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July 5, 2001


The opinion of the court was delivered by: Hamilton, United States District Judge


Defendants' motions to dismiss the consolidated amended complaint came on for hearing on May 30, 2001, before this court, the Honorable Phyllis J. Hamilton presiding. Plaintiffs appeared by their counsel Reed R. Kathrein, Shawn A. Williams, Edward M. Gersosian, and David Kessler; the Harmonic, Inc., defendants appeared by their counsel Melvin R. Goldman and Terri Garland; and the C-Cube Microsystems, Inc., defendants appeared by their counsel Terry T. Johnson and Hanley Chew. Having read the parties' papers and carefully considered their arguments and the relevant legal authority, and good cause appearing, the court hereby GRANTS the motions to dismiss for the following reasons.


This is a proposed class action alleging violation of the federal securities laws. Defendant Harmonic, Inc., ("Harmonic") merged with the DiviCom division of C-Cube Microsystems, Inc. ("C-Cube") on May 3, 2000. The merger was approved by the shareholders of both corporations at shareholders' meetings conducted in late April 2000. As part of the merger, the shareholders of C-Cube's successor corporate entity received shares of Harmonic common stock, issued pursuant to a March 23, 2000, Registration Statement and Joint Proxy Statement/Prospectus filed with the SEC on March 24, 2000.

On June 26, 2000, Harmonic announced that its results for the second quarter of 2000 would be lower than anticipated. The price of Harmonic's stock dropped significantly on June 27, 2000, and plaintiffs filed suit, alleging that Harmonic and C-Cube had concealed or failed to disclose material information about, or had made false statements about, the companies' financial prospects.

The proposed class consists of all persons or entities who purchased or acquired Harmonic securities during the class period (January 19, 2000, to June 26, 2000), or who purchased or acquired C-Cube securities during the subclass period (January 19, 2000, to May 3, 2000). The subclass consists of all persons who acquired Harmonic shares pursuant to the registration statement and prospectus for the May 2000 merger between Harmonic and C-Cube.


Harmonic was founded in 1988 and went public in 1995. Harmonic provides fiber optic systems for cable operators, and has also developed and marketed digital video equipment. Historically, a significant portion of Harmonic's sales have been to a relatively small group of customers, AT & T being one of the largest.

C-Cube Microsystems, Inc., which manufactured and sold semi-conductors and systems for digital video applications, was also founded in 1988. Until May 2, 2000, C-Cube had two divisions — the semi-conductor division, which manufactured and sold communication processors used in digital video disc (DVD) players and other products, and the DiviCom division,*fn1 which manufactured and sold products relating to the transmission of digital video, audio, and data over satellite, wireless, and cable networks.

On October 27, 1999, Harmonic and C-Cube entered into an agreement to merge C-Cube's DiviCom division with Harmonic. On December 9, 1999, the parties amended and restated the merger agreement. The amended agreement required all holders of vested options in C-Cube stock to exercise those options before the close of the merger, and also provided that C-Cube would spin off or sell its semi-conductor business before the merger.

On January 19, 2000, Harmonic announced its results for the quarter and year ending December 31, 1999. Sales were up 134% from the fourth quarter of 1998, and net income for 4Q99 was $.33 a share, compared with net income of $.02 in 4Q98. (In the same announcement, Harmonic also disclosed that sales to AT & T, one of its major customers, had declined as a percentage of Harmonic's total sales during 4Q99, from the percentage reported for 3Q99.) Anthony Ley, President and CEO, was quoted as saying, "We are very pleased with our growth in sales and profitability, and our continued development and roll-out of new systems." The results announced by Harmonic exceeded the earnings per share estimates, and various securities analysts subsequently issued "strong buy" recommendations.

The price of Harmonic's and C-Cube's stock, which had been rising throughout the fall of 1999, continued to rise during the period after January 19, 2000, hitting highs of slightly over $152 (Harmonic) and $102 (C-Cube) on March 6, 2000. Despite continued "strong buy" recommendations from the analysts, however, the price of shares in the two companies began to fall after reaching the March 6th high, following the general trend of the NASDAQ, which reached its historic high at approximately the same time, and subsequently declined.

On March 23, 2000, Harmonic filed a Form S-4 Registration Statement ("the Form S-4") with the SEC, which incorporated a Joint Proxy Statement/Prospectus issued by Harmonic and C-Cube and dated March 24, 2000. The joint proxy and prospectus discussed the merger between Harmonic and C-Cube, and stated that it was the unanimous recommendation of the boards of directors of both Harmonic and C-Cube that the shareholders of both corporations vote in favor of the merger at the shareholders' meeting, which was scheduled for April 24, 2000.

On March 30, 2000, Harmonic filed its Form 10K for 1999 with the SEC. On April 19, 2000, in a press release, Harmonic announced its results for the first quarter of 2000, again reporting a decline in percentage of sales to AT & T (from 4Q99 to 1Q00). On April 24, 2000, the shareholders of Harmonic and C-Cube voted to approve the proposed merger.

On May 2, 2000, the assets of C-Cube's semi-conductor division were transferred to a newly formed corporation, C-Cube Semi-conductor. On May 3, 2000, what remained of old C-Cube*fn2 (the DiviCom division) was merged into Harmonic.*fn3 Harmonic issued common stock pursuant to the registration statement on May 3, 2000, and new C-Cube stockholders received .5427 of a share of Harmonic common stock in exchange for each share of C-Cube common stock. After the merger, C-Cube Semi-conductor (new C-Cube) changed its name to C-Cube Microsystems, Inc. (which was also old C-Cube's name before the merger).

On May 15, 2000, Harmonic filed its Form 10-Q for the first quarter of 2000 with the SEC, reporting the fact (previously disclosed in the April 19th press release) that the AT & T portion of total sales had declined since 4Q99. Harmonic's Form 10-Q also disclosed DiviCom's results for the first quarter (even though DiviCom did not become part of Harmonic until the second quarter). C-Cube filed a Form 10-Q for 1Q00 on May 15.

On May 16, 2000, the price of Harmonic's stock, which had been generally falling since reaching its high of 152 3/8 on March 6, 2000, dropped from 65 3/4 on May 16, to 38 on May 26. It recovered somewhat after May 26th but, on June 26, 2000, before the second quarter had ended, Harmonic announced that results for that quarter would be lower than anticipated. The next day, June 27, 2000, the price of Harmonic's stock fell to 22 11/16. The first complaints were filed in district court on June 28th.

Defendants are Harmonic, C-Cube, and the following executive officers and directors of the two corporations: Anthony Ley — President, CEO, and Chairman of the Board of Harmonic; Robin N. Dickson — CFO of Harmonic; Michael Yost — Vice President, Operations, Harmonic; Kirk Flatow — an Officer of Harmonic; Moshe Nazarathy, Floyd Kvamme, David Lane, Barry Lemieux, and Michel Vaillaud — Directors of Harmonic; Alexandre Balkanski — President and CEO of old C-Cube to 5/3/00, then a Director of new C-Cube; Tom Lookabaugh — President of DiviCom Division of old C-Cube until May 3, 2000, then an Officer of Harmonic; Fred Brown — Vice President, Worldwide Sales, C-Cube (old and new); Richard Foreman — Chief Information Officer, and Vice President, Information Technology, C-Cube (old and new); Donald McKinney — Senior Vice President, Worldwide Sales, and a Director of C-Cube (old and new); Umesh Padval — President of Semi-Conductor Division of old C-Cube to May 3, 2000, then President, CEO, and a Director of new C-Cube; Donald Valentine — Chairman of the Board and a Director of C-Cube (old and new); Walt Walczykowski — Vice President, Finance, and CFO of C-Cube (old and new); Baryn Futa — a Director of old C-Cube until May 3, 2000, then a Director of Harmonic; and Gregorio Reyes — a Director of C-Cube (old and new).

Plaintiffs allege 4 causes of action in the "[Corrected] Consolidated Amended Complaint" (referred to herein as the "complaint"). The basis of the complaint is that Harmonic and C-Cube publicly reported financial results, discussed their plans to merge DiviCom with Harmonic, and made optimistic statements about their expectations for Harmonic's future prospects, and that these statements and comments — contained in the Form S-4 (registration statement, prospectus, and proxy solicitation), and in various SEC filings, press releases, and discussions with analysts — were false and misleading because they failed to disclose that AT & T was reducing its orders for Harmonic's products and that DiviCom was suffering from declining sales to its satellite customers.

The first two causes of action are alleged by plaintiffs Knollenberg and Glynn, on behalf of themselves and the subclass of plaintiffs who acquired Harmonic shares pursuant to the registration statement and prospectus, respectively. The first cause of action alleges that the Harmonic defendants made false statements and material omissions in the registration statement, in violation of § 11(a)(1) and (2) of the 1933 Securities Act, 15 U.S.C. § 77k(a)(1) and (2); while the second alleges false statements and material omissions in the prospectus, in violation of § 12(a)(2) of the 1933 Act, 15 U.S.C. § 771 (a)(2). Both the first and the second causes of action also allege controlling person liability in violation of § 15 of the 1933 Act, 15 U.S.C. § 77o.

The third cause of action is alleged by plaintiffs Knollenberg and Glynn, on behalf of themselves and all subclass members who held Harmonic or C-Cube common stock on April 24, 2000 (the date the shareholders voted to approve the merger) and still held those shares on May 3, 2000 (the date the merger became final). The third cause of action alleges false and misleading statements and material omissions in the solicitation of proxies, in violation of § 14(a) of the 1934 Securities Exchange Act, 15 U.S.C. § 78n(a), and Rule 14a-9 promulgated thereunder, 17 C.F.R. § 240.14a-9.

The fourth cause of action, alleging a violation of § 10(b) of the 1934 Act, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, is alleged by all plaintiffs on behalf of themselves and the entire class, who purchased shares of Harmonic between January 19, 2000, and June 26, 2000, and alleges false statements and material omissions throughout the class period. The fourth cause of action also alleges controlling person liability, in violation of § 20(a) of the 1934 Act, 15 U.S.C. § 78t(a).


A. Legal Standards

1. Motions to dismiss under Federal Rule of Civil Procedure 12(b)(6)

A court should dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim only where it appears beyond doubt that plaintiff can prove no set of facts in support of the claim which would entitle the plaintiff to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Pillsbury, Madison & Sutro v. Lerner, 31 F.3d 924, 928 (9th Cir. 1994). All allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party. Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996).

Review is limited to the contents of the complaint. Allarcom Pay Television, Ltd. v. Gen. Instrument Corp., 69 F.3d 381, 385 (9th Cir. 1995). When matters outside the pleading are presented to and not excluded by the court, a Rule 12(b)(6) motion is to be treated as one for summary judgment, and all parties shall be given opportunity to present all material made pertinent to such a motion by Rule 56. See Fed. R.Civ.P. 12(b). However, material that is properly presented to the court as part of the complaint may be considered as part of a motion to dismiss. See Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n. 19 (9th Cir. 1989). If a plaintiff fails to attach to the complaint the documents on which it is based, defendant may attach to a 12(b)(6) motion the documents referred to in the complaint to show that they do not support plaintiffs claim. See Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994).

2. Federal Rule of Civil Procedure 9(b)

Generally, plaintiffs in federal court are required to give a short, plain statement of the claim sufficient to put the defendants on notice. Fed.R.Civ.P. 8. In actions alleging fraud, however, "the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). Under Rule 9(b), the complaint must allege specific facts regarding the fraudulent activity, such as the time, date, place, and content of the alleged fraudulent representation, how or why the representation was false or misleading, and in some cases, the identity of the person engaged in the fraud. See In re GlenFed Sec. Litig., 42 F.3d 1541, 1547-49 (9th Cir. 1994).

3. Claims under the 1933 Act

Under § 11(a) of the 1933 Securities Act, any purchaser of a security covered by a registration statement may sue based on material omissions or misrepresentations in that statement. 15 U.S.C. § 77k(a). Persons liable under § 11(a) are those who signed the registration statement, directors of or partners in the issuer, professionals who participated in the preparation of the registration statement, and underwriters of the security. Id. In order to plead a § 11(a) claim, a plaintiff must allege that the registration statement contained an omission or misrepresentation, and that the omission or misrepresentation was material — that is, that it would have misled a reasonable investor about the nature of his or her investment. In re Stac Electronics Sec. Litig., 89 F.3d 1399, 1403-04 (9th Cir. 1996), cert. denied, 520 U.S. 1103, 117 S.Ct. 1105, 137 L.Ed.2d 308 (1997).

Section 12(a)(2) of the 1933 Act makes it unlawful for any person to use any instrumentality of interstate commerce to offer or sell securities by means of a prospectus or oral communication that includes "an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading." 15 U.S.C. § 771 (a)(2). To establish liability under § 12(a)(2), plaintiffs must allege that the defendants actively solicited purchase of the securities for "their own financial motives." In re Stratosphere Corp. Sec. Litig., 1 F. Supp.2d 1096, 1120 (D.Nev. 1998) (citing Pinter v. Dahl, 486 U.S. 622, 646-48, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988)).

Section 15(a) imposes joint and several liability upon every person who controls any person liable under §§ 11 or 12. 15 U.S.C. § 77o. Thus, violation of § 15 is predicated upon violation of § 11 or § 12. To state a claim for control person liability under § 15, a plaintiff must allege that the individual defendants had the power to control or influence the company, and that the individual defendants were culpable participants in the company's alleged illegal activity. Durham v. Kelly, 810 F.2d 1500, 1503 (9th Cir. 1987).

4. Claims under the 1934 Act

Section 10(b) of the Securities Exchange Act provides, in part, that it is unlawful "to use or employ in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 78j(b).

Rule 10b-5 makes it unlawful for any person to use interstate commerce

(a) To employ any device, scheme, or artifice to defraud,
(b) 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, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5.

In order to state a claim under § 10(b) and Rule 10b-5, the plaintiff must allege 1) a misrepresentation or omission 2) of material fact 3) made with scienter 4) on which the plaintiff justifiably relied 5) that proximately caused the alleged loss. Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 1999), cert. denied, 528 U.S. 1154, 120 S.Ct. 1158, 145 L.Ed.2d 1070 (2000). A presumption of reliance is available to plaintiffs alleging violations of § 10(b) based primarily on omissions of material fact, but not in cases alleging significant misrepresentations in addition to omissions, or alleging only misrepresentations. Id. at 1063-64.*fn4

Section 14(a) of the 1934 Act regulates the solicitation of proxies with respect to any security registered under the Act. It shall be unlawful for any person . . . in contravention of [SEC rules and regulations] to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security" registered pursuant to the Act. 15 U.S.C. § 78n(a). SEC Rule 14a-9, which was promulgated under § 14, provides that

No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, containing any statement, which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any ...

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