United States District Court, N.D. California, San Jose Division
ORDER DENYING DEFENDANTS' MOTION TO DISMISS RE:
DKT. NO. 94
J. DAVILA United States District Judge.
Plaintiff, the Oklahoma Firefighters Pension & Retirement
System (“Plaintiff”), brings this putative
securities fraud class action against Defendants Finisar
Corporation (“Finisar”), Eitan Gertel, and Jerry
S. Rawls (collectively, “Defendants”),
alleging that Defendants issued a single false or misleading
statement on December 2, 2010, denying an inventory build-up
of Finisar's key telecom products by the Company's
before the court is Defendants' Motion to Dismiss the
Second Amended Complaint. Dkt. No. 94 (“MTD”).
After careful consideration of the parties' papers and
for the reasons explained below, Defendants' Motion will
a remand from the Ninth Circuit, this is now the third motion
to dismiss filed in this action. Accordingly, the factual
allegations in this case are well-established. See
Order Granting Defs.' Mot. to Dismiss (“Prior
Order”), Dkt. No. 77. The following is a brief overview
of the factual and procedural background relevant to the
instant motion, and is taken primarily from Plaintiff's
Second Amended Consolidated Class Action Complaint
brings this action on behalf of itself and a class of all
persons and entities who purchased or otherwise acquired the
common stock of Finisar between December 2, 2010 and March 8,
2011 (the “Class Period”). SAC ¶ 1.
is a technology company that “develops and sells fiber
optic subsystems and components that enable high-speed voice,
video and data communications for telecommunications,
networking, storage, wireless and cable television
applications.” Id. ¶ 2. Gertel served as
Chief Executive Officer (“CEO”) and a director of
Finisar from August 2008 to September 2015. Id.
¶ 23. Plaintiff alleges that during the Class Period,
Gertel made over $5.17 million by selling 201, 913 shares of
his Finisar stock at artificially inflated prices.
Id. ¶¶ 23, 74-75. Rawls has served as
Chairman of the Board of Finisar since 2006, and was
appointed CEO in September 2015. Id. ¶ 24.
to the Class Period, Finisar experienced six consecutive
fiscal quarters of revenue growth, which Plaintiff alleges
was driven primarily by sales of its wavelength selective
switches (“WSS”) and reconfigurable optical
add/drop multiplexers (“ROADM”) linecard telecom
products. Id. ¶¶ 30-33. During this phase
of growth, but prior to the Class Period, Plaintiff alleges
that analysts in the industry “suspected that this
growth was driven by customers building-up inventory rather
than purchasing Finisar products for immediate use in
production.” Id. ¶ 3. Plaintiff contends
that Finisar did not affirm nor deny the inventory build-up
suspicions during this time, and as a result,
“Finisar's stock price remained relatively
consistent over the course of the six-quarters of
record-growth.” Id. ¶ 36.
on December 2, 2010, Plaintiff alleges that Finisar's
then-CEO, Gertel, “participated in the Credit Suisse
Technology Conference call with analysts, media
representatives, and investors.” Id. ¶
62. During this call, Plaintiff claims that an analyst from
Credit Suisse named William Stein highlighted that Finisar
had “significantly outgrown [its] end markets for the
last six quarters” and raised the fear that that the
company's growth “is going to revert.”
Id. Mr. Stein then asked, “Can you help us
understand how it's possible for the company to not only
sustain that [growth] but continue to grow faster than the
end markets?” Id. In response, Gertel provided
the following explanation:
So if you look at the market, you see the fundamentals for
growth are there. People need more higher bit rate products,
more sophisticated products to address the cost reduction
that the network needs and the demand continues.
As far as we know we haven't seen any inventory issues
with our product with our customers. Our product-our business
is 60/40, basically 40% is LAN/SAN business, 60% is telecom.
On the LAN/SAN side, by far the majority of our sales is a
vendor-managed inventory. So we have visibility to what
people have. There is no reason for them to have inventory
because we own the inventory. So we're pretty safe with
And on the telecom side, look, there can be one or two guys
who try to build their own inventory, but by far the majority
of the customers expediting products and doesn't look to
us, not visible to us at all, all these quarters if they are
building any inventory.
same day Gertel made this statement, Finisar's common
stock increased $3.29 per share (or 16.64%), going from
$19.77 per share on December 1, 2010, to close at $23.06 per
share on December 2, 2010. Id. ¶¶ 13, 63.
The following day, on December 3, 2010, the price per share
increased another $0.95 (or 4.12%). Id. ¶ 63.
Plaintiff alleges that Finisar's stock price continued to
rise in this manner throughout the Class Period, reaching a
Class Period high of $43.23 per share on February 14, 2011.
Id. ¶¶ 63, ¶ 77.
March 8, 2011, Finisar issued a press release indicating that
its fourth quarter revenues would be lower than projected due
in part to “the previously undisclosed inventory
build-up at some of the Company's telecom customers and a
slowdown in business in China.” Id. ¶ 78.
The press release read, in relevant part:
During the fourth quarter ending April 30, 2011, the Company
will be impacted by the full three months of the annual price
negotiations with telecom customers that typically take
effect on January 1, the 10-day long shutdown at certain
customers for Chinese New Year in February, the adjustment of
inventory levels at some telecom customers, particularly for
products which had previously been on allocation and long
lead times, including WSS and ROADM line cards, and a
slowdown in business in China overall. Primarily as a result
of these factors, the Company indicated that it currently
expects revenues for the fourth quarter to be in the range of
$235 to $250 million.
Id.¶ 53, 79. The press release was issued after
the market closed on March 8, 2011. Id. Rawls also
held a conference call the same day to discuss the expected
results, and explained the inventory adjustment in this way:
[M]any, many of the people that follow our company have
speculated for several quarters about double ordering
inventory builds on the part of our customers and we
continually responded that we asked our customers and they
say, “No. We're buying for production and we're
not buying for inventory.” Well we have clearly learned
here in the last month or so from several of them that all of
a sudden surprise, surprise they have some pretty good size
inventories of wavelength selective switches. And the
question is we don't really have great visibility into