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In re Finisar Corporation Securities Litigation

United States District Court, N.D. California, San Jose Division

May 1, 2017

In re FINISAR CORPORATION SECURITIES LITIGATION

          ORDER DENYING DEFENDANTS' MOTION TO DISMISS RE: DKT. NO. 94

          EDWARD J. DAVILA United States District Judge.

         Lead 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”), [1] 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 customers.

         Presently 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 be DENIED.

         I. BACKGROUND

         Following 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 (“SAC”).

         A. Factual Background

         Plaintiff 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.

         Finisar 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.

         Prior 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.

         However, 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 that.
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.

Id.

         The 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.

         But on 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 ...

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