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Luna v. Marvell Technology Group

United States District Court, N.D. California

May 17, 2017

DANIEL LUNA, individually and on behalf of all others similarly situated Plaintiff,




         In this securities fraud action, the company and three individual defendants each move to dismiss the amended consolidated complaint. For the reasons stated below, the motions as to the company and its chief executive officer are Denied, and the other motions are Granted.


         Defendant Marvell Technology Group, Ltd., was and remains a publicly-traded company holding stakes in subsidiaries that produced and sold various semiconductor products. Defendant Sehat Sutardja served as the chief executive officer of Marvell throughout the class period (November 20, 2014 through December 7, 2015). Sutardja's wife, third-party Weili Dai, served as the president. Defendant Sukhi Nagesh served as its interim chief financial officer until from March 2015 (following Rashkin's departure) until he became a senior vice president in October 2015 (Amd. Consolidated Compl. ¶¶ 2, 15-18, 59).[1]

         Marvell's fiscal years ended on January 31, so fiscal year 2015 ended on January 31, 2015, and fiscal year 2016 began on February 1, 2015 (id. ¶ 1 n.1). In a press release on September 11, 2015 (soon after the second quarter of fiscal year 2016 closed), Marvell disclosed that its audit committee had begun an independent investigation of certain accounting and internal control matters, inter alia, and that its quarterly report for the second quarter of 2016 would be delayed (id. ¶¶ 88, 162-63).

         Marvell's use of so-called “pull-in” transactions in recognizing revenue became one focus of the audit committee's investigation. Such pull-in transactions, whereby “revenue recognized in the second quarter of fiscal 2016 that, based on the original customer request date, would have been received and earned in the third quarter of fiscal 2016 and is now no longer available for receipt in that quarter” constituted seven to eight percent of revenue in the second quarter of fiscal year 2016 (Defs.' RJN, Exh. 4 at Exh. 99.1 (emphasis added)).[2]

         That same morning, Marvell's share price declined more than 18% (Amd. Consolidated Compl. ¶ 164). Within hours, plaintiff Daniel Luna commenced this action for securities fraud against Marvell in federal court here in San Francisco, where it was assigned to Judge Ronald Whyte. Two other plaintiffs filed similar complaints in federal court in the Southern District of New York.

         In October 2015, Marvell disclosed in a press release that PricewaterhouseCoopers LLP, its auditor of over fifteen years, had resigned (id. ¶ 165). This disclosure did not address the reason for PwC's resignation, but PWC did not disavow any previous opinions or audits (Defs.' RJN, Exh. 5 at 2).

         In November 2015, an order consolidated the actions before Judge Whyte (Dkt. No. 8).

         On December 7, 2015, Marvell disclosed in a press release that its audit committee continued to investigate which of the company's transactions constituted pull-ins, noting that the pull-in transactions impacted not only the second quarter of fiscal year 2016, but also the previous two quarters (quarter four of fiscal year 2015 and quarter one of fiscal year 2016) (Amd. Consolidated Compl. ¶ 167).

         Marvell also disclosed that the Securities and Exchange Commission and the United States Attorney's Office had opened investigations into various practices, including its revenue recognition (Amd. Consolidated Compl. ¶ 169).

         In February 2016, Judge Whyte appointed plaintiff Plumbers and Pipefitters National Pension Fund as lead plaintiff (see Dkt. No. 53).

         In March 2016, Marvell issued a press release announcing the completion of the audit committee's investigation, which concluded that “revenue related to pull-in transactions . . . was for most such transactions properly recognized in accordance with Marvell's revenue recognition policy and generally accepted accounting principles, though for certain transactions Marvell's internal controls were not fully followed and revenue from certain pull-in and distributor transactions was recognized prematurely, ” generally due to side agreements involving the extension of purchasers' payment terms beyond the terms Marvell customarily offered. That press release also stated that “[t]he Audit Committee identified no fraudulent activity, ” and the prematurely recognized revenue had no “impact on the total amount of revenue ultimately recognized . . . for the aggregate of the three quarters” at issue and did “not reflect a lack of validity of the underlying transactions.” Rather, it stated “[i]f any correction to previously reported financial periods were to be made as a result of these identified transactions, it would result in a shift of revenues from the fourth quarter of fiscal 2015 to the first quarter of fiscal 2016 or from the first quarter of fiscal 2016 to the second quarter of fiscal 2016.” The press release identified several recommendations of the audit committee, “including recommendations regarding the addition of certain compliance, finance and legal personnel, the review and revision of certain policies and procedures, the augmented training of employees in some areas, and the addition of independent board members (Defs.' RJN, Exh. 6 at Exh. 99.1 at 1-2).

         In April 2016, Marvell disclosed the departure of CEO Sutardja and President Dai from their management positions, though they would remain on the board. No other departures ...

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