The opinion of the court was delivered by: ROBERT P. AGUILAR
This is a securities fraud class action on behalf of disgruntled investors who purchased Cypress Semiconductor Corporation's ("Cypress") stock between August 19, 1991 and April 14, 1992. The plaintiffs allege that Cypress and its officers and directors artificially inflated the price of Cypress' stock by issuing misleading public statements in violation of §§ 10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10b-5. Defendants Cypress, T.J. Rogers, Mark Allen, Ken Goldman, Marcel Gani, Thomas North and Lowell Turriff now move for summary judgment against all of plaintiffs' claims. The court has read the moving and responding papers and has heard the argument of counsel. For the reasons discussed below, defendants' motion is GRANTED.
Cypress manufactures and sells semiconductor chips for use in computers and telecommunications. Cypress' Chief Executive Officer, T.J. Rodgers, founded the company in 1982 and took it public four years later. Cypress grew dramatically. Revenue increased from $ 51 million in 1986 to $ 285 million in 1991.
Cypress, however, had a disappointing fourth quarter in 1991 and a disappointing first quarter in 1992. Revenue and earnings decreased in those quarters, falling short of Cypress' internal projections. After Cypress reported the disappointing results, its stock dropped, precipitating this lawsuit. Cypress is now a very successful company, generating $ 406 million in revenue in 1994.
Plaintiffs' allegations center on Cypress' revenue and earnings forecasts for the fourth quarter of 1991 and the first quarter of 1992. Cypress's beginning of quarter ("BOQ") forecast, issued in the first month of the quarter, projected revenue of $ 76.1 million and earnings per share of $ 0.21 for the fourth quarter of 1991. The actual revenue for the fourth quarter was $ 71 million, yielding earnings per share of $ 0.15. Cypress' stock price fell from $ 17 3/4 to $ 14 1/8 on this news.
After getting the fourth quarter results, Rodgers ordered a review of the reasons Cypress had missed its forecast. The "Post Mortem " that followed did not reveal a single cause of the shortfall. The "Post Mortem" found that manufacturing errors in the San Jose test area were responsible for $ 756,000 in lost revenue. Marketing was responsible for $ 743,000 of lost revenue. Problems involving certain high-performance low-volume parts was responsible for $ 712,000.
Cypress' projections for the first quarter of 1992 were also off the mark. The first quarter BOQ forecast predicted revenue of $ 73 million and earnings per share of $ 0.16. Although first quarter revenues exceeded Cypress' predictions, earnings per share fell short of expectations, reaching only $ 0.10. The news lowered the stock price from $ 11 to $ 10 3/8. Cypress attributed the low earnings per share to unexpected price erosion in the SRAM (Static Random Access Memories) chip market and to an increase in demand for low margin SRAMs.
Plaintiffs maintain that Cypress should not have been surprised by the disappointing numbers, that it should have known all along that the projections were unrealistic. According to the plaintiffs, Cypress' projections were fraudulent because Cypress knew of and failed to disclose adverse facts that undermined the foundation of the forecasts. Specifically, plaintiffs allege that Cypress was aware of softening demand for several major product lines, a market-wide decrease in SRAM prices, a fissure in Cypress' relationship with Sun Microsystems -- one of Cypress' biggest customers -- that was sure have an negative effect on revenue and earnings during the class period. Plaintiffs also contend that Cypress concealed problems at the San Jose and Minnesota manufacturing plants.
In addition to hiding these adverse facts, plaintiffs assert that Cypress concealed problems with its forecasting system itself. Cypress allegedly knew before the class period that the system had become unreliable. Plaintiffs point out that Cypress' officers expressed frustration in internal memos with the company's BOQ forecast process.
Plaintiffs also claim that Cypress violated Rule 10b-5 by using "pull-ins" -- i.e., encouraging buyers who had placed orders for future delivery to take delivery in the current quarter so that Cypress could show the revenue in that quarter. Cypress' failure to disclose the use of "pull-ins" rendered its revenue and earnings figures misleading, plaintiffs argue, because the figures actually reflect future sales.
Plaintiffs seek to hold Cypress liable for projections contained in newspaper articles and analysts' reports. Cypress allegedly disseminated its projections to the media and securities analysts, who in turn communicated the numbers to the public. Plaintiffs also rely on statements in shareholder letters and press releases concerning Cypress' prospects for the fourth and first quarters.
Cypress and the individual defendants seek summary judgment on all of the alleged misstatements. In so doing, the defendants object to some of plaintiffs' evidence submitted in opposition to the summary judgment motion.
SUMMARY JUDGMENT STANDARD
Once the moving party demonstrates that there is no genuine issue of material fact, the nonmoving party must designate "'specific facts showing that there is a genuine issue for trial.'" Id. at 324, 106 S. Ct. at 2553 (quoting Fed.R.Civ.P. 56(e)). The nonmoving party must "make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322, 106 S. Ct. at 2552.
The adjudication of a summary judgment motion is not a "trial on affidavits." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S. Ct. 2505, 2513, 91 L. Ed. 2d 202 (1986). Credibility determinations and weighing of the evidence are solely jury functions. Id. Inferences drawn from underlying facts must be viewed in the light most favorable to the nonmoving party. Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 994, 8 L. Ed. 2d 176 (1962)).
However, there may be no genuine issue of material fact if "the evidence is of insufficient caliber or quantity to allow a rational finder of fact" to find for the nonmoving party. Anderson, 477 U.S. at 254, 106 S. Ct. at 2513. And in some circumstances the factual context may render the nonmoving party's claim implausible, and the nonmoving party must come forward with "more persuasive evidence" to support the claim "than would otherwise be necessary." Matsushita, 475 U.S. at 587, 106 S. Ct. at 1356.
Plaintiffs' claims are based on Section 10(b) of the Securities and Exchange Act of 1934 and SEC's Rule 10b-5, a regulation issued under § 10(b). The elements of a Rule 10b-5 claim are (1) a false statement or an omission that rendered another statement misleading; (2) materiality; (3) scienter; (4) loss causation; and (5) damages. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989), cert. denied, 496 U.S. 943 (1990).
Cypress maintains that it is entitled to summary judgment because the record shows that its projections for the fourth quarter of 1991 and the first quarter of 1992 did not lack a reasonable basis. According to Cypress, the projections proved inaccurate -- and barely at that -- not because Cypress ignored or failed to take into account adverse facts, but because of unexpected developments both within Cypress and in the semiconductor market in general. Cypress contends that it factored all of the problems highlighted by plaintiffs of which it was aware into its quarterly forecasts.
Plaintiffs have identified over thirty allegedly false and misleading statements. The court will address the statements and omissions within the following categories: (1) statements contained in newspaper and magazine articles; (2) statements contained in analysts' reports; (3) Cypress' statements made at conference calls and in press releases and annual reports.
A. Newspaper and Magazine Articles (Statements A,B,D,K,U)