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May 19, 2003


The opinion of the court was delivered by: Amy J. St. Eve, United States District Court Judge


Plaintiffs allege that Defendants engaged in a scheme to deceive and defraud the investing public as to the true value of Tellabs, Inc.'s ("Tellabs") common stock. Plaintiffs contend that Defendants carried out this scheme, in part, by making misrepresentations about Tellabs' current financial condition and future prospects. According to Plaintiffs, these misrepresentations were false and misleading and resulted in the artificial inflation of Tellabs' stock price. Plaintiffs claim that they were injured when they purchased Tellabs' common stock at these artificially inflated prices.

Defendants seek to dismiss the Consolidated Amended Class Action Complaint (the "Complaint") for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6), for failure to plead fraud with particularity pursuant to Federal Rule of Civil Procedure 9(b), and for failure to meet the pleading standards set forth in the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b) (the "PSLRA"). For the reasons set forth below, Defendants' motion is granted.


I. The Parties

This putative class action lawsuit is brought by various plaintiffs individually and on behalf of persons who purchased common stock of Defendant Tellabs between December 11, 2000 and June 19, 2001 (the "Glass Period"). On September 27, 2002, the Court appointed Makor Issues & Rights ("Makor Issues") Lead Plaintiff pursuant to 15 U.S.C. § 78(u)-4. See Johnson v. Tellabs, Inc., No. 01 C 4356, 2002 WL 31163670 (N.D.Ill. Sept. 27, 2002).

Tellabs is a Delaware corporation with its principal place of business in Lisle, Illinois. (R. 40-1, Compl. ¶ 21.) Tellabs designs, manufactures and markets highly specialized optical network and broadband access equipment as well as other hardware for use in fiber-optic cable networks. (Id. ¶ 50.) It is a global supplier of networking solutions and services that support the Internet. The Tellabs' products that are relevant to this case are the TITAN 5500, the TITAN 6500 and the SALIX 7600. All of these products are complex transmission systems utilized with optical networking systems. The TITAN 5500 is a digital cross-connect product that is utilized by many of the major telecommunications companies. (Id. ¶ 51.) The TITAN 6500 is a multi-service transport switch. (Id. ¶ 53.) The SALIX 7600 is a software control suite that helps carriers increase revenue by building low cost networks that deliver innovative new services quickly. (Id. ¶ 62.)

Defendants Michael Brick, J. Thomas Gruenwald, Brian Jackman, John Kohler, Catherine Kozik, Richard Notebaert, Robert Pullen, Joan Ryan and William Souders (collectively, the "Individual Defendants") are all officers and/or directors of Tellabs. Michael Birck was a director and served as chairman of Tellabs' board of directors beginning in 2000. (R. 40-1, Compl. ¶ 22.) He also served as chief executive officer and president of Tellabs from 1975 through 2000. (Id.) J. Thomas Gruenwald served as a senior vice president and general manager of the broadband access group since 1999 and as a vice president of strategic resources from 1995 through 1999. (Id.) Brian Jackman was a director of Tellabs and served as president of global systems and technology. He also was president and an executive vice president of business operations from 1990 through 1998. (Id.) John Kohler was a senior vice president of global business operations beginning in 2000 and a vice president of global manufacturing from 1992 through 2000. (Id.)

Beginning in 2000, Catherine Kozik served as chief information officer and as a senior vice president of global information services. (R. 40-1, Compl. ¶ 22.) Also that year, Richard Notebaert became a director and served as chief executive officer and president of Tellabs. (Id.) Robert Pullen was a senior vice president and general manager of optical networking starting in 2000. Pullen also served as a vice president of engineering and marketing in the digital systems division from 1997 through 2000. (Id.) Joan Ryan was an executive vice president and chief financial officer since 2000. (Id.) Finally, William Souders served as a director of Tellabs.*fn1 (Id.)

II. Stock Sales

Plaintiffs allege that Birck, Gruenwald, Kohler, Kozik and Souders*fn2 sold stock during the purported Class Period at an artificially inflated price.*fn3 During this period of time, Plaintiffs claim that Birck sold 80,000 shares for $5,183,150; Gruenwald sold 1,500 shares for $93,281; Kohler sold 7,500 shares for $484,968; Kozik sold 3,220 shares for $187,766; and Souders sold 16,000 for $560,074. (R. 40-1, Comp. ¶ 22.)

III. The Telecommunications Industry

Plaintiffs allege that the telecommunications industry suffered a significant decline in demand for its products in early 2000. (Id. ¶¶ 3, 47.) In addition, Plaintiffs claim that the Internet sector substantially contracted, which "severely constrict[ed] continued access to capital and demand for products to maintain and further develop what had been a rapidly expanding and growing Internet and telecommunications infrastructure." (Id. ¶ 47.) According to Plaintiffs, many of Tellabs' competitors suffered a dramatic decline in earnings. (Id. ¶ 48.) Plaintiffs maintain that Defendants disguised the impact this decline had on Tellabs and, instead, falsely contended that Tellabs was not affected by the industry slow-down.

IV. Allegedly False Statements by Tellabs

Plaintiffs claim that during the purported Class Period, Defendants made a series of false statements and omissions that resulted in the artificial inflation of Tellabs' stock price. These purported false statements and omissions related to Tellabs' financial condition, its earnings and operations and its future prospects. Specifically, Plaintiffs maintain that Defendants falsely reported Tellabs' financial condition for fourth quarter of 2000, and provided false "guidance" for 2001. According to Plaintiffs, Defendants also communicated regularly and directly with securities analysts and provided them with these misrepresentations so that the security analysts would unknowingly falsely promote Tellabs, resulting in an artificially inflated price of Tellabs' common stock.

A. December 2000

On December 11, 2000 — the start of the purported Class Period — Tellabs issued a press release announcing a strategy to deliver an all optical network. The press release noted, "Tellabs is making all-optical networking a reality. . . . We have the strategy and the products that will enable service providers to deliver and manage all-optical services on demand." (R. 40-1, Compl. ¶ 52.) On that same day, Tellabs also announced a multi-year $100 million sales agreement with Sprint for the Titan 6500 multi-service transport switch. The release reported that "[t]he TITAN 6500 helps caters manage their SONET and SDH-based broadband networks today and protects their investment as we migrate to packet networks tomorrow. The TITAN 6500 system is available now." (Id. ¶ 53.)

The next day, securities analysts issued positive research reports on Tellabs. UBS Warburg noted, "Tellabs maintained its guidance for 4Q 2000 and all of 2001. In doing so, the company indicated that the demand for its Titan 5500 product line remain [sic] solid in 4Q and there is visibility for at least two years (if not more) of ongoing good growth for the product." (Id. ¶ 55.) It also estimated thirty-percent growth in sales for 2001. ABN AMRO reported that "the TITAN 5500 remains the workhorse of the group and is expected to see strong growth for the next 2-3 years." (Id.) Baird & Co. reported that Tellabs "reiterated its confidence in the telecom-spending environment" and "reconfirmed consensus growth forecasts for fourth quarter 2000 and 2001." (Id.)

B. January 23, 2001 Press Release

On January 23, 2001, Tellabs reported fourth quarter net income of $232 million. (R. 40-1, Compl. ¶ 58.) Its press release noted that the "strength in Tellabs' core business drove record sales and earnings in the fourth quarter of 2000. Fourth-quarter 2000 sales totaled $1,018 million, up 42% from $716 million in 1999." The press release also stated that fourth quarter net income was up 41% from 1999. (Id.) Notebaert explained, "[t]o keep up with robust growth in communications traffic customers are buying more and more Tellabs equipment-fueling our records [sic] results and our first $1 billion quarter." (Id.)

During a teleconference with securities analysts that day, Notebaert commented on the TITAN 6500. Specifically, he said that "[o]n the 6500, demand for that product is exceeding our expectations. . . . We had spent . . . a large amount of time working on our ability to create or manufacture enough product to meet customer demand. Demand is just . . . huge for this product." (R. 40-1, Compl. ¶ 59.) In an interview with Eric Schatzker from the Bloomberg News, Notebaert also commented: "I'm a little surprised at the performance of our stock the last few weeks, because last quarter, this quarter, we've been solid and we feel very, very good about the robust growth we're experiencing." (Id. ¶ 60.)

Following the press release and teleconference, numerous securities analysts issued positive research reports for Tellabs. On January 24, 2001, for example, Morgan Stanley reiterated its "outperform" rating and noted that "sales of the TITAN products continued to fuel growth." (Id. ¶ 61.)

C. January 30, 2001 Press Release

Tellabs issued another press release on January 30, 2001, announcing "a new suite of softswitches, the SALIX 7600 softswitch control suite." (R. 40-1, Compl. ¶ 62.) The press release noted, "[t]he SALIX 7600 brings together voice and data technologies to create a set of telepacket service applications that can help carriers grow profitably." (Id.) It also stated, "[w]ith the new SALIX 7600 suite, Tellabs has redefined the softswitch market and can now offer integrated, comprehensive solutions to all carriers." (Id.)

D. March 2001

On March 7, 2001, Tellabs issued a press release announcing that it was lowering its revenue and earnings per share expectations for the first quarter 2001. It noted, "Tellabs projects first quarter sales in the range of $830 million to $865 million. . . . The company projects earnings per share in the range of 35 cents to 38 cents, compared with prior guidance of 39 cents per share." (R. 40-1, Compl. ¶ 67.) It also reported that Tellabs could not recognize revenue from TITAN 6500 shipments in the first quarter but expected to do so in the second quarter of 2001. (Id.) "Growth in Tellabs' core optical networking business remains strong." (Id.) Notebaert went on to project, "[g]iven the strong acceptance of the new TITAN 6500, we continue to target 30 percent growth in revenue and earnings for the year. . . . Demand for our new products is strong, and I am confident we have the right set of solutions to help our customers build tomorrow's converged networks." (Id.)

During a March 8, 2001 teleconference with securities analysts, Notebaert reiterated that "demand for our core optical products, or our core networking products remains strong. . . . We are as confident as ever — that may be an understatement — about the 6500. . . . To put this into a bit more perspective, we still expect revenue and EPS growth for the quarter to exceed 30%. . . . Tellabs will meet the adjusted revenue and earnings targets." (R. 40-1, Compl. ¶ 68.) Notebaert also stated that Tellabs had not received "any indication from any of our major clients, major customers, of a downturn in the segment we're in. . . ." (Id.) Defendant Jackman added, "[t]here's nothing in the revenue recognition issue that should be construed to imply that the testing and the customer's acceptance of these systems are having difficulty." (Id.) That day, various securities analysts issued favorable reports and maintained their buy ratings for Tellabs' stock. (Id. ¶ 69.)

On March 29, 2001, Tellabs issued its 10-K for 2000. The "Highlights" section of the financial statement noted: "The Company achieved record levels in sales ($3,387.4), net earnings ($730.8 million) and earnings per share ($1.75) — putting it on track to meet its objective of $6 billion in annual revenues by the year 2003." (R. 40-1, Compl. ¶ 71.) It also stated that "[t]he growth in optical networking product sales was a result of continued strong demand for the Company's TITAN 5500/5500S and TITAN 532L digital cross connect systems." (Id.) Tellabs reported that it expected "continued strong sales growth in 2001." (Id.)

E. April 6, 2001

On April 6, 2001, Tellabs issued another press release that lowered its first quarter guidance. The press release stated, "[t]he revised guidance stems from reduced and deferred spending by major communications carriers late in the quarter." (R. 40-1, Compl. ¶ 72.)

That same day, Notebaert was quoted as saying, "[t]he good news is, orders weren't canceled, they were pushed out into the next quarter." (Id. ¶ 73.) In a conference call with analysts that same day, Notebaert stated that "the 6500 is showing strength . . . we should hit our full manufacturing capacity in May or June to accommodate the demand we are seeing. Everything we can build, we are building and shipping. The demand is very strong." (Id. ¶ 74.)

F. April 18, 2001*fn4

On April 18, 2001, Tellabs issued a press release announcing its first quarter financials for the period ending March 31, 2001 and reducing its revenue projections for 2001. Notebaert stated, "I am as confident as ever in Tellabs' long-term prospects and our ability to deliver strong revenue and earnings growth in the future." (R. 40-1, Compl. ¶ 77.)

G. June 2001

On June 19, 2001, which is the close of the purported Class Period, Tellabs issued a press release revising its second quarter guidance and reducing its revenues by approximately $300 million to $500 million. (Id. ¶ 85.) Tellabs common stock fell from a high of $23.01 per share on June 19, 2001 to a low of $15.87 per share on June 20, 2001. (Id. ¶ 87.) The June 20, 2001 price reflected a "decline of more than 75% from the Class Period high of $67.125." (Id.)

V. Tellabs' Accounting Practices

Plaintiffs allege that Defendants knowingly and recklessly employed improper accounting practices that falsely inflated Tellabs' balance sheet and falsely reported income and expenses in the interim quarters and fiscal year during the purported Class Period, in violation of Generally Accepted Accounting Principles ("GAAP"). (R. 40-1, Compl. ¶ 93.) They further contend that Defendants engaged in "channel stuffing" activities to conceal true sales and that Tellabs offered its customers special incentives and the unlimited right of return in order to improperly overstate Tellabs' revenues. (Id. ¶ 98.)


The three count Complaint in this case is premised on securities fraud arising out of the purchase of Tellabs' common stock. In count one, Plaintiffs allege that Defendants violated Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5. Count two alleges that the Individual Defendants violated Section 20(a) of the Exchange Act. Count three alleges that Birck, Kozik, Kohler, Souders and Gruenwald violated Section 20A of the Exchange Act by insider trading. Defendants move to dismiss the Complaint in its entirety for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), for failure to plead fraud with particularity pursuant to Federal Rule of Civil Procedure 9(b), and for failure to meet the pleading standards set forth in the PSLRA.

I. Legal Standard

The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test the legal sufficiency of a complaint, not the merits of the case. See Triad Assocs., Inc. v. Chicago Hous. Auth., 892 F.2d 583, 586 (7th Cir. 1989). When considering a motion to dismiss, the Court considers "whether relief is possible under [any] set of facts that could be established consistent with [the] allegations." Bartholet v. Reishauer A.G. (Zurich), 953 F.2d 1073, 1078 (7th Cir. 1992). The Court views all the facts alleged in the Complaint, as well as any reasonable inferences drawn from those facts, in the light most favorable to Plaintiff. See Stachon v. United Consumers Club, Inc., 229 F.3d 673, 675 (7th Cir. 2000).

Dismissal of a complaint is appropriate only where it appears beyond doubt that under no set of facts would the plaintiff's allegations entitle him to relief. Henderson v. Sheahan, 196 F.3d 839, 846 (7th Cir. 1999); Kennedy v. National Juvenile Det. Ass'n, 187 F.3d 690, 695 (7th Cir. 1999). A plaintiff that solely attaches bare legal conclusions to narrated facts that fail to outline the bases of his claims does not satisfy ...

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