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SPERBER v. BROOKFREE CORP.

March 9, 1998

MURRAY ALLISON and ISABEL SPERBER, Plaintiffs,
v.
BROOKFREE CORPORATION, JAMES A. BIXBY, JERRY E. CANNING, STEWART KELLY, ROBERT W. ZABARONICK, DAVID C. GELVIN and EDWARD P. HOLTAWAY, Defendant.



The opinion of the court was delivered by: MILLER

 Defendants Brooktree Corporation ("Brooktree"), James A. Bixby, Jerry E. Canning, Stewart Kelly, Robert W. Zabaronick, David C. Gelvin and Edward P. Holtaway move to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Plaintiffs Murray Allison and Isabel Sperber oppose the motions. Having carefully considered the papers submitted, the record before the court, the oral arguments of counsel, and the applicable authority, the court grants Defendants' motion to dismiss and grants plaintiffs 45 days from the date of entry of this order to file an amended complaint.

 BACKGROUND

 Brooktree is a San Diego based high-tech company that designs, develops and markets high-performance integrated circuits for use with graphics, imaging, communications and multimedia applications. (Compl. P2). This class action was brought on behalf of all purchasers of Brooktree common stock between February 13, 1995, and February, 7, 1996 (the "Class Period"). The essence of the complaint is that Defendants made materially false and misleading statements concerning Brooktree's BtV Media chipset product (the "BtV chipset"). These statements, Plaintiffs allege, indicated that the BtV chipset was technologically superior than competing products, was enthusiastically received in the marketplace, was being incorporated into PC products by several manufacturers and would provide strong revenue and earnings growth for fiscal year 1996, ending September 30, 1996. (Compl. P1).

 The complaint identifies statements made in company press releases, securities analyst reports, media interviews with defendant James Bixby, Brooktree's CEO, and newspaper articles. A sampling of the statements include:

 
(1) On February 13, 1995, at a securities analyst conference, David Russian, CFO, stated that revenues would be flat until shipment of the BtV chipset in the fall and that Brooktree has "received strong interest in trade (sic) recent trade shows." (Compl. P59).
 
(2) In a newspaper article on March 9, 1995, Defendant Bixby stated, "I think we're on the right track," and "if we're successful we may get 20 percent" of the multimedia market. (Compl. P60).
 
(3) In a March 14, 1995 securities report, the analyst stated that "Brooktree appears to be offering a superior product . . . even a modest market penetration rate could have a substantial impact on the company's financial results." Compl. P61).
 
(4) In a May 10, 1995, press release the company announced that several companies had adopted the BtV chipset for integration into planned multimedia products and that Brooktree received several "design wins." (Compl. P64).
 
(5) In a June 5, 1995 PC Week article it was reported that volume quantities of the chipset are "expected" to be shipped in the fourth quarter. (Compl. P66).
 
(6) In a July 12, 1995, press release the company stated that the outlook for Brooktree continued to improve, that the company "felt" positive about the prospects for future growth, and that the company received multiple orders for shipment in the fourth quarter. (Compl. P68).
 
(7) In a July 28, 1995 interview, Defendant Bixby stated that Brooktree's "biggest investment" is about to bear fruit, that he "believed" that Brooktree had a product to increase its operating income, that Brooktree had "high expectations" for future growth and that its chipset would have 3-D capabilities in 1996. (Compl. P69).
 
(8) In late August 1995, Defendant Bixby informed securities analysts that the company expected a strong ramp up in sales and that it forecast revenues from multimedia products in fiscal 1996 of $ 50-$ 80 million. (Compl. P71).
 
(9) In late October 1995, Defendants Bixby and Canning allegedly told securities analysts that six companies had placed orders for the BtV chipset, that sales of multimedia products could reach $ 28 million per quarter by 1996, and that the chipset had a bright future.
 
(10) In a December 4, 1995 newspaper article Defendant Bixby stated that, after only one quarter, the BtV chipset has had strong sales. (Compl. P83).
 
(11) In a January 15, 1996 analyst report, Defendant Bixby informed the market that sales of Brooktree's maturing products had declined and that by mid-year the product should be in a strong growth mode. (Compl. P86)

 As the Class Period ended, Brooktree reported declining revenues and earnings due to weak sales of its BtV chipset. On February 7, 1997, Brooktree's stock, having reached a Class Period high of $ 21 per share, closed at approximately $ 8.50 per share.

 Plaintiffs allege that at the time the statements were made, Defendants knew:

 
(1) that the BtV chipset lacked compatible software drivers for numerous operating systems and configurations, that the product suffered numerous compatibility problems, that the product was difficult to install and support add-in cards and software drivers, that the BtV product could not be readily uninstalled, and that Brooktree was too aggressive because it prematurely released the chipset. (Compl. PP43-58).
 
(2) that its BtV chipset had only 2-D capabilities even though 3-D capabilities were rapidly becoming very important in the multimedia market. (Compl. P63(g)).
 
(3) that initial interest by customers was positive but as customers learned of its performance their interest declined. (Compl. P70).
 
(4) that there was no basis for the projections by securities analysts that Brooktree would have BtV chipset sales of $ 50-80 million in fiscal 1996. (Compl. P88).

 Plaintiffs allege that defendants willfully participated in a scheme and fraudulent course of conduct in order to sell their stock at inflated prices. Plaintiffs also allege that defendants engaged in the fraudulent conduct in order to cash in their stock options at the time of a buy-out offer. In fact, six months after the end of the Class Period, on July 1, 1996, Rockwell announced that it had agreed to purchase Brooktree for $ 15 per share.

 Defendants now move to dismiss the complaint under Fed.R.Civ.P. 12(b)(6) and the PSLRA.

 DISCUSSION

 A. Legal Standards

 1. Rule 12(b)(6)

 When ruling on a motion to dismiss, the court must accept all material allegations of fact as true and must construe those allegations in the light most favorable to the nonmovant. North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). If the complaint fails to state a claim, the court should grant leave to amend unless it appears beyond a doubt the plaintiff would not be entitled ...


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