The opinion of the court was delivered by: Breyer, United States District Judge
This consolidated securities fraud class action arises from defendant
FVC.COM's revision of its unaudited financial statements for the quarter
ending December 31, 1998. As a result of the change, FVC.COM reported $7
million less in revenue for the fourth quarter 1998 than it had
previously reported and the value of its stock plunged by nearly 60
Defendant FVC.COM ("FVC") is the leading provider of broad band network
video applications. Complaint ¶ 12. FVC was founded in 1993 by
defendants Ralph Ungermann ("Ungermann") and Allwyn Sequeira ("Sequeira")
and in April 1998 it completed an initial public offering ("IPO") of
stock. Id. ¶¶ 5, 7, 14.
FVC's IPO prospectus disclosed that its future performance would depend
in large part on the sales of its products through original equipment
manufacturers ("OEMs"), in particular, through Bay Networks and Nortel.
Complaint ¶ 14. The prospectus further advised that the "OEM partners
generally have no rights of return and historically carried limited
amounts of the Company products" Id. ¶ 15. That is, that sales to OEM
partners did not include a material risk of loss stemming from product
returns. Id. In its third quarter Form 10-Q, FVC disclosed that its two
most significant OEM partners. Bay Networks and Nortel, had combined as
the result of Nortels acquisition of Bay Networks and that the
combination would not have a material adverse effect on [FVC's] future
operating results. Id. ¶ 20.
In January 1999, FVC issued two press releases one week apart from each
other announcing preliminary, unaudited financial results of the
just-completed fourth quarter of 1998. On January 21, FVC issued a press
release which announced anticipated fourth quarter revenues of $12
million, a 58% increase over the $7.6 million in revenues reported in the
fourth quarter a year earlier. The release added that "actual results"
for the fourth quarter would be released a week later. Complaint ¶
26. The only FVC officer who made a statement in the release was the
Chief Executive Officer ("CEO") Richard Bever, who had joined FVC two
weeks earlier. Id.
On January 28, as promised, FVC released its actual unaudited fourth
quarter results and confirmed the revenue numbers announced in the
January 21 press release. The release announced the first ever annual
profit in the history of the company, and the first significant quarterly
profit. Complaint ¶ 27. The next day FVC's common stock rose $2.625 to
$13.625, or 24%, on volume of 1.12 million shares (as compared to the
daily average of 221,000). Complaint ¶ 31.
Ten weeks later, on April 6, 1999, FVC issued a press release
announcing its first quarter fiscal 1999 financial results, which were
significantly below analyst expectations for the quarter. Rather than
earning $0.03 per share, FVC posted a loss of $0.20 — $0.22 per
share. The release, entitled "FVC.COM Reports Preliminary First Quarter
Results as the Company Redefines Relationship with Largest OEM,"
explained the decline as follows:
The Company attributed the drop in system's to a
combination of factors including a significant
decline in business through its major OEM partner.
Bay Networks, now a part of Nortel Networks. Bay
Networks has been FVC.COM's largest customer for the
last several years. Negotiations during the quarter
to restructure the companies relationship resulted
in a significant reduction in joint sales activity.
Sales to Bay/Nortel fell to approximately 25 percent
in the first quarter, compared with approximately 43
percent as previously reported for the fourth
quarter of 1998. In addition, the Company stated
that Nortel has indicated its intention to move from
stocking inventory to having FVC.COM drop-ship it
In light of Nortel's change in its business practice, the April 6
release also announced a revision of FVC's unaudited fourth quarter 1998
results previously announced on January 28, 1999:
In order to reflect this change [the restructuring
of the customer relationship with Nortel], CEO Rich
Beyer, who joined the Company in January of this
year, stated that the Company will now record its
sales to Nortel on a sell-through basis and has
implemented this change effective December 31,
1998. Therefore, FVC.COM is reducing its previously
announced revenues for the quarter ended December
31, 1998 by approximately $7.0 to $7.3 million to
defer the revenue on inventory of FVC.COM products
held by Nortel on December 31, 1998. Such revenues
under the revised policy are now being recognized as
and when such products are sold by Nortel. Sales for
the fourth quarter 1998 are being revised to
approximately $4.7 to $5.2 million; earnings per
share will be revised accordingly to a net loss per
share of approximately $0.20 and $0.22.
April 6, 1999 Press Release. Instead of the $12.3 in revenues FVC had
announced in January, FVC's revenue for the fourth quarter 1998 would be
between $4.7 and $5.2 million — a reduction of 57% to 61% from what
it had previously reported and a net loss rather than a net profit.
B. The Consolidated Class Action
Within days of FVC's Tuesday, April 6, 1999 announcement several
securities fraud class actions were filed against FVC in this District.
See 99-1815 (April 9, 1999), 99-1827 (April 12, 1999), 99-1832 (April
12, 1999), 99-1861 (April 14, 1999), 99-1877 (April 15, 1999), 99-1915
(April 19, 1999), 99-2003 (April 27, 1999), 99-2115 (May 5, 2000). The
Court consolidated the class actions in accordance with the Private
Securities Reform Litigation Act ...