analysts during the class period in which the officers confirmed the accuracy of projections: "In my opinion, defendants confirmed analysts' expectations in response to their request for guidance." Defendants have moved to strike Preston's declaration -- and with good reason. Preston cannot testify about what someone said to someone else in a conversation if she wasn't there. The factual basis for this kind of opinion is completely lacking. She might be able to opine on how the typical analyst would interpret a given statement made by a corporate executive, like an expert did in In re Adobe Systems, Inc. Sec. Litig., 787 F. Supp. 912, 916 (N.D. Cal. 1992), aff'd 5 F.3d 535 (9th Cir. 1993), but that is a far cry from giving an opinion about whether the executive made the statement in the first place. Preston's testimony is incompetent. The motion to strike her testimony on this subject is granted.
Further, evidence that Cypress tracked analysts forecasts after they were published is insufficient. Such evidence does not demonstrate that Cypress commented on the accuracy of the reports before they were published. See Seagate II P98,530 at 91,583 (tabulating analysts' forecasts after publication is not probative of adoption). Absent evidence that Cypress engaged in activity suggesting that the analysts' forecasts were accurate, plaintiffs cannot show that Cypress adopted the forecasts before publication.
The next question is whether Cypress ratified the analysts' reports after they were published. Plaintiffs point out that in February 1992, Cypress' CFO Goldman sent several analysts' reports to two shareholders who had requested investment information from the company. By sending the reports, Cypress may have impliedly endorsed the projections contained in them. The insurmountable problem for the plaintiffs, however, is the absence of evidence that news of Cypress' endorsement was made public. Plaintiffs rely on the fraud on the market theory to establish reliance, which requires that misleading statements enter the market and affect the stock price. 886 F.2d at 1114-1115; VeriFone, 784 F. Supp. at 1478-1479. Cypress sent the reports to only two shareholders. There was no mass mailing and no evidence that the marketplace was informed of Cypress' actions. As a result, Plaintiffs cannot show that Cypress' alleged endorsement of the allegedly misleading analysts reports defrauded the market. Summary judgment is appropriate on all of the statements contained in analysts' reports.
C. Cypress' Own Statements
1. Statement To Sales Force (C)
In August 1991, Cypress officer Tony Alvarez said that Cypress would have its 1 Meg SRAM available for customers in the third quarter of 1991. The rub for plaintiffs is that Alvarez made the statement to a group of Cypress sales persons. This was an internal private audience, not a public gathering. Since the information did not enter the market and affect the stock price, plaintiffs cannot establish reliance on this statement. See Apple, 886 F.2d at 1115.
2. Statements About Fourth Quarter Backlog (E,F,R)
Plaintiffs challenge two statements relating to Cypress' backlog: (1) an October 14, 1991 press release stating that Cypress was entering the fourth quarter with a record order backlog; and (2) a statement during a January 20, 1992 conference call that 78% of its 1992 first quarter forecast was on the order backlog. Plaintiffs do not challenge the literal truth of these statements -- it is undisputed that the fourth quarter backlog was a record and that 78% was an accurate figure. Instead, plaintiffs contend that the statements were misleading because the backlog included double bookings which did not represent real orders. Unfortunately for the Plaintiffs, however, there is no evidence in the record that the fourth quarter 1991 or the first quarter 1992 backlogs included any double bookings. The only evidence plaintiffs present is a memo stating that Cypress had found double bookings in June 1991, months before the beginning of the fourth quarter. The evidence indicates that Cypress eliminated the double bookings in that month. Without any evidence of double bookings made later than June 1991, plaintiffs cannot get to the jury on the backlog statements.
3. Statements About Sun Microsystems (E,F)
In its October 1991 Press Release and Conference Call, and in a letter to shareholders in December 1991, Cypress stated that Sun's Galaxy product, which included modules made by Cypress' Ross subsidiary, was "a hit" and would contribute significantly to revenue in the fourth quarter 1991 and in 1992. Plaintiffs argue that this statement misled the market because Cypress failed to disclose that Galaxy would soon be rendered obsolete by a new generation of Sun products which would use Texas Instrument modules instead of Ross modules.
Plaintiffs' argument fails because there is no evidence that Cypress knew in October or December that Galaxy, which had just been introduced on September 30, might soon become obsolete. Nor is there evidence that Galaxy sales were declining at the time of the press release or when the letter was sent. In fact, Cypress beat its fourth quarter 1991 forecast of sales to Sun and met its first quarter 1992 forecast.
Further, the market knew of the risk of Sun's Galaxy product becoming obsolete. The market is presumed to know of the risk of product obsolescence in high-tech industries. See Convergent Technologies, 948 F.2d at 513. In Convergent Technologies, the Ninth Circuit held that the defendant had no duty to disclose the risk that its own product might become obsolete on the ground that the market is presumed to know of this risk. 948 F.2d at 513-514. If, as Convergent Technologies says, a company does not have a duty to disclose the risk of its own product's obsolescence, then Cypress certainly had no obligation to tell the market that another company - Sun - might trump its new product with an even newer product. In any event, Cypress does not need the benefit of the presumption that the market knows about obsolescence. The record demonstrates that specific information about Galaxy's obsolescence -- and the threat it posed to Cypress' business -- entered the market during the class period. A Kidder Peabody report issued October 18, 1991 stated that Sun's new computer "has not been committed to Cypress' Pinnacle, which is up against the Sun/Texas Instruments Viking." A Wertheim Schroder & Co. report dated February 12, 1992 stated that "Sun will be shifting much of its SPARC line to the SuperSPARC-based products produced by Texas Instruments." Because this information was made credibly available to the market, any failure on Cypress' part to disclose material information about its business with Sun would be excused. Apple, 886 F.2d at 1115. For these reasons, Cypress is entitled to summary judgment on all statements regarding SUN.
4. Cypress' Statements Concerning Third Quarter Results (P)
In the December 1991 letter, Rodgers also reviewed Cypress' performance in the third quarter:
Our gross profit margin of 56.9% of revenues decreased one-half percentage point from the preceding quarter due to lower sales generated by the relatively high-margin Ross technology and Aspen Semiconductor business units. Our new Minnesota plant continues its excellent performance and already accounts for 6% of Cypress' revenues. . . . Higher yields in our Texas and Minnesota plant contributed to higher output.
This statement is not actionable. Rodgers gave an accurate factual account of Cypress' third quarter performance. Moreover, these statements of historic fact did not convey a misleading impression by implying similar success for the future. See Convergent Technologies, 948 F.2d at 513 (statements of past growth did not imply future growth at same rate).
5. Cypress' Statements Regarding Execution (E,F)
In the press release and conference call, Rodgers also stated that "our fourth quarter results depend on our own execution." Plaintiffs do not contest the truth of this statement (its hard to imagine this kind of statement ever being false on its face), but rather argue that it conveyed a misleading impression because it failed to disclose execution problems in Cypress' test areas. Specifically, plaintiffs point to delays or bottlenecks at the "burn in" stage of Cypress' testing process. This cost Cypress $ 750,000 in revenue for the fourth quarter. However, while Cypress did encounter a delay at the "burn-in" stage, the evidence shows that the severity of the delay was unexpected. Cypress had frequently confronted such delays in the past but had always been able to work through them quickly. Cypress had no duty to disclose a problem that neither existed nor was foreseeable at the time it made the statement. See, e.g., Pommer v. Medtest Corp., 961 F.2d 620, 623 (7th Cir. 1992) ("[A] statement true when made does not become fraudulent because things unexpectedly go wrong.").
6. Statements Regarding Testing In 1st Quarter 1992 (R,S)
A Cypress press release on January 22, 1992 stated: "The test problem will shortly be addressed by changes in the way we manage tests in the company. . . . The test area will be reorganized this week." Plaintiffs maintain that this statement was misleading. The evidence proves otherwise: Cypress reorganized the test area and had no more problems with it for the rest of the quarter. Defendants are entitled to summary judgment on this statement.
7. Cypress' Prediction of 1st Quarter 1992 Performance (S)
Plaintiffs also rely on a prediction that Rodgers made during a conference call with analysts on January 20, 1992. Rodgers stated, "We expect to beat revenue of last quarter in this quarter but not by a lot. The market is sluggish, if not disastrous. We expect to go forward but not dazzling performance . . . to be up in both shipments and earnings." Plaintiffs claim that two undisclosed facts seriously undermined the accuracy of this statement: (1) competition in the SRAM market would force Cypress to sell SRAMs at a discount; and (2) Cypress' "pull-ins" in the fourth quarter of 1991 increased the amount of new orders Cypress needed in the first quarter of 1992. (Pull-ins are existing orders shipped in the current quarter rather than in a later quarter as originally scheduled.)
Plaintiffs' argument that SRAM competition undermined Cypress' prediction of a revenue and earnings increase is unavailing. First, the evidence shows that Cypress factored the prospect of lower SRAM margins into its prediction of growth for the fourth quarter. The decrease turned out to be more precipitous than Cypress expected, but there is no evidence that Cypress should have anticipated such a severe drop when it made its first quarter prediction. Cypress did not have the benefit of 20-20 hindsight that Plaintiffs have now.
Second, Cypress did inform the market about aggressive pricing in the SRAM market. In the analyst teleconference, Rodgers warned analysts, "Pricing in the SRAM group is pressure-on in the 256K SRAMs . . . and the 64K SRAM I would pick as the most pressured product." And, even if this disclosure was inadequate, a number of analyst reports and articles published in the first quarter explicitly warned of the risks of SRAM price competition. For instance, a Merrill Lynch report dated January 21, 1991, attributed Cypress' poor performance in the fourth quarter of 1991 in part to pricing pressures in the SRAM market. Similarly, Wertheim Schroder's report dated the same day observed: "Much effort is being made to address [Cypress'] SRAM costs, as it needs to be more responsive to competitive pricing." Given the availability of this information, no reasonable jury could find that the market was mislead by Cypress' alleged failure to adequately disclose the risk of SRAM price decreases. See Kaplan v. Rose, 49 F.3d 1363, 1368 (9th Cir. 1994); Apple, 886 F.2d at 1115.
Plaintiffs' argument that Cypress' use of "pull-ins" undermined Rodgers' expression of optimism for the first quarter fares no better. The evidence shows that Cypress' forecast for the first quarter took into account revenues lost to the fourth quarter as a result of "pull ins." In other words, the first quarter forecast upon which Rodgers based his statement did not reflect shipments originally scheduled for the first quarter that were shipped in the fourth quarter. Moreover, while they may be emblematic of American business' habitual tendency toward short-term views, "pull-ins" are not the nefariously manipulative scheme that plaintiffs make them out to be. "Pull-ins" do not result in the improper recognition of revenue under generally accepted accounting principles. They are actual sales which are treated no differently than any other sale, i.e., revenue is recognized upon shipment to the customer. This is not a case where a corporation overstated its revenues by, for example, reporting consignment transactions as sales. See Malone v. Microdyne Corp., 26 F.3d 471, 478 (4th Cir. 1994). Cypress' use of "pull-ins' did not seriously undermine Rodgers' statement that he expected growth in the first quarter of 1992.
8. Cypress' 1991 Annual Report (Y)
In its 1991 Annual Report, Cypress stated that it "expects to improve productivity in 1992." In addition to the absence of evidence showing that this statement lacked a reasonable basis, the statement is too vague to be actionable. See Raab, 4 F.3d at 289.
D. Secondary Liability Claims
Plaintiffs' Second Amended Complaint also alleges that defendants are liable for aiding and abetting and conspiracy. The Supreme Court in Central Bank of Denver v. First Interstate Bank of Denver, 128 L. Ed. 2d 119, 114 S. Ct. 1439, 1448 (1994), held that there is no aiding and abetting liability under Rule 10b-5. This court and other courts in this district have held that Central Bank's rationale precludes conspiracy liability as well. Rasterops, 98,467 at 91,195; Syntex, 855 F. Supp. at 1097.
The short of the matter is this: Cypress had two disappointing quarters in late 1991 and early 1992. As a result, its stock price dropped. Plaintiffs argue that Cypress should have known what was coining and should have disclosed it. But the evidence shows that the problems underlying Cypress' poor performance were unexpected and that Cypress did not know and had no reason to know that it would not make its forecasts. Plaintiffs' entire case is based on hindsight, forgetting that the securities laws do not adopt this perspective. As Frederic William Maitland put it, "it is very difficult to remember that events now in the past were once far in the future." All of Cypress forward-looking statements had a reasonable basis at the time they were made, which is the only time that matters as far as the securities laws are concerned. No reasonable jury could find that any of Cypress's statements were false or misleading. Given this conclusion, the Court need not reach the issues of scienter or the individual defendants' liability. Defendants' motion for summary judgment is GRANTED in its entirety.
IT IS SO ORDERED.
DATE: June 6, 1995
ROBERT P. AGUILAR
United States District Judge