Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

IN RE RAMP NETWORKS

March 1, 2002

IN RE RAMP NETWORKS, INC. SECURITIES LITIGATION THIS DOCUMENT RELATES TO ALL ACTIONS


The opinion of the court was delivered by: Spero, United States Magistrate Judge.

   
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS SECOND AMENDED COMPLAINT WITH LIMITED LEAVE TO AMEND

Defendants' Motion to Dismiss Second Amended Complaint ("the Motion") came on for hearing on Friday, January 25, 2002, at 9:30 a.m. For the reasons stated below, Defendants' Motion is GRANTED and Plaintiffs' Second Amended Complaint is DISMISSED, in part with leave to amend and in part without leave to amend.

I. INTRODUCTION

Plaintiffs bring this securities class action on behalf of public investors who purchased securities from Ramp Networks, Inc. ("Ramp") during the class period from November 15, 1999, through September 29, 2000. Second Amended Complaint ("SAC") at 1, 6 1. Plaintiffs allege that Ramp "manipulated the Company's financial and accounting systems and materially overstated Ramp's publicly-reported financial results throughout the Class period." SAC at 1, 6 3. Plaintiffs are suing Ramp and two individual defendants, Mahesh Veerina (CEO, President and Chairman of the Board of Ramp throughout the class period) and Timothy McElwee (Vice-President of Worldwide Sales for Ramp until March 31, 2000), for allegedly making false and misleading statements or omissions in violation of § 10(b) of the Securities Exchange Act of 1934 ("1934 Act") and SEC Rule 10(b)(5). SAC at 53, 6 110. Plaintiffs also allege claims under § 20(a) of the 1934 Act against Veerina and McElwee.

II. BACKGROUND

A. Facts

1. History and Performance of Ramp

Prior to its acquisition by Nokia Corporation, in January 2001, Ramp was a Delaware corporation with its headquarters in Santa Clara, California. SAC at 5, 66 13, 15. On June 22, 1999, Ramp completed an Initial Public Offering ("IPO") of 3,853,000 shares. SAC at 10, 6 35. Ramp is a provider of "shared Internet access solutions for the small office market." SAC at 5, 6 14. Ramp has designed a line of products called WebRamp. SAC at 11, 6 37. In 1999, Ramp began shifting from the first generation of WebRamp products, using analog modems and ISDN lines, to its second generation of WebRamp products, which focused on broadband technologies such as DSL and cable modems. SAC at 11, 6 39. In particular, Ramp began offering "broadband platforms that incorporated security features designed to prevent unauthorized access to small office networks using shared Internet connections." Id. As the demand for analog products declined, investor reports issued by Kaufman Bros., L.P. indicated that the investment community valued Ramp primarily for its broadband and security business. Id.

On November 16, 1999, Ramp issued a press release stating that it had conducted a survey that revealed that "DSL service is quickly emerging as the broadband technology of choice for small businesses." November 16, 1999 Press Release, Exh. J to Defendant's Request For Judicial Notice;*fn1 See also SAC at 14, 6 44. According to the press release, these survey results "confirm[ed] the overwhelming commitment from [Internet Service Providers], carriers and [Value-Added Resellers] to bring DSL service to their small business customers, and validate[d] Ramp's strategy to provide the most scalable platform for software and corporate-class services, independent of access method." Id.

On February 9, 2000, Ramp announced its fourth quarter and fiscal year results for 1999 in another press release. February 9, 2000 Press Release, Exh. J to Defendants' Request For Judicial Notice; see also SAC at 15, 6 46. According to the press release,

Revenues for the fourth quarter of 1999 were $4.8 million, an increase of 62% over revenues of $3.0 million for the fourth quarter of 1998. For the year ended December 31, 1999, Ramp reported revenues of $18.2 million, an 85% increase over revenues of $9.9 million reported for the year ended December 31, 1998.

Id. The President and CEO of Ramp, Mahesh Veerina, was quoted in the press release as saying "[w]e are pleased with our year over year growth of 85% . . . ." Id. Veerina went on to say that "[w]e also saw strong progress in the fourth quarter in expanding the broadband product portfolio, adding the WebRamp 600i ADSL router and the WebRamp 450i IDSL router to complement the WebRamp 500i and 510i SDSL products that we began shipping Q3." Id. On the basis of Ramp's 1999 revenues, Veerina was awarded a $39,000 bonus and 96,000 stock options. SAC at 52, 6 107. Veerina's salary in 1998 and 1999 was $140,000/year. Id.

On March 30, 2000, Ramp filed with the SEC its annual report for the year ended December 31, 1999, on Form 10-K. SAC at 14, 6 48; see also 1999 10-K, Exh. A to Request For Judicial Notice. Ramp stated that its revenues increase 85% to $18.2 million for that year, from $9.9 million in revenues in the previous year. Id. at 27. According to Ramp, the "increase was primarily due to increased sales of the Company's WebRamp 200 and 300 series of analog products as well as sales of the new ISDN WebRamp 410i product and the WebRamp 700 series for security." Id. Ramp also stated that "revenue growth was reported in all geographic regions, with particular strength in North America." Id.

On March 31, 2000, Ramp's Vice President of World Wide Sales, Timothy J. McElwee, was fired after he was "nailed" for high product returns. SAC at 28, 6 60(a). Sometime during the Class Period, McElwee sold 92,000 shares of Ramp common stock. SAC 7, 6 23 (alleging that "[d]uring the Class Period, Defendant McElwee sold approximately 92,000 shares of Ramp common stock at artificially inflated prices, while in possession of undisclosed, materially adverse information about the Company").

On April 25, 2000, Ramp issued a press release reporting revenues for the first quarter of 2000. April 25, 2000 Press Release, Exh. J to Request For Judicial Notice; see also SAC at 20, 6 53. According to that press release, "[r]evenues for the first quarter of 2000 were $5.6 million, an increase of 44% over revenues of $3.9 million for the first quarter of 1999." Id. Veerina was quoted in the April 25, 2000 press release as stating that "DSL orders and shipments drove our revenue growth this quarter. . . . Orders for our broadband solutions exceeded our expectations and we are increasing production to meet the demand." Id.

Ramp's apparent success with its broadband products was reflected in an analyst report by Dain Rauscher Wessels issued May 31, 2000. Exh. K to Request for Judicial Notice; see also SAC at 35, 6 70. The report stated:

We caught up with Ramp's management to discuss the status of the company's June quarter along with some of the recently announced product and sales initiatives. We believe the quarter is tracking ahead of expectations and we remain very comfortable with our June quarter and fiscal 2000 estimates. . . . We remain optimistic with respect to the opportunities available to Ramp and believe that the company is executing on its plan of becoming a significant provider of value-added DSL CPE equipment.

Id.

On July 25, 2000, Ramp announced that its was postponing release of its earnings for second quarter 2000, originally scheduled for July 25, by one day. July 25, 2000 Press Release, Exh. J to Defendant's Request For Judicial Notice; see also SAC at 35, 6 71. The next day, Ramp released second quarter 2000 earnings in a press release which stated as follows:

Ramp shipped a record $8.3 million of product in the second quarter of 2000. The company posted more than 60% sequential growth in broadband/security product revenue quarter over quarter. Revenues recorded for the second quarter were $5.8 million, an increase of 27% over revenues of $4.5 million for the second quarter of 1999, and an increase of 4% over revenues of 5.6 million for the first quarter of 2000. For the six months ended June 30, 2000, Ramp reported revenues of $11.3 million, an increase of 35% over revenues of $8.4 million reported for the six months ended June 30, 1999.

July 26, 2000 Press Release, Exh. J to Defendants' Request For Judicial Notice.

A Dain Rauscher Wessels report issued on July 27, 2000, expressed disappointment with Ramp's second quarter 2000 performance:

Ramp Networks released disappointing 2Q00 results yesterday as analog product sales declined much faster than expected. Revenues were $5.77 million, up 3.3% sequentially from $5.58 million in the prior quarter but $1.2 million shy of our $6.98 million estimate. The shortfall was entirely in analog product sales, which came in at $1.96 million, down 36% sequentially and $1.18 million short of our $3.14 million estimate. Broadband and security product sales were strong, up 51.4% sequentially and in line with our estimate.
Balance Sheet: This quarter, the balance sheet has become a major issue for Ramp. The company shipped $8.3 million worth of product in the quarter, but only recognized $5.77 million as sell through of analog products slowed to a trickle. Much of the balance, $1.35 million was booked as deferred revenue. This, combined with a few slow-paying customers and a back-end weighted manufacturing ramp for broadband products, led to an increase in DSO to 141 days from 98 days. Inventory turns fell to 3.9x from 4.5x as the company stocked components to alleviate component shortages. Cash fell to $21.6 million from $32.7 million.

July 27, 2000 Dain Rauscher Wessels Report, Exh. K to Defendants' Request For Judicial Notice; see also SAC at 13, 6 43.

Another analyst report, prepared by Chase H & Q, came to similar conclusions:

We are downgrading Ramp to Market Perform from BUY. Ramp announced a Q2 00 shortfall of ($0.33)/share on $5.8 million in revenue to our estimate of ($0.25)/share on $7M in revenue; . . . The shortfall resulted from declines in sales of analog products by resellers as well as longer- [than]- expected sales cycles with large enterprise and carrier accounts. Despite the revenue shortfall, the company actually shipped slightly more than $7 million in product. However, a large portion of the product shipped to resellers did not sell out of the channel and therefore the company did not recognize the revenue. In addition to deferring sales, the company wrote off about $900K for bad debt expenses, for uncollectible accounts receivable that were more than 90 days old. We are lowering our rating on Ramp to reflect a severe deterioration in fundamentals.

July 27, 2000 Chase H & Q Report, Exh. L to Defendants' Request For Judicial Notice.

On August 14, 2000, Ramp filed its quarterly report on Form 10-Q for the second quarter of 2000. SAC at 35, 6 72; see also Exh. E to Request For Judicial Notice. In that report, Ramp stated that:

Revenue increased 27% to $5.8 million in the three months ended June 30, 2000 from $4.5 million in the three months ended June 30, 1999. The increase was primarily due to continued growth in the WebRamp 700 series of security products and growth in our Broadband products dominated by the Company's line of SDSL and ADSL products servicing the "broadband" market.

Id. Ramp reported that 35% of its revenues in the second quarter were derived from sales to a Chinese company, Xiao Tong Electronics Company. Id.

On September 29, 2000, Ramp issued a press release announcing that it expected revenues and earnings for the third quarter 2000, ending September 30, to be "significantly lower" than the revenue and earnings recorded in the prior quarter, ending June 30, 2000. September 29, 2000 Press Release, Exh. J to Defendants' Request For Judicial Notice; see also SAC at 46, 6 86. Specifically, the press release stated that Ramp expected that third quarter revenues would not exceed $1 million. Id. The press release also stated that Ramp planned to restructure its operations. Id. Apparently in response to the announcement, Ramp's stock price fell again, from $3.5312/share at the close of trading on Friday, September 29, 2000 to $2.375/share at the open of trading on Monday, October 2, 2000. SAC at 46, 6 89.

2. Ramp's Revenue Recognition Policy

On November 14, 2000, Ramp filed its quarterly report for the third quarter ending September 30, 2000. November 14, 2000 Quarterly Report, Form 10 Q, Exh. F to Defendants' Request For Judicial Notice; see also SAC at 49, 66 97-98. In that report, Ramp explained that it had decided to abandon its previous accounting practice of recognizing revenue at the time products were shipped in favor of a policy under which revenue would not be recognized until it was "sold through" to customers. Id. at 7. The report explained the change in accounting practices as follows:

Historically, revenue has been recognized by the Company upon transfer of title and risks of ownership, which generally occurred upon product shipment. Certain agreements with distributors and retailers provide for rights of return, co-op advertising, price protection and stock rotation rights. Under the guidelines and requirements of Statement of Financial Accounting Standards ("SFAS") 48, "Revenue Recognition When Right of Return Exists," the Company concluded that it had sufficient history and experience to quantify reserves required for these provisions. Accordingly, Ramp provided an allowance for returns and price adjustments and provided a warranty reserve at the point of revenue recognition. These reserves had been adjusted periodically based upon historical experience and anticipated future returns, price adjustments, and warranty costs.
In the first quarter of 2000, the Company launched a new sales and marketing campaign that involved sales of new technology and products to both existing and a variety of new types of customers, including new customers serving the relatively new Digital Subscriber Loop (DSL) market. The DSL market experienced significant fluctuations in supply and demand in 2000. As a result, current customers and potential customers experienced delays in the provisioning of this marketplace which delayed demand for the Company's products. During 2000 the Company has experienced changing business conditions and demand for product from its distributors. Specifically, the Company experienced lower demand for both new and existing products and a trend of increasing past due accounts receivable from its current distributors as well as from some of the company's new customers. The Company has now decided that this increase in past due accounts receivable from distributors was a result of the distributors not paying the company until product was ultimately "sold through" to the customers. Additionally, certain new customers returned a significant portion of previously sold product in amounts greater than had been estimated by the Company . . . .
The Company determined that given the current market, a more preferable method of revenue recognition would be to defer the recognition of revenue. Under this new method, the Company will now record revenue on product shipped to distributors when the product is ultimately "sold through" to the customer. Additionally, the Company will now defer revenues for all other customers where collection and returns history is not proven until such activity reflects the "sell through" of products by Value-Added Resellers ("VAR") and Managed Service Providers ("MSP").

Id. at 7-8.

Applying the new accounting practice, Ramp reported revenues of $3 million for the third quarter of 2000 ending September 30. Id. at 4. Although these revenues reflected a 41% decrease as compared to the same quarter for the previous year, they were substantially higher than predicted in Ramp's September 29, 2000 Press Release. SAC at 50, 6 99. The September 29 press release reported that Ramp expected its third quarter earnings to be "no higher than $1 million." September 29, 2000 Press Release, Exh. J to Defendants' Request For Judicial Notice.

On November 14, 2000, Ramp also filed amended quarterly reports for the first and second quarters of 2000 restating revenues under the new accounting policy, which Ramp applied retroactively beginning January 1, 2000. Exh. G (First Quarter 2000) and H (Second Quarter 2000) to Request For Judicial Notice; see also SAC at 31, 6 64 (amended report for first quarter 2000) and 41, 6 78 (amended report for second quarter 2000). The Amended Quarterly Report for the first quarter of 2000 reflected that revenues declined by 9% relative to the same quarter in 1999 to $3.5 million (rather than increasing by 44% to $5.6 million, as previously reported). November 14, 2000 10-Q/A Form, Amended Quarterly Report at 5, Exh. G to Defendants' Request For Judicial Notice. For the second quarter of 2000, Ramp reported restated revenues of $5 million - an increase of 9.8% over the previous year - rather than the 27% increase to $5.8 million that was previously reported. Amended Quarterly Report, Form 10-Q/A at 5, Exh. G to Defendants' Request For Judicial Notice.

B. The Complaint

This class action lawsuit originated as three lawsuits filed between October 3, 2000, and October 23, 2000, which were consolidated on January 9, 2001. See Order Consolidating Related Actions Against Ramp Networks, Inc. and Mahesh Veerina, filed January 9, 2001. Following consolidation, Plaintiffs filed their Consolidated Amended Complaint For Violation Of Federal Securities Law ("CAC"). Defendants brought a Motion To Dismiss, and on June 22, 2001, the Court granted Defendants' Motion to Dismiss with leave to amend. Plaintiffs filed a Second Amended Complaint on August 6, 2001. The sufficiency of the allegations in the Second Amended Complaint is the subject of this Motion.

In the section of their SAC entitled "Summary of Action," Plaintiffs allege that Defendants "manipulated the Company's financial and accounting systems and materially overstated Ramp's publicly-reported financial results throughout the Class Period." SAC at 1, 6 3. Plaintiffs allege that Defendants' "revenue figures for the first and second quarters of 2000 unreasonably failed to take into account expected returns of product" because:

1) Ramp "dumped [products] on distributors who were paid to accept and store Company merchandise for revenue recognition purposes and then instructed to remove the shrink wrap from Ramp products (to convey the false impression that products had been `sold through' or used) before returning them to the Company as defective." SAC at 2, 6 4(a).
2) Defendants "shipped [products] to other companies for revenue recognition purposes near the end of quarterly or monthly reporting periods with the understanding that the `buyers' would simply store the merchandise at Ramp's expense before returning the merchandise for full credit after the close of the Company's reporting period." SAC at 2, 6 4(b).
3) Defendants "temporarily removed [products] from Ramp's DisCopy Labs ("DCL") warehouse facility in Fremont, California by `sweeper' trucks which arrived on the last day of each quarter to move product off the loading docks in order to book the `sales' of these products as revenue for the quarter. SAC at 2, 6 4(c).

Plaintiffs further allege that Defendants violated SFAS No. 48 by booking sales as revenue before the product's price was fixed or determinable. SAC at 4, 6 5. In particular, Plaintiffs alleged that Ramp: 1) shipped product on the "slightest of verbal commitments;" 2) shipped product "before a prospective buyer had tested Company equipment or agreed to price and payment terms;" and 3) sent products to local distributors, who were paid by Ramp to store the product pending execution of the deal; these products were treated as returns if no deal was executed. SAC at 3, 6 5.

Plaintiffs allege that Defendants also violated SFAS No. 48 by booking sales that were, in fact, contingent sales as revenue. SAC at 3, 6 6. Plaintiffs allege that such sales were made to distributors that included Ingram Micro, Tech Data, Merisel, Merit, Multiple Zones, Inc., and Synnex. Id. According to Plaintiffs, these distributors were not required to pay Ramp for product until sold through to resellers or ultimate consumers. Id.

Finally, Plaintiffs allege that Ramp violated SFAS No. 48 by making sales to distributors that entailed "significant obligations to assist in product resale." SAC at 3, 6 7. Plaintiffs allege that one such deal, for between $900,000.00 and $1,000,000.00 in product, was made with Telsource. Id. When resale efforts were unsuccessful, the product was returned and Ramp's Vice President of Sales, Gary Metalonis, was fired. Id.

According to Plaintiffs, Defendants were aware of these fraudulent practices yet nonetheless deliberately "portrayed Ramp as a booming company which was experiencing and would continue to experience rapidly rising product sales." SAC at 3, 6 8. On the basis of these allegations, Plaintiffs bring claims under §§ 10(b) and 20(a) of the 1934 Act.

C. Defendants' Motion To Dismiss

In their Opposition, Plaintiffs argue that they have alleged sufficient specific facts to show scienter on the part of all Defendants and to meet the pleading requirements for securities fraud claims. Specifically, Plaintiffs argue that: 1) Ramp's third quarter restatement of revenues constituted an admission that it made false and misleading statements concerning both the magnitude of its revenues in the first and second quarters of 2000 and its adherence to the requirements of SFAS No. 48; 2) Ramp's allegations concerning specific improperly booked transactions satisfy the pleading requirements of Rule 9(b) and the PSLRA; 3) Plaintiffs have alleged specific facts establishing multiple violations of SFAS No. 48, which in turn, gives rise to an inference of scienter; and 4) Plaintiffs have alleged additional facts, beyond the Generally Accepted Accounting Principles ("GAAP") violations, indicating the existence of deliberate recklessness. Plaintiffs further argue that Defendants' statements were neither "forward-looking" nor "puffery" and therefore are not protected. In addition, Plaintiffs assert that they have sufficiently alleged loss causation. Finally, they assert that they have alleged sufficient facts to establish "control person" liability under § 20(a).

III. ANALYSIS

A. Pleading Standards For Section 10(b) and 20(a) Claims

1. Section 10(b) Claims

Section 10(b) of the 1934 Act provides that:

[i]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mail, or of any facility of any national security exchange . . . to use or employ, in connection with the purchase or sale, of any security registered on a national securities exchange . . . any manipulative or deceptive device in contrivance or contravention of such rules and regulations as the ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.