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City of Royal Oak Retirement System, et al v. Juniper Networks

May 17, 2013


The opinion of the court was delivered by: Lucy H. Koh United States District Judge

United States District Court


For the Northern District of California

Defendants Juniper Networks, Inc. ("Juniper" or "the Company"), Kevin R. Johnson ("Johnson"), Robyn M. Denholm ("Denholm"), and Scott G. Kriens ("Kriens") (collectively, 21 "Defendants") move to dismiss Plaintiffs' second amended complaint pursuant to Rules 12(b)(6) 22 and 9(b) of the Federal Rules of Civil Procedure. See Mot. to Dismiss, ECF No. 91. The motion 23 has been fully briefed. See Opp'n., ECF No. 99; Reply, ECF No. 100. The Court found the motion 24 to be appropriate for disposition without oral argument pursuant to Civil Local Rule 7-1(b) and 25 vacated the hearing that had been set for May 16, 2013. Order Vacating Hr'g, ECF No. 104. For 26 the reasons explained below, the Court GRANTS the motion as to all defendants without leave to 27 amend and DISMISSES the action with prejudice. 28

4 against Defendants on August 15, 2011. Compl., ECF No. 1. Several entities sought appointment 5 as lead plaintiff and approval of lead counsel. The Court appointed the City of Omaha Police and 6

Scott䧊 LLP as lead counsel. Order, ECF No. 42. Plaintiffs filed an amended complaint on 8

On July 23, 2012, the Court issued an order that inter alia granted Defendants' motions to

10 dismiss the amended complaint with leave to amend ("July 23 Order"). July 23 Order, ECF No. 84.

The thirty-two page order explained in detail how the amended complaint was deficient. Id. The

order expressly advised Plaintiffs that "[f]ailure to cure the deficiencies identified herein will result 13 in dismissal with prejudice." Id. at 32. 14

Plaintiffs filed the operative second amended complaint ("SAC") on August 20, 2012,

15 asserting claims on behalf of persons who purchased or otherwise acquired Jupiter's common stock 16 between July 20, 2010 and July 26, 2011, inclusive (the "Class Period"). SAC, ECF No. 87. 17

1934 ("Exchange Act") and Rule 10b-5 of the Securities and Exchange Commission ("SEC"); (2) 19 controlling person liability under § 20(a) of the Exchange Act; and (3) insider trading under § 20A 20 of the Exchange Act. Id. 21

Juniper designs and sells communications networking equipment to larger global service

23 providers, enterprises, and public sector organizations. SAC ¶ 3, ECF No. 87. "Juniper's primary 24 product and service offerings are its core routers and switches that allow customers to move voice, 25 video, and data traffic across their networks, as well as its security products and software that enable 26 the secure and efficient operation of data networks." Id. All Juniper hardware systems, including 27 routing, switching, and security devices, use Juniper's proprietary JUNOS network operating 28 system. Id. ¶ 6. The biggest competitor of the JUNOS operating system is the IOS operating


A. Procedural History

The City of Royal Oak Retirement System filed this putative securities fraud class action

Fire Retirement System and the City of Bristol Pension Fund as lead plaintiffs and appointed 7

February 13, 2012. Am'd Compl., ECF No. 47. 9

United States District Court For the Northern District of California

Plaintiffs assert three claims: (1) securities fraud under § 10(b) of the Securities Exchange Act of 18

B. Factual Allegations

system of Cisco Systems, Inc. ("Cisco"). Id. ¶ 7. 2

Johnson was the company's president, chief executive officer ("CEO"), and director. Id. ¶ 27. 4

Johnson, Denholm, and Kriens held key positions at Juniper during the Class Period.

Denholm was the company's chief financial officer ("CFO") as well as an executive vice president. 5

On February 23, 2010, prior to the start of the Class Period, Juniper hosted an analyst day

7 conference during which it disclosed a long-term business plan calling for a 20% growth in 8 revenue and a 25% operating margin over the next three to five years. Id. ¶ 30. On July 20, 2010, 9 the first day of the Class Period, Juniper issued a press release announcing its preliminary 2Q10 10 financial results, which were filed the same date on a Form 8-K. Id. ¶ 61. Juniper reported a 24%

increase in revenue on a year-over-year basis and a non-GAAP*fn1 operating margin of 23.9%. Id.

Juniper attributed its financial results to skillful execution of its business plan and increased demand 13 for its products, and expressed bullish future expectations through a number of comments, for 14 example, that it was "well on track to delivering profitable growth in 2010 and making progress 15 against [its] long-term revenue growth objective while expanding operating margins." Id. ¶ 68; see 16 also ¶¶ 61, 69-71. 17

Throughout the Class Period, Juniper continued to report that it "was still on track to meet its

18 long-term business plan of 20% revenue growth and 25% operating margins." Id. ¶ 95. Juniper 19 also continued to make bullish statements such as the following: "[O]ur demand indicators are 20 strong, our portfolio is robust and we are focused on executing against the market opportunity ahead 21 of us." Id. ¶ 95; see also ¶¶ 88, 96-99, 103, 111, 119-23, 129, 137, 140, 142. Juniper's stock price 22 rose during the Class Period, from $26.60 per share the day before the start of the Class Period to a 23 high of $44.46 per share on March 8, 2011. Id. ¶¶ 73, 139. On March 3, 2011, when the stock price 24 was at its peak, Juniper conducted a $1 Billion Debt IPO. Id. ¶ 138. 25

"Defendants knew but failed to disclose, the Company's business fundamentals did not support 27

Id. ¶ 28. Kriens was the chairman of the board of directors. Id. ¶ 26. 6

United States District Court For the Northern District of California

Plaintiffs allege that Juniper's long-term projections were false and misleading because

these lofty revenue and operating margin targets." SAC ¶ 34, ECF No. 87. According to Plaintiffs, 2

Juniper was experiencing "slumping sales and intense pricing pressures," as well as problems with 3 its proprietary JUNOS operating system. Id. Moreover, Juniper did not have the sales force 4 necessary to grow its network business (routers and switches) at the projected levels. Id. 5

Defendants did not adequately disclose the impact of the company's adoption of new revenue 7 recognition rules issued by the Financial Accounting Standards Board ("FASB"). Under the old 8 rules, when Juniper sold hardware or software that included an ongoing obligation to provide 9 service or maintenance ("multiple-element arrangements" or "multiple-deliverable arrangements"), 10

obligation was satisfied. Id. ¶¶ 51-53. Under the new rules -- Accounting Standards Update

("ASU") 2009-13 and ASU 2009-14 -- Juniper had discretion to determine the value of the 13 undelivered portion of the ongoing obligation and was required to defer revenue recognition only 14 with respect to that undelivered portion. Id. ¶ 54. Once Juniper adopted the new rules, there was an 15 initial period in which it recognized more of its revenue up-front on current period sales while it 16 continued to recognize deferred revenue on past-period sales. Id. Plaintiffs allege that as a result of 17 this temporary bump in revenue, Juniper's financials gave the appearance that the company was 18 meeting its long-term growth targets when in fact Juniper's actual revenue growth was trending 19 down. Id. ¶ 55. For example, Plaintiffs allege that while Juniper reported revenue growth of 24.4%, 20

22.9%, and 26.4% in 2Q10, 3Q10, and 4Q10, respectively, Juniper's "actual" revenue growth was 21 only 17.7%, 16.8%, and 14.8%, respectively. Id. Plaintiffs allege that during this same period, 22

Juniper's much larger competitor, Cisco, reported less robust revenue growth and suffered a decline 23 in its stock price. Id. ¶ 9. While the purpose of the juxtaposition of the two companies' financials is 24 not entirely clear, Plaintiffs may wish the Court to infer that the market assumed that Juniper was 25 picking up customers from Cisco. 26

27 recognition rules. Id. ¶ 59. However, Plaintiffs assert that the disclosures were not sufficiently 28 detailed and comprehensive to inform the market that a significant portion of Juniper's apparent

Plaintiffs also allege that Juniper's financial reporting was false or misleading because

Juniper was required to defer recognition of a significant portion of the total sales price until such

United States District Court For the Northern District of California

Plaintiffs acknowledge that Juniper publicly disclosed its adoption of the new revenue

growth trend actually was attributable to the change in revenue recognition practices. Id. ¶¶ 59-60. 2

On June 1, 2011, Juniper disclosed that growth in certain segments of its business was

3 slowing, and that 1Q11 had started "kind of on the weak side." Id. ¶ 153. Juniper's stock declined 4 several dollars per share on this news. Id. ¶ 155. On July 25, 2011, Juniper announced "a major 5 management reshuffling." Id. ¶ 159. On July 26, 2011, the last day of the Class Period, Juniper 6 issued a press release reporting a year-over-year revenue increase of 15%, which was lower than its 7 previous guidance of a year-over year revenue increase of between 16% and 21%. Id. ¶ 160. 8

21.6%; these figures were significantly off previous guidance. Id. Juniper lowered guidance for 10

19% and 21%. Id. On this news, Juniper's stock fell nearly 21% to $24.66 per share. Id. ¶ 171.

Juniper also reported non-GAAP gross margin of 65.6% and non-GAAP operating margin of 9

3Q11 and FY11, projecting revenue growth between 12% and 14% and operating margins between

15 sufficiency of the plaintiff's claims. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). When 16 determining whether a claim has been stated, the court accepts as true all well-pled factual 17 allegations and construes them in the light most favorable to the plaintiff. Reese v. BP Exploration 18

(Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). However, the court need not "accept as true 19 allegations that contradict matters properly subject to judicial notice or by exhibit" or "allegations 20 that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." In re 21

Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (internal quotation marks and citations 22 omitted). While a complaint need not contain detailed factual allegations, it "must contain sufficient 23 factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. 24

Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A 25 claim is facially plausible when it "allows the court to draw the reasonable inference that the 26 defendant is liable for the misconduct alleged." Id. 27

In addition to the pleading standards discussed above, a plaintiff asserting a private securities

United States District Court For the Northern District of California


A. Federal Rule of Civil Procedure 12(b)(6)

A motion to dismiss brought under Federal Rule of Civil Procedure ...

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