In re Finisar Corporation Securities Litigation

Filing 77

ORDER granting 70 Motion to Dismiss. The clerk shall close this file upon entry of judgment. Signed by Judge Edward J. Davila on 9/30/2013. (ejdlc4S, COURT STAFF) (Filed on 9/30/2013) Modified on 9/30/2013 (ejdlc1, COURT STAFF).

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UNITED STATES DISTRICT COURT

United States District Court
For the Northern District of California

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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IN RE:FINISAR CORPORATION
SECURITIES LITIGATION

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’
MOTION TO DISMISS FIRST
AMENDED COMPLAINT

[Re: Docket No. 70]

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Presently before the court in this securities fraud class action is Defendants Finisar

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Corporation, Eitan Gertel, Jerry Rawls, and Kurt Adzema’s (collectively, “Defendants”) Motion to

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Dismiss Lead Plaintiff Oklahoma Firefighters Pension and Retirement System’s (“Plaintiff”) First

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Amended Complaint (“FAC”). Dkt. No. 70. The court found this matter suitable for decision

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without oral argument pursuant to Civil Local Rule 7-1(b) and vacated the hearing on June 25,

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2013. Dkt. No. 76. The court has subject matter jurisdiction pursuant to 28 U.S.C. § 1331.

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Having fully reviewed the parties’ briefing, and for the following reasons, the court GRANTS

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Defendants’ Motion.

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT

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I. BACKGROUND

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a. Factual Background

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The following factual background is taken from Plaintiff’s FAC and is presumed to be true

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for purposes of this motion. See FAC, Dkt. No. 69. Plaintiff brings this federal securities fraud

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action on behalf of itself and a class of all persons and entities who purchased or otherwise

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acquired the common stock of Finisar between September 8, 2010 and March 8, 2011 (the “Class

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Period”). Defendant is a technology company that develops and sells fiber optic subsystems and

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components that enable high-speed voice, video and data communications for telecommunications,

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networking, storage, wireless and cable television applications. The individual defendants each

United States District Court
For the Northern District of California

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served as directors of Finisar during the Class Period: Mr. Gertel was the Chief Executive Officer,

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Mr. Rawls was the Chairman of the Board, and Mr. Adzema was the Chief Financial Officer.

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Prior to the Class Period, Finisar experienced six consecutive fiscal quarters of revenue

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growth, purportedly driven by sales of its key wavelength selective switches (“WSS”) and

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reconfigurable optical add/drop multiplexers (“ROADM”) linecard telecom products. Plaintiff

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alleges that Defendants misled investors as to the nature of that growth by denying that Finisar’s

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revenue increase was the result of a short-term, unsustainable inventory build-up by customers

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rather than the result of increased demand for Finisar products. Moreover, Plaintiff contends that

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Defendants knew at some point during the Class Period that customers’ fears of over-supply

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constraints had not materialized but failed to disclose that information, and also failed to disclose

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that customers would be reducing their orders from Finisar as a result.

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Plaintiff points to the following allegedly misleading statements Defendants made about
Finisar’s performance:
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On September 8, 2010 PiperJaffray analyst Troy Jensen issued a report on Finisar

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titled “Takeaways from Recent Management Meeting” which purportedly repeated

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statements made by Mr. Gertel at an investor dinner. Particularly, Mr. Jensen

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reported that “[t]he negative concerns with respect to Finisar and the optical

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component sector is a belief that customers have been double ordering over the past

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT

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several quarters and, if true, this could dramatically slow demand if customers return

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to normal patterns. While it is hard to quantify the amount of optical components

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sitting in OEM’s inventories, Finisar (and JDS Uniphase and Oclaro) have been

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adamant that inventory levels have not increased materially.” Moreover, the report

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stated that “We [the PiperJaffray analysts] believe concerns regarding double

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ordering and inventory levels being [sic] overblown and have created a compelling

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valuation for FNSR shares.” FAC ¶ 36.

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•

On December 2, 2010 during a Credit Suisse Technology Conference Call, a Credit
Suisse analyst highlighted that Finisar had “significantly outgrown [its] end markets

United States District Court
For the Northern District of California

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for the last six quarters” and raised the fear that that “this is going to revert.” Mr.

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Gertel responded saying:

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So if you look at the market, you see the fundamentals for growth are

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there. People need more higher bit rate products, more sophisticated

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products to address the cost reduction that the network needs and the

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demand continues.

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As far as we know we haven’t seen any inventory issues with our product

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with our customers. Our product—our business is 60/40, basically 40% is

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LAN/SAN business, 60% is telecom. On the LAN/SAN side, by far the

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majority of our sales is a vendor-managed inventory. So we have

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visibility to what people have. There is no reason for them to have

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inventory because we own the inventory. So we’re pretty safe with that.

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And on the telecom side, look, there can be one or two guys who try to

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build their own inventory, but by far the majority of the customers

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expediting products and doesn’t look to us, not visible to us at all, all these

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quarters if they are building any inventory.

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Id. at ¶ 38.

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT

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On January 11, 2011 Mr. Rawls stated during a call with analysts, investors, and
media representatives that:

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This [the ROADMs, the wavelength selective switch or the WSS] is the fastest

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growing product on the planet for optic. It is the drug that phone companies don’t

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seem to be able to get enough off [sic], it is—gives them the ability to switch light

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instead of electrons and gives them operational efficiency, that is they can spend

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CapEx and save OpEx.

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So it is—the demand has been incredibly strong and we have been at capacity and

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on allocation now for—oh, I don’t know, the last five quarters, maybe six quarters

United States District Court
For the Northern District of California

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in this product. It’s a very exciting space.

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[F]or most—some of our customers, we get very specific rolling production

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forecasts that go out as far as 12 months as to what—that are updated biweekly.

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So we understand their business, at least what they expect for their business. And

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others, we get forecasts that say, this is what we need for capacity, this is what we

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expect to sell. Because we are such an important supplier and all of our

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customers depend on us so heavily, they have to share with us what it is that they

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expect to happen in their business to make sure that we are ready for it. I mean,

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we are not only the number one supplier for Cisco, Alcatel, Huawei, but also

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IBM, EMC, you name it. And all of these guys in their business need us to be

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able to respond or they’re going to be revenue-limited.

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Id. at ¶¶ 42-43.
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On February 10, 2011, during another call with analysts, investors, and media

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representatives, Mr. Rawls stated that Finisar, “today,” was in a “very strong demand

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environment.” Id. at ¶ 46.

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Plaintiff alleges that, despite the statements listed above, Finisar learned through the course of

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annual negotiations with customers that Finisar was experiencing a serious slowdown in business,

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particularly from customers in China. According to Plaintiff, these negotiations were substantially

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ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT

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completed by December 2010. Defendants also knew after its customer negotiations were

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completed that Finisar was experiencing increased pricing pressures due to intense competition and

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that Finisar was forced to steeply discount pricing in order to retain certain customers.

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Despite learning of these conditions as early as November 2010, Finisar did not share this

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information with its investors or the public until March 8, 2011. On that date, Finisar issued a press

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release indicating that, during the fourth quarter of fiscal year 2011 (February 1, 2011, through

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April 30, 2011), Finisar revenues would be impacted by certain developments, including: (1) the

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annual price negotiations, (2) a shutdown at certain customers for Chinese New Year, (3) an

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inventory adjustment by some customers who had been double ordering and building inventory,

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For the Northern District of California

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particularly for products that had been on allocation such as WSS and ROADM line cards, and (4)

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a slowdown in business in China overall. Id. at ¶ 48.

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Mr. Rawls gave a conference call that same day to discuss Finisar’s expected results.
During the call, Mr. Rawls explained the inventory adjustment saying:

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[M]any, many of the people that follow our company have speculated for several quarters

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about double ordering inventory builds on the part of our customers and we continually

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responded that we asked our customers and they say, “No. We’re buying for production

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and we’re not buying for inventory.” Well we have clearly learned here in the last month or

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so from several of them that all of a sudden surprise, surprise they have some pretty good

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size inventories of wavelength selective switches. And the question is we don’t really have

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great visibility into their inventory levels other than what they tell us and I, you know,

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they’re not—we’re not getting complete information I don’t think.

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Id. at ¶ 49. Mr. Rawls also stated that Finisar had seen “reduced order rates” for “a couple of

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months.” Id. at ¶ 52. Mr. Gertel admitted that Finisar had seen the slowdown in a more

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pronounced way since the beginning of February. Id. at ¶ 53.

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On this news, Finisar’s stock price, which had nearly tripled during the Class Period,
erased nearly all of those gains in one day, falling from its previous close of $40.04 to $24.61 at

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT

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the close of March 9, 2011. Id. at ¶¶ 7, 79, 86. The financial news media reported on Finisar’s

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March disclosure and the fallen stock price.

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Plaintiff further alleges that during the more than three months in which Defendants knew

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of the inventory build-up and slowdown in the Chinese market prior to disclosing the same on

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March 8, 2011, they capitalized on the rapidly rising stock price. Finisar conducted a substantial

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stock offering garnering over $118 million in gross proceeds. Id. at ¶ 72. At the same time,

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individual defendants Mr. Rawls, Mr. Gertel and Mr. Adzema sold over 264,000 shares of their

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personally held Finisar stock for proceeds of over $6.8 million. Id. at ¶ 73.

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United States District Court
For the Northern District of California

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b. Procedural History
On March 15, 2011, Plaintiff Martin Derchi-Russo filed a class action complaint in this

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court against Defendants for violation of Sections 10(b) and 20(a) of the Securities Exchange Act

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of 1934 (“Exchange Act”). Dkt. No. 1; 15 U.S.C. § 78j(b). Two additional plaintiffs filed separate

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but similar actions in the ensuing weeks. See Dkt. No. 12. On May 4, 2011, this court ordered that

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the three cases be related. Dkt. No. 17. Several months later, on October 27, 2011, this court

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issued an order consolidating all related actions, appointing Oklahoma Firefighters Pension and

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Retirement System as Lead Plaintiff, and approving the same’s legal counsel as Lead Counsel.

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Dkt. No. 48. Lead Plaintiff filed the Amended Consolidated Class Action Complaint on January

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20, 2012. Dkt. No. 53. Defendants filed a motion to dismiss (Dkt. No. 56), which the court

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granted on January 16, 2013 (Dkt. No. 68). The FAC followed (Dkt. No. 69), and Defendants

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moved to dismiss it on February 20, 2013 (Dkt. No. 70). The court now turns to the substance of

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that motion.

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II. LEGAL STANDARD

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Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim in the

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complaint with sufficient specificity to “give the defendant fair notice of what the ... claim is and

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the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)

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(internal quotations omitted). A complaint which falls short of the Rule 8(a) standard may be

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dismissed if it fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6).

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT

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Dismissal under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim is “proper only

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where there is no cognizable legal theory or an absence of sufficient facts alleged to support a

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cognizable legal theory.” Shroyer v. New Cingular Wireless Servs., Inc., 606 F.3d 658, 664 (9th

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Cir. 2010) (quoting Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)). In considering whether

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the complaint is sufficient to state a claim, the court must accept as true all of the factual

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allegations contained in the complaint. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While a

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complaint need not contain detailed factual allegations, it “must contain sufficient factual matter,

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accepted as true, to ‘state a claim to relief that is plausible on its face.’” Id. (quoting Twombly, 550

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U.S. at 570).

United States District Court
For the Northern District of California

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Because Plaintiff’s FAC exclusively raises federal securities laws causes of action, it is

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also subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b)

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and the pleading standards articulated in the Private Securities Litigation Reform Act of 1995

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(“PSLRA”). See 15 U.S.C. § 78u-4(b)(1) (applying the PSLRA provisions to “any private

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action arising under this chapter [the Exchange Act]” alleging false or misleading statements).

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Under these rules, a securities fraud plaintiff must “state with particularity” the elements of its

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claim. See Fed. R. Civ. Proc. 9(b) (requiring the plaintiff to “state with particularity the

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circumstances constituting fraud or mistake”); Zucco Partners, LLC v. Digimarc Corp., 552

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F.3d 981, 990 (9th Cir. 2009) (finding the PSLRA requires the plaintiff to plead falsity and

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scienter with particularity).

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With respect to falsity, the plaintiff must “specify each statement alleged to have been

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misleading, [and] the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u-

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4(b)(1). To the extent an allegation is based on information and belief, “the complaint shall

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state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). In

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doing so, the plaintiff shall “reveal ‘the sources of [his] information.’” In re Daou Sys., Inc.

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Sec. Litig., 411 F.3d 1006, 1015 (9th Cir. 2005) (quoting In re Silicon Graphics Inc. Sec.

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Litig., 183 F.3d 970, 975 (9th Cir. 1999)). With respect to scienter, the plaintiff must “state

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with particularity facts giving rise to a strong inference that the defendant acted with the

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT

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required state of mind.” 15 U.S.C. § 78u-4(b)(2). That is, the plaintiff must plead with

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particularity the facts evidencing “the defendant’s intention ‘to deceive, manipulate, or

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defraud.’” Tellabs Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (quoting

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Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 & n. 12 (1976)). To satisfy the rigorous

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pleading standards of the PSLRA, the complaint’s scienter allegations must give rise not

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simply to a plausible inference of scienter, but rather to an inference of scienter that is “cogent

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and at least as compelling as any opposing inference of nonfraudulent intent.” Id. at 314.

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III. DISCUSSION
To state a claim under Section 10(b) of the Exchange Act and its accompanying rule

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United States District Court
For the Northern District of California

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promulgated by the Securities and Exchange Commission (“SEC”), Rule 10b-5, 17 C.F.R. §

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240.10b-5, a plaintiff must allege (1) a material misrepresentation or omission made by the

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defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the

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purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic

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loss; and (6) loss causation. Janus Capital Grp. v. First Derivate Traders, --- U.S. ---; 131 S. Ct.

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2296, 2301 n.3 (2011). Defendants argue that Plaintiff has failed to adequately alleged the first

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(false or misleading statement), second (scienter), and sixth (loss causation) prongs of its 10(b)

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claim.

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a. False or Misleading Statement by Defendants
i. Mr. Gertel’s Statement as Reported by the September 8, 2010 Analyst
Report
Plaintiff alleges that on September 7, 2010, ACI Research issued a report and

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recommendation on Finisar that relayed, in pertinent part, that analysts “are now detecting

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inventory buildup in Finisar’s ROADM business, particularly in their merchant market WSS

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[wavelength selective switches] business.” FAC ¶ 35. The very next day, which marks the start of

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the Class Period, an analyst from PiperJaffray issued a report based largely on information he had

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gathered during a dinner he hosted with Mr. Gertel. Id. at ¶ 36. According to the report, “Finisar

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(and JDS Uniphase and Oclaro),” as of that date, “have been adamant that inventory levels have

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT

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not increased materially.” Id. Plaintiff argues that, because Mr. Gertel hosted this dinner and

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because Finisar is mentioned in this statement in the report, the court should attribute the

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“adamant” denial of inventory build-up to Mr. Gertel. The court disagrees.

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Plaintiff’s argument appears to be in direct conflict with the Supreme Court’s recent

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decision in Janus Capital. In that case, the Court considered whether certain allegedly misleading

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statements contained in several fund prospectuses could be attributed to the funds’ creator and

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investment adviser. See 131 S. Ct. 2296. The Court first articulated a rule for determining if a

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speaker is a “maker” of a statement, holding that “[f]or purposes of Rule 10b-5, the maker of a

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statement is the person or entity with ultimate authority over the statement, including its content

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For the Northern District of California

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and whether and how to communicate it.” 131 S. Ct. at 2302. It then went on to note that, despite

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the close relationship between the funds and their adviser, they were maintained as legally separate

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entities. Thus, the Court found that statements made by the funds could not be attributed to the

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adviser, even if the adviser assisted in preparing the prospectuses. 131 S. Ct. at 2304-05.

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The statement at issue in this case is even further removed from its alleged maker than the

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ones at issue in Janus Capital. There, the alleged “maker” was a corporate entity closely related to

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the true speaker and had been heavily involved in preparing the statement. Here, the “adamant”

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denial statement is contained in an independent analyst’s report. While that report appears to be

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based at least in part on statements made by Mr. Gertel at a recent dinner, Plaintiff supplies no

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allegations suggesting that Mr. Gertel or anyone else at Finisar had editorial control over the

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author’s use of it or the preparation of the ultimate report. Moreover, the statement is clearly

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attributed to at least three separate speakers: Finisar, JDS Uniphase, and Oclaro. See FAC ¶ 36.

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The collective nature of this statement makes it impossible for the court to determine whether the

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author was reporting on each individual company’s specific “adamant” denial, or rather the

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cumulative impression he received from the three companies throughout the evening. Accordingly,

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the court finds that the September 8, 2010 statement cannot be attributed to Mr. Gertel or Finisar.

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT

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ii. Mr. Gertel’s Statements During the December 2, 2010 Investor Call
Plaintiff next alleges that Mr. Gertel’s December 2, 2010 statements that the “fundamentals

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for growth” were present in the market, that Finisar had not seen inventory issues with its

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customers, and that it did not have visibility into inventory issues with its telecom customers were

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false and misleading. The court previously found that these statements, when read in full, were

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insufficient to show falsity because the only visibility Mr. Gertel appeared to admit to was that of

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the inventory of Finisar’s LAN/SAN products, which are not at issue in this case. Dkt. No. 68 7-8.

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Plaintiff now alleges that Finisar’s annual price negotiations with its telecom customers typically

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cover topics such as production needs and capacity and that during these negotiations in 2010

United States District Court
For the Northern District of California

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customers “disclosed—and had every incentive to disclose—their inventory levels and decreased

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demand for Finisar products as they burned-off excess inventory.” FAC ¶¶ 8, 41, 62, 66-67.

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Moreover, according to Plaintiff, these negotiations occurred “at the end of 2010” and were

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substantially completed by the time of Mr. Gertel’s statement. Id. at ¶¶ 8, 9, 41, 61.

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These allegations plausibly suggest that Finisar at least discussed inventory levels with its

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telecom customers prior to December 2, 2010. However, they do not go so far as to suggest that

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Finisar had any true visibility into its customers’ inventory levels as of that time. Most notably,

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these allegations do not support an inference that Finisar’s customers had actually revealed an

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excess of inventory during these discussions, and thus that Mr. Gertel’s statement suggesting that

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Finisar’s growth was in-line with end market sales and that Finisar had “visibility” into telecom

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inventory can be inferred to be false or misleading.

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Elsewhere in the FAC, Plaintiff includes curative statements issued by Finisar regarding its

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fiscal fourth quarter 2011 revenues that directly contradict the inference it asks the court to make

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here. In a March 8, 2011 press release, Finisar listed both the annual price negotiations and “the

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adjustment of inventory levels at some telecom customers” among the factors influencing its

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revised revenue estimates. Finisar’s setting forth the negotiations and the inventory adjustment as

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separate causes of the decrease in its revenue contradicts Plaintiff’s argument that Defendants had

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accurate visibility into its customers’ inventories during the annual negotiations. Id. at ¶ 48. Even

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT

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more strongly detracting from this argument is Plaintiff’s inclusion of Mr. Rawls’ March 8, 2011

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statement to investors that “we don’t really have great visibility into [customers’] inventory levels

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other than what they tell us and I, you know, they’re not—we’re not getting complete information I

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don’t think.” Id. at ¶ 49. Without more to support an inference that customers revealed an

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inventory build-up to Defendants by December, the court finds that Plaintiff has not alleged that

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Mr. Gertel’s December 2, 2010 statement was false or misleading when made to the satisfaction of

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Rule 9(b) and the PLSRA.

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United States District Court
For the Northern District of California

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iii. Mr. Rawls’ Statements During the January 11, 2011 and February 10,
2011 Investor Calls
Finally, Plaintiff contends that Mr. Rawls’ January 11, 2011 statement that WSS is “the

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fastest growing product on the planet for optic” and “the drug that phone companies don’t seem to

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be able to get enough of,” along with his statement that demand had been “incredibly strong,” and

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on February 10, 2011 that “today” Finisar finds itself “in a very strong demand environment” for

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ROADM and WSS products misled investors to believe that demand for WSS and other telecom

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products remained strong at the time of the respective calls. FAC ¶¶ 42, 46. Plaintiff makes clear

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that it only alleges these cited portions of the January and February 2011 statements to be false or

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misleading. Dkt. No. 73 at 9. The court previously found that Plaintiff did not adequately allege

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falsity as to these statements because Plaintiff had not included allegations suggesting that

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customers were actually building inventory at the time of the call or, even if customers were

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building inventory, Plaintiff did not allege that the statements about demand were false, only that

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the source of the demand was omitted. Dkt. No. 68 at 8-9.

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Plaintiff maintains that it has changed its theory as to these statements from that of

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omission to that of an affirmative misstatement, now arguing that the statements were false when

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made because, at the time Mr. Rawls was trumpeting the “incredibly strong” demand environment

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for WSS and ROADM to investors, demand for the telecom products was actually falling as a

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result of customers’ inventory build-up. In arguing that its allegations are sufficient to state falsity,

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Plaintiff points to Finisar’s own later statements suggesting that Defendants had already seen

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT

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reduced order rates by the time the January and February statements were made. Particularly,

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during the March 8, 2011 call on Finisar’s revised revenue estimates, Mr. Rawls stated that he had

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seen the impact of reduced order rates for “a couple of months” due to “an industry-wide

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phenomenon” that was “not limited to just one customer in China.” FAC ¶ 45. This statement

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plausibly suggests that Finisar’s orders had been reduced since at least January. Also on March 8,

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2011, Mr. Gertel explained that Defendants had seen this “more pronounced” slowdown in China

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“starting at the beginning of February in a more serious way.” This statement appears to directly

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contradict Mr. Rawls’ February 10 statement that “today” Finisar is in a “strong demand

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environment.”

United States District Court
For the Northern District of California

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Despite Plaintiff’s plausible allegations that demand had started to curtail by January 2011,

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the court does not find that Plaintiff has plausibly alleged that Mr. Rawls’ January statements were

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false. Taking these statements in context, Mr. Rawls appears to have been discussing Finisar’s past

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performance:

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This [the ROADMs, the wavelength selective switch or the WSS] is the fastest growing

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product on the planet for optic. It is the drug that phone companies don’t seem to be able

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to get enough off [sic], it is—gives them the ability to switch light instead of electrons

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and gives them operational efficiency, that is they can spend CapEx and save OpEx.

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So it is—the demand has been incredibly strong and we have been at capacity and on

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allocation now for—oh, I don’t know, the last five quarters, maybe six quarters in this

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product. It’s a very exciting space.

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Id. at ¶ 42. On its face, Mr. Rawls’ statement pertains to the prior “five quarters, maybe six

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quarters.” The present tense in the introductory portion of these statements appears only to be

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used for the purpose of setting up an analogy to describe what the demand “has been” like over

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these past quarters.

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Similarly, Mr. Rawls’ February statement also appears, in context, to be referring to prior
quarters:

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT

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And if you think about the headlines for the company, most of it what you’ve seen I think

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over the last few quarters has been wavelength selective switches, switching light, not

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electrons, the ROADM capabilities and telecom equipment, and it has been very exciting as

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that business has grown 20%, 30% per quarter, quarter after quarter…so anyway, today we

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find ourselves in a very strong demand environment. Revenues have been growing fast.

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Id. at ¶ 46. Given Plaintiff’s own admissions that Defendants’ “double-digit, sequential growth” in

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the six consecutive quarters leading into the Class Period was “driven primarily” by WSS and

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ROADM sales, the court cannot find that these statements describing demand in those recent

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quarters as “strong” were false. Id. at ¶ 33.

United States District Court
For the Northern District of California

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Even isolating the narrow portion of Mr. Rawls’ February statement that Plaintiff asserts as

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the misrepresentation, i.e. the statement that “today” Finisar finds itself “in a very strong demand

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environment,” the court still cannot find that Plaintiff has adequately alleged falsity. This

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statement, taken alone, does suggest at least a pivot in the conversation towards present day

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conditions. However, without more, the word “strong” used to describe a company’s demand is

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insufficient to serve as the basis of a securities fraud cause of action. See In re Splash Tech.

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Holdings, Inc. Sec. Litig., 160 F. Supp. 2d 1059, 1076-77 (N.D. Cal. 2001) (noting that courts have

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held that phrases such as “strong,” “robust,” and “well-positioned,” when used to describe demand,

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results, or strategy are not actionable as material misrepresentations); see also In re Calpine Corp.,

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288 F. Supp. 2d 1054, 1088 (N.D. Cal. 2003) (holding that words such as “strong” and “solid”

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could not form a basis for Section 10(b) claims). Accordingly, the court finds that Plaintiff has

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failed to adequately allege falsity of the January and February statements.

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Because Plaintiff has for the second time failed to adequately allege any material

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misrepresentation on the part of Defendants, the court DISMISSES its Section 10(b) claim

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WITHOUT LEAVE TO AMEND. For the same reasons, the court DISMISSES Plaintiff’s Section

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20(a) claim WITHOUT LEAVE TO AMEND. See Zucco Partners, 552 F.3d at 990 (“Section

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20(a) claims may be dismissed summarily…if a plaintiff fails to adequately plead a primary

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violation of section 10(b).”).

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Case No.: 5:11-CV-01252-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT