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St. Lucie County Fire District v. Motorola

February 28, 2011

ST. LUCIE COUNTY FIRE DISTRICT FIREFIGHTERS' PENSION TRUST FUND, TOWN OF NORTH BRANFORD PENSION COMMITTEE, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
MOTOROLA, INC., EDWARD J. ZANDER, GREGORY Q. BROWN, AND THOMAS MEREDITH DEFENDANTS.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

Plaintiffs St. Lucie County Fire District Firefighters' Pension Trust Fund and the Town of North Branford Pension Committee (together "Plaintiffs") filed suit against Motorola, Inc., ("Motorola"), Edward J. Zander ("Zander"), Gregory Q. Brown ("Brown"), and Thomas Meredith ("Meredith") (together "Defendants") alleging, in their Second Amended Complaint, violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a) ("1934 Act") and violations of Rule 10b-5, 17 C.F.R. § 240.10b-5. Defendants move to dismiss for failure to state a claim and for failure to meet the heightened pleading standards required in securities class actions. For the following reasons, the Court grants Defendants' Motion to Dismiss with prejudice.

STATEMENT OF FACTS

The following facts are taken from Plaintiffs' Second Amended Complaint and are assumed to be true for purposes of this Motion to Dismiss. See Murphy v. Walker, 51 F.3d 714, 717 (7th Cir. 1995). Defendants included several exhibits, including SEC filings and transcripts of shareholder meetings and conferences that are referenced and excerpted in Plaintiffs' Second Amended Complaint. The Court may take judicial notice of SEC filings without converting a motion to dismiss to a motion for summary judgment. See, e.g., Stavros v. Exelon, 266 F. Supp. 2d 833, 844 n. 8 (N.D. Ill. 2003). The Court may also examine the documents included in Defendants' Motion to Dismiss because they are referred to in Plaintiffs' Second Amended Complaint and they are central to Plaintiffs' claims. See Albany Bank & Trust Co. v. Exxon Mobil Corp., 310 F.3d 969, 971 (7th Cir. 2002).

I. Motorola Mobile Devices

Motorola is a technology company that operates in three primary business segments: mobile devices, networks and enterprise, and connected home solutions. (Second Amd. Compl. ¶ 16.) From October 25, 2007 until January 22, 2008 ("Class Period") the largest of these was mobile devices. (Id.) The mobile device division had 42% of its 2007 net sales concentrated in several large phone operators. (Id. ¶ 17.) This high level of concentration gave Motorola's management access to sales data that was useful for forecasting future purchases. (Id. ¶ 18.) According to Plaintiffs' confidential witnesses, Motorola provided concessions to the major cell phone carriers to accept unneeded inventory (a process known as "channel stuffing" that depresses sales volumes in later quarters) to meet quarterly and annual targets. (Id. ¶ 19.)

By the close of fiscal year 2006 Motorola was the second largest global supplier of wireless handsets with an estimated global market share of 22%. (Id. ¶ 23.) Indeed, Motorola's RAZR cell phone was the most popular line of mobile phones ever released until it ceded that title to Apple's iPhone 3G in November 2008 (the iPhone 3G was released in June 2007). (Id.) Motorola sold 100 million units of the RAZR through July 2007, the month that the RAZR2 was released. (Id.) By the end of the third quarter ("3Q") in 2007, however, Motorola's global market share was down to 13%. (Id. ¶ 25.) Its profits and sales were similarly down, and Motorola recognized hundreds of millions of dollars in losses during the first three quarters of 2007. (Id. ¶ 26.)

On September 7, 2007, at its annual analyst conference, Motorola announced a turnaround plan to restore the health of its mobile devices unit. (Id. ¶ 28.) This turnaround plan was reaffirmed on October 25, 2007 and again on December 6, 2007. (Id. ¶¶ 26, 213.)

II. Motorola Officers

Zander joined Motorola as CEO, Chairman of the Board and Chairman of the Board's Executive Committee in January 2004. (Id. ¶ 29.) Zander served as Motorola's CEO until December 31, 2007 and as Chairman of its Board and its Executive Committee until May 5, 2008. (Id.) Zander received a salary of over $14 million in 2006 and over $17 million in 2007, however the vast majority of this compensation came in the form of restricted stock units ("RSUs"), stock options, and other long-term incentive payments. (Id.) Zander's RSUs would not vest unless Motorola's stock price closed above $22; Zander's stock options had an exercise price of $12.97, which rendered them valueless if Motorola's stock was trading below that amount. (Id. ¶ 30.)

Meredith served as Motorola's Acting Chief Financial Officer and Executive Vice President between April 1, 2007 and March 1, 2008. (Id. ¶ 31.) Like Zander, Meredith received a substantial portion of his 2007 compensation in stock options and RSUs. (Id.)

Brown served as President and Chief Operating Officer of Motorola from March 2007 through December 2007. (Id. ¶ 33.) Brown assumed the role of President and CEO on January 1, 2008. (Id.)

III. October 25, 2007: 3Q Earnings Conference

Motorola released its 3Q 2007 financial results on October 25, 2007, reporting that sales were down 36% from 3Q 2006 in the mobile device segment. (Id. ¶ 202.) The mobile device segment also incurred a 3Q 2007 operating loss of $138 million, compared to a second quarter ("2Q") 2007 operating loss of $264 million. (Id.)

Zander, Brown, and Meredith also held an earnings conference on October 25, 2007 to discuss 3Q 2007 and look ahead to the fourth quarter ("4Q") of the year, which was already underway. (Id. ¶ 203.) Zander stated that "[o]ur 3Q can be characterized by one word, progress." (Id.) Zander continued, "We . . . made substantial improvement in all key metrics in mobile devices." (Id.) Zander further represented that "We increased unit sales and gross margin percentage" and "lower[ed] operating expenses," concluding that Motorola had already sold 900,000 units of the RAZR2 phone. (Id.)

Turning to 4Q 2007, Meredith stated that "we are encouraged by progress in mobile devices as compared to prior quarters. We expect continued improvement in the 4Q." (Id. ¶ 204.) Meredith then specified that "[w]e expect 4Q earnings per share from continuing operations to be in the range of $0.12 to $0.14." (Id.) Meredith continued, "we do see, sequentially seeing our top line go up, revenue units up, and improvement in our bottom line." (Id.) Zander stated that the management team "is committed to returning the company to our financial targets as outlined during the September Analyst meeting." (Id.) Brown concluded that "[w]e will continue the momentum and drive further improvements in the coming quarter." (Id.)

Motorola's stock price closed up $0.75 to reach $19.30 per share on unusually high trading volume. (Id. ¶ 206.)

IV. December 6, 2007 Lehman Brothers Conference

By early December, investors were concerned with Motorola's viability-whether the company would be broken up and sold-as well as the recent announcement that Zander would be stepping down as CEO. (Id. ¶¶ 211-12.) Motorola's stock price closed at $15.75 on December 5, 2007. (Id.)

Meredith appeared at the Lehman Brothers Conference in San Francisco on December 6, 2007. (Id. ¶ 213.) Meredith "affirmed" earlier 4Q 2007 projections, specifically that earnings from continuing operations in 4Q would be "in the $0.12 to $0.14 range." (Id.) Meredith also affirmed that Motorola would experience "sequential improvement in our top and bottom line." (Id. ¶ 214.) In response to a question, Meredith echoed the characterization of Q3 as a "start or progress" and stated that he believed "that's sort of where we are." (Id. ¶ 215.)

At the end of the session, Meredith was questioned about Motorola's attempts to diversify its semi-conductor chip suppliers. (Id. ¶ 217.) Meredith responded that "we're in and have been in discussions with all of the named players and they will play out in terms of finalizing those arrangements in coming weeks and months. And so that's a space that continues to be one of extraordinary focus, lots of activity and watch that space." (Id.)

After the conference, based in part on Meredith's affirming previous earnings estimates, Motorola's stock price increased $0.56 to close at $16.31 on December 6, 2007. (Id. ¶ 221.)

V. January 22, 2008: Estimates Questioned

On January 22, 2008, a research analyst at Merril Lynch's Telecom Equipment/Wireless Cellular division issued an estimate change report for Motorola. (Id. ¶ 225.)Based on "supply chain checks" that suggested "steeper than normal order declines in December," Merrill Lynch lowered its first quarter ("1Q") 2008 earnings per share estimates from $0.12 to $0.09. (Id.) Merrill Lynch also noted Motorola's decline in the orders it was placing with its suppliers for 1Q 2008 delivery. (Id.)

VI. January 23, 2008: Motorola 4Q 2007 Results

Motorola announced its 4Q 2007 and full-year 2007 results on January 23, 2008. (Id. ¶ 227.) Motorola's mobile phone sales from 3Q 2007 to 4Q 2007 had improved by 7%. (Id. ¶ 219.) Demand for Motorola's mobile devices had "slowed" during 4Q 2007 while competitors such as Apple experienced growth. (Id.) Motorola reported earnings per share of only $0.04, due in part to a $277 million settlement with a chip manufacturer, Freescale Semiconductor ("Freescale"), in January 2008 that accounted for a loss of $0.07 per share. (Id. ¶ 227.) Motorola's earnings per share based on continuing operations for 4Q 2007 were $0.14. (Id. ¶ 116) Motorola's revenue in the mobile devices segment increased from $4.5 billion in 3Q 2007 to $4.8 billion in 4Q 2007 and sales increased from 37.2 million units to 40.9 million units in ...


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