in any act,

practice, or course of business which operates or would

operate as a fraud or deceit upon any person, in

connection with the purchase or sale of any security." Id.

Ta

The language of Section 10(b) and Rule 10b-5 does not

explicitly create a private right of action. In fact, the

legislative history fails to indicate whether Congress even

contemplated creating such a right. *31 Blue Chip Stamps

v. Manor Drug Stores, 421 U.S. 723, 729-30, 95 S.Ct.

1917, 44 L.Ed.2d 539 (1975) (citing Note, Implied

Liability Under the Securities Exchange Act, 61

Harv.L.Rev. 858, 861 (1948); A. BROMBERG,

SECURITIES LAW: FRAUD--SEC RULE 10b-5 §

2.2(300)-(340) (1968); s. Rep. No.792, 73d Cong., 2d Sess.,

5-6 (1934)). Nevertheless, courts long have held that a

private right of action was indeed created. See eg.,

Kardon v. National Gypsum Co., 69 F. Supp. 512, 514

(E.D.Pa.1946), Superintendent of Ins. v. Banker's Life &

Cas. Co., 404 U.S. 6, 13 n. 9, 92 S.Ct. 165, 30 L.Ed.2d 128

(1971). This understanding of Congress' intent supports

the conclusion that private enforcement of SEC rules —

“[provides] a necessary supplement to Commission

action." J.J. Case Co. v. Borak, 377 U.S. 426, 432, 84 S.Ct.

1555, 12 L.Ed.2d 423 (1964).

However, the private right of action is not unlimited. The

Supreme Court has explained that " [w]hen we deal with

private actions under Rule 10b-5, we deal with a judicial

oak which has grown from little more than a legislative

acorn.... It is therefore proper that we consider, in

addition to the factors already discussed, what may be

described as policy considerations when we come to flesh

out the portions of the law with respect to which neither

the congressional enactment nor the administrative

regulations offer conclusive guidance." Blue Chip Stamps,

421 U.S. at 737, 95 S.Ct. 1917. While courts were quick to

recognize a private right of action under Rule 10b-5, they

were equally quick to set limits on it. Indeed, our court

was one of the first to restrict Rule 10b-5's private right of

action. In Birnbaum v. Newport Steel Corp., 193 F.2d 461

(2d Cir.1952), a group of Newport Steel shareholders tried

to bring suit against their company and its directors

pursuant to Rule 10b-5. Jd. at 462. They complained that

one of the directors, who also held a controlling 40%

interest in Newport Steel, had broken off merger talks

with another steel company and had instead sold his

stock to a third steel company in order to realize a control

8a

premium. Jd. In explaining the transaction to the other

shareholders, he told them that merger talks had broken

down because of the "uncertain international situation."

Id. They claimed that this misrepresentation, along with

the director's sale of securities was enough to trigger

liability under Rule 10b-5. Jd. We found no standing,

holding that Rule 10b-5 "was directed solely at that type

of misrepresentation or fraudulent practice usually

associated with the sale or purchase of securities" thus

limited the class of plaintiffs who could make use of the

Rule. Id. at 464.

This restrictive view of standing under Rule 10b-5 was

confirmed by the Supreme Court in Blue Chip Stamps. In

that case, the Supreme Court held that individuals who

failed to purchase a stock due to a company's

misrepresentation of the value of its stock did not have

standing to sue under Rule 10b-5 because they were not

purchasers or sellers of the security. Id. at 754-55, 95

S.Ct. 1917.

In reaching its conclusion, the Court relied heavily on an

analysis of congressional intent. Specifically, the Court

found that Section 10(b)(5) of the Exchange Act served the

same goal as the Securities Act of 1933, 15 U.S.C. § 77a et

seq., which was passed in order to prevent companies

from using high pressure sales tactics to intimidate

people into buying their securities. Id. at 752-53, 95 S.Ct.

1917. The Court reasoned that this intent was not

furthered by allowing a cause of action for people who did

not buy the securities. Id. at 754, 95 S.Ct. 1917.

The Court also noted that "[t]here has been widespread

recognition that litigation under Rule 10b-5 presents a

danger of vexatiousness different in degree and in *32

kind from that which accompanies litigation in general."

Id. at 739, 95 S.Ct. 1917. Thus, allowing a cause of action

for non-purchasers would lead to an unacceptable level of

abusive litigation. This problem of abusive litigation was

particularly salient in the securities litigation field

because actions by non-purchasers brought under Rule

10b-5 rely heavily on oral testimony, making them

extremely unpredictable unti! they reach a jury. [FN2] Id.

9a

at 739-745, 95 S.Ct. 1917. Thus, the Court: was concerned

companies could be forced to settle cases that were not

meritorious in order to manage their risk-levels. Jd.

FN2. While the Private Securities Litigation

Reform Act of 1995, Pub.L. No. 104-67, 109 Stat.

737 (1995) (codified in scattered sections of titles

15 and 18 of the United States Code), was enacted

to further limit the problem of potentially abusive

securities litigation, it did so without affecting the

Court's holding in Blue Chip Stamps.

[1] In this case, plaintiffs are quick to point out that they

did purchase securities after the alleged

misrepresentations took place. However, instead of

purchasing securities of the entity that made the alleged

misrepresentations, they purchased securities of a

company that had a business relationship with the

misrepresenter. They claim that they have met the Blue

Chip Stamps standing requirements because they

purchased the security at issue in their lawsuit. They

base this argument on the references in Section 10(b) and

Rule 10b-5 to fraudulent conduct "in connection with the

purchase or sale of any security." 15 U.S.C. § 78) (b)

(emphasis added), 17 C.F.R. § 240.10b-5 (emphasis

added). In plaintiffs' view, the word "any" indicates that

the intent of Congress and the SEC was to create

universal standing for purchasers of securities, allowing

anyone who made use of the markets to sue under Rule

10b-5. They further argue that this interpretation is

consistent with the Supreme Court's understanding that

Congress intended Section 10(b) to be interpreted flexibly

to protect against the ever-evolving nature of securities

fraud. Affiliated Ute Citizens v. United States, 406 U.S.

128, 151, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972).

[2] Plaintiffs assume that the phrase "any security"

includes securities of any company affected in some way

by the misrepresentation and not just securities of the

company that makes the material misstatements.

However, in our view, the phrase indicates that the

regulations reach all types of securities, and not any

Aas Ae, Fy eS ee

RCP EE ies MEE RA ME > TPL a ge ae

10a

affected company's securities. See Thomas Lee Hazen, The

-———Law Of Securities Regulation § 12.4 (4th ed.2002)

(explaining that Rule 10b-5's "any security" language

means that it applies to all types of securities, even those

that are exempt from registration). Furthermore,

plaintiffs' interpretation of this passage is entirely at odds

with the purchaser-seller requirement in Blue Chip

Stamps that "limits the class of plaintiffs to thase who

have at least dealt in the security to which the

prospectus, representation, or omission relates." Blue

Chip Stamps, 421 U.S. at 747, 95 S.Ct. 1917.

Plaintiffs attempt to salvage their case by arguing that

Blue Chip Stamps merely holds that an individual who

does not purchase securities cannot sue under Section

10(b) and Rule 10b-5. They contend that Blue Chip

Stamps has no bearing on the facts of this case, as

plaintiffs did purchase securities. While plaintiffs

correctly identify the factual context of Blue Chip Stamps,

the Court's reasoning is nonetheless valuable in analyzing

plaintiffs' claim. First, in Blue Chip Stamps the Court

embraced the Birnbaum standing limitations as

compatible with the legislative intent of the Exchange

Act. Blue Chip Stamps, 421 U.S. at 733-34, 95 S.Ct. 1917.

The Supreme Court's adoption of Birnbaum is *33

particularly significant because, like the plaintiffs in our

case, the plaintiffs in Birnbaum attempted to stretch the

_ meaning of Rule 10b-5. Birnbaum, 193 F.2d at 462. We

rejected that view of the statute, and the Supreme Court

agreed with our narrow interpretation.

Furthermore, in this case, as in Blue Chip Stamps, to

allow plaintiffs standing would encourage individuals to

engage in potentially abusive litigation. This concern was

based in part on the fact that an individual's claim that

he did not purchase a security would rest almost

exclusively on oral testimony. Blue Chip Stamps, 421 U.S.

at 743, 95 S.Ct. 1917. Because oral testimony cannot be

adequately evaluated until presented to a jury, the Court

wanted to protect companies from having to defend and

settle cases that relied heavily on that form of evidence.

As the Court noted, "the abolition of the Birnbaum rule

would throw open to the trier of fact many rather hazy

lla

issues of historical fact the proof of which depended

almost entirely on oral testimony." Jd. Here, oral

testimony would play a crucial role in proving that

plaintiffs relied on Nortel's financial projections when

they purchased JDS's securities. In a case where the

plaintiff is bringing an action against the company whose

securities he purchased, this testimony is corroborated by

his ownership of the company’s securities. However,

where a plaintiff is bringing an action based on the

statements of a company whose securities he did not

purchase, "(plaintiff's entire testimony could be

dependent upon uncorroborated oral evidence of many of

the crucial elements of his claims and still be sufficient to

go to the jury." Jd. at 746, 95 S.Ct. 1917.

Plaintiffs' also rely on Semerenko v. Cendant Corp., a

Third Circuit case. 223 F.3d 165 (3d Cir.2000). In

Cendant, the American International Group, Inc. ("AIG")

and Cendant Corp. ("Cendant") entered into a bidding

war to claim majority control over American Bankers

Insurance Group, Inc. ("ABI"). Jd. at 170. AIG initiated

the bidding, but Cendant eventually won the war. Jd.

However, before the transaction could be finalizd,

Cendant announced that it had uncovered some

accounting irregularities that would force it to restate its

earnings. Jd. Cendant initially tried to honor its bid for

ABI, but as details of its accounting problems surfaced,

Cendant eventually withdrew from the transaction. Jd. at

171. As soon as Cendant cancelled the merger, individuals

who had purchased shares of ABI after AIG put the

company in play with its initial tender offer filed a 10b-5

class action complaint, alleging that Cendant's

misstatement of its financial condition caused the price of

the ABI stock they purchased to fall.

The Cendant court remanded the case to the district court

to determine whether the "in connection with"

requirement of Rule 10b-5 had been met. Jd. at 177-78.

Plaintiffs argue that by reaching the "in connection with"

requirement, the Cendant court implicitly held that the

plaintiffs had standing to bring their Rule 10b-5 action.

However, the opinion never explicitly addressed the

standing requirement of Rule 10b-5, and this limits its

12a

persuasiveness. It is unclear whether the Cendant court

even considered the standing question and it is

unreasonable to assume that the court believed standing

to be so clearly established that it did not even warrant

discussion in the opinion. Thus, while we take notice of

the result in Cendant, we do not agree with the plaintiffs

that it presents a compelling argument in favor of

standing.

Furthermore, Cendant is easily distinguishable. In

Cendant, the purchasers of ABI stock understood that it

would be exchanged for another company's stock, *34 and

the later purchasers thought that it would be exchanged

for Cendant stock. This understanding created a direct

link between the value of Cendant's stock and ABI's stock

that is not present in this case. Furthermore, because

Cendant was in the process of merging with ABI, its

representations had a much more direct relationship to

the value of ABI's stock than Nortel's statements did to

the value of JDS's stock, given that no merger was

contemplated between these two companies. While there

is a multi-billion dollar transaction involved in both cases,

a merger creates a far more significant relationship

between two companies than does the sale of a business -

unit. Thus, while a potential merger might require a

different outcome, a question that we leave for another

day and about which we express no opinion, what remains

clear is that the plaintiffs in this case do not have the

necessary standing to proceed in an action under Section

10(b) and Rule 10b-5.

Finally, the district court, in finding that the plaintiffs

lacked standing, appeared to conflate the issue of

standing with the question of whether the "in connection

with" requirement had been met. This is misleading

because these are two distinct inquiries. In order for our

court to properly reach the merits of the case, including

the "in connection with" requirement, we must first find

that the parties involved have met the basic requirements

of standing. See Warth v. Seldin, 422 U.S. 490, 498, 95

S.Ct. 2197, 45 L.Ed.2d 343 (1975). Thus, because we find

that the plaintiffs lack standing under Section 10(b), we

do not reach the "in connection with" requirement.

13a

CONCLUSION

[3] Stockholders do not have standing to sue under

Section 10(b) and Rule 10b-5 when the company whose

stock they purchased is negatively impacted by the

material misstatement of another company, whose stock

they do not purchase. Therefore, we affirm the district

court's dismissal of plaintiffs' complaint pursuant to

Fed.R.Civ.P. 12(b)(6).

$e 3

I PO EE er et fe ee eek, ee A ae ee a er

l4a

ORDER OF THE UNITED STATES DISTRICT COURT FOR

THE SOUTHERN DISTRICT OF NEW YORK, DATED AND

FILED JANUARY 3, 2003

15a

United States District Court,

S.D. New York.

ln re NORTEL NETWORKS CORP. SECURITIES

LITIGATION

No. 01 Civ. 1855(RMB).

Jan. 3, 2003.

Investors brought putative securities fraud class actions

against company and its executives. Investors in second

company that sold assets to first company in exchange for

stock also brought securities claims against company. On

motion to dismiss complaints for failure to state claims or

allege fraud with particularity, the District Court,

Berman, J., held that: (1) investors in second company did

not have securities claims based on alleged

misrepresentations about first company's value; (2)

investors in first company adequately alleged materiality;

(3) alleged "soft" opinions were actionable under

allegations; (4) bespeaks caution doctrine did not apply;

(5) safe-harbor provision of Private Securities Litigation

Reform Act (PSLRA) did not apply; and (6) investors

adequately pled scienter by alleging facts indicating

recklessness or knowledge of falsity.

Motions granted in part and denied in part.

Investors adequately pled scienter for purposes of Section

10(b) and Rule 10b-5 by alleging facts indicating

recklessness, including allegation that executives either

knew or should have known that their positive statements

about company's "momentum" were false in light of

common knowledge within company that major sales

orders were headed for serious decline. Securities

Exchange Act of 1934, § 10(b) as amended, 15 U.S.C.A. §

78j(b); 17 C.F.R. § 240.10b-5.

*616 Joshua M. Lifshitz, Peter D. Bull, Bull & Lifshitz,

New York City, John Halebian, Wechsler, Harwood,

Halebian & Feffer, LLP, New York City, Steven

16a

Schulman, Milberg, Weiss, Bershad, Hynes, LLP, New

York City, Mark Smilow, Weiss & Yourman, New York

City, for plaintiffs.

Stuart Baskin, Sherman & Sterling, New York City, Mark

Allen Strauss, Kirby, McInerney & Squire, New York

City, Fred I. Isquith, Wolf, Haldenstein, Adler, Freeman

& Hertz, New York City, Marvin L. Frank, Rabin &

Peckel, LLP, New York City, Richard A. Speirs, Zwerling,

Schacter & Zwerling, LLP, New York City, Marc I. Gross,

Pomerantz, Haudek, Block, Grossman & Gross, LLP, New

York City, Kenneth A. Elan, New York City, Jules Brody,

Stull, Stull & Brody, New York City, Gary S. Graifman,

Robert D. Wilkins, Kantrowiz, Goldhamer, & Graifman,

New York City, Peter L. Masnik, Kalikman & Masnik,

Haddonfield, NJ, Jeffrey Hermann, Cohn, Lifland,

Perlman, Herman & Knopf, NJ, James P. Bonner, Salov,

Stone & Bonner, New York City, Robert C. Susser, New

York City, Brian Berry, CA, Andrew M. Schatz, Hartford,

CT, Joseph Weiss, Weiss & Yourman, New York City, Roy

J. Jacobs, New York City, Shaye Fuchs, NY, James

Bashian, New York City, Laurence Rosen, New York City,

Michael J. Kane, Mager, White & Goldenstein, LLP,

Philadelphia, PA, for defendants.

DECISION AND ORDER

BERMAN, District Judge.

I. Introduction

This Decision and Order resolves Nortel Networks

Corporation's ("Nortel" or "Company") motion(s) to

dismiss, pursuant to Rules 12(b) and 9(a) of the Federal

Rules of Civil Procedure, a series of purported class

actions alleging violations of the federal securities laws,

particularly Section 10(b) of the Securities Exchange Act

of 1934 ("Exchange Act"), 15 U.S.C. § 78) (b), Rule 10b-5

promulgated thereunder, 17 C.F.R. § 240.10b-5, and

Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). The

litigation was initiated following the precipitous decline in

the value of Nortel's common stock on and after February

17a

16, 2001. [FN1] In this (consolidated) *617 action,

purchasers of Nortel common stock and call options

("Nortel Plaintiffs") during the period October 24, 2000

through February 15, 2001 ("Class Period"), filed a Second

Consolidated Amended Class Action Complaint ("Nortel

Complaint" or "NC") against Nortel as well as John

Andrew Roth, Nortel's Chief Executive Officer and

President during the Class Period ("Roth"), Clarence

Chandran, Nortel's Chief Operating Officer during the

Class Period ("Chandran"), and Nortel's Chief Financial

Officer during the Class Period, Frank Dunn ("Dunn").

(Roth, Chandran, and Dunn will be referred to as

"Individual Defendants." The Individual Defendants,

together with Nortel, collectively will be referred to as

"Defendants.")

FN1. Soon after the drop in Nortel's stock, more.

than two dozen suits were filed against the

Company in a number federal district courts. On

October 16, 2002, those actions were consolidated

here.

In a second purported class action, individuals who

purchased the common stock of JDS Uniphase

Corporation ("JDSU") during the period January 18, 2001

through February 15, 2001 ("JDSU Plaintiffs" and,

collectively with the Nortel Plaintiffs, "Plaintiffs"), allege,

as against Nortel and the Individual Defendants,

violations of Sections 10(b) and 20(a) of the Exchange Act

and Rule 10b-5 ("JDSU Complaint" or "JC"). [FN2]

FN2. JDSU, headquartered in both Ontario,

Canada, and San Jose, California, designs and

manufactures products used in fiber-optic

communications. As described infra, in February

2001 Nortel purchased one of JDSU's production

facilities in exchange for Nortel stock. JC ¥ 5

Defendants filed their Joint Motion to Dismiss the Nortel

and JDSU Complaints on August 15, 2002 ("Def.Mem.").

On September 15, 2002, Plaintiffs filed a Joint

Memorandum of Law opposing Defendants' motion

18a

("Pl.Mem."). On September 30, 2002, Defendants filed a

Reply Memorandum ("Def.Reply"). The Court heard (very

helpful) oral argument on December 11, 2002. For the

reasons set forth below, the Court grants

Defendants' motion to dismiss the JDSU Complaint

and denies Defendants' motion to dismiss the

Nortel Complaint.

II. Background

For the purposes of this motion, the allegations of the

Nortel Complaint and the JDSU Complaint are taken as

true. Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir.1998).

Defendant Nortel is a Canadian corporation and one of

the world's largest suppliers of "networking solutions and

other services that support the Internet and other public

and private data, voice, and video networks using wireless

and wireline technologies." NC { 28. Nortel is among the

leaders of the Internet and telecommunications industry,

which, particularly from 1999 through early 2000, became

“very hot" and experienced substantial and rapid growth.

NC 7 44. During 2000, the Internet and

telecommunications sectors began a severe contraction.

NC ¥ 45. By the start of the Nortel Plaintiffs' Class Period

in October 2000, several of Nortel's largest customers

were reducing orders for Nortel products and indicating to

Nortel salespeople that orders for 2001 would be (even)

lower. NC { 5.

On October 24, 2000, Nortel issued an allegedly false and

misleading press release indicating that the Company had

experienced "strong growth" for the quarter ending

September 30, 2000, and that "[lleading the growth again

this quarter, revenues for our Optical Internet Solutions

grew nearly 90% in the quarter compared to the same

period last year," ("October 2000 Announcement"). [FN3]

NC { 66. The *618 October 24 press release went on to

say that "[blased on the momentum we have experienced

during the first nine months and the strong order backlog,

we continue to expect that our percentage growth in 2000

over 1999 will be in the low 40's" and that in 2001 Nortel's

19a

revenue and earnings per share would grow "in the 30 to

35 percent range." NC {J 67-68. The October 2000

Announcement also included "cautionary language,"

stating that "[clertain information included in this press

release is forward-looking and is subject to important

risks," and that "results or events predicted in these

statements may differ materially from actual results or

events." Nortel indicated that:

FN3. "Despite a substantial $7.3 billion in reported

sales and an impressive 42% in reported revenue

growth for the third quarter of 2000, Nortel's third

quarter financial results were below analysts’

expectations." NC J 71.

Factors which could cause results or events to differ from

current expectations include among other things: ... the

impact of rapid technological and market change; ...

general industry and market conditions and growth rates;

international growth and global economics conditions, ...

the uncertainties of the Internet; ... and the impact of

increased provision of customer financing by Nortel

Networks. October 2000 Announcement; Attached as

Exhibit C to Affidavit of Stuart J. Baskin, dated Aug. 15,

2002 ("Baskin Aff."). [FN4]

FN4. These comments were also included in Nortel

press releases dated November 1, 2000 and

December 14, 2000, discussed infra.

According to the Nortel Complaint, the results reported in

the October 2000 Announcement were materially false

and misleading. NC { 76. Specifically, Plaintiffs allege

that Nortel did not experience "strong growth" and did not

have a "strong order backlog" during the third quarter of

2000, "but rather experienced a material decline in the

demand for its products" and "suffered a steady

deterioration of sales and revenues in its Enterprise

Solutions Group, which historically has accounted for a

significant portion of the Company's business." Id.

Plaintiffs further allege that Defendants' "guidance for

2001 (30-35% revenue growth) would be nearly impossible

20a

to achieve in light of contracting Internet and

telecommunications sectors and the fact that defendants

planned to improperly sacrifice a substantial portion of

Nortel's 2001 revenues by pulling those revenues into

2000." NC J 77.

Plaintiffs allege that Nortel's third quarter results were

also materially misstated in the Company's third quarter

2000 Form 10-Q, filed with the Securities and Exchange

Commission ("SEC") on November 7, 2000 ("Third

Quarter Form 10-Q"). NC { 86. In order, allegedly, to

"conceal and temper the impact of the negative market

changes on Nortel's business, defendants engaged in a

variety of practices which caused Nortel's financial results

for the third quarter to be materially enhanced and

misstated in violation of Generally Accepted Accounting

Principles ('GAAP") and SEC reporting rules." Jd. For

example, Plaintiffs allege that the Third Quarter Form

10-Q overstated the Company's results improperly by

recording and reporting revenues from shipments of

products, even though Nortel "vendor financed" these

shipments by extending credit on 100 percent ofthe sale

“price to its customers. NC { 88. According to Plaintiffs,

vendor financing allowed customers to make purchases

that they could not otherwise have made. “Without the

extension of credit and/or infusions of cash from Nortel,

these companies would not have had the funds sufficient

to make the purchases of Nortel products that they did,

and, in many cases, were so cash-poor that *619 they

were on the brink of insolvency at the time they

purchased Nortel products." NC { 55. Plaintiffs allege

that by recognizing revenue from these transactions,

Nortel violated GAAP and the Company's own internal

revenue recognition guideline policies, presumably

because Defendants knew that the customers were unable

to pay for the products. NC {{ 89-93.

—_

Another practice that allegedly was used improperly to

increase reported revenues, involved "pulling forward"

revenue into the third and fourth quarters of 2000. NC {

82. "According to former Nortel employees ‘pulling

forward' is the practice of recording and reporting

revenues from the anticipated sales of products in later

2la

quarters in[ ] an earlier quarter," i.e., in this case,

recognizing in 2000 revenue for anticipated sales in 2001

to 2003. Jd. Plaintiffs also allege that Nortel improperly

recognized revenue based on "letters of intent’ rather

than formal purchase orders. [FN5] NC { 98.

FN5. Plaintiffs allege a number of ways in which

Nortel improperly boosted revenue in the third and

fourth quarters of 2000. "In general, Nortel: (i)

improperly used ‘vendor financing’ to generate

hundreds of millions of dollars of illusory revenues;

(ii) engaged in a series of improper practices that

caused Nortel to recognize hundreds of millions of

dollars of revenue; (iii) failed to properly account

for hundreds of millions of dollars of uncollectible

receivables; and (iv) failed to timely and properly

recognize approximately $12.5 billion in

impairment losses in connection with four of

Nortel's recent Internet and telecommunications

acquisitions until the second quarter of 2001, after

the end of the class period." NC ] 7.

Plaintiffs allege that by September 2000 major Nortel

clients, such as Verizon, WorldCom and AT & T, were

(significantly) scaling back their business with Nortel and

indicating that orders in 2001 would also be significantly

reduced. NC { 83-85. Despite these dramatic business

difficulties, Plaintiffs allege that on November 1, 2000,

Nortel issued another materially false and misleading

press release, reiterating its positive outlook for 2000 and

2001 ("November 2000 Announcement"). NC J 119. The

November 2000 Announcement quoted Roth as saying

that Nortel expected its "percentage growth in revenue

and earnings per share from operations in 2000 over 1999

will be in the low 40's." Jd. Roth further indicated that

"{llooking forward to 2001, we continue to expect the

overall market to grow in excess of 20 percent," and that

Nortel expected "to grow significantly faster than the

market, with expected growth in revenues and earnings

per share from operations in the 30 to 35 percent range"

for 2001. NC { 120.

22a

At Nortel's Annual Investor Conference on November 21,

2000, the Individual Defendants continued to offer

positive, but allegedly false and misleading, reassurances

regarding Nortel's prospects for the fourth quarter of 2000

and for 2001. NC ¥ 125. Roth reiterated that the

Company's sales and profits from operations (excluding

costs of acquisitions) would grow 30 to 35 percent in 2001.

Id. Dunn reaffirmed that Nortel expected to meet its

revenue projections for the first quarter of 2001

Chandran described the demand for fiber-optics as

"inevitable and unstoppable," and predicted 40 percent

growth in the optical networking market. NC 7 126.

On December 14, 2000, Nortel issued another press

release that was "virtually identical to the November 1,

2000 statement, again confirming their previously stated

guidance for 2000 and 2001," ("December 2000

Announcement"). NC { 136. Roth was quoted as saying

that looking forward to 2001, the Company expected "to

grow significantly faster than the market, with

anticipated growth in revenues *620 and earnings per

share from operations in the 30 to 35 percent range." NC

{ 137. Plaintiffs allege that the statements contained in

the December 2000 Announcement were materially false

and misleading when made, in part because Nortel had

experienced a decline in demand for the Company's

products throughout the fourth quarter and because

Defendants knew that Nortel's customers would reduce

their orders in 2001. NC 7 141 ("defendants knew or

recklessly disregarded that in light of significant market

changes, Nortel's customers would continue to reduce

their orders for Nortel products throughout 2001").

Purchase of JDSU's Zurich Business

By December 2000, the Company was engaged in talks

with JDSU regarding Nortel's purchase of JDSU's Zurich,

Switzerland pump laser business ("Zurich Business") for

approximately $3 billion in Nortel stock. JC { 7. JDSU's

Zurich Business "was one of two facilities in the world

that manufactured pump lasers, a key component of the

most advanced fiber-optic networks." JC J 192. Plaintiffs

allege that the Zurich Business purchase was part of

23a

Nortel's strategy of acquiring other telecommunications

companies using Nortel's "highly-priced shares as

currency." NC { 14. The JDSU Plaintiffs allege that

during negotiations between Nortel and JDSU, Nortel

provided JDSU with false and misleading information

regarding the value of Nortel's stock. JC J 132. On

February 6, 2001, JDSU announced the sale of its Zurich

Business to Nortel for $2.5 billion worth of Nortel

common stock in addition to another $500 million in

Nortel stock payable to JDSU if Nortel did not meet

certain purchase commitments. [FN6] JC {J 135-36.

FN6. On February 8, 2001, Nortel Networks

Limited, a wholly owned subsidiary of Nortel,

completed an offering of $1.5 billion of 6.125

percent notes which mature on February 15, 2006.

NC { 188. Plaintiffs allege the "Defendants were ...

motivated to maintain Nortel's stock price at

artificially inflated levels in order to receive

favorable ratings from credit agencies prior to [the]

$1.5 billion bond offering." Id.

Nortel issued another allegedly false and misleading

press release on January 18, 2001, reporting the

Company's results for the fourth quarter and full-year

2000 ("January 2001 Announcement"). Nortel reported

that, for the fourth quarter, revenues increased 34

percent, while earnings per share from operations grew

24 percent. NC 7 152. Roth was quoted as saying that

“the fourth quarter capped a year of exceptional growth,

which was in line with our expectations." Jd.

On February 15, 2001, nine days after the acquisition of

JDSU's Zurich Business, Nortel allegedly reversed course

and issued a press release dramatically lowering the

Company's expectations for the first quarter and fiscal

year 2001 ("February 2001 Announcement"). NC { 165.

The February 2001 Announcement “dramatically reduced

the Company’ s guidance for 2001 growth in revenues and

earnings per share from 30%, as stated less than one

month earlier, to just 15% growth in revenues and 10%

growth in earnings per dias NC { 166. Nortel indicated

24a

that, among other things, the change was due to a "faster

and more severe economic downturn in the United States"

and longer than expected delays in spending by Nortel

customers. NC { 165. In a conference call with investors

following the February 2001 Announcement, Roth said

that the change in outlook was due, in part, to the fact

that "[flaced with limited access to capital, many

telecommunications companies no longer are buying

equipment in anticipation of new voice and data traffic."

NC J 168. "The press release also indicated *621 that the

Company would be laying off thousands of employees and

that the scale back process had already begun." NC { 165.

On February 16, 2001, Nortel's stock price dropped almost

34 percent from its price the day before, i.e. from $29.75

to $19.00. NC J 167. JDSU's stock dropped 21 percent

that same day. JC { 163. By November 2001, Nortel's

quarterly revenue was down more than $3 billion from

2000 and Nortel had cut nearly 28,000 jobs. NC ¥ 174.

Ili. Standard of Review

"Any Rule 12(b)(6) movant for dismissal faces a difficult

(though not insurmountable) hurdle." Harris v. City of

New York, 186 F.3d 243, 247 (2d Cir.1999). "In reviewing

a Rule 12(b)(6) motion, this Court must accept the factual

allegations of the complaint as true and must draw all

reasonable inferences in favor of the plaintiff." Bernheim

v. Litt, 79 F.3d 318, 321 (2d Cir.1996). "The issue is not

whether a plaintiff is likely to prevail ultimately, ‘but

whether the claimant is entitled to offer evidence to

support the claims.'" Gant v. Wallingford Bd. of Educ., 69

F.3d 669 (2d Cir.1995) (quoting Weisman v. LeLandais,

532 F.2d 308, 311 (2d Cir.1976) (per curiam)). "Common

sense requires that courts remember the purpose of a

pleading--to state a claim and provide adequate notice of

that claim. A pleading is not a trial and plaintiffs are not

required to marshal their evidence and sustain a verdict

at this stage." Gabriel Capital, L.P. v. NatWest Finance,

Inc., 122 F.Supp.2d 407, 411 (S.D.N.Y.2000). It has been

said that "(t]he motion to dismiss for failure to state a

claim is disfavored and is seldom granted." Bouer v.

Weisman, 639 F. Supp. 532, 539 (S.D.N.Y.1986) (citing

Arfons v. E.I. du Pont De Nemours & Co., 261 F.2d 434,

25a

435 (2d Cir.1958)).

[1] A Rule 10b-5 plaintiff must comply with Fed.R.Civ.P.

9(b) and plead fraud with particularity, so that

defendants have "a reasonable opportunity to answer the

complaint and ... adequate information to frame a

response." Ryan v. Hunton & Williams, 99 Civ. 5938(JG),

2000 WL 1375265, at *6 (E.D.N.Y. Sept. 20, 2000)

(quoting Ross v. A.H. Robins Co., 607 F.2d 545, 557-58 (2d

Cir.1979)). And, the Private Securities Litigation Reform

Act of 1995 ("PSLRA") requires that, "the complaint shall

specify each statement alleged to have been misleading,

the reason or reasons why the statement is misleading,

and, if an allegation regarding the statement or omission

is made on information and belief, the complaint shall

state with particularity all facts on which that belief is

formed." 15 U.S.C. § 78u-4(b)(1) (1997). "To state a claim

under § 10(b) and the corresponding Rule 10b-5, a

plaintiff must plead that the defendant, in connection

with the purchase or sale of securities, made a materially

false statement or omitted a material fact, with scienter,

and that the plaintiff's reliance on the defendant's action

caused injury to the plaintiff." Ganino v. Citizens Utilities

Co., 228 F.3d 154, 161 (2d Cir.2000).

IV. Analysis

[2] Defendants seek to dismiss the JDSU Complaint on

"standing" grounds. See Def. Mem. at 3. Defendants seek

to dismiss the Nortel Complaint on the grounds that it (i)

fails to allege a misstatement of material fact; and (ii)

fails adequately to allege scienter. [FN7] Id. The *622

JDSU Plaintiffs argue that they have standing based on

the materiality of the Defendants' misleading statements

about Nortel and the allegedly related decline in the

JDSU stock price. Plaintiffs also argue that the Nortel

Complaint adequately alleges "a stream of false

reassurances and aggressive earnings guidance," NC { 6,

including the October 2000 Announcement, the Third

Quarter Form 10-Q, the November 2000 Announcement,

the December 2000 Announcement, the January 2001

Announcement, and the February 2001 Announcement.

See Pl. Mem. at 6. The Nortel Plaintiffs allege that these

26a

misstatements were based, in part, on accounting

violations designed to increase Nortel's reported revenue

in the third and fourth quarter 2000. Jd. Plaintiffs also

contend that the Nortel Complaint sufficiently pleads

scienter through allegations of (both) motive and

opportunity and conscious misbehavior or recklessness.

Pl. Mem. at 4.

FN7. Defendants argue that because "plaintiffs

have failed to plead either a primary violation of

the Act by the individual defendants, or scienter, ..

the Section 20(a) [claim] must therefore be

dismissed." Def. Mem. at 21 n. 20. "Section 20(a)

of the Exchange Act provides that '[e]very person

who ... controls any person liable [for a § 10(b)

violation] ... shall also be liable jointly and

severally with and to the same extent as such

controlled person.' " Ellison v. American Image

Motor Co., Inc., 36 F.Supp.2d 628, 637

(S.D.N.Y.1999) (citation omitted). The Court does

not (here) dismiss the Nortel Plaintiffs' Section

10(b) claim and, therefore, their Section 20(a)

claim also survives.

A. Standing of the JDSU Plaintiffs

[3] Defendants persuasively point out that the JDSU

Plaintiffs, who held JDSU stock during their class period,

neither purchased nor sold Nortel shares and cannot

bring a (private) claim under Rule 10b-5. Def. Mem. at 21.

"Having neither bought nor sold Nortel securities of any

kind, the JDSU plaintiffs seek money damages from

Nortel on the ground that its statements about its own

business performance and prospects adversely affected

JDSU's stock price.... The JDSU plaintiffs’ case is

foreclosed by the Supreme Court decision of Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct.

1917, 44 L.Ed.2d 539 (1975), as well as the seminal

decision of the Second Circuit in Birnbaum v. Newport

Steel Corp., 193 F.2d 461 (2d Cir.1952)." Def. Mem. at 21.

Plaintiffs respond that they are purchasers of securities

(namely JDSU securities) as defined by Blue Chip, and,

therefore, have standing. "Because each named JDSU

27a

Plaintiff and the JDSU Class bought JDSU stock during

the class period ... the Birnbaum purchaser/seller rule is

plainly satisfied." Pl. Mem. at 22. [FN8]

FN8. Plaintiffs argue that "they were injured when

they purchased JDSU stock at prices that were

artificially inflated by defendants’ statements." Pl.

Mem. at 22.

[4] In Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), the Supreme

Court adopted the Birnbaum rule that "the plaintiff class

for purposes of a private damage action unders 10(b) and

Rule 10b-5 [is] limited to actual purchasers and sellers of

securities." [FN9] Blue Chip, 421 U.S. at 730,-95 S.Ct.

1917. The question in Blue Chip was "whether respondent

may base its action on Rule 10b-5 of the Securities and‘

Exchange Commission without having either bought or

sold the securities described in the allegedly misleading

prospectus." 421 U.S. at 727, 95 S.Ct. 1917. The Court

found that the Birnbaum rule "limits the class of

plaintiffs to those who have at least dealt in the security

to which the prospectus, representation, or omission

relates." 421 U.S. at 747, 95 S.Ct. 1917.

F'NY. The Birnbaum rule refers to the holding of

the United States Court of Appeals for the Second

Circuit in Birnbaum v. Newport Steel Corp., 193

F.2d 461 (2d Cir.1952).

The JDSU Plaintiffs acquired JDSU shares during their

class period. They did not purchase or sell the Nortel

securities *623 "to which the prospectus, representation,

or omission relates." See also Holmes v. Sec. Investor

Protection Corp., 503 U.S. 258, 277, 112 S.Ct. 13811, 117

L.Ed.2d 532 (1992) (O'Connor, J., concurring) ("in Blue

Chip ... we confirmed the federal courts' ‘longstanding

acceptance’ of the rule that a plaintiff must have actually

purchased or sold the securities at issue in order to bring

a Rule 10b-5 private damages action") (citations omitted);

Grace v. Rosenstock, 228 F.3d 40, 46 (2d Cir.2000) ("this

Court ruled that no private action under those provisions

28a

is available to persons who were neither buyers nor

sellers of the relevant securities") (citation omitted);

Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts

Inc., 140 F.3d 478, 485 (3d Cir.1998) ( "[iln Birnbaum the

court ... concluded that Rule 10b-5 ‘extended protection

only to the defrauded purchaser or seller’ of the security

at issue") (citations omitted); Jnter-County Resources, Inc.

v. Medical Resources, Inc., 49 F.Supp.2d 682, 683

(S.D.N.Y.1999) ("plaintiff was concededly neither a

purchaser nor a seller of the securities at issuein the

claim, a basic requirement for standing to bring such a

claim"). [FN10]

FN10. The JDSU Complaint revolves around

alleged misrepresentations regarding Nortel

securities which the JDSU Plaintiffs never

purchased. See, e.g., JC { 10 ("Defendants

perpetrated their fraudulent scheme by, among

other false pronouncements, repeatedly informing

investors that Nortel would see growth in revenue

and earnings of 30% during 2001 and that they

continued to see ‘strong market demand’ for

Nortel's products.").

Plaintiffs argue (unpersuasively in the Court's view) that

the "stock at issue" in this case is JDSU stock. Tr. at 32

("In our case the stock at issue is JDSU and by virtue of

their purchases of JDSU, they plainly and simply

satisfied the Birnbaum [/| Blue Chip doctrine.") "Because

defendants' statements were material to JDSU investors,

plaintiffs' purchases were in connection with those

statements." Pl. Mem. at 23.

[5] The United States Court of Appeals for the Second

Circuit has "broadly construed the phrase ‘in connection

with,’ holding that Congress, in using the phrase

‘intended only that the device employed, whatever it

might be, be of a sort that would cause reasonable

investors to rely thereon, and, in connection therewith, so

relying, cause them to purchase or sell a corporation's

securities.’ " Jn re Carter-Wallace, Inc. Secs. Litig., 150

F.3d 153, 156 (2d Cir.1998) (quoting SEC v. Texas Gulf

29a

Sulphur Co., 401 F.2d 833, 860 (2d Cir.1968) (en banc)).

Generally, the requisite connection exists "when the fraud

alleged is that the plaintiff bought or sold a security in

reliance on misrepresentations as to its value." Jn re Ames

Dep't Stores Inc. Stock Litig., 991 F.2d 953, 966 (2d

Cir.1993) (misrepresentations about Ames' business made

in that company's reset note and debenture prospectus

were issued "in connection with" plaintiffs' purchases of

Ames common stock). That connection does not exist

where, as here, the plaintiff does not allege that the

defendant "misled him concerning the value of the

securities he [actually bought or] sold or the consideration

he received in return." Saxe v. E.F. Hutton & Co., Inc.,

789 F.2d 105, 108 (2d Cir.1986); see also Production

Resource Group, LLC v. Stonebridge Ptns. Equity Fund, 6

F.Supp.2d 236, 240 (S.D.N.Y.1998) ("the alleged

misrepresentations made by defendants were not ‘in

connection with' the purchase or sale of securities,

because they did not pertain to the value, nature or

investment characteristics of the securities at issue.")

As Defendants point out, the JDSU Plaintiffs’ allegations

are the "essence of a *624 derivative claim." Def. Reply at

10 (citing Burghart v. Landau, 821 F. Supp. 173, 176

(S.D.N.Y.) affd 9 F.3d 1538 (2d Cir.1993)). And, while

Plaintiffs may be correct that "JDSU may have its own

cause of action for its purchase of Nortel shares at an

inflated price," Pl. Mem. at 22, the JDSU Complaint is not

brought by JDSU or derivatively on its behalf.

Plaintiffs fail to identify an analogous case (from this or

another circuit) that allows, in the circumstances

presented here, a shareholder of one company to bring a

private Section 10(b) or Rule 10b-5 claim against a second

company based on alleged misstatements pertaining to

the second company's stock. Plaintiffs cite to Ames,

discussed above, for the proposition that "it is not a bar to

a 10b-5 action that the allegedly misleading statements

pertain to a security other than the one purchased." Def.

Mem. at 23. The instant ruling is consistent with Ames.

In Ames, the court of appeals held that it was improper

for the district court to dismiss a case where the plaintiffs

were holders of common stock of the same issuer that

30a

allegedly made misrepresentations in connection with its

reset note and debenture offering. Jd. at 961. "[I]t is not a

bar to a 10b-5 action that the false and misleading

statements in a Registration Statement are pertaining to

an issue of a security, be it preferred stock, reset note, or

debenture, or otherwise, which is not the security

purchased." Jd. at 964. The Ames court did not find, as

Plaintiffs contend, that misleading statements of one

issuer are actionable by the holders of securities of a

different issuer upon the facts presented here.

The Plaintiffs also rely upon the decision of the United

States Court of Appeals for the Third Circuit in

Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir.2000).

The Court believes that such reliance does not enhance

the JDSU Plaintiffs’ cause. In Semerenko, a case involving

competing tender offers, the Third Circuit did not, in fact,

resolve the question of “whether the 'in connection with'

test [was] satisfied," but ruled only that the district court

applied the wrong standard. Jd. at 177. In analyzing the

standard of review employed by the district court, the

court of appeals held that alleged misrepresentations by

and about one company (Cendant) could be found to have

been made-"in connection with" the purchase of shares in

a different company (ABI) where, among other things,

Cendant made fraudulent misrepresentations concerning

Cendant's financial condition, and about "its willingness

to complete the tender offer, and its willingness to

complete the proposed merger." Jd. at 171. [FN11]

Cendant shares may have been at issue because it was

"possible that members of the Class would not have

purchased shares of ABI common stock had they been

unable to exchange them for shares of Cendant." Id. at

180. Semerenko does not stand for the proposition

asserted by Plaintiffs here, i.e. that information regarding

the financial condition of Nortel is "material" to the

shareholder(s) of JDSU and is sufficient to give rise to the

pe — Section 10(b) and Rule 10b-5 claims.

12

FN11. In Semerenko, Cendant was competing

against AIG, Inc. to purchase the outstanding

shares of ABI, eventually bidding the tender offer

3la

price up from $47 per share to a final price of $67

per share. Jd. at 171. Cendant signed a merger

agreement with ABI and made a number of public

statements indicating that "it was committed to

completing the merger with ABI." Id. at 170.

Cendant thereafter abandoned its tender offer

plans; it terminated the merger agreement with

ABI and agreed to pay ABI a $400 million break-

up fee. Jd. at 171.

FN12. Plaintiffs also cite to an unpublished

opinion from the United States District Court for

the District of Idaho, Muzinich & Co. v. Raytheon

Co., No. CV-01-284-S-BLW, slip op. at 2-3 (D.Idaho

May 1, 2002), in support of the proposition that

“statements issued about one company or its

securities can, indeed, be ‘in connection with' _

plaintiffs' purchases or sales of another security”.

Pl. Mem. at 25. In Muzinich, unlike the case at

bar, it was alleged that the defendant "knew that

these false financials would be included in WGI's

Form 10-K filings with the [SEC], and that

investors would rely on the Form 10-Ks."

Muzinich, slip op. at 2.

*625 B. Misstatements of Material Fact

Defendants argue that the Nortel Complaint, consisting of

209 paragraphs and 88 pages, fails to identify any

(actionable) material misstatements made during the

Class Period. Def. Mem. at 5. Defendants contend that the

misstatements alleged fall into three categories: (i)

factually accurate statements of historical fact, Def. Mem.

at 7; (ii) expressions of "soft opinion" and "puffery", Def.

Mem. at 7; and (iii) forward looking statements

accompanied by suitable cautionary warnings. Def. Mem.

at 9. Plaintiffs argue that the Nortel Complaint

sufficiently alleges that Defendants’ statements of both

historical results and predictions of future financial

performance were materially misleading. Pl]. Mem. at 5.

Plaintiffs also claim that some of Nortel's forward looking

statements are actionable because they were not

32a

accompanied by sufficient cautionary language and

Defendants did not have a reasonable basis for believing

that Nortel's predictions were accurate. Pl. Mem. at 16.

1. Historical Statements

Plaintiffs allege that the historical results reported in

Nortel's October 2000 and January 2001 Announcements

and the Third Quarter Form 10-K were materially

misstated, among other reasons, because of various

“accounting irregularities perpetrated at Nortel." Pl.

Mem. at 5. Plaintiffs contend that these irregularities

included improper revenue recognition, failure to account

for uncollectible receivables, and GAAP violations relating

to the impairment of assets and caused Nortel's third

quarter, fourth quarter and year-end 2000 results to be

materially (over) enhanced and misleading. See, e.g., NC ]

163 ("As in the 2000 third quarter, in order to conceal the

impact of the significant contraction of the Internet and

telecommunications markets on Nortel's business,

defendants engaged in a number of accounting

improprieties which caused the Company's results for the

year-end 2000 (as reported by defendants on January 18

and 19, 2001) to be materially enhanced and misstated in

violation of GAAP and SEC reporting rules.").

Defendants argue that because "Nortel's 2000 results

were so stellar, and understandably provided the context

for its own ... expectations for 2001, plaintiffs have no

choice but to plead that the results were not real." Def.

Mem. at 11. That is, Defendants contend that Nortel's

results for the third and fourth quarters of 2000 were not

misstated and that Plaintiffs' allegation(s) of accounting

improprieties must "fail as a matter of law." Jd.

Defendants argue that Plaintiffs have neither plead the

alleged accounting improprieties with the requisite

specificity, nor have the Plaintiffs adequately plead the

materiality of the alleged misstatements. Def. Mem. at 12;

see also Transcript of Dec. 11, 2002 Oral Argument ("Tr.")

at 50 ("they plead all of these accounting standards which

are the accounting standards and then if you look at it,

your Honor, you will not find a single fact, other than

Verizon, not a single particularized event other than

33a

Verizon, to try to apply those standards").

a. Accounting Allegations are Adequately Specific

[6] [7] "The complaint must identify the statements

plaintiff asserts were fraudulent *626 and why, in

plaintiff's view, they were fraudulent, specifying who

made them, and where and when they were made." Jn re

Scholastic Corp. Secs. Litig., 252 F.3d 63, 69-70 (2d

Cir.2001). "A statement made in violation of GAAP may

be found to be misleading or inaccurate under the federal

securities laws." SEC v. Caserta, 75 F.Supp.2d 79, 90

(E.D.N.Y.1999); see also In re Quintel Entertainment Inc.

Secs. Litig., 72 F.Supp.2d 283, 293 (S.D.N.Y.1999)

("Although ‘allegations of a violation of GAAP provisions,

without corresponding fraudulent intent are not sufficient

to state a securities fraud claim,' if the Complaint alleges

additional evidence of intent, a violation of GAAP may be

the basis of a § 10(b) claim.") (citation omitted).

[8] The Nortel Complaint alleges a number accounting

practices that may have inflated improperly the

Company's (reported) revenues during the third and

fourth quarter of 2000 including: improper recognition of

revenue from sales based upon letters of intent rather

than formal purchase orders, NC { 98; failure properly to

reflect (through reserves or charges against income) the

risk of "noncollectibility" of unsecured loans extended to

uncreditworthy customers, NC { 108; and failure to

recognize "billions of dollars" in impairment losses on

long-term assets obtained through the Company's

acquisitions. NC ¥ 113. [FN13] The Nortel Complaint

specifically alleges that the Company improperly reported

revenue on sales where Nortel extended 100 percent

vendor-financing to customers, with the knowledge that

those customers could not pay for the product(s). NC { 92.

Plaintiffs contend that revenue from these sales were

“known to be materially uncollectible” and that recording

that revenue violated Nortel's "internal revenue

recognition policies, which, according to Nortel's Form 10-

K for the fiscal year ended December 31, 2000, required

collection to be ‘reasonably assured’ prior to rewgnition."

NC { 93. Plaintiffs allege that this practice led to

recording improperly "hundreds of millions, if not billions,

34a

of dollars" in revenue. NC J 92. These allegations, if true,

are more than a mere "contention that Nortel extended

unwise loans." Def. Mem. at 12. They provide a

(sufficiently) detailed account of “why, in plaintiff's view

[the challenged statements] were fraudulent." Scholastic,

252 F.3d at 69. See also Quintel Entertainment, 72

F.Supp.2d at 293 ("These allegations sufficiently plead

that the financial reports were false or misleading

statements, subject to the requirements of materiality

and scienter, discussed below.").

FN13. Defendants do not appear to challenge a

number of alleged GAAP violations, including

improperly recognizing revenue where "Nortel

shipped interim or substitute products and booked

revenue as though the final products had been

shipped," NC { 100, and improperly recognizing

revenue on the sale of new products prior to the

expiration of the allowable date of

return. NC { 101.

b. Accounting Allegations are Material

[9] Defendants contend that the alleged accounting

improprieties are (individually) immaterial in light of

Nortel's $30 billion in reported revenue for 2000. Def.

Mem. at 12 ("In this case the [materiality] bar is high, as

Nortel had $30 billion in 2000 revenue."). Plaintiffs

respond that the alleged misstatements, taken as a whole,

are "plainly material." Pl. Mem. at 20. "In Nortel's press

releases, conference calls with analysts and periodic SEC

filings, Nortel: (i) reported hundreds of millions, if not

billions of dollars in false revenues ({{ 88-102); (ii) failed

to timely and properly recognize $12.5 billion in

impairment losses from certain of its acquisitions ({{ 113-

18); and (iii) overstated the *627 Company's reported

assets by failing to account for hundreds of millions, if not

billions, of dollars in wholly uncollectible receivables ({{J

103-12)." Id. (emphasis excluded).

"At the pleading stage, a plaintiff satisfies the materiality

requirement of Rule 10b-5 by alleging a statement or

35a

omission that a reasonable investor would have

considered significant in making investment decisions."

Ganino, 228 F.3d at 161. "The determination of

materiality is a mixed question of law and fact that

generally should be presented to a jury." Press v. Chem.

Inv. Servs. Corp., 166 F.3d 529, 538 (2d Cir.1999). A

complaint should not be dismissed "on the ground that

the alleged misstatements or omissions are not material

unless they are so obviously unimportant to a reasonable

investor that reasonable minds could not differ on the

question of their importance." Goldman v. Belden, 754

F.2d 1059, 1067 (2d Cir.1985); see Ganino, 228 F.3d at

162.

"[A]llegations of materiality should not be considered in

isolation." Manavazian v. Atec Group, Inc., 160 F.Supp.2d

468, 478 (E.D.N.Y.2001) Rather, "whether an alleged

misrepresentation or omission is material necessarily

depends on all relevant circumstances of the particular

case." Ganino, 228 F.3d at 162. Looking at all of the

alleged accounting improprieties in the Nortel Complaint,

the Court cannot conclude, as a matter of law, that they

are "so obviously unimportant to a reasonable investor

that reasonable minds could not differ on the question of

their importance." Goldman, 754 F.2d at 1067; see also In

re Revion, Inc. Secs. Litig., 99 Civ. 10192, 2001 WL

293820 at *9 (Mar. 27, 2001) ("A bill and hold transaction

here, an improperly delayed customer credit there, 'and

pretty soon you're talking about real money.' ") (citation

omitted).

2. "Soft-Opinion"

[10] Defendants argue that Nortel's "statements of

prediction, hope, opinion or belief about its own future

performance are not actionable under Rule 10b-5." Def.

Mem. at 7. Plaintiffs respond that the purported

statements of "soft-opinion" are actionable because

“defendants made specific and consistent

misrepresentations, based on purported contemporaneous

facts, regarding Nortel's expected revenues, earnings and

earnings per share for fiscal year-end 2000 and fiscal

2001, and that each of those statements was made with

ee

36a

defendants' actual knowledge or reckless disregard based

upon adverse contrary facts." Pl. Mem. at 16-17 (citation

omitted).

[11] "Statements regarding projections of future

performance may be actionable under Section 10(b) or

Rule 10b-5 if they are worded as guarantees or are

supported by specific statements of fact, or if the speaker

does not genuinely or reasonably believe them" Jn re

International Business Machines Corp. Sec. Litig., 163

F.3d 102, 107 (2d Cir.1998) (citations omitted). Here,

Plaintiffs have alleged that Defendants did not genuinely

or reasonably believe that the purportedly "soft"

statements were true. The November 2000

Announcement, for example, quoted Roth as saying:

Looking forward to 2001, we continue to expect the

overall market to grow in excess of 20 percent.

Given our strong market position and leadership

in high performance Internet solutions, we

continue to expect to grow significantly faster than

the market, with anticipated growth in revenues

and earnings per share from operations in the 30

to 35 percent range.

*628 NC { 120. [FN14] The Nortel Complaint, however,

explicitly alleges: that Defendants did not believe that the

market would grow in excess of 20 percent; that the

Internet and telecommunications markets experienced a

significant contraction in the third quarter of 2000; and

that it would be "nearly impossible" for Nortel to achieve

30 to 35 percent revenue growth in 2001, NC { 123. See

Gabriel Capital, 122 F.Supp.2d at 419 ("Thus, plaintiffs

have alleged that SDI did not genuinely or reasonably

believe that Mini-Mill was 'first class' when it made that

statement.").

FN14. Defendants contend that this statement is

nothing more than a prediction or hope for the

future and is "not actionable as a matter of law."

Def. Mem. at 8.

37a

Several of Nortel's alleged misstatements were not simply

"soft" predictions; rather, they contained recitations of

(allegedly inaccurate) historical facts. In the October 2000

Announcement, for example, Roth stated: "Based on the

momentum we have experienced during the first nine

months and the strong order backlog, we continue to

expect our percentage growth in 2000 over 1999 will be in

the low 40's." NC { 67. Plaintiffs have alleged that there,

in fact, was no such momentum and that there was no

such strong order backlog. NC { 76. See In re APAC

Teleservice, Inc. Secs. Litig., No. 97 Civ. 9145(BSJ), 1999

WL 1052004 at *8 (S.D.N.Y. Nov.19, 1999) ("Linking

future success to present and past performance does not

render statements immune from liability.").

3. Bespeaks Caution and Safe Harbor

Defendants argue that Nortel's forward looking

statements and expressions of opinion were accompanied

by suitable cautionary warnings and, therefore, are not

actionable under the bespeaks caution doctrine, and that

they enjoy "safe-harbor" protection under the Private

Securities Litigation Reform Act ("PSLRA"). Def. Mem. at

9 ("Moreover, the guidance provided by Nortel to the

investing public, as well as the expressions of opinion ...

were all qualified with plentiful cautionary language.").

Plaintiffs argue that Defendants’ "generic warnings" were

insufficient and failed to warn investors about the

“undisclosed, adverse conditions" Defendants knew

existed at the time they made the allegedly misleading

statements. Def. Mem at 18-19 ("Defendants' generic

warnings about potential negative economic trends

‘beyond Nortel's control’ did not alert investors to the

undisclosed, adverse conditions then existing.").

[12] "Under the bespeaks caution doctrine, a

misstatement or omission will be considered immaterial if

cautionary language is sufficiently specific to render

reliance on the false or omitted statement unreasonable."

In re Independent Energy Holdings PLC Secs. Litig., 154

F.Supp.2d 741, 755 (S.D.N.Y.2001). The cautionary

language "must precisely address the substance of the 1

i

:' .

38a

specific statement or omission that is challenged." Jn re

Prudential Sec. Inc. Ltd. Partnerships Litig., 930 F. Supp.

68, 72 (S.D.N.Y.1996). "[N]o degree of cautionary

language will protect material misrepresentations or

omissions where defendants knew their statements were

false when made." Milman v. Box Hill Sys. Corp., 72

F.Supp.2d 220, 231 (S.D.N.Y.1999).

[13] The warnings that accompanied Nortel's public

statements, press releases and SEC filings failed

adequately to warn investors about existing conditions

described (alleged) in the Nortel Complaint. For example,

Nortel's SEC Form 10-K for fiscal year 1999 (also referred

to in Nortel's press releases during 2000), talks of *629

"intense competition in the telecommunications industry,

the highly volatile nature of the technology sector, and ..

‘factors beyond Nortel Networks’ control [including] ...

adverse changes in the specific markets for Nortel

Networks’ products; the conditions in the broader market

for communications ... and the conditions in the domestic

or global economy generally.'" Def. Mem. at 10 (citation

omitted). Plaintiffs do not complain about Nortel's failure

to disclose generic risks. Plaintiffs allege Nortel failed to

disclose negative consequences from specific risks that

-had either already come to pass or were known to be

imminent, i.e. that public statements were made with

actual knowledge that they were false or misleading. See,

e.g., NC ¥ 77 ("defendants had been informed by major

customers prior to the close of the 2000 third quarter that

their orders in the fourth quarter and throughout 2001

would be significantly reduced"); see also Prudential, 930

F. Supp. at 72 ("The doctrine of bespeaks caution provides

no protection to someone who warns his hiking companion

to walk slowly because there might be a ditch ahead when

he knows with near certainty that the Grand Canyon lies

one foot away."). [FN15]

FN15. With respect to vendor financing, "warnings

of specific risks ... do not shelter defendants from

liability if they fail to disclose hard facts critical to

appreciating the magnitude of the risks described."

Credit Suisse First Boston Corp. v. ARM Fin.

Group, Inc., 99 Civ. 12046(WHP), 2001 WL

39a

300733, *8 (S.D.N.Y. Mar. 28, 2001). See Def.

Mem. at 12 n. 14 ("Should [vendor financing]

customers fail to meet their obligations, losses

could be incurred and such losses may have a

material adverse effect on the business, results of

operations, and financial condition of Nortel

Networks").

[14] [15] Under the safe-harbor provisions of the PSLRA,

a statement regarding a forward looking statement

generally does not give rise to a securities fraud claim if

either: (i) it is accompanied by meaningful cautionary

language, or (ii) the plaintiff fails to prove the statement

was made with actual knowledge that it was false or

misleading. See 15 U.S.C. § 78u-5(c).; see also Independent

Energy, 154 F.Supp.2d at 755. However, "it is well

recognized that even when an allegedly false statement

‘has both a forwardlooking aspect and an aspect that

encompasses a representation of present fact,' the safe

harbor provision of the PSLRA does not apply." APAC

Teleservice, 1999 WL 1052004 at *7 (quoting Shaw v.

Digital Equip. Corp., 82 F.3d 1194, 1213 (1st Cir.1996)).

As noted supra, many of the allegedly misleading

statements identified in the Nortel Complaint included

recitations of historical facts. See In re Complete

Management Inc. Securities Litigation, 153 F.Supp.2d

314, 340 (S.D.N.Y.2001) (noting that safe-harbor

provisions “apply to forward-looking statements only, and

not to material omissions or misstatements of historical

fact"). Because the Nortel Complaint alleges that the

Defendants had no basis for their optimistic statements

and already knew (allegedly) that certain risks had

become reality, the misstatements do not fall under the

PSLRA's safe harbor provisions. See Independent Energy,

154 F.Supp.2d at 767.

C. Scienter

Defendants argue that "plaintiffs have failed to 'state

with particularity facts giving rise to a strong inference

that the defendant acted with the required state of mind.’

" Def. Mem. at 16 (quoting 15 U.S.C. § 78u-4(b)(2)).

Plaintiffs respond that the Nortel Complaint alleges both

40a

"motive and opportunity" to commit fraud and "facts that

constitute strong circumstantial evidence of defendants'

conscious misbehavior or recklessness by establishing

that they knew facts or recklessly disregarded *630

information contradicting their public statements." PI.

Mem. at 13. [FN16]

FN16. "Scienter is a necessary element of every

10b-5 action, and though it need not be plead with

‘great specificity,’ the facts alleged in the complaint

must 'give[ ] rise to a "strong inference" of

fraudulent intent.'" Jn re Time Warner Inc. Secs.

Litig., 9 F.3d 259, 268 (2d Cir.1993) (citations

- omitted). "A plaintiff can establish a strong

inference of fraudulent intent in two ways: ‘either

(a) by alleging facts to show that defendants had

both motive and opportunity to commit fraud, or

(b) by alleging facts that constitute strong

circumstantial evidence of conscious misbehavior

or recklessness.’ " Chill v. General Elec. Co., 101

F.3d 263, 267 (2d Cir.1996) (quoting Shields v.

Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d

Cir.1994)).

1. Motive and Opportunity

Defendants argue that "[flar from pleading motive and

opportunity to commit fraud, the [Nortel] Complaint

manages to negate any such motive." Def. Mem. at 17.

Plaintiffs respond by saying: first, that because "Nortel's

success was particularly and highly dependent upon

making acquisitions to sustain its revenue and growth

targets," the Company was "motivated" to mamtain the

market price of its shares, PL Mem. 11, and second,

“Nortel could not have completed its February 8, 2001,

$1.5 billion bond offering on the terms at which the bonds

were sold had defendants first made truthful disclosures

about Nortel's adverse financial condition." Pl. Mem. at

12.

Generally, motive "would entail concrete benefits that

could be realized by one or more of the false statements

4la

and wrongful nondisclosures alleged. Opportunity, would

entail the means and likely prospect of achieving concrete

benefits by the means alleged." Shields, 25 F.3d at 1130.

"Motives that are generally possessed by most corporate

directors and officers do not suffice; instead, plaintiffs

must assert a concrete and personal benefit tothe

individual defendants resulting from this fraud." Kalnit v.

Eichler, 264 F.3d 131, 139 (2d Cir.2001).

[16] It is unclear that motive is shown here. See Leventhal

v. Tow, 48 F.Supp.2d 104, 115 (D.Conn.1999) ("Finally,

the complaint alleges that the defendants had a motive to

artificially inflate Citizens' stock price during the class

period in order to get more favorable terms in the stock-

for-stock transactions and in the issuance of the

debentures. This motive is also insufficient to establish

scienter and is routinely rejected by the courts."); see also

San Leandro Emergency Med. Group Profit Sharing Plan

v. Philip Morris Cos., 75 F.3d 801, 814 (2d Cir.1996) ("We

do not agree that a company’s desire to maintam a high

bond or credit rating qualifies as a sufficient motive for

fraud in these circumstances because '[i]f scienter could

be pleaded on that basis alone’, virtually every company

in the United States that experiences a downturn in stock

price could be forced to defend securities fraud actions.")

(citation omitted). At the same time, the desire to

consummate corporate transactions may in some

instances "be a motive for securities fraud." Rothman v.

Gregor, 220 F.3d 81, 93 (2d Cir.2000). In any event, the

Court need not reach the question of motive, because

Plaintiffs have sufficiently plead that Defendants knew or

recklessly disregarded that their public statements were

misleading.

2. Conscious Misbehavior or Recklessness

Plaintiffs argue that they have pled scienter by alleging

"facts that constitute strong circumstantial evidence of

defendants' conscious misbehavior or recklessness." Pl.

Mem. at 13. Plaintiffs point, among others, to allegations

that "Nortel's *631 problem. were fundamental and

should have been obvious to the Individual Defendants."

Pl. Mem. at 13 citing NC {{ 29- 31. The Nortel Complaint

42a

alleges that the Defendants knew that many of the

Company's largest customers were canceling orders and

were planning to reduce orders in the coming years. See,

e.g., NC J 85. Defendants respond that Plaintiffs fail to

establish that "the executives responsible for the

company's securities disclosures" had knowledge that the

alleged misstatements were false. Def. Mem. at 19.

"To survive dismissal under the ‘conscious misbehavior’

theory, the [Plaintiffs] must show that they alleged

reckless conduct by the [Defendants], which is at the

least, conduct which is highly unreasonable and which

represents an extreme departure from the standards of

ordinary care to the extent thai the danger was either

known to the defendant or so obvious that the defendant

must have been aware of it.' " Carter-Wallace, 220 F.3d at

39 (citation omitted). "The facts alleged to support

recklessness must be ‘strong circumstantial evidence’ of

that recklessness." Chill, 101 F.3d at 269 (quoting Acito v.

IMCERA Group, 47 F.3d 47, 52 (2d Cir.1995))

"(Slecurities fraud claims typically have sufficed to state a

claim based on recklessness when they have specifically

alleged defendants' knowledge of facts or access to

information contradicting their public statements. Under

such circumstances, defendants knew or, more

importantly, should have known that they were

misrepresenting material facts related to the corporation."

Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir.2000).

Plaintiffs have adequately alleged that the Defendants

either had actual knowledge of or ready access to facts

that contradicted their public statements. "[P]rior to the

close of the third quarter, Nortel senior management had

been informed by ... major clients, including WorldCom

and AT & T that orders in 2001 would be significantly

reduced," NC 7 83; by the end of 2001, it was "common

knowledge at Nortel ... that sales were headed for a

‘serious decline.’ " NC { 143. Despite these negative

developments, Plaintiffs allege that Defendants continued

to issue positive statements regarding Nortel's outlook for

of 2000 and 2001. The October 2000 Announcement

stated that based on Nortel's "mamentum”" and "strong

order backlog" the Company expected "percentage growth

43a

in 2000 over 1999 will be in the low 40's." NC ¥ 67. The

Nortel Complaint alleges that this statement was made

despite the fact that "defendants had been informed by

major customers prior to the close of the 2000 third

quarter that their orders in the fourth quarter and

throughout 2001 would be significantly reduced" NC {

77. In the January 2001 Announcement, Roth said that

"[o]verall the fourth quarter capped a year of exceptional

growth, which was in line with our expectations." NC ]

153. The Announcement went on to quote Dunn as saying

that Nortel was "projecting growth in revenues and

earnings per share from operations in 2001 over 2000 of

30 percent." The Nortel Complaint alleges that these

statements were false. See NC J 161 ("the financial

results reported for the fourth quarter and full year-end

2000 were materially misstated and presented in

violation of GAAP"). "Defendants knew that '30 percent’

growth in revenues and earnings per share in 2001 would

not be possible because ... throughout the fourth quarter

2000, they received budgets from numerous customers '

indicating that their 2001 orders would be substantially

below that of 2000. Indeed, Verizon's optical purchases

were projected to be less than 10% of the $1.1 billion

reported in 2000, and AT & T, WorldCom and other major — -

customers submitted budgets for 2001 that were 20%

*632 lower than that of 2000." Jd Plaintiffs sufficiently

allege "defendants' knowledge of facts or access to

information contradicting their public statements."

Carter-Waillace, 220 F.3d at 40 (quotation omitted); see

also NC { 85 ("Nortel management were regularly

provided with Equipment Inventory Reports for

WorldCom and other major Nortel customers"); NC { 84

("Based on conversations with his customers in

September 2000 [the Vice President of Global Sales for

Nortel's High Performance Optical Group] submitted to

defendant Chandran his group's fourth quarter 2000 sales

forecasts, which were significantly lower than previously

expected."); ¥ 161 ("throughout the fourth quarter of 2000,

they received budgets from numerous customers

indicating that their 2001 orders would be substantially

below that of 2000"); CAili, 101 F.3d at 269 ("An egregious

refusal to see the obvious, or to investigate the doubtful,

44a

may ... give rise to an inference of recklessness.") (internal

citations and quotations omitted).

V. Conclusion and Order

Defendants' motion to dismiss [61] is granted as to the

JSDU Complaint [31] and denied as to the Nortel

Complaint.

Counsel are requested to appear at.a statusScheduling

conference with the Court on January 29, 2003, at 3:00

p.m., in Courtroom 706 of the Thurgood Marshall

Courthouse, 40 Centre Street, New York, New York. Any

application to replead may be addressed at the

conference. The parties are directed to engage in

good faith settlement negotiations prior to the

conference with the Court.

45a

ORDER OF THE UNITED STATES COURT OF APPEALS FOR

THE SECOND CiRCUIT DENYING PETITION FOR

REHEARING EN BANC OR BEFORE THE PANEL,

JULY 14, 2004

46a

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

THURGOOD MARSHALL U.S. COURTHOUSE

40 FOLEY SQUARE

NEW YORK 10007

Roseann B. MacKechnie

CLERK

. At a stated term of the United States Court of

Appeals for the Second Circuit, held at the Thurgood

Marshall United States Courthouse, Foley Square, in the

City of New York, on the 14th day of July two thousand

four.

Weinstein, et al

Plaintiffs-Appellants

Vv

Nortel, et al

Defendants-Appellees

A petition for panel rehearing and a petition for rehearing

en banc having been filed herein by the appellant Eli

Weinstein, et al.

Upon consideration by the panel that decided the

appeal, it is Ordered that said petition for rehearing is

DENIED.

It is further noted that the petition for rehearing en banc

has been transmitted to the judges for the court in regular

active service and to any other judge that heard the

appeal and that no such judge has requested that a vote

be taken thereon.

For the Court,

Roseann B. MacKechnie, Clerk

By: /s/ A. Heller

Motion Staff Attorney

UNITED STATES COURT OF APPEALS

FILED JULY 14, 2004

ROSEANN B. MACKECHNIE, CLERK

SECOND CIRCUIT

48a

RELEVANT PORTIONS OF STATUTES AND

REGULATIONS

49a

United States Code

Title 15. Commerce and Trade

Chapter 2B. Securities Exchanges

§ 78c. Definitions and application

(a) Definitions

When used in this chapter, unless the context otherwise

requires--

* *

collateral-trust certificate, preorganization certificate or

subscription, transferable share, investment contract,

voting-trust certificate, certificate of deposit for a security,

any put, call, straddle, option, or privilege on any

privilege entered into on a national securities exchange

relating to foreign currency, or in general, any instrument

commonly known as a "security"; or any certificate of

interest or participation in, temporary or interim

certificate for, receipt for, or warrant or right to subscribe

50a

United States Code

Title 15. Commerce and Trade

Chapter 2B. Securities Exchanges

§ 78}. Manipulative and deceptive devices

It shall be unlawful for any person, directly or indirectly,

by the use of any means or instrumentality of interstate

commerce or of the mails, or of any facility of any national

securities exchange--

b) To use or employ, in connection with the purchase or

sale of any security registered on a national securities

exchange or any security not so registered, or any

securities-based swap agreement (as defined in section

206B of the Gramm-Leach-Bliley Act), any manipulative

or deceptive device or contrivance in contravention of such

rules and regulations as the Commission may prescribe as

necessary or appropriate in the public interest or for the

protection of investors.

Sla

United States Code

Title 15. Commerce and Trade

Chapter 2B. Securities Exchanges

§ 78r. Liability for misleading statements

(a) Persons liable; persons entitled to recover; defense of

good faith; suit at law or in equity; costs, etc.

Any person who shall make or cause to be made any

statement in any application, report, or document filed

price which was affected by such statement, for damages

caused by such reliance, unless the person sued shall

prove that he acted in good faith and had no knowledge

that such statement was false or misleading. A person

seeking to enforce such liability may sue at law or in

equity in any court of competent jurisdiction. In any such

suit the court may, in its discretion, require an

undertaking for the payment of the costs of such suit, and

assess reasonable costs, including reasonable attorneys'

fees, against either party litigant.

52a

CODE OF FEDERAL REGULATIONS

TITLE 17--COMMODITY AND SECURITIES

EXCHANGES

CHAPTER II--SECURITIES AND EXCHANGE

COMMISSION

PART 240--GENERAL RULES AND REGULATIONS,

SECURITIES EXCHANGE ACT OF 1934

SUBPART A--RULES AND REGULATIONS UNDER

THE SECURITIES EXCHANGE ACT OF 1934

MANIPULATIVE AND DECEPTIVE DEVICES AND

CONTRIVANCES

§ 240.10b-5 Employment of manipulative and deceptive

devices.

It shall be unlawful for any person, directly or indiredly,

by the use of any means or instrumentality of interstate

commerce, or of the mails or of any facility of any national

securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to

omit to state a material fact necessary in order to make

the statements made, in the light of the circumstances

under which they were made, not misleading, or .

(c) To engage in any act, practice, or course of business

which operates or would operate as a fraud or deceit upon

any person, in connection with the purchase or sale of any

security.