Alizadeh v. Tellabs, Inc. et al

Filing 85

OPINION AND ORDER. Signed by the Honorable Sara L. Ellis on 6/16/2014. Defendants' motion to dismiss amended complaint 42 is granted. For the reasons set forth in the Opinion and Order, the Amended Complaint 36 is dismissed without prejudice. Plaintiffs are given until July 1, 2014 to file a Second Amended Complaint in conformity with this Opinion and Order. Status hearing set for 6/17/2014 is stricken and reset to 7/8/2014 at 9:30 AM. Mailed notice(rj, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
MAHMOOD ALIZADEH, on behalf of
himself and all others similarly situated,
Plaintiff,
v.
TELLABS, INC., TIMOTHY J. WIGGINS,
and THOMAS P. MINICHIELLO
Defendants.

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No. 13 C 537
Judge Sara L. Ellis

OPINION AND ORDER
Lead Plaintiffs Brian Jensen and Alfredo Acosta bring this case on behalf of themselves
and a putative class of similarly situated individuals who purchased securities in Tellabs, Inc.
(“Tellabs”). Plaintiffs allege that Tellabs and two of its officers, Timothy Wiggins and Thomas
Minichiello, made false or misleading representations with regard to Tellabs’ business operations
which caused Tellabs’ stock price to be artificially inflated. Specifically, Plaintiffs allege that
Defendants misrepresented the viability of Tellabs’ products and failed to promptly disclose that
Tellabs had lost the business of its primary customer, AT&T. In doing so, Plaintiffs contend that
Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, codified as
15 U.S.C. § 78j(b) and t(a), and SEC Rule 10b-5, 17 U.S.C. § 240.10b-5. Now before the Court
are Defendants’ motion to dismiss the Amended Complaint for failure to comply with the
heightened pleading standards that govern claims for securities fraud. [42] Because Plaintiffs fail
to specify which of Defendants’ statements were false or misleading and fail to connect each
alleged misstatement with a contrary allegation of fact, the Amended Complaint is dismissed
without prejudice.

BACKGROUND 1
Tellabs designs and develops telecommunications network products, which it sells
primarily to telecommunications service providers. Tellabs stock is traded publicly on the
National Association of Securities Dealers Automated Quotations Market (“NASDAQ”).
Plaintiffs seek to represent a class of individuals who purchased Tellabs stock between June 9,
2010 and April 26, 2011 (the “Class Period”). Defendant Timothy Wiggins served as Tellabs’
Chief Financial Officer and Defendant Thomas Minichiello was Tellabs’ Chief Accounting
Officer during the Class Period.
At the beginning of the Class Period, AT&T was Tellabs’ largest customer. But this was
likely to change, as AT&T announced in 2009 that it intended to buy its telecommunications
products from “domain suppliers,” rather than from Tellabs. But as the iPhone was introduced
and the mobile internet market ballooned, AT&T experienced “an explosion of demand for
bandwith in 2010.” Doc. 36 ¶ 70. To satisfy demand, AT&T purchased large quantities of
Tellabs products, including the 5500 Digital Cross-Connect (the “5500”). By 2010, the 5500
was nearing obsolescence, but AT&T purchased $120 million worth of the devices in 2010 in
order to meet this high demand. In light of AT&T’s earlier announcement and the benefit of
hindsight, these sales constituted a temporary fix for AT&T rather than an emerging trend.
Tellabs acknowledged as much during the Class Period. In October of 2010, when asked on an
earnings conference call whether sales of 5500s would continue to grow in 2011, Wiggins
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The facts in the background section are taken from the Amended Complaint and documents
incorporated by reference therein and are presumed true for the purpose of resolving Defendants’
motion to dismiss. See Virnich v. Vorwald, 664 F.3d 206, 212 (7th Cir. 2011); Local 15, Int’l Bhd. of
Elec. Workers, AFL-CIO v. Exelon Corp., 495 F.3d 779, 782 (7th Cir. 2007). A court normally
cannot consider extrinsic evidence without converting a motion to dismiss into one for summary
judgment. Hecker v. Deere & Co., 556 F.3d 575, 582–83 (7th Cir. 2009). Where a document is
referenced in the complaint and central to plaintiff’s claims, however, the Court may consider it in
ruling on the motion to dismiss. Id. The Court may also take judicial notice of matters of public
record. Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080–81 (7th Cir. 1997).

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responded, “lightning probably won’t strike twice. I don’t think so.” Doc. 41-2, Ex. 8 at 18. 2
But Tellabs also asserted that as of June of 2010, AT&T continued to purchase its products at a
steady rate.
With the 5500 nearing obsolescence, Tellabs sought to develop a product to satisfy
AT&T’s demand in its next generation network—known as “4G.” Tellabs initially invested in
developing the 8900, which was intended to replace the 8800, its “bread and butter” product.
Doc. 36 ¶ 7. But Tellabs switched focus, cutting its research and development budget in the
8900 and investing instead in products first developed by WiChorus, Inc., a company Tellabs
acquired in December of 2009. But Tellabs’ WiChorus product was slow to roll-out and
ultimately did not succeed in recapturing Tellabs’ market share, resulting in the stock price
losing its value. Exacerbating Tellabs’ problems, a new competitor, Alcatel-Lucent, emerged
during the first half of 2010 and began offering AT&T a pure ethernet product to support its
network. Alcatel-Lucent ultimately won AT&T’s business and took market share from Tellabs.
Plaintiffs allege that Tellabs made several material misstatements with regard to the
viability of its products and the likelihood that it could retain AT&T as a customer. Plaintiffs
allege that these misstatements began on June 9, 2010, when a representative from Tellabs told
analysts and investors, “[w]e continue to compete for future business at AT&T and other
companies. . . . The solution we’re providing AT&T has a longer life and a longer runway in the
network than the market has given it credit for.” Doc. 36 ¶ 101. The following day, Wiggins
stated, “[w]hat we’re seeing in the current term is no degradation of the orders from the
customer, but in fact we’re seeing stronger orders than we expect so.” Doc. 36 ¶ 103. But
Tellabs simultaneously warned that it could lose business to Alcatel-Lucent in the long term
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The Court may consider the transcript of this call as it was quoted at length in the Amended
Complaint and is central to the Amended Complaint. See Doc. 36 ¶ 122; Hecker, 556 F.3d at 582–83.

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because AT&T “would prefer over time to put a pure Ethernet system in because . . . pure
Ethernet is probably a third less expensive.” Doc. 36 ¶ 103. On this June of 2010 earnings call,
Tellabs also projected that its WiChorus product would be available in 2011.
In July of 2010, Tellabs’ CEO Robert Pullen stated on an investor conference call,
“[w]hile I can’t speak for our customer, we do know that AT&T is trialing a third vendor in its
mobile back-haul networks. At the same time, Tellabs sees good demand from AT&T. We’re in
the network now. We’re seeing growth on the embedded base. And we believe we offer the
lowest risk and the least cost evolution to the long-term evolution in the mobile backhaul.” Doc.
36 ¶ 113. In August of 2010, Pullen reiterated, “[o]ur orders still remain very good and we are
approved in their mobile backhaul and obviously, it’s growing demand there. As I shared on the
earnings call, we do know that they are about to introduce a new vendor into the mix, but we
continue to be deployed in their current business and it’s a big and growing marketplace. We
will continue to do well there.” Doc. 36 ¶ 116. In October of 2010, Tellabs announced its third
quarter earnings, including total revenue of $429 million, within the guidance range it had
predicted three months earlier. Tellabs simultaneously released guidance for the fourth quarter
of 2010, estimating revenue between $410 and $430 million.
Plaintiffs allege that “[t]he house of cards began to crumble” on January 25, 2011. Doc.
36 ¶ 125. On this date, Tellabs reported $410 million in earnings for the fourth quarter of 2010,
at the low end of its guidance range. But Tellabs explained that this total included an accounting
change that resulted in Tellabs recognizing $20.8 million in revenue that it otherwise would not
have recognized until the first quarter of 2011. Wiggins acknowledged on January 25, 2011,
“when we set the guidance and provided it to you in October, we did anticipate the change in this
distribution arrangement with the customer.” Doc. 36 ¶ 128. That same day, Tellabs also

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released disappointing guidance for the first quarter of 2011, estimating revenues between $315
and $335 million. Tellabs’ stock price declined by almost twenty percent on that day.
On April 26, 2011, the last day of the Class Period, Tellabs revealed that it collected $322
million in revenues during the first quarter of 2011, again within the guidance range. Tellabs
announced that its declining revenues were driven largely by decreasing sales in North America,
specifically to AT&T. Tellabs’ stock price dropped by nine percent on April 26, 2011.
Plaintiffs contend that Tellabs also misrepresented its relationship with a company called
Juniper. A Tellabs representative stated in August of 2010, “[a]lso recently I was speaking with
Kevin Johnson at Juniper and we have our products interoperating around the world for
customers as well. And so our equipment’s in their lab, we’re doing interoperability testing with
them for customers around the world, including AT&T.” Doc. 36 ¶ 117. Plaintiffs allege that
this statement “was clearly false and misleading” because Tellabs never formalized a business
relationship with Juniper. Doc. 36 ¶ 118.
LEGAL STANDARD
A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint, not
its merits. Fed. R. Civ. P. 12(b)(6); Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir.
1990). In considering a Rule 12(b)(6) motion to dismiss, the Court accepts as true all wellpleaded facts in the complaint and draws all reasonable inferences from those facts in the
plaintiff’s favor. AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th Cir. 2011). To survive a
Rule 12(b)(6) motion, the complaint must not only provide the defendant with fair notice of a
claim’s basis but must also be facially plausible. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct.
1937, 173 L. Ed. 2d 868 (2009); see also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.
Ct. 1955, 167 L. Ed. 2d 929 (2007). “A claim has facial plausibility when the plaintiff pleads

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factual content that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.” Iqbal, 556 U.S. at 678.
Rule 9(b) requires a party alleging fraud to “state with particularity the circumstances
constituting fraud.” Fed. R. Civ. P. 9(b). This “ordinarily requires describing the ‘who, what,
when, where, and how’ of the fraud, although the exact level of particularity that is required will
necessarily differ based on the facts of the case.” AnchorBank, 649 F.3d at 615 (citation
omitted). Rule 9(b) applies to “all averments of fraud, not claims of fraud.” Borsellino v.
Goldman Sachs Grp., Inc., 477 F.3d 502, 507 (7th Cir. 2007). “A claim that ‘sounds in fraud’—
in other words, one that is premised upon a course of fraudulent conduct—can implicate Rule
9(b)’s heightened pleading requirements.” Id.
On top of the burden imposed by Rules 12(b)(6) and 9(b), Congress further heightened
the pleading standards on securities fraud claims when it enacted the Private Securities Litigation
Reform Act (“PSLRA”). Congress created this standard to check pleading abuses in private
securities fraud suits. Tellabs, Inc. v. Makor Issues & Rights, Ltd. (Tellabs II), 551 U.S. 308,
313–14, 127 S. Ct. 2499, 168 L. Ed. 2d 179 (2007). In order to properly allege that defendants
misrepresented or omitted material facts, the PSLRA requires plaintiffs to “specify each
statement alleged to have been misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement or omission is made on information or
belief, the complaint shall state with particularity all facts on which that belief is formed.” 15
U.S.C. § 78u-4(b)(1). In pleading scienter, the PSLRA requires that plaintiffs, “with respect to
each act or omission alleged to violate this chapter, state with particularity facts giving rise to a
strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-

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4(b)(2). For an inference to be “strong,” it must be “cogent and at least as compelling as any
plausible opposing inference one could draw from the facts alleged.” Tellabs II, 551 U.S. at 324.
ANALYSIS
In moving to dismiss the Amended Complaint, Tellabs raises seven principal arguments.
The Court focuses on the first argument, that Plaintiffs have failed to satisfy the PSLRA’s
heightened pleading standards because they have not specified which of Tellabs’ statements
during the Class Period were false, nor explained exactly why such statements are false. The
Court agrees.
The PSLRA requires a plaintiff to “specify each statement alleged to have been
misleading, the reason or reasons why the statement is misleading,” and all facts that form the
plaintiff’s basis for believing that the statement is misleading. 15 U.S.C. § 78u-4(b)(1). Courts
around the country have made clear that a complaint does not satisfy the PSLRA’s pleading
standards when it quotes the defendant at length and then uses a stock assertion that the
statement is false or misleading for reasons stated in an earlier paragraph. For example, in Boca
Raton Firefighters & Police Pension Fund v. Bahash, the Second Circuit dismissed a complaint
for failing to satisfy the PSLRA because it “consist[ed] in large part of large block quotations
with italicized text, followed by a passage that reads ‘[t]he statements referenced in [the
preceding paragraphs] were each materially false and misleading when made for the reasons set
forth in ¶ 256 and the factual data contained throughout this Complaint.” 506 F. App’x 32, 38
(2d Cir. 2012) (second and third alterations in original). Likewise, in Conlee v. WMS Industries,
Inc., a court in this district dismissed the complaint wherein “the heart of the complaint, the
section titled ‘Defendants’ False and Misleading Statements Made During the Class Period,’ is a
sixteen page mash-up of block quotes, snippets, parentheticals, and Lead Plaintiff’s

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characterizations of alleged statements made by one or more Defendants.” No. 11 C 3503, 2012
WL 3042498, at *4 (N.D. Ill. July 25, 2012).
That is precisely what Plaintiffs do here. To start, Plaintiffs allege that statements were
false only after quoting Tellabs representatives at length. For example, paragraph 130 of the
Amended Complaint includes a block quote of the January 25, 2011 investor conference call
which covers more than five single spaced pages. Doc. 36 at 47–53. The Court is therefore left
to speculate which statements Plaintiffs allege are inaccurate. Plaintiffs’ use of bold and italics
to emphasize certain statements does nothing to clarify Plaintiffs’ assertions of false statements.
See Bashash, 506 F. App’x. at 38; Lauria v. Biosante Pharm., Inc., 968 F. Supp. 2d 951, 958
(N.D. Ill. 2013). After quoting transcripts and press releases at length, Plaintiffs merely set out,
as the plaintiffs in Bashash and Conlee did, that these statements were false and misleading for
reasons stated earlier in the Amended Complaint. See Doc. 36 ¶ 110 (“Tellabs’ statements in
¶¶ 101-109 above were false and misleading for the reasons stated in ¶ 16(a)-(j) as well as the
statements made by Confidential Witnesses.”); Doc. 36 ¶ 124 (“The statements contained in
¶¶ 101-123 above were materially false and/or misleading when made for the reasons stated in
¶ 16(a)-(j) and the statements made by the Confidential Witnesses.”); Doc. 36 ¶ 135 (“ The
statements contained in ¶¶ 101-134 above were materially false and/or misleading when made
for the reasons stated in ¶ 16(a)-(j) and statements made by Confidential Witnesses.”).
Several courts have described this pleading style as “puzzle pleading,” because it requires
the Court and the defendant to piece together exactly which statements Plaintiffs are challenging
and what allegations contradict those statements. Conlee, 2012 WL 3042498, at *4. In the
context of the PSLRA, Courts have found that this practice “improperly place[s] the burden on
the Court to sort out the alleged misrepresentations and then match them with the corresponding

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adverse facts.” Id. (alteration in original) (quoting In re Harley-Davidson, Inc. Sec. Litig., 660 F.
Supp. 2d 969, 984 (E.D. Wis. 2009)). “[C]ourts have repeatedly lamented” this practice of
requiring the Court to determine exactly which statements plaintiffs allege are misleading and
which alleged facts support plaintiffs’ claims. Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231, 1244
(N.D. Cal. 1998). Puzzle pleading has also been described as a “not uncommon mask for an
absence of detail.” In re Spiegel, Inc. Sec. Litig., 382 F. Supp. 2d 989, 1011 (N.D. Ill. 2004)
(quoting Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir.1997)). As in Conlee:
[t]he net effect of the pleading’s format is to leave the reader—whether
Defendants or the court—jumping from page to page in an attempt to link the
alleged statements to the background that supposedly makes them false or
misleading. Even this activity might be tolerable if the statements themselves
were clearly identified, but as noted above, they are not. Rather, it is frequently
difficult to discern where the supposedly challenged statements end and the
context or characterization begins.
Conlee, 2012 WL 3042498 at *4. The imprecise nature of the Amended Complaint not only
makes the Court’s job more difficult, but it also leads to increased discovery costs, as the parties
are likely to incur costs examining irrelevant issues. Id.
The PSLRA requires plaintiffs not only to identify specific false or misleading
statements, but also to explicitly connect those statements to factual allegations demonstrating
that they are false. See Bashash, 506 F. App’x at 38 (holding that the complaint did not
sufficiently connect the allegedly false statements with contrary allegations: “Needless to say,
asking the Court to assess the truth of facts in light of ‘the factual detail contained throughout
this Complaint,’ does not comport with our exhortation that plaintiffs ‘must demonstrate with
specificity why and how’ each statement is materially false or misleading.” (citation omitted));
Wagner v. First Horizon Pharm. Corp., 464 F.3d 1273, 1279 (11th Cir. 2006) (dismissing the
complaint because “the factual particularity of the first 175 paragraphs is not connected to the
otherwise generally pled claim in any meaningful way”); In re Alcatel Sec. Litig., 382 F. Supp.
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2d 513, 531–32 (S.D.N.Y. 2005) (dismissing the complaint because the allegations of fraud and
the alleged misstatements did “not connect with sufficient particularity to meet the Rule 9(b)
pleading requirements”); In re Autodesk, Inc. Sec. Litig., 132 F. Supp. 2d 833, 842 (N.D. Cal.
2000) (dismissing the complaint, stating, “plaintiffs have left it up to defendants and the court to
try to figure out exactly what the misleading statements are, and to match the statements up with
the reasons they are false or misleading”). Directly contrary to the practice of puzzle pleading,
the PSLRA “prevents a plaintiff from skirting dismissal by filing a complaint laden with vague
allegations of deception unaccompanied by a particularized explanation stating why the
defendant’s alleged statements or omissions are deceitful.” Metzler Inv. GMBH v. Corinthian
Colls., Inc., 540 F.3d 1049, 1061 (9th Cir. 2008). By failing to identify exactly which facts
controvert each specific false or misleading statement, Plaintiffs fall short of the PSLRA’s
pleading standard.
The Court finds that Plaintiffs have not satisfied the applicable pleading standards
because the Amended Complaint does not identify with specificity which statements Plaintiffs
alleges are false, nor does it set out why Plaintiffs believe each individual statement is false. The
Court affords Plaintiffs another opportunity to amend the Amended Complaint in order to
comply with all applicable pleading standards. See Conlee, 2012 WL 3042498 at *5; Boca
Raton Firefighters’ & Police Pension Fund v. DeVry Inc., No. 10 C 7031, 2012 WL 1030474, at
*19 (N.D. Ill. Mar. 27, 2012); In re Metro. Sec. Litig., 532 F. Supp. 2d at 1280.

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CONCLUSION
For the reasons set forth above, the Amended Complaint [36] is dismissed without
prejudice. Plaintiffs are given until July 1, 2014 to file a Second Amended Complaint in
conformity with this Opinion and Order.

Dated: June 16, 2014

______________________
SARA L. ELLIS
United States District Judge

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