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November 1, 1996


The opinion of the court was delivered by: ORRICK

 In this class action, plaintiff shareholders of defendant Cirrus Logic, Inc. ("Cirrus") sue Cirrus, and certain of its officers and directors, for securities fraud. At the request of the Court, defendants have filed three separate motions for summary judgment. For the reasons stated hereinafter, the Court grants defendants' motions for summary judgment in part, and denies them in part.


 This is a federal securities class action alleging violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 *fn1" , and Rule 10b-5 promulgated thereunder, *fn2" by Cirrus, and certain of its officers and directors, during the class period of October 22, 1992 through April 26, 1993. The individual defendants are Michael L. Hackworth ("Hackworth"), Cirrus's founder, President, CEO, and Director; Sam S. Srinivasan ("Srinivasan"), Chief Financial Officer and Vice President of Finance; George N. Alexy ("Alexy"), Vice President of Marketing; Douglas J. Bartek ("Bartek"), Vice-President and General Manager of User Interface Products ("Bartek"); and William D. Caparelli ("Caparelli"), Vice President of Worldwide Sales.

 Plaintiffs allege that by the end of the summer of 1992, Cirrus was aware that its Mass Storage Division was experiencing a decline in demand that would materially worsen. By October 1992, the beginning of the class period, Cirrus was allegedly aware that demand for its Mass Storage products was evaporating, yet defendants publicly stated that its business remained strong. Plaintiffs allege that Cirrus "cooked the books" for the third quarter of fiscal 1993 (ended December 31, 1992) to avoid revealing the fact and extent of the purportedly declining demand for its products. In particular, plaintiffs allege that Cirrus calculated its inventory reserves by a method that violated both its own internal accounting policy and Generally Accepted Accounting Principles ("GAAP"). Plaintiffs also contend that Cirrus improperly failed to recognize a $ 1.7 million shortfall between physical and book inventory in the third quarter, and that Cirrus improperly pulled in revenue from the fourth quarter to the third quarter. Plaintiffs argue that these allegedly improper accounting manipulations permitted Cirrus fraudulently to report increased revenues and earnings for the third quarter, thus keeping stock prices artificially high.

 A number of sales of stock by corporate insiders took place in late October and during the month of November 1992. Between October 26 and November 2, 1992, Srinivasan sold 61,000 shares of his Cirrus stock. (UF P 125.) Caparelli sold 30,000 shares of stock between October 28 and November 9, 1992. (UF P 128.) Between November 6 and 10, 1992, Bartek sold 60,000 shares of stock previously subject to lockup restrictions. (UF P 127.) On November 10, 1992, Alexy sold 10,000 shares of stock (approximately 8.3 percent of his total holdings), retaining thereafter 71,013 shares and 38,625 vested options. (UF P 126.)

 In December 1992, Cirrus announced its acquisition of Pacific Communication Sciences, Inc. ("PCSI"), allegedly representing that the acquisition would have no impact on the third quarter results, and only a $ .10 to $ .15 impact on the company's earnings per share for the fourth quarter.

 On April 26, 1993, Cirrus announced that its earnings per share for the fourth quarter would be lower than market expectations. Cirrus also announced that its previously reported third quarter results would be restated downward from $ 0.46 to $ 0.28 per share. One of the reasons given for the shortfall in fourth quarter earnings was a $ 4 million increase in Cirrus's inventory reserves. On April 27, the day after the end of the class period, the price of Cirrus shares dropped $ 6 to $ 14.50 per share, representing a drop of almost 30 percent.

 Of the three separate summary judgment motions, the first motion concerns plaintiffs' allegations that Cirrus's preparation and issuance of its third quarter financial results constituted accounting fraud. The second motion discusses Cirrus's alleged liability for opinions by third-party securities analysts, and for Cirrus's private statements to one particular analyst. The third motion discusses Cirrus's alleged liability for its own public statements in conference calls, press releases, and filings with the Securities and Exchange Commission ("SEC") during the third and fourth quarters of fiscal 1993.



 Rule 56(c) of the Federal Rules of Civil Procedure provides that a court may grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."

 The Supreme Court's 1986 "trilogy" of Celotex Corp. v. Catrett, 477 U.S. 317, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986), Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986), and Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986) requires that a party seeking summary judgment show the absence of a genuine issue of material fact. Once the moving party has made this showing, the nonmoving party must "designate 'specific facts showing that there is a genuine issue for trial.'" Celotex, 477 U.S. at 324 (quoting Fed. R. Civ. P. 56(c)). "When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586. "If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Liberty Lobby, 477 U.S. at 249-50 (citations omitted). When determining whether there is a genuine issue for trial, "inferences to be drawn from the underlying facts . . . must be viewed in the light most favorable to the party opposing the motion." Matsushita, 475 U.S. at 587 (citation omitted).


 Rule 10b-5 of the Securities and Exchange Act of 1934 makes it unlawful 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." 17 C.F.R. § 240.10b-5(b) (1996). To prove a violation of Rule 10b-5, plaintiffs must show "(1) a misrepresentation or omission of a material fact, (2) reliance, (3) scienter, and (4) resulting damages." Paracor Fin., Inc. v. General Elec. Capital Corp., 96 F.3d 1151, 1157 (9th Cir. 1996).


 Misrepresentations of material facts within the meaning of Rule 10b-5 typically involve misstatements of historical fact. A material misstatement need not be one of historical fact, however, to be actionable. See In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989), cert. denied, 496 U.S. 943, 110 L. Ed. 2d 676, 110 S. Ct. 3229 (1990). Both projections and "general expressions of optimism" may be actionable under the securities laws. Id. (citing Marx v. Computer Sciences Corp., 507 F.2d 485, 489-92 (9th Cir. 1974)); see also In re Wells Fargo Sec. Litig., 12 F.3d 922, 930 (9th Cir. 1993), cert. denied, 130 L. Ed. 2d 209, 115 S. Ct. 295 (1994) (quoting Hanon v. Dataproducts Corp., 976 F.2d 497, 501 (9th Cir. 1992)) ("statements of reasons, opinions, or beliefs are 'factual' for purposes of the securities laws," and thus may be actionable, unless certain conditions are met).

 There are three principal ways to shield forward-looking statements from actionability under Rule 10b-5. First, the statement will not be actionable if all of the following are true: "(1) . . . the statement is genuinely believed, (2) . . . there is a reasonable basis for that belief, and (3) . . . the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement." See 12 F.3d at 930 (quoting Hanon, 976 F.2d at 501). In order to "seriously undermine" the accuracy of the statement, undisclosed facts must "undermine [its] foundation[s]." Arazie v. Mullane, 2 F.3d 1456, 1467 (7th Cir. 1993).

 The second way to shield such statements from actionability is through reliance on the precept that statements must be evaluated in context, "in light of all the information then available" (including information available to the market), to determine liability under the securities laws. In re Convergent Technologies Sec. Litig., 948 F.2d 507, 512 (9th Cir. 1991). Pursuant to the "bespeaks caution" doctrine recognized by the Ninth Circuit, typically applied in cases involving a written document, "a court can rule as a matter of law ([for example in] . . . a motion for summary judgment) that defendants' forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud." In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413 (9th Cir. 1994), cert. denied, 116 S. Ct. 185 and 116 S. Ct. 277 (1995) (citation omitted). More specifically,

 Id. (quoting In re Worlds of Wonder Sec. Litig., 814 F. Supp. 850, 858 (N.D. Cal. 1993), aff'd in part, rev'd in part, 35 F.3d 1407 (9th Cir. 1994), cert. denied, 116 S. Ct. 185 and 116 S. Ct. 277 (1995). *fn3" The mere inclusion of some cautionary language, however, will not suffice "to support a determination as a matter of law that defendants' statements were not misleading." Fecht v. Price Co., 70 F.3d 1078, 1082 (9th Cir. 1995), cert. denied, 134 L. Ed. 2d 547, 116 S. Ct. 1422 (1996).

 Third, certain types of forward-looking statements are so vague that as a matter of law they are not actionable. In re Caere Corporate Sec. Litig., 837 F. Supp. 1054, 1057 (N.D. Cal. 1993). *fn4"

In considering whether the market was misled by a particular statement of optimism, courts should keep in mind that "professional investors, and most amateur investors as well, know how to devalue the optimism of corporate executives, who have a personal stake in the future success of the company."

 Id. at 1058 (quoting In re Verifone Sec. Litig., 784 F. Supp. 1471, 1481 (N.D. Cal. 1992) (citation omitted), aff'd, 11 F.3d 865 (9th Cir. 1993)); accord In re Syntex Corp. Sec. Litig., 855 F. Supp. 1086, 1096 (N.D. Cal. 1994), aff'd, 95 F.3d 922 (9th Cir. 1996) (statements that company expected "increased sales" and "very strong fiscal 1993" not actionable).

 Unlike affirmative statements, discussed above, omissions in the Rule 10b-5 context must be of material, actual facts (such as financial data) to be actionable. See Verifone, 11 F.3d at 869. *fn5" Additionally, in a "fraud on the market" *fn6" case such as this one, "the defendant's failure to disclose material information may be excused where that information has been made credibly available to the market by other sources." Apple, 886 F.2d at 1115. Because of the heavy weight placed by the investing public on the statements and opinions of corporate insiders, however, in order to avoid Rule 10b-5 liability for material omissions, "any material information which insiders fail to disclose must be transmitted to the public with a degree of intensity and credibility sufficient to effectively counterbalance any misleading impression created by the insiders' one-sided representations." 886 F.2d at 1116 (citing Basic Inc. v. Levinson, 485 U.S. 224, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988)).

 As a general rule, companies are not required to disclose internal forecasts. See, e.g., Convergent, 948 F.2d at 516 (company not required to disclose internal projections); Verifone, 11 F.3d at 869 ("Absent allegations that VeriFone withheld financial data or other existing facts from which forecasts are typically derived . . . the forecasts need not have been disclosed"); In re Lyondell Petrochemical Co. Sec. Litig., 984 F.2d 1050, 1052-53 (9th Cir. 1993) (no duty to disclose projections indicating that 1989 income and revenues would be below 1988 levels, reasoning that "[a] corporation may be called upon to make confidential projections for a variety of sound purposes where public disclosure would be harmful"); Marx, 507 F.2d at 491 (company "need not detail every corporate event, current or prospective"); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 448-49, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976) (management not required "to bury the shareholders in an avalanche of trivial information -- a result that is hardly conducive to informed decisionmaking"); In re Stac Electronics Sec. Litig., 89 F.3d 1399, 1411 (9th Cir. 1996) ("Issuers need not reveal all projections. Any firm generates a range of estimates internally or through consultants. It may reveal the projection it thinks best while withholding others, so long as the one revealed has a 'reasonable basis'") (quoting Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 516 (7th Cir. 1989)).

 Failure to disclose internal forecasts, moreover, does not render the statements that were made necessarily misleading. See Verifone, 11 F.3d at 869 ("failure to make the omitted forecasts did not render other statements that were made misleading"); accord In re Adobe Systems Sec. Litig., 787 F. Supp. 912, 918-19 (N.D. Cal. 1992), aff'd sub nom. Cloutier v. Adobe Sys., 5 F.3d 535 (9th Cir. 1993) ("If the mere existence of differing implications (for future corporate performance) reasonably drawable from information available at the time a projection is made can create a triable issue of fact . . . then virtually every lawsuit alleging such a projection would, it seems, go to trial -- for, indeed, every projection of corporate earnings is uncertain and subject to different predictive interpretations." Id. at 919.).

 On the other hand, companies have a duty to disclose internal forecasts "made with . . . reasonable certainty," Convergent, 948 F.2d at 516, as well as "financial data and other material information upon which an internal forecast is based." Provenz v. Miller, 95 F.3d 1376, 1386 (9th Cir. 1996) (citing Verifone, 11 F.3d at 869) (reversing grant of summary judgment for defendants where company executive, disregarding reliable internal spreadsheet predicting $ 4,000,000 loss for the quarter, predicted quarterly earnings of approximately $ 624,000).


 According to the Supreme Court, materiality is "a mixed question of law and fact, involving as it does the application of a legal standard to a particular set of facts." TSC Indus., 426 U.S. at 450 (proxy solicitation case). An omitted fact is material "if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote," or that its disclosure "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." Basic, 485 U.S. at 231-232 (adopting the TSC Indus. standard of materiality for the § 10(b) and Rule 10b-5 context).

 The determination of materiality "requires delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact." TSC Indus., 426 U.S. at 450 (footnote omitted). Like scienter, therefore, materiality is ordinarily best left to the trier of fact, see Worlds of Wonder, 35 F.3d at 1412 (citing Hanon, 976 F.2d at 500). Similarly, whether a particular public statement is misleading, or whether adverse facts were adequately disclosed, "is a mixed question to be decided by the trier of fact." Fecht, 70 F.3d at 1081 (citing Durning v. First Boston Corp., 815 F.2d 1265, 1268 (9th Cir. 1987), cert. denied, 484 U.S. 944, 98 L. Ed. 2d 358, 108 S. Ct. 330 (1987)) ("like materiality, adequacy of disclosure is normally a jury question") (internal quotation marks omitted).

 Summary judgment may, however, be granted on the issue of materiality in appropriate cases. Apple, 886 F.2d at 1113. The standard is strict. As the Ninth Circuit explained in Fecht, "only if the adequacy of the disclosure or the materiality of the statement is 'so obvious that reasonable minds [could] not differ' are these issues 'appropriately resolved as a matter of law.'" 70 F.3d at 1081 (quoting Durning, 815 F.2d at 1268); accord TSC Indus., 426 U.S. at 450.


 Scienter is a "mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976). Recklessness may also satisfy the scienter element. Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990) (en banc), cert. denied, 499 U.S. 976, 113 L. Ed. 2d 719, 111 S. Ct. 1621 (1991). Recklessness is defined as "a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care . . . ." Id. (quoting Sunstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.), cert. denied, 434 U.S. 875, 54 L. Ed. 2d 155, 98 S. Ct. 224, 98 S. Ct. 225 (1977)). Insider trading "in suspicious amounts or at suspicious times" may be probative of scienter. Apple, 886 F.2d at 1117.

 Scienter may be established in a number of ways, employing both direct and circumstantial evidence. Provenz, 95 F.3d at 1388 (citing Worlds of Wonder, 35 F.3d at 1425). One way to establish scienter is to show motive and opportunity. See In re Wells Fargo Sec. Litig., 12 F.3d 922, 931 (9th Cir. 1993), cert. denied, 130 L. Ed. 2d 209, 115 S. Ct. 295 (1994) (citation omitted) (on a motion to dismiss, "motive and opportunity . . . are sufficient to establish a basis for inferring . . . fraudulent intent"). Another way is to provide circumstantial evidence of reckless or deliberate behavior. See, e.g., Herman & MacLean v. Huddleston, 459 U.S. 375, 390 n.30, 74 L. Ed. 2d 548, 103 S. Ct. 683 (1983) (circumstantial evidence sufficient to prove scienter because of the difficulty inherent in proving state of mind); In re Network Equip. Technologies, Inc. Litig., 762 F. Supp. 1359, 1362-63 (N.D. Cal. 1991); accord Gray v. First Winthrop Corp., 82 F.3d 877, 884 (9th Cir. 1996).

 In In re Software Toolworks Inc. Sec. Litig., 50 F.3d 615, 627 (9th Cir. 1994), cert. denied, 116 S. Ct. 274 (1995), the Ninth Circuit held that, even where plaintiffs presented no evidence of defendants' actual knowledge or fraudulent intent, the evidence presented sufficed to defeat summary judgment because it permitted "a reasonable inference that 'the [defendants] had access to all information that was available and deliberately chose to conceal the truth.'"


 The Court begins with defendants' motion for summary judgment on plaintiffs' allegations that Cirrus's preparation and issuance of its third quarter 1993 financial statements constituted accounting fraud. Plaintiffs' claims of accounting fraud are based on three theories. First, they allege that defendants caused Cirrus to understate its inventory reserves and, thus, overstated or inflated its reported net income and earnings per share. Second, plaintiffs allege that Cirrus should have booked a $ 1.7 million variance between book and physical inventory in the third quarter of 1993. Third, plaintiffs contend that Cirrus improperly recognized revenue in the third quarter of 1993 that should have been recognized in the fourth quarter.


 Plaintiffs' first argument is that Cirrus's alleged deviation from its undisclosed internal inventory reserve policy, in setting inventory reserves for the third quarter of fiscal year 1993, constituted fraud. Alternatively, plaintiffs argue that the inventory reserves actually calculated for the third quarter of fiscal 1993 were so unreasonable as to violate GAAP *fn7" and constitute accounting fraud.

 As a preliminary matter, it should be noted that GAAP is not a set of rules ensuring identical treatment of identical transactions; rather, it tolerates a range of reasonable treatments, leaving the choice among alternatives to management. Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 544, 58 L. Ed. 2d 785, 99 S. Ct. 773 (1979). (See also Def. Ex. 812, APB Op. No. 22 ("Applying generally accepted accounting principles requires that judgment be exercised as to the relative appropriateness of acceptable alternative principles and methods of application in specific circumstances of diverse and complex economic activities."); Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1021 (5th Cir. 1996) (citation omitted) (GAAP "is a term of art encompassing a wide range of acceptable procedures, such that 'an ethical, reasonably diligent accountant may choose to apply any variety of acceptable accounting procedures when that accountant prepares a financial statement.'")). Even at the pleading stage, the Ninth Circuit has held that plaintiffs must set forth facts explaining why the allegedly fraudulent accounting decision "is not merely the difference between two permissible judgments," because flexible accounting concepts "do not always (or perhaps ever) yield a single correct figure." In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1549 (9th Cir. 1994) (en banc).


 Cirrus's publicly disclosed policy was to state inventory at "the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market . . . ." (Def. Ex. 702, Cirrus 1992 Annual Report at 24; Def. Ex. 734, Cirrus 1993 Annual Report at 29.) The parties agree that GAAP includes the principle that inventory be valued at the lower of cost or market. (UF P 6.) Plaintiffs' accounting expert acknowledges that this policy complied with GAAP. (Murovitz Decl. at P 10; Accord, Murovitz Decl., Ex. B, ARB No. 43, ch. 4, Statement No. 5.)

 If a company determines that it is probable that the inventory cost reflected on its books is greater than the value for which the inventory can be sold, it must establish an "inventory reserve" to cover the difference. (Srinivasan Decl. *fn8" at P 18; Murovitz Decl. P 10 and Ex. B, ARB No. 43, Ch. 4, Statement 5; Def. Ex. 824, FASB Statement of Financial Accounting Standards No. 5 at P 8.) This may occur if the company anticipates that the market value of its inventory will drop below cost, or that it may not be able to sell all of its inventory. (Srinivasan Decl. P 18.) Thus, an inventory reserve is essentially a write-off of inventory that is unlikely to be sold, or that will be sold for less than cost. (Thornbrugh Dep. *fn9" at 8:20-9:11.) One could also characterize an inventory reserve as a company's forecast of future demand for its products.

 Cirrus's internal written inventory reserve policy provided for establishment of an inventory reserve for products with Equivalent Finished Goods Units in excess of demand over the subsequent 120-day period. (UF P 13.) The policy provided that the reserve could be waived at management discretion if significant booked backlog existed outside the 120-day window. (UF P 13.) The policy also specifically exempted from the 120-day reserve requirement inventory put in place as a result of a specific volume purchase agreement. (UF P 13.) (See Def. Ex. 4, Inventory Reserve Policy, dated Nov. 20, 1991.) Thus, generally, Cirrus's internal policy provided for the calculation of a "120-day demand reserve" for existing inventory that it estimated would not be sold within 120 days. (Srinivasan Decl. P 19; Thornbrugh Decl. P 12.)

 It is undisputed that, for the third quarter of fiscal 1993, Cirrus management reduced the 120-day demand reserve by $ 3.46 million based on factors other than significant booked backlog or inventory put in place as a result of a volume purchase agreement. (UF P 15.) Thus, the initial issue before the Court is whether there exists a triable issue of fact as to whether Cirrus's reduction of the 120-day demand reserves for various products was in itself fraudulent.

 Cirrus argues that its inventory reserve policy was merely a starting point for determining the proper inventory reserve to comply with GAAP. (Srinivasan Decl. P 23; Thornbrugh Decl. P 16.) The 120-day demand reserve was calculated by the cost accounting department's computer system. (Srinivasan Decl. P 19; Thornbrugh Decl. P 12.) Numerous Cirrus executives then evaluated the 120-day demand reserve to decide whether it accurately valued the inventory in accordance with Cirrus's publicly-disclosed accounting policy and GAAP. (Srinivasan Decl. P 20; Thornbrugh Decl. P 13.) Cirrus frequently adjusted the 120-day demand reserve based on its business judgment, which took into consideration such factors as demand beyond 120 days, longer production lead times, cross-shippability of products, and management's knowledge of the overall computer market and the market for Cirrus's products. (Srinivasan Decl. P 22; Thornbrugh Decl. P 14.). Susan James of Ernst & Young ("E&Y") testified that nothing in GAAP requires that there be a strict 120-day demand reserve, and that ongoing adjustments to the demand reserve would almost have to be made to comply with GAAP. (James Dep. at 31:12-19.) Judge Jensen of this Court has previously held that GAAP does not require that reserves be set at any predetermined level. Leonard v. NetFrame Sys., Inc., [Current Tr. Binder] Fed. Sec. L. Rep. P 98,982 at 93,780 (N.D. Cal. Aug. 8, 1995).

 Plaintiffs argue that Cirrus had no reasonable basis for deviating from its inventory reserve policy by reducing the 120-day reserves. According to plaintiffs, this subjectivity in calculating the reserves removed the required comparability and consistency from the calculation of inventory reserves. (Murovitz Decl. PP 17-18.) Although a company's internal accounting policies may be relevant to show how the company complied, or failed to comply, with GAAP, however, there can be no claim of fraud based merely on a company's deviation from its own undisclosed internal accounting policies. *fn10" Cf. In re Worlds of Wonder Sec. Litig., 147 F.R.D. 214, 216-17 (N.D. Cal. 1992) ("The audit manuals do not establish the standards against which Deloitte's conduct of the WOW audit is to be measured. That standard is established by GAAS and GAAP, publicly disseminated standards recognized throughout the accounting industry. . . . It is . . . unfair to use professionals' self-imposed standards, which may exceed industry standards, against them to try to prove fraud. This violates public policy which encourages the highest standards, in order to protect the public"). The issue, then, is, whether Cirrus's reserve decisions complied with GAAP, and with Cirrus's publicly disclosed policy of valuing inventory at the lower of cost or market value, not whether Cirrus complied with its undisclosed internal reserve policy.

 Plaintiffs also argue that Cirrus fraudulently failed to disclose that it changed its method of accounting for excess and obsolete inventory during the class period. Plaintiffs have submitted no evidence that Cirrus changed its publicly disclosed practice and policy of valuing inventory at the lower of cost or market during the class period. (See Murovitz Decl., Ex. F, APB Op. No. 28, P 23 ("Each report of interim financial information should indicate any change in accounting principles or practices from those applied in (a) the comparable interim period of the prior annual period, (b) the preceding interim periods in the current annual period and (c) the prior annual report.").)

 With respect to changes in its internal policy, Cirrus presents evidence that it has always injected a subjective element into its inventory reserve decisions to adjust the 120-day inventory reserve, and cites to E&Y work papers from earlier quarters. In the third and fourth quarters of fiscal 1992, for example, Cirrus reduced the system-generated 120-day inventory reserve by $ 1.432 million and $ 1 million, respectively. (Eicholz Decl. PP 11-14; Def. Exs. 801, and 810.) E&Y specifically addressed this issue in the fiscal 1993 audit: "[The] reserve has then been adjusted by consideration of the 180 day demand and any other known factors. This methodology of judging down the systematically determined 120 day demand is consistent with Company policy and the Company's prior practices." (Def. Ex. 806; Eicholz Decl. P 27.) Thus, even assuming that Cirrus was required to disclose to the market any changes in its undisclosed internal method of calculating inventory reserves, which it was not, Cirrus has shown that it did not calculate the inventory reserves differently in the third quarter of fiscal 1993 than in previous quarters.

 Plaintiffs also argue that Thornbrugh testified that Cirrus's inventory reserve policy changed as a result of its acquisition of Acumos in April 1992. Thornbrugh actually testified, however, that the way that the inventory reserves were calculated prior to the acquisition of Acumos was probably closer to the letter of Cirrus's undisclosed internal reserve policy than afterwards. (Thornbrugh Decl. at 172:9-173:23.) Because there is no cause of action under the federal securities laws merely for deviating from an undisclosed internal accounting policy, Thornbrugh's testimony does not raise a disputed issue of material fact as to whether Cirrus's inventory reserve calculations were fraudulent.

 Plaintiffs contend that Cirrus was required to disclose in its financial statements that it had reduced the 120-day demand reserve. Again, there is no such duty. Because nothing in GAAP requires that inventory reserves be set at a 120-day demand reserve level, ongoing adjustments to reserves that otherwise comply with GAAP need not be disclosed.

 Accordingly, the Court finds that plaintiffs have failed to raise a genuine issue of material fact to defeat summary judgment on their claims that Cirrus's alleged deviations from its undisclosed internal reserve policy in the third quarter of fiscal 1993, without more, constituted accounting fraud.


 As discussed above, plaintiffs present no evidence that Cirrus deviated from its publicly disclosed inventory reserve policy at any time during the class period. Thus, the Court now turns to whether the inventory reserves set by Cirrus in third quarter of fiscal 1993 complied with GAAP. This requires evaluation of the reasonableness of the reserve decisions. A company's determination of inventory reserves, like other types of forecasts, is considered fraudulent only if plaintiffs can show that the company lacked a reasonable basis for the determination. See VeriFone, 11 F.3d at 870; Worlds of Wonder, 35 F.3d at 1426 (plaintiff must prove that the accounting practices were so deficient that no reasonable accountant would have made the same decision).

 Under GAAP, management is responsible for establishing a process for preparing accounting estimates, although the process need not be documented or formally applied. (Murovitz Decl., Ex. C, AICPA Professional Standards, Auditing Accounting Estimates § 342.05.) Indeed, GAAP approves of the use of subjective criteria in determining financial estimates.

Management is responsible for making the accounting estimates included in the financial statements. Estimates are based on subjective as well as objective factors and, as a result, judgment is required to estimate an amount at the date of the financial statements. Management's judgment is normally based on its knowledge and experience about past and current events and its assumptions about conditions it expects to exist and courses of action it expects to take.

 (Murovitz Decl., Ex. C., AICPA Professional Standards, Auditing Accounting Estimates § 342.03 (emphasis added).) Even Cirrus's 120-day demand reserve contained elements of subjectivity because it was based in part on the "current month demand forecast." (Def. Ex. 4.) An auditor's objective when evaluating management's accounting estimates is to ensure that the accounting estimates were reasonable under the circumstances. (Murovitz Decl., Ex. C., AICPA Professional Standards, Auditing Accounting Estimates § 342.07.)

 Courts in this district have granted summary judgment in accounting fraud cases even where the opposing party has provided a declaration from an accountant attesting that the accounting practices at issue did not meet the applicable professional standards. See, e.g., In re Software Toolworks, Inc. Sec. Litig., 789 F. Supp. 1489, 1504 (N.D. Cal. 1992) aff'd in relevant part and rev'd in part, 50 F.3d 615, 628-29 (9th Cir. 1994), cert. denied, 116 S. Ct. 274 (1995) (granting partial summary judgment for defendant auditors and holding that whether inventory reserve should have been higher was a matter of judgment on which the parties disagreed, not a basis on which to infer scienter); Mathews v. Centex Telemanagement, Inc., [1994-95 Tr. Binder] Fed. Sec. L. Rep. (CCH) P 98,440 at 91,037 (N.D. Cal. 1994) (granting summary judgment for defendants because plaintiffs' claims about how reserves should have been calculated "are only differences in business judgment viewed from hindsight"; "the jury need not be given the task of deciding whose proffered method is more reasonable").

 Before Cirrus publicly released its financial statements, Cirrus disclosed its reserve decisions to E&Y and discussed them. (Berry Decl. P 7; Eicholz Decl. P 5.) At the end of fiscal 1993, E&Y audited Cirrus's financial statements and concluded that the inventory reserve decisions were reasonable. (Eicholz Decl. PP 24-27; Def. Ex. 734, 1993 Annual Report at 33; Def. Ex. 202, E&Y 3rd qtr. work papers; Def. Ex. 806, E&Y 3/31/93 inventory reserve mem.) E&Y never required Cirrus to change a reserve decision. (Srinivasan Decl. P 24.)

 Plaintiffs argue that the reduction from the 120-day demand reserve was unreasonable because, during the class period, Cirrus's inventory was increasing at a significantly faster rate than its revenue. (Murovitz Decl. P 25.) Cirrus's revenues for the three months ended December 31, 1992 increased 20 percent from the previous quarter, while gross inventories increased 35 percent. (Murovitz Decl., citing Pl. Ex. 201 at EY2 03902-06.) Inventory turns, a ratio that measures the number of times inventory is turned over during the year, decreased from 6.26 for the first five months of fiscal 1993 to only 5.08 for the four months ended December 31, 1992. (Murovitz Decl., citing Def. Ex. 202 at EY2 03958.) According to plaintiffs' expert, low inventory turnover can indicate poor liquidity, possible overstocking, or obsolescence. (Murovitz Decl. P 26, n.5.) Plaintiffs' expert contends that the decreases in inventory turns were a significant trend indicative of deteriorating quality of inventory. (Murovitz Decl. at P 27.)

 Defendants respond that neither total inventory for all Cirrus products, nor the rate of turns for all products, has any bearing on the issue whether the reserve set for a specific product was reasonable. Moreover, they contend, Cirrus's gross inventory had risen because of increasing sales and to meet the future demand for Cirrus's products. (Def. Ex. 500; Thornbrugh Decl. P 38.) Cirrus's net sales increased from $ 217.6 million in fiscal 1992 to $ 354.8 million in fiscal 1993 to $ 544.1 million in fiscal 1994. (Def. Ex. 723, Cirrus's 1994 Annual Report at NC 000182). In his deposition, Murovitz acknowledged that there is no evidence that Cirrus did not consider its gross inventory, its reserves as a percentage of gross inventory, and its inventory turns in making its reserve decisions. (Murovitz Dep. at 106:24-107:6, 108:8-11.) Murovitz acknowledged that he was unaware of any provision in GAAP that requires an increase in reserves when inventory grows at a faster rate than sales over a three month period. (Murovitz Dep. at 107:11-14.) He also conceded that inventory turns may drop as a company grows in size, and that this may not be a problem for the company. (Murovitz Dep. at 107:23-108:27.) Murovitz testified that he had no idea whether Cirrus's reserves had been reduced from those of the second quarter of fiscal 1993; his comments about Cirrus's reduction in reserves refer only to a reduction from the 120-day demand reserve, which the Court has already held is a problem only if that reduction violates GAAP. (Murovitz Dep. at 106:9-21.)

 Plaintiffs' expert also argues that Cirrus's reliance on E&Y for a determination of the adequacy of its inventory reserves was unreasonable, because E&Y performed no professional service that required E&Y to determine whether Cirrus adhered to GAAP in the preparation of Cirrus's third quarter financial information. (Murovitz Decl. at P 32.) Plaintiff argues that E&Y's fiscal 1993 year-end audit opinion also provides no basis for assessing the reasonableness of Cirrus's inventory reserves, as it is based almost entirely on representations by Cirrus management that were not independently confirmed. (Murovitz Decl. at PP 35-36.) Steven Berry, who performed E&Y's third quarter consultation work regarding inventories, testified that E&Y did no testing on balance sheet accounts. (Berry Dep. at 18:22-25, 54:1-16.) Susan James testified that E&Y's consultation with regard to the third quarter financial results involved very limited analytical procedures, and that E&Y was not asked to issue a review report. (James Dep. at 14:10-22.)

 Berry's declaration submitted in support of Cirrus's motion for summary judgment states, however, that "in the course of the third quarter consultation, I analyzed judgmental reductions to product-specific user interface reserves totaling $ 2.058 million. E&Y concluded that the judgments appeared reasonable." (Berry Decl. P 19, citing Def. Ex. 202.) E&Y's contemporaneous workpapers from the period do contain notations demonstrating that E&Y analyzed the numbers and information presented to them by Cirrus management and concluded that "overall, the judgment applied to the demand reserve to reduce the system generated reserve appears reasonable." (Def. Ex. 202 at EY2 03944-45.)

 In their opposition to defendants' motion for summary judgment, plaintiffs challenge the actual reserve calculations for only four of Cirrus's products.

 a. Mercury C. Defendants present evidence that Cirrus reduced the inventory reserve by $ 74,000 due to demand from Conner. (Def. Ex. 385, referring to "Conner liability buffer.") Mercury C is part of the Mass Storage group. E&Y reviewed the decision and stated "the most recent sales forecast shows an increase in demand from the forecast used to initially value this inventory. This appears consistent with my review of the forecast." (Def. Ex. 202 at EY2 03945.) Berry states in his declaration that "I specifically analyzed the judgmental reduction to the demand reserve for one mass storage product, Mercury E, and concluded that the company's judgment was reasonable based on the facts known to management." (Berry Decl. P 20.) Plaintiffs argue that this decision was unreasonable because Cirrus's January 14, 1993 demand forecast shows that Mercury demand decreased by 154,700 units from the December 15, 1992 demand forecast. (Def. Ex. 822 at CIR 338591.) A January 14 memorandum, however, indicates that Conner was likely to need 126,000 additional units of Mercury, and that the order was likely to come before the end of the week. (Def. Ex. 215.) As of December 31, 1992, Cirrus had only 120,800 units of Mercury C in excess of the projected 120-day demand, less than the anticipated Conner order. (Def. Ex. 385 at CIR 094440.) The Court finds that plaintiffs have not raised a material issue of fact as to whether Cirrus's reduction in the 120-day inventory reserve for the Mercury products was reasonable.

 b. GC 45 D-Servo. Cirrus reduced the 120-day demand reserve by $ 427,000. (Def. Ex. 385.) Around the time Cirrus was reducing the reserve for this product, it was also identifying GC 45 as a potential writeoff. (Pl. Ex. 10.) Moreover, the January demand forecast showed a dramatic decrease in the six-month demand for this product compared to the December forecast. (Def. Ex. 822 at CIR 338593.) Plaintiffs also argue that although the reduction in inventory reserves for GC 45 was the largest reduction to third-quarter Mass Storage demand reserves, it was not even shown to E&Y. Although defendants contend that the amount of inventory on hand was below E&Y's materiality threshold and, thus, was too low to be reviewed during the quarterly consultation, they do not submit any evidence of E&Y's materiality threshold. Thornbrugh avers that GC 45 was a product typically booked and shipped in a period shorter than the manufacturing lead time; Cirrus reduced the reserve to zero because it believed that it could sell all of this product. (Thornbrugh Decl. P 24.) Thornbrugh also avers that Cirrus and Conner had entered into a "die bank agreement" under which Conner was liable for at least 50,000 units of GC 45 even if the product was not consumed. (Thornbrugh Decl. P 24.) Defendants do not cite to any evidence before the Court of the terms of this "die bank agreement." Viewing the evidence in the light most favorable to plaintiffs, the Court finds that plaintiffs have raised a genuine issue of fact as to whether Cirrus's reduction in the 120-day inventory reserve for GC 45 D-Servo was reasonable.

 c. Raven II. Defendants submit evidence that Cirrus reduced the 120-day demand reserve for Raven II by $ 204,000 because of six-month demand. (Def. Ex. 385 at CIR 094450.) Raven is part of the User Interface group. E&Y found this reduction in the 120-day demand reserve to be reasonable because it was due to longer lead times and increased product demand. (Def. Ex. 202 at EY2 03944-45; Def. Ex. 500 at EY 01479.) Plaintiffs argue that the January demand forecast reflected a decrease in demand for Raven II. There is no citation to evidence for this contention, and defendants' Exhibit 822 does not appear to contain a projection for the Raven product. Rather, the January 1993 demand forecast showed a projected demand for Raven II of 56,800 units for May and June 1993; this six-month demand accounted for almost all of the 59,500 units in excess of the 120-day demand. (Compare Def. Ex. 740 at CIR 524744 with Def. Ex. 385 at CIR 094453.) The Court finds that plaintiffs have not raised a material issue of fact as to whether Cirrus's reduction in the 120-day inventory reserve for the Raven products was reasonable.

 d. Stingray. Cirrus reduced the 120-day demand reserve for the Stingray group of products by $ 599,000 (175,000 units). (Def. Ex. 385 at CIR 094450.) This reduction was based on Stingray's prior success. (Solari Decl. P 20.) Stingray was a successful product, having netted billings of more than $ 2 million in the third quarter of fiscal 1993. (Def. Ex. 770.) The 270-day demand for the product reduced the excess product on hand to 58,200 units. (Def. Ex. 740 at CIR 524745.) In addition, Cirrus envisioned that price breaks would boost sales in future quarters, while still enabling Cirrus to sell the product at a reasonable profit. (Solari Decl. P 20; Def. Ex. 202 at EY2 03946.) Plaintiffs argue, however, that E&Y recognized that Stingray was an "end-of-life" product. (Def. Ex. 202.) Moreover, while defendants claimed that price breaks would increase sales, Cirrus's demand forecast did not envision a ...

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