Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_02-cv-04656/USCOURTS-cand-4_02-cv-04656-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SHIRLEY ZELMAN, TRUSTEE, F/B/O

SHIRLEY ZELMAN LIVING TRUST,

on behalf of plaintiff and all others

similarly situated,

Plaintiff,

 v.

JDS UNIPHASE CORPORATION,

JOZEF STRAUS, KEVIN

KALKHOVEN,

ANTHONY R. MULLER and

CHARLES J. ABBE,

Defendants.

 /

Master File No. C-02-4656 CW (WWS)

ORDER DENYING IN PART AND

GRANTING IN PART

DEFENDANTS’ MOTIONS TO

DISMISS

Shirley Zelman, a purchaser of securities called GOALs, brings this securities

fraud action against JDS Uniphase Corporation (JDSU) and four of its former directors

on behalf of herself and other GOALs purchasers. JDSU and Kevin Kalkhoven, one of

its former directors, have moved separately to dismiss the Complaint. For the reasons

presented below, the Court denies the JDSU defendants’ motion to dismiss and grants in

part Kalkhoven’s motion to dismiss, with leave to amend.

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BACKGROUND

Since the Court is considering Defendants’ motions to dismiss, the following

description is drawn from Plaintiff’s complaint. See In re Daou Systs., Inc., Sec. Litig.,

397 F.3d 704, 709-10 (9th Cir. 2005) (“[W]e accept the plaintiffs’ allegations as true and

construe them in the light most favorable to plaintiffs.”) (internal quotation marks and

citation omitted). 

The GOAL notes Plaintiff purchased were “equity-linked” debt securities issued

by the Swiss bank UBS AG (UBS). The GOALs sold at a face value of $1000, paid

26% interest per annum, and were set to mature on September 12, 2002, 18 months after

issuance. The nature of the payment to which holders were entitled at the notes’

maturity depended solely on the price at which JDSU common stock was trading on

September 9, 2002. If JDSU stock was trading above $28.125 per share, GOALs holders

would receive a return of their principal in cash. If JDSU stock was trading below that

price, GOALs holders would receive 35.5556 shares of JDSU stock for each $1000

GOAL. This ratio was based on the price of JDSU stock at issuance of the GOALs in

March 2001, when JDSU stock was trading for $28.125 per share. GOALs holders had

no option to convert their notes to JDSU stock.

The prospectus statement relating to the GOALs that UBS filed with the

Securities and Exchange Commission (SEC) included the following statements: 

The return on the GOALs is linked to the performance of JDS Uniphase

Corporation common stock and there is no guaranteed return of

principal. . . . WE EXPECT THAT GENERALLY THE MARKET

PRICE OF JDS UNIPHASE CORPORATION COMMON STOCK ON

ANY DAY WILL AFFECT THE VALUE OF THE GOALs MORE

THAN ANY OTHER SINGLE FACTOR. . . . Owning the GOALs is not

the same as owning common stock of the JDS Uniphase Corporation[.]

Accordingly, the market value of your GOALs may not have a direct

relationship with the market price of JDS Uniphase Corporation common

stock and changes in the market price of JDS Uniphase Corporation

common stock may not result in a comparable change in the market value

of your GOALs.

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28 1Defendants note that this date is two days before the GOALs were alleged to have been

offered to the public. This discrepancy is not material to the merits of the motions.

3

The proposed plaintiff class is the group of all who purchased GOALs between

March 6, 2001,1 and July 26, 2001. Plaintiff names as defendants JDSU itself; Jozef

Straus, CEO of JDSU since May 2000; Straus’s predecessor, Kevin Kalkhoven, CEO of

JDSU from June 1999 to May 2000; Anthony R. Muller, CFO and Executive Vice

President of JDSU during the proposed class period; and Charles J. Abbe, President and

COO of JDSU during the proposed class period. 

Plaintiff alleges that Defendants’ false statements before and during this period

caused the GOALs to be issued and to be traded at artificially inflated prices. Plaintiff’s

allegations largely parallel the allegations in the related case In re JDS Uniphase

Securities Litigation, No. 02-01486 (N.D. Cal.). Thus, Plaintiff alleges that during 1999

and 2000, JDSU had a practice of fraudulently recognizing revenue in violation of

Generally Accepted Accounting Principles (GAAP), that JDSU knowingly and

misleadingly concealed dramatic decreases in demand for JDSU products, and that JDSU

consistently publicly overstated its assets and goodwill. Plaintiff further alleges that

JDSU and individual officers began to acknowledge the company’s problems in January

2001 but did not disclose the full extent of the company’s poor health until July 2001. 

Kalkhoven retired as CEO and from the JDSU board of directors on May 18,

2000, but Plaintiff alleges that he retained an office at JDSU, often used it, and

continued to have access to inside information about JDSU through July 31, 2001. 

Plaintiff does not, however, allege any actionable statements by Kalkhoven following his

retirement.

Plaintiff alleges that JDSU management, including all four individual defendants,

had knowledge of the discrepancies between the above alleged misstatements and the

facts. Plaintiff maintains that individual defendants had access to the company’s Oracle

spreadsheet files, which recorded actual inventory, and to the “Redbook,” an internal

accounting report disseminated to top JDSU management. Plaintiff alleges specific

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incidents in which most of the individual defendants consulted or were provided with

these materials, although the incidents predate the proposed class period. 

Plaintiff also alleges that the GOALs were trading on the American Stock

Exchange during the class period and that JDSU stock was trading on NASDAQ. 

Plaintiff points to price declines of both JDSU stock and the GOALs immediately

following disclosures by Defendants on April 24, June 14, and July 26, 2001. 

JDSU and the individual Defendants other than Kalkhoven have moved to dismiss

the Complaint on the grounds that Plaintiff lacks standing to sue JDSU, that she has not

sufficiently alleged that any misstatements were made “in connection with” the GOALs,

that she has not sufficiently alleged that she relied on any misstatements, and that she has

not sufficiently alleged that any misstatements were accompanied by scienter. Defendant

Kalkhoven has moved separately for dismissal as to him on the same grounds, as well as

on the grounds that as to him Plaintiff has failed to allege any actionable misstatements

and has failed to plead causation and scienter adequately. 

DISCUSSION

I. STANDING

In arguing that Plaintiff should be held to lack standing, JDSU relies on Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), and on Ontario Public Service

Employees Union Pension Trust Fund v. Nortel Networks Corp., 369 F.3d 27 (2d Cir.

2004), cert. denied, 125 S. Ct. 919 (2005). The Court concludes, however, that Blue

Chip Stamps and subsequent cases, including Nortel, do not indicate that Plaintiff should

be held to lack standing. Since Plaintiff engaged in the type of activity that § 10(b) was

enacted to protect, the Court concludes that she should have standing to bring this action.

A. Blue Chip Stamps and Subsequent Cases on Standing

Because private rights of action under § 10(b) were not expressly created by

Congress but “have been judicially found to exist, [they also] have to be judicially

limited.” Blue Chip Stamps, 421 U.S. at 749. One way of doing this is by limiting the

class of plaintiffs who may bring such actions, as the Supreme Court did in Blue Chip

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Stamps. See id; see also Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1000-01

(9th Cir. 2002) (“Because neither [§ 10(b) nor Rule 10b-5] contains an express right of

action, they also do not delineate who is a proper plaintiff. In the absence of explicit

Congressional guidance, courts have developed various ‘standing’ limitations, primarily

on policy grounds.”).

In Blue Chip Stamps, the leading Supreme Court case on standing in § 10(b)

actions, the Court addressed the meaning of the statute’s prohibition of fraud “in

connection with the purchase or sale of any security.” 15 U.S.C. § 178j(b) (emphasis

added). The Court held that this language requires a plaintiff to have actually

“purchased or sold . . . shares” to have standing under § 10(b). 421 U.S. at 725. The

Court supported the interpretation with a policy analysis, see id. at 737-49, noting that if

courts recognized the standing of plaintiffs who had not traded in securities but merely

claimed they had refrained from trading because of alleged false or misleading

statements, the risk of “nuisance or ‘strike’ suits” would increase. Id. at 740. Because it

would be so difficult to prove or rule out those plaintiffs’ alleged decisions not to act

other than by oral testimony, plaintiffs of this type would have an enhanced ability to

force trial or settlement, even without meritorious claims. See id. at 742-46. 

Between Blue Chip Stamps in 1975 and Nortel in 2004, decisions on standing in

§ 10(b) actions focused on which acts qualify as the “purchase or sale” of “securities.” 

In Blue Chip Stamps the Court noted that the securities laws define “contract[s] to

purchase or sell securities” as securities, so buyers or sellers of “puts, calls, options, and

other contractual rights or duties to purchase or sell securities” have standing under

§ 10(b). 421 U.S. at 750-51 (citing 15 U.S.C. § 78c(a)). The Ninth Circuit, extending

this reasoning, subsequently held that an individual who acquires “contingent rights to

receive stock,” but not stock, has standing to sue under § 10(b), even if the individual’s

future acquisition of actual stock depends entirely on the performance of the company’s

subsidiaries. Griggs v. Pace Am. Group, Inc., 170 F.3d 877, 878 (9th Cir. 1999). 

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2

In Semerenko, the Third Circuit held that purchasers of stock in a corporation that had been

the target of a failed merger could state a claim against the prospective acquirer of the corporation

for misstatements affecting the value of the stock plaintiffs purchased. 223 F.3d at 174-77. The

court concluded that in this context statements made by one corporation could have been made “in

connection with” the purchase or sale of stock in another corporation. Id. 

3

In Worldcom, the District Court for the Southern District of New York concluded that the

“connection” required by § 10(b) may exist between equity-linked debt securities like the GOALs

and statements about the value of the stock to which the debt securities are tied. 2004 WL 1435356,

at *7-*9. 

4

JDSU’s involvement in Nortel is coincidental and has no relation to the present action.

6

B. “In Connection With” Cases

A number of courts have also addressed the meaning of the related statutory “in

connection with” requirement. See, e.g., Semerenko v. Cendant Corp., 223 F.3d 165,

174-77 (3d Cir. 2000); In re Ames Dep’t Stores, Inc. Stock Litig., 991 F.2d 953, 961-68

(9th Cir. 1993); In re Worldcom Sec. Litig., Nos. 02 Civ. 3288, 03 Civ. 9499, 2004

WL 1435356, at *7-*9 (S.D.N.Y. June 28, 2004). In opposing JDSU’s standing

arguments Plaintiff relies primarily on these cases, particularly Semerenko2and

Worldcom.

3

Although the “in connection with” language appears in § 10(b) adjacent to the

“purchase or sale” language interpreted in Blue Chip Stamps, courts have not considered

the “in connection with” issue to be one of standing. Rather, courts have construed the

“in connection with” requirement as an element of the plaintiff’s prima facie case. See,

e.g., Dura Pharms., Inc. v. Broudo, 125 S. Ct. 1627, 1631 (2005). Thus these decisions,

while relevant to the present case, cannot resolve the question of Plaintiff’s standing. 

JDSU contends that the Second Circuit’s opinion in Nortel alone resolves this question. 

C. Rationale of Nortel and Application to the Present Case

Nortel is the first decision to address the standing of holders of securities issued

by a company other than the company that made the alleged misstatements and that is

named as a defendant. See 369 F.3d at 32. In Nortel, owners of JDSU stock sued Nortel

for securities fraud.4 The plaintiffs bought their stock before and after Nortel acquired

part of JDSU’s business. Nortel paid JDSU with Nortel stock, making JDSU a

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significant Nortel shareholder. During the class period Nortel allegedly misrepresented

its financial state, inflating the price of Nortel stock and also, according to the plaintiffs,

JDSU’s stock price. 

The Second Circuit held that the plaintiffs lacked standing to sue Nortel. Id. at

29. The court concluded that the phrase “any security” in § 10(b) was not meant to

“include[] securities of any company affected in some way by [an alleged]

misrepresentation,” but meant simply “that the regulations [and securities laws] reach all

types of securities, and not any affected company’s securities.” Id. at 32. The court held

that individuals lack § 10(b) standing “when the company whose stock they purchased is

negatively impacted by the material misstatement of another company, whose stock they

do not purchase.” Id. at 34. 

Here, as in Nortel, a plaintiff seeks to sue an entity other than the issuer of the

securities purchased. Defendants contend that the court’s denial of standing in Nortel

compels the same conclusion in this case. However, unlike the plaintiffs in Nortel, who

purchased common stock, Plaintiff here purchased debt securities issued by an

investment bank. From one perspective this difference is irrelevant. Both common

stock and debt securities are “securities” under the securities laws. 15 U.S.C.

§§ 78c(a)(10), (11). But from another perspective the difference between the two

securities is significant. Unlike common stock, equity-linked debt securities are defined

in redemption value by reference to the value of stock in a company other than the issuer

of the debt securities. Misstatements by JDSU affecting the price of JDSU stock bear a

“direct relationship” to the value of the GOALs because of the way the GOALs have

been defined, even though it was not JDSU that defined the GOALs in this way. Nortel,

369 F.3d at 34. Also, unlike common stock—but like stock in a merger target, see

Nortel, 369 F.3d at 33-34 (discussing Semerenko, 223 F.3d 165), and contingent rights to

acquire stock, see Griggs, 170 F.3d at 878—debt securities like GOALs make their

owners into potential holders of the linked corporation’s common stock. In buying

GOALs Plaintiff bought a specific “contractual right to receive [JDSU] stock” and

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In this regard the Second Circuit noted:

[O]ral testimony would play a crucial role in proving that plaintiffs relied on

[defendants’] financial projections when they purchased [the] securities at issue. . . .

[W]here a plaintiff is bringing an action based on the statements of a company

whose securities he did not purchase, “[p]laintiff’s entire testimony would be

dependent upon uncorroborated oral evidence of many of the crucial elements of his

claims and still be sufficient to go to a jury.” [Blue Chip Stamps, 421 U.S.] at 746. 

Nortel, 369 F.3d at 33. The relevant discussion in Blue Chip Stamps is as follows:

Without [a requirement that plaintiffs have purchased or sold securities, an] action

under Rule 10b-5 will turn largely on which oral version of a series of occurrences

the jury may decide to credit, and therefore no matter how improbable the

allegations of the plaintiff, the case will be virtually impossible to dispose of prior to

trial other than by settlement. . . . The fact of purchase . . . and . . . sale of stock are

generally matters which are verifiable by documentation, and do not depend upon

(continued...)

8

became a contingent purchaser of JDSU stock. See Griggs, 170 F.3d at 878. These

differences preclude direct application of Nortel to the present case. 

The Court also hesitates to apply Nortel to the present case because the Second

Circuit’s rationale in that decision is problematic. Although the Second Circuit’s

interpretation of “any security” is not plainly compelled by the statutory language, the

court did not support its interpretation by extensive reasoning. See 369 F.3d at 32. The

treatise the Second Circuit cites does not rule out the interpretation the Second Circuit

rejects, but only notes the expansive meaning of “security” under § 10(b) and Rule 10b5. See THOMAS LEE HAZEN, THE LAW OF SECURITIES REGULATION § 12.4[2] (5th ed.

2005). Moreover, the conclusion reached in Nortel is not compelled by Blue Chip

Stamps. The plaintiffs in Blue Chip Stamps did not seek to sue a corporation other than

the issuer of the securities they allegedly refrained from buying, so the Supreme Court

did not need to address the question of which corporations would be proper defendants. 

(In general, standing analysis focuses on defining appropriate plaintiffs. See Brody,

280 F.3d at 1000.) Additionally, the proof problems the Blue Chip Stamps Court

described in connection with claims of harm resulting from decisions not to act are not

present in situations such as the present case or Nortel, where documentary proof of

transactions is available.5 See 421 U.S. at 741-46.

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(...continued)

oral recollection, so that failure to qualify [for standing] . . . can normally be

established by the defendant either on a motion to dismiss or on a motion for

summary judgment. . . . 

[Without this rule, a p]laintiff’s proof would not be that he purchased or

sold stock, a fact which would be capable of documentary verification in most

situations, but instead that he decided not to purchase or sell stock. Plaintiff’s entire

testimony could be dependent upon uncorroborated oral evidence of many of the

crucial elements of that claim, and still be sufficient to go to the jury. . . . 

421 U.S. at 741-46 (emphasis added). The Second Circuit in Nortel conflated the Blue Chip Stamps

analysis of the difficulty of proving an omission to act with analysis of proof of reliance, which is an

element of the plaintiff’s prima facie case, not a standing requirement. See Nortel, 369 F.3d at 33. 

See also Kircher v. Putnam Funds Trust, 403 F.3d 478, 483 (7th Cir. 2005) (“The [Court in Blue

Chip Stamps] observed that anyone can say that a failure to trade bore some relation to what the

issuer did (or didn’t) disclose, but that judges and juries would have an exceedingly hard time

knowing whether a given counterfactual claim (‘I would have traded, if only . . .’) was honest. The

Court thought it best to limit private actions to harms arising out of actual trading.”). 

9

The Second Circuit’s justifications for its interpretation are not strong or broad

enough to justify adoption of that interpretation in this factual situation. Since there is

no persuasive authority on point, the Court turns to Defendants’ policy argument.

D. Purpose of Recognizing § 10(b) Private Right of Action

Defendants correctly point out that “considerations of policy” are relevant to the

issue of standing to bring an action under § 10(b). Blue Chip Stamps, 421 U.S. at 749.

As noted, however, the policy considerations on which the Supreme Court relied in

limiting standing in Blue Chip Stamps are not directly relevant to this case. The factual

scenario presented by the Complaint does not inherently necessitate oral testimony to a

jury for resolution. Cf. id. at 741-46.

Defendants argue that a conclusion that Plaintiff has standing to bring this action

would be the type of “inexorable broadening of the class of plaintiff who may sue in this

area of the law” forbidden by Blue Chip Stamps. 421 U.S. at 747. But while concluding

that Plaintiff has standing would make the class of permissible plaintiffs larger than it

would be if the Court reached the opposite conclusion, recognizing Plaintiff’s standing

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6This is because only a limited set of plaintiffs will be able to allege the kind of direct

relationship between one security and another that is contained in the definition of the GOALs in this

case. 

In making their argument that courts must resist any broadening of the class of plaintiffs

entitled to sue under § 10(b), Defendants rely heavily on Brody. 280 F.3d 997. In Brody, the Ninth

Circuit affirmed a rule limiting standing, in actions alleging insider trading, to plaintiffs who had

traded contemporaneously with the alleged insider traders. Id. at 1001. The court reasoned that this

rule was necessary in part to limit the number of parties to whom securities fraud defendants could

be liable. Id. But the court in Brody also based its conclusion on the fact that “noncontemporaneous

traders do not require the protection of [the securities laws] because they do not suffer the

disadvantage of trading with someone who has superior access to information.” Id. (citing

Neubronner v. Milken, 6 F.3d 666, 669-70 (9th Cir. 1993)). That is, noncontemporaneous traders by

definition cannot suffer injury caused by fraudulent inside trades and thus are not the types of

individuals the securities laws were enacted to protect. 

7The Supreme Court recently restated the purpose of securities fraud laws in general and

private § 10(b) actions in particular: to “maintain public confidence in the marketplace” by

“protect[ing] investors against those economic losses that misrepresentations actually cause.” Dura

Pharms., 125 S. Ct. at 1633 (citing, inter alia, United States v. O’Hagan, 521 U.S. 642, 658 (1997)). 

10

does not create a slippery slope by permitting any investor to bring an action against any

corporation, as Defendants seem to contend.6 

As noted, standing analysis focuses on defining appropriate plaintiffs. Brody,

280 F.3d at 1000. Permitting Plaintiff to sue here merely recognizes that unlike the

plaintiffs in Blue Chip Stamps she is a member of “the precise class for the protection of

which the 1934 Act [including § 10(b)] was enacted: participants in the national

securities markets,” Deutschman v. Beneficial Corp., 841 F. 2d 502, 507 (3d Cir. 1988),7

and that the GOALs’ redemption value bore a “direct relationship” to the value of JDSU

stock on a particular date, Nortel, 369 F.3d at 33. For these reasons, the Court concludes

that Plaintiff and other GOALs purchasers have standing to sue JDSU for securities

fraud. 

II. SUFFICIENCY OF PLAINTIFF’S ALLEGATIONS

Defendants have also moved to dismiss on the grounds that Plaintiff has not

sufficiently alleged that any misstatements were “in connection with” the GOALs, that

she relied on any misstatements, or that any misstatements were accompanied by

scienter. 

A. Legal Standards 

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Generally, a motion to dismiss for failure to state a claim should be denied unless

it appears that the plaintiff can prove no set of facts entitling the plaintiff to relief. See

Conley v. Gibson, 355 U.S. 41, 45-46 (1957). All material allegations in the complaint

are to be taken as true and construed in the light most favorable to the plaintiff, see Daou

Systs., 397 F.3d at 709-10, although “conclusory allegations without more are

insufficient to defeat a motion to dismiss,” McGlinchy v. Shell Chemical Co., 845 F.2d

802, 810 (9th Cir. 1988). 

Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful for any

person to “use or employ, in connection with the purchase or sale of any security . . . any

manipulative or deceptive device or contrivance.” 15 U.S.C. § 178j(b); see also

17 C.F.R. § 240.10b-5 (Rule 10b-5). To state a claim under § 10(b), a plaintiff must

allege a material misrepresentation, scienter, a connection with the purchase or sale of a

security, reliance, economic loss, and loss causation. Dura Pharms., 125 S. Ct. at 1631.

Special pleading rules apply to actions under § 10(b) and Rule 10b-5. First, since

these provisions address fraud, they fall within the scope of Federal Rule of Civil

Procedure 9(b), which requires a plaintiff to plead fraud with particularity. In re Stac

Elec. Sec. Litig., 89 F.3d 1399, 1410 (9th Cir. 1996). Allegations of fraud must be

“specific enough to give defendants notice of the particular misconduct which is alleged

to constitute the fraud charged so that they can defend against the charge and not just

deny that they have done anything wrong.” Semegen v. Weidner, 780 F.2d 727, 731 (9th

Cir. 1985). The Private Securities Litigation Reform Act of 1995 (PSLRA), Pub. L. No.

104-67, 109 Stat. 737, further heightened pleading requirements in § 10(b) actions as to

allegations of the falsity of alleged misstatements and of the scienter, or state of mind,

accompanying those statements. Thus, under the PSLRA, a plaintiff must “state with

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

required state of mind [i.e., scienter].” 15 U.S.C. § 78u-4(b)(2). 

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8The Third Circuit has described the Ninth Circuit’s approach to the “in connection with”

requirement as follows: “We therefore adopt the reasoning of the Second Circuit and the Ninth

Circuit and hold that the Class may establish the ‘in connection with’ element simply by showing

that the misrepresentations in question were disseminated to the public in a medium upon which a

reasonable investor would rely. . . . [T]he Class is not required to establish that the defendant actually

envisioned that members of the Class would rely upon the alleged misrepresentation when making

their investment decisions.” Semerenko, 223 F.3d at 176 (citing Ames Dep’t Stores, 991 F.2d at

965).

12

B. “In Connection With”

Defendants argue that Plaintiff does not allege statements “in connection with”

the securities she purchased because the misstatements alleged were not made about the

GOALs or by their issuer. Defendants also argue that Plaintiff may base her securities

fraud claim only on statements made during the class period, and that the only

misstatements alleged during the class period occurred after purchase of the GOALs, so

the misstatements alleged cannot have been “in connection with” the purchase of those

securities. Neither argument accurately reflects applicable law.

The “in connection with” language requires the plaintiff to “establish a

connection between the . . . alleged misrepresentation and the security at issue.” 

Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1486 (9th Cir. 1991). This may be shown

through misstatements that “relate to the nature of the securities, the risks associated

with their purchase or sale, or some other factor with similar connection to the securities

themselves.” Ambassador Hotel Co., Ltd. v. Wei-Chuan Inv., 189 F.3d 1017, 1026 (9th

Cir. 1999). A misstatement “need not relate to the investment value of the securities

themselves, [but] it must have more than some tangential relation to the securities

transaction.”8 Id.

1. Requirements regarding maker and subject of statements

JDSU argues that misstatements may be considered “in connection with” a

transaction only where the statements are made by the issuer of the securities and/or refer

to the securities in question. The case law does not dictate such a bright-line rule.

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28 9Saxe v. E.F. Hutton & Co., Inc., 789 F.2d 105 (2d Cir. 1986); Gershon v. Wal-Mart Stores,

901 F. Supp. 128 (S.D.N.Y. 1995).

13

Although JDSU cites cases applying the above principle,9 Plaintiff cites cases in

which, in contrast, courts have held that misstatements made by and/or about companies

other than the issuer of the securities satisfied the “in connection with” requirement. In

Worldcom, for example, the court held that statements by a bank that issued equitylinked debt securities like the GOALs were “in connection with” the debt securities even

though the statements concerned only the financial health of the corporation with whose

share prices the debt securities were linked. 2004 WL 1434356, at *7, *8. Similarly, in

Semerenko, the Third Circuit held that a corporation’s statements about itself could be

“in connection with” securities in a merger target even though the merger never

occurred. 223 F.3d at 170, 174-78.

Defendants do not offer a persuasive reason for rejecting the approach of these

decisions. The functional approach of these decisions is also consistent with the Ninth

Circuit’s flexible standard. See Ambassador Hotel, 189 F.3d at 1026 (noting that

element may be met by showing fraud “relate[d] to . . . some . . . factor with . . . [a]

connection to the securities”). Misstatements concerning JDSU’s financial health clearly

had a “connection to” the GOALs, given the definition of GOALs’ redemption value in

terms of the value of JDSU common stock. The Court declines to adopt a more rigid

interpretation of the “in connection with” requirement.

2. Requirements regarding timing of statements

Defendants also argue that any statements made before the proposed class period

are not actionable and that statements following the date on which Plaintiff alleges she

purchased her GOALs, at the start of the class period, cannot have been made “in

connection with” that transaction. This argument is also unsupported by the case law.

First, Defendants’ theory excluding from consideration pre-class period

statements would seem to preclude any securities fraud actions by purchasers of equitybacked debt securities, which normally are linked to securities that will have been issued

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10Defendants have contended that recognizing the potential liability of securities issuers to

holders of securities that the defendants did not issue but that are backed by the defendants’

securities, like the GOALs, will increase the insurance needs of the defendants, harming their own

shareholders. As noted above, however, courts have consistently found the principal purpose of the

Securities Exchange Act to be the protection of investors in the securities markets, and the Act

defines “security” broadly. See note 5, supra; see also 15 U.S.C. § 78c(a)(10) (defining “security”). 

Defendants’ argument does not compel the conclusion that Congress would have intended to exclude

holders of equity-backed securities from the benefit of the securities laws.

11Thus, in other types of class actions, plaintiff classes sometimes include only members

injured by acts alleged to have occurred before the opening of the class period. See, e.g., Payton v.

Abbott Labs., 551 F. Supp. 245 (D. Mass. 1982) (holding that plaintiff class should be defined by

reference to dates when symptoms first appeared in putative plaintiffs whose mothers ingested

diethylstilbestrol during pregnancy).

14

previously. But Defendants do not provide any reason to conclude that Congress

intended such investors not to receive the protection of the securities laws.10

Defendants also err in generalizing the principle that “[i]n a securities class action

lawsuit, liability cannot attach to statements made either before or after the class period.” 

In re Seagate Tech. II Sec. Litig., 1995 WL 66841, at *4 (N.D. Cal. Feb. 8, 1995). This

statement accurately describes how the scope of a class period coincides with the timing

of actionable statements in the traditional securities fraud action, but it does not make

sense in an action like this one. 

The purpose of defining a plaintiff class, through dates or otherwise, is to limit the

class of plaintiffs to those ascertainable individuals who have standing to bring the

action. See ALBA CONTE & HERBERT NEWBERG, 1 NEWBERG ON CLASS ACTIONS §§ 2.3

(4th ed. 2002) (addressing class definition, scope, and member identification), 6.14

(addressing prefiling definition of plaintiff class). Definition of the plaintiff class is not

a device for limiting the universe of actionable conduct,11 even though, in the standard

securities fraud action, the class period also happens to be the same as the period “during

which defendants’ fraud was allegedly alive in the market.” In re Clearly Canadian Sec.

Litig., 875 F. Supp. 1410, 1420 (N.D. Cal. 1995). This overlap occurs simply because it

is only those plaintiffs who traded in the securities at issue while the fraud could have

been affecting those securities’ value who can possibly state a claim for damage

resulting from the fraud. See Basic Inc. v. Levinson, 485 U.S. 224, 228 & n.5 (1988). 

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12Although this generally holds true, even under the standard model statements or actions

preceding the class period may sometimes be relevant and/or actionable. See, e.g., In re Crown Am.

Realty Trust Sec. Litig., 1997 WL 599299, at *15-*16 (W.D. Pa. Sept. 15, 1997) (rejecting Seagate

and citing securities fraud cases taking pre-class period statements into account). 

15

For these reasons, it is generally true that in the standard securities fraud class

action, “liability cannot attach to statements made either before or after the class

period.”12 Seagate Tech. II, 1995 WL 66841, at *4. But this analysis does not apply to

an action concerning securities like the GOALs. Plaintiff alleges that the value of the

securities she purchased was distorted by fraud relating to the value of pre-existing

linked securities; she asserts a causal connection between the misstatements and the

GOALs’ value. See Ambassador Hotel, 189 F.3d at 1026. Such a relationship could

exist only while the GOALs existed. It would make no sense to begin the class period at

the point at which the alleged fraud began to affect the value of JDSU stock, without any

further effect on the value of GOALs. 

On its face, Plaintiff’s proposed class definition serves the purposes it is supposed

to serve: It defines a group of plaintiffs all of whom were injured in the same way, if any

were. The fact that the proposed class period begins after the first of the alleged

misstatements does not make those earlier statements irrelevant or not actionable. The

Court rejects the argument that Plaintiff cannot maintain an action on the basis of

statements made before the proposed class period. Although some such statements may

have a stronger connection with the GOALs and the claimed injury than others, the

strength of these connections is not an issue to be considered at this stage in the action.

C. Reliance

Defendants also argue that Plaintiff does not sufficiently plead reliance. A

securities fraud plaintiff may plead actual reliance on alleged misstatements or, in a class

action involving securities traded in an efficient market, invoke the “fraud on the

market” rebuttable presumption of reliance to satisfy this element of the plaintiff’s prima

facie case. Basic Inc., 485 U.S. at 245-47; Binder v. Gillespie, 184 F.3d 1059, 1064-65

(9th Cir. 1999). This presumption is based on the assumption that “[a]n investor who

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13Defendants also argue that the complaint should be dismissed because Plaintiff fails to

allege actual reliance. In her opposition Plaintiff claims to have pleaded “direct reliance,” but her

argument in this connection is indistinguishable from the theory outlined in this discussion, so this

Order does not address it separately. 

16

buys or sells stock at the price set by the market does so in reliance on the integrity of

that price.” Basic Inc., 485 U.S. at 247. A market price is assumed to have integrity

only insofar as it is the product of an efficient market. Id. at 246 (noting that only an

efficient market reflects “all publicly available information, and, hence, any material

misrepresentations”). To benefit from the presumption plaintiffs therefore need to show

that the securities in question were traded on an efficient market. Binder, 184 F.3d at

1064-65. Assessment of the market’s efficiency is above all a means of determining

whether a security’s market price incorporates all extant public information material to

the value of the security. Basic Inc., 485 U.S. at 245-46.

Securities fraud plaintiffs may also benefit from presumptions of reliance in

certain other specific contexts. For instance, where a positive duty to disclose

information exists, a plaintiff need not provide “positive proof of reliance.” Basic Inc.,

485 U.S. at 243 (citing Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54

(1972)). Where the misstatements appeared in a proxy statement, a plaintiff need not

prove that the misstatements “decisively affected voting, because the proxy solicitation

itself [is presumed to have] . . . served as an essential link in the transaction.” Basic Inc.,

485 U.S. at 243 (citing Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384-85 (1970)).

Defendants argue that Plaintiff may not invoke a presumption of reliance because

she has not alleged an efficient market for GOALs, because the efficiency of the market

for JDSU common stock is irrelevant to the question of her reliance, and because the

presumption is unavailable in the context of an initial public offering.13 These arguments

misconstrue the theory of reliance advanced by Plaintiff.

Plaintiff alleges that JDSU common stock was traded on an efficient market, AC

¶ 214, and that the GOALs prospectus, which explained the securities’ definition and

redemption value, drew a direct relationship between the price of JDSU common stock

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14Defendants stress that Chu and McEwen involved securities convertible at the holders’ will

into common stock. Chu, 100 F. Supp. 2d at 826; McEwen, 160 F.R.D. at 637. Clearly, the cases are

distinguishable in this sense. Nevertheless, plaintiffs in both cases had purchased securities whose

values, like the value of the GOALs here, were dependent both on the value of the common stock

into which they were convertible and on other factors. In both cases, the courts held that the possible

influence of other factors on the value of the convertible notes did not preclude the plaintiffs from

invoking presumptions of reliance on the integrity of the common stock’s market price. 

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on the dates of the GOALs’ issuance and redemption and the value of the GOALs at

redemption. AC ¶¶ 4, 6, 31-46. Plaintiff’s theory is that GOALs purchasers may be

presumed to have relied on the GOALs prospectus and on the integrity of the market

price of JDSU common stock when the GOALs were issued, since that price was

incorporated into the redemption value and thus the overall value of the GOALs. See

AC ¶¶ 4, 39, 40; cf. Basic Inc., 485 U.S. at 245-46; Chu v. Sabratek Corp.,

100 F. Supp. 2d 815, 826 (N.D. Ill. 2000) (allowing holder of convertible notes to invoke

presumption of reliance by pleading efficient market in securities into which notes were

convertible); McEwen v. Digitran Sys., 160 F.R.D. 631, 637 (D. Utah 1994) (same).14

On this theory, the relevant market is the market for JDSU stock at issuance and

purchase or sale of GOALs. 

Defendants argue that courts have rejected such a theory, but the only authority

they cite is distinguishable. In re MDC Holdings Securities Litigation, 754 F. Supp. 785,

805 (S.D. Cal. 1990). MDC Holdings was a class action brought by purchasers of

securities including subordinated notes issued by the defendant. Id. at 791, 804. The

plaintiffs alleged an efficient market in the defendant’s common stock but not

specifically in the subordinated notes. Id. at 804-05. The court declined to adopt the

presumption as to the subclass of subordinated note holders because the subclass had

neither pleaded that the market for the notes themselves was efficient, differentiated

between notes and common stock in the relevant portion of the complaint, nor advanced

any other theory supporting a presumption of reliance. See id. at 804-05. Rather, they

had made a “conclusory, generic reference to the market price for MDC securities,”

including both common stock and subordinated notes. Id. at 805. Plaintiff here, in

contrast, has clearly and in detail alleged a direct relation between the market price of

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15In this connection, Defendants have argued that the Complaint falls short of the pleading

requirements of Federal Rule of Civil Procedure 9(b) because Plaintiff does not assert a sufficiently

tight correlation between GOALs and JDSU stock prices. For the reasons presented the Court

concludes that, assuming Rule 9(b)’s requirements apply in the context of presumptions of reliance,

Plaintiff has pleaded the relationship between the GOALs’ value and JDSU stock price with

sufficient particularity to satisfy Rule 9(b). 

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JDSU common stock on the dates of the GOALs’ issuance and redemption and the value

of the GOALs. AC ¶¶ 4, 6, 31-46. This relationship is part of the definition of the

GOALs. Defendants cite no authority indicating that holders of derivative securities may

not benefit from a presumption of reliance if they plead such an explicit connection

between their securities’ value and the price of other securities.

Defendants further argue that the connection asserted is not direct enough to

allow Plaintiff to benefit from a presumption of reliance. Defendants point out that the

GOALs prospectus acknowledges that factors other than the price of JDSU common

stock could affect the value of the GOALs and that the prospectus states that the

relationship between the market value of GOALs and the market price of JDSU common

stock is not a direct one. Defendants further assert that, historically, stronger

correlations have existed between the prices of JDSU common stock and, for instance,

Nortel common stock than ever existed between the price of JDSU stock and the price of

GOALs.15 Moreover, even if the price of JDSU stock has some relationship to the value

of GOALs, Defendants contend, the price of GOALs cannot have incorporated any

information about JDSU since the GOALs did not trade on an efficient market. 

These arguments are unsuccessful for two reasons. First, while factors other than

the price of JDSU stock might have affected the value of the GOALs on any given day,

this is irrelevant to the directness of the relationship between the price of JDSU stock at

issuance and redemption of the GOALs, on the one hand, and the value of the GOALs,

on the other. Courts have found that holders of convertible subordinated notes may

benefit from presumptions of reliance even though the notes’ values would presumably

have been affected by factors other than the price of the note issuers’ common stock. 

See Chu, 100 F. Supp. 2d at 826; McEwen, 160 F.R.D. at 637. For these reasons, the

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statement in the GOALs prospectus that the relationship between GOALs value and

JDSU stock price is not a “direct” one, and the factual question of the actual correlation

between GOALs and JDSU stock prices, do not dispose of the question of Plaintiff’s

reliance, as Defendants contend. 

Second, Defendants’ argument assumes that material misstatements may be

presumed to be relied on in purchasing decisions only through the setting of prices by an

efficient market. This assumption is inaccurate; as noted above, the Supreme Court

permits securities fraud plaintiffs to benefit from presumptions of reliance in other

contexts. See Basic Inc., 485 U.S. at 243 (citing Affiliated Ute Citizens, 406 U.S. at 153-

54; Mills, 396 U.S. at 384-85). Similarly, courts in the Ninth Circuit have adopted an

“integrity of the regulatory process” theory permitting plaintiffs to invoke a presumption

of reliance in the context of initial public offerings. See MDC Holdings, 754 F. Supp. at

806. The GOALs’ issuer expressly defined the GOALs’ redemption value in terms of

the value of JDSU common stock on the date of the GOALs’ issuance and thereafter. 

Since GOALs purchasers presumably understood what they were purchasing, the

definition of the GOALs in terms of JDSU stock price must be presumed to have been

“an essential link in the transaction” leading to any purchase of the GOALs. See Basic

Inc., 485 U.S. at 243 (citing Mills, 396 U.S. at 384-85). The fact that GOALs purchasers

may also have relied on other information in making their purchasing decisions does not

negate the presumption that given the definition of the GOALs they must also have been

relying on the integrity of the price of JDSU stock. See Basic Inc., 485 U.S. at 241-44. 

Defendants are free to attempt to rebut this presumption with specific factual showings

later in this litigation. See id. at 248-49.

Finally, Defendants have maintained that purchasers of securities in an initial

public offering may not benefit from a presumption of reliance. It is not clear that this is

Ninth Circuit law. See MDC Holdings, 754 F.3d at 806. At any rate, the argument is

irrelevant to the present case because the efficiency of the market for GOALs is not at

issue. Defendants also make the related contention that Plaintiff may not invoke the

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presumption because UBS, and not the market, set the price of GOALs. As noted,

however, this contention is only partly accurate. UBS set the GOALs’ issuance and

redemption dates and face value but also expressly defined their redemption value in

relation to the market price of JDSU stock. UBS thus delegated part of its task of

defining the GOALs’ value to the efficient market in JDSU common stock. Defendants’

contention that the market could have played no role in a purchaser’s decisions to

purchase GOALs cannot be sustained.

Plaintiff’s theory of reliance is novel, but it is a logical extension of existing

doctrine. The Court cannot say, under these circumstances, that plaintiff has pleaded “no

set of facts in support of [her] claim which would entitle [her] to relief.” Conley v.

Gibson, 355 U.S. at 45-46. 

D. Scienter

Defendants contend that Plaintiff has not sufficiently pleaded scienter. In the

securities fraud context, scienter is “a mental state embracing intent to deceive,

manipulate, or defraud” and must be alleged as part of a § 10(b) claim. Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 193 n.2 (1976). Scienter includes some forms of

recklessness. See Nelson v. Serwold, 576 F.3d 1332, 1337 (9th Cir. 1978). Such

recklessness is a form of intentional conduct, not an extreme form of negligence. In re

Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 976-77 (9th Cir. 1999). In Silicon

Graphics, the Ninth Circuit described it as “deliberate recklessness.” Id. at 977. 

Thus, in the Ninth Circuit, a plaintiff must plead with particularity “facts giving

rise to a strong inference that the defendant acted with,” at minimum, deliberate

recklessness. 15 U.S.C. § 78u-4(b)(2); Silicon Graphics, 183 F.3d at 977. Facts

establishing only motive and opportunity, or circumstantial evidence of “simple 

recklessness,” are insufficient to create a strong inference of deliberate recklessness. See

Silicon Graphics, 183 F.3d at 979. However, we assess the sufficiency of scienter

allegations based on the totality of the allegations in the complaint, even if allegations

are “individually lacking.” Nursing Home Pension Fund v. Oracle Corp., 380 F.3d

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1226, 1230 (9th Cir. 2004) (citing No. 84 Employer-Teamster Joint Council Pension

Trust Fund v. Am. West Holding Corp., 320 F.3d 920, 938 (9th Cir. 2003)).

Defendants argue that Plaintiff’s allegations fall short of these standards in two

ways: (1) Plaintiff may not rely on allegations of events from before the proposed class

period to show scienter, and (2) as to alleged misstatements during the class period,

Plaintiff fails to allege contemporaneous facts indicating “the deliberately reckless false

and misleading nature of the statements when made.” In re Read-Rite Corp. Sec. Litig.,

335 F.3d 843, 846 (9th Cir. 2003). Neither argument is successful. 

1. Facts relating to scienter before proposed class period

Defendants’ first argument is similar to their argument about whether statements

from before the proposed class period might be “in connection with” the GOALs. The

analysis above also applies here. The proposed class period dates function only to define

the plaintiff class, not to restrict the universe of relevant or actionable facts in this case.

Plaintiff here alleges facts relating to scienter dating from before the proposed

class period because by definition scienter is the state of mind accompanying

misstatements forbidden by § 10(b). See Hochfelder, 425 U.S. at 193 n.2. If

misstatements alleged before the class period are relevant to her case, then facts

indicating the contemporaneous state of mind of the individuals making those alleged

misstatements are as well. 

With respect to the particularity with which she has alleged these facts, Plaintiff

notes that in the related securities fraud action brought by JDSU shareholders,

substantially identical allegations were held sufficient to support an inference of scienter. 

See Order Den. Mot. to Dismiss, In re JDS Uniphase Corp. Sec. Litig., No. 02-04186, at

16-20 (N.D. Cal. Jan. 6, 2005). Although this Court is not bound by the rulings in the

related action, it makes sense for this Court to consider those rulings. 

In its Order of January 6, 2005, addressing the defendants’ renewed motion to

dismiss in that action, the district court noted that the plaintiffs had alleged insider sales

of JDSU stock by officer defendants as well as internal records available to those

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16In Read-Rite, the court found insufficient to support an inference of scienter officers’ postfraud admissions of general prior knowledge about the defendant corporation’s state. 335 F.3d at

846-47. The admissions were insufficient because they lacked specificity and postdated the alleged

misstatements, not because they were not exactly contemporaneous with the alleged misstatements. 

Id. at 847. 

17Defendants cite CornerStone for the rule that a plaintiff must “allege contemporaneous

facts in sufficient detail and in a manner that would create a strong inference that the alleged adverse

facts were known at the time of the challenged statements.” Defs.’ Mot. at 18 (quoting CornerStone,

355 F. Supp. 2d at 1093-94) (emphases added by defendants). CornerStone quoted this language

directly from In re The Vantive Corp. Securities Litigation, 283 F.3d 1079, 1085 (9th Cir. 2002).

(continued...)

22

defendants and contradicting their contemporaneous public statements regarding JDSU’s

sales and demand figures. The court reasonably concluded that these allegations, taken

together, created “a strong inference that [the officer defendants] all knowingly made

false statements.” Order at 19. Plaintiff in the present case pleads all of the same facts. 

See, e.g., Compl. ¶¶ 28, 29, 58, 61, 104, 115, 171-72, 175-78, 179, 180, 189-94. The

relationship of the proposed class periods to the fraud alleged in the two cases is the only

difference arguably relevant to scienter between the allegations in the two complaints. 

But, as noted, the difference between the proposed class period in this case and the

period of alleged fraud is not relevant to the sufficiency of this Complaint. There is thus

no reason for this Court not to reach the same conclusions regarding scienter as the

district court reasonably reached in the related action. 

 2. Facts relating to scienter during proposed class period

Defendants’ second argument is that as to the three alleged misstatements

occurring during the class period, Plaintiff does not plead contemporaneous facts

supporting an inference of scienter. Plaintiff correctly responds that she need not allege

facts dating specifically from the months between March and July 2001 to support an

inference of scienter during that period. 

Indeed, the cases defendants cite in support of their argument indicate that facts

relevant to scienter will ordinarily date from before any alleged misrepresentations. See

Read-Rite, 335 F.3d at 845;16 In re CornerStone Propane Partners, L.P., Sec. Litig.,

355 F. Supp. 2d 1069, 1093-94 (N.D. Cal. 2005);17 see also In re The Vantive Corp. Sec.

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17(...continued)

The facts in The Vantive are similar to those in Read-Rite, and the court similarly concluded that

plaintiffs could not “speculate in hindsight that earlier projections . . . must have been false for

failure to disclose adverse facts.” The Vantive, 283 F.3d at 1085. Neither CornerStone nor The

Vantive holds that facts supporting scienter must be contemporaneous with any misstatements; if

anything, they imply that facts relevant to scienter ordinarily precede the alleged misstatements.

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Litig., 283 F.3d 1079, 1085 (9th Cir. 2002). This conclusion is also supported by

common sense. Showing scienter is a matter of showing facts known to or knowable by

the makers of alleged misstatements at the time the statements were made. 15 U.S.C.

§ 78u-4(b)(2); Silicon Graphics, 183 F.3d at 977. Allegations supporting an inference of

scienter must often refer to circumstances preceding the statements, since such

circumstances would be among those knowable at the time of the statements. While the

scienter itself must be contemporaneous with the alleged misstatements, facts supporting

the inference of scienter will not always be. Cf. In re Splash Tech. Holdings Inc. Sec.

Litig., 160 F. Supp. 2d 1059, 1072 (N.D. Cal. 2001) (“[T]he complaint must allege that

the ‘true facts’ arose prior to the allegedly misleading statement.”). 

While this Court is not bound by the district court’s rulings in the related

securities fraud action, the fact that the present action involves a different class period is

not in itself a basis for rejecting those rulings. For the reasons noted, this Court holds

that Plaintiff has pleaded scienter adequately.

III. KALKHOVEN’S MOTION TO DISMISS

Kevin Kalkhoven, JDSU’s CEO from June 1999 to May 2000, has separately

moved for dismissal of the action against him. In addition to adopting all of the

arguments addressed above, he maintains that (1) the Complaint fails to allege any

misstatements by Kalkhoven himself during the proposed class period; (2) the Complaint

fails to plead that any statements about demand by Kalkhoven caused losses to the

plaintiffs; and (3) the Complaint fails to plead scienter sufficiently as to alleged

statements regarding revenue recognition by Kalkhoven.

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18The second count in the Complaint alleges that the individual defendants are liable as

“controlling persons” under § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a). 

Compl. ¶ 233. Straus, Muller, and Abbe do not separately argue for dismissal of this claim, but

Kalkhoven argues that he should be dismissed as to this claim because as of the class period he was

not a JDSU officer. Kalkhoven Mot. at 16. This is yet another version of the flawed argument

concerning liability for acts outside the class period and is rejected accordingly. 

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The first of these arguments depends on the class period timing argument

discussed above. This argument fails for Kalkhoven just as it does for the other

defendants.18 Kalkhoven’s other two arguments are addressed in turn below.

1. Sufficiency of allegations of loss causation as

to alleged misstatements about demand

Kalkhoven contends that Plaintiff has failed to allege “loss causation” as to him,

since any misstatements about demand attributable to him occurred so long before

GOALs purchasers could have suffered any damage that Plaintiff’s alleged loss can only

be the result of causes postdating Kalkhoven’s retirement. Kalkhoven Reply at 7. 

Allegations of “loss causation” are a necessary element of a § 10(b) claim and

require a plaintiff to plead “a causal connection between the material misrepresentation

and the loss” the plaintiff suffered. Dura Pharms., 125 S. Ct. at 1631. Loss causation is

“equivalent to proximate causation in tort.” Binder, 184 F.3d at 1066 (internal quotation

marks and citations omitted). The “plaintiff must show that the fraud caused, or at least

had something to do with,” the plaintiff’s loss. Id. On their own, allegations that the

purchase price of a security was inflated due to alleged misstatements do not state a

claim with respect to either economic loss or loss causation. Dura Pharms., 125 S. Ct. at

1631-32, 1634-35. 

Plaintiff does not dispute that other factors may have influenced the GOALs’

value but takes the position that Kalkhoven’s pre-class period statements “remained

‘alive in the market’ until” at least the issuance of the GOALs. Pl.’s Opp’n at 11. This

is not simply an assertion that the GOALs’ value was inflated at issuance due to

manipulation of the market value of JDSU stock by JDSU officers, including Kalkhoven. 

Cf. Dura Pharms., 125 S. Ct. 1631-32, 1634-35. Since the GOALs’ value following

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issuance was tied to the relationship between the price of JDSU stock at issuance of the

GOALs and the price of JDSU stock at the GOALs’ redemption, the Court takes

Plaintiff also to be asserting losses flowing from the decline in post-GOAL-issuance

price of JDSU stock, a decline magnified by the extent of the correction necessary and

thus, in part, a consequence of the degree to which JDSU’s stock price was inflated at

issuance of the GOALs. See, e.g., AC ¶ 4, 6, 31-46. These allegations suffice to assert

that the alleged misstatements about demand by the individual defendants, including

Kalkhoven, before issuance of the GOALs had “something to do with” the prices of

JDSU stock at various times and, therefore, with plaintiff’s alleged losses. Binder,

184 F.3d at 1066. 

In connection with causation Kalkhoven also points out that Plaintiff contends

that “to be actionable a misrepresentation need only be a ‘substantial cause’ of the

investors [sic] injury,” Pls’ Opp’n at 6 n.5 (citing Semerenko, 223 F.3d at 186-87). 

Kalkhoven maintains that Plaintiff’s allegations establish that she cannot possibly make

this showing of substantial cause. According to Kalkhoven, the nine-month lapse

between his final alleged misstatement regarding demand for JDSU products in May

2000 and the issuance of the GOALs in March 2001, coupled with the numerous

statements about demand made by others during that period, would preclude any rational

finding that Kalkhoven’s statements were a “substantial cause” of Plaintiff’s losses.

The Court cannot accept this argument. The cited language from Semerenko goes

to a securities fraud plaintiff’s burden of proof at trial, and the Third Circuit indicated in

that opinion that the substantiality of the link between misstatement and loss is not a

question appropriate for consideration on a motion to dismiss. See 223 F.3d at 187

(“[T]he defendants may disprove that the Class suffered a loss as a result of the alleged

misrepresentations by showing that the misrepresentations were not a substantial factor

in setting the price of [the] common stock during the class period, [but] we disagree that

the defendants may do so at this stage of the proceedings.”). The cases that Kalkhoven

cites to support the conclusion that nine-month-old statements about demand cannot, as a

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19 In Rand v. Cullinet Software, the District Court for the District of Massachusetts held that

no reasonable juror could find that a ten-month-old statement regarding “pipeline” prospects of

demand for the defendant company’s products was a substantial cause of the plaintiffs’ alleged

losses. 847 F. Supp 200, 210 (D. Mass. 1994). However, the court based this conclusion in part on

the fact that “no statements were made regarding [the defendants’] pipeline” following the statement

in question. Id. Not backed up by subsequent corroborating statements, the alleged misstatement

became stale after a certain period of time. See id. Here, in contrast, Kalhoven concedes that

numerous other statements reiterating the substance of his alleged misstatement about demand

followed his own statement. Rand does not indicate that no reasonable jury could find that

Kalkhoven’s statement combined in some way with these other statements to become a substantial

cause of Plaintiff’s loss.

In In re Time Warner, Inc., Securities Litigation, the District Court for the Southern District

of New York held that an officer’s alleged misstatement concerning the value of the corporation’s

stock, made ten months “before the asserted class period, . . . cannot have formed a basis for

plaintiffs’ expectations when they purchased shares ten or more months later,” “since innumerable

intervening factors could have changed the company’s value since Levin spoke.” 794 F. Supp. 1252,

1260 (S.D.N.Y.), aff’d in part, rev’d in part, 9 F.3d 129 (2d Cir. 1992). In Time Warner, however,

the alleged misstatement directly concerned the value of the corporation’s stock at the time of the

statement. Id. at 1259 (characterizing statement as officer’s “somewhat hyperbolic opinion of the

company’s inherent worth as of February 1990”). Moreover, like the alleged misstatement in Rand,

it was not followed by subsequent similar statements. Thus, its relevance and its effects were limited

in time. Kalkhoven’s statement about demand cannot be separated from prior and subsequent

statements about demand by other directors in the same way. Given a context of consistent

statements over an extended period, a reasonable trier of fact could conclude that the statements

cumulatively had a substantial effect on JDSU stock prices over that period, and that individual

statements all contributed to the effect. 

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matter of law, be found to be substantial causes of loss are factually distinct and do not

support a similar conclusion here.19

2. Sufficiency of allegations of scienter as to

alleged fraudulent revenue recognition

Finally, Kalkhoven notes that Plaintiff must allege scienter in connection with

each alleged misstatement, see 15 U.S.C. § 78u-4(b)(2) (providing that “the complaint

shall, 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”), and argues that she has failed to allege sufficiently that

Kalkhoven acted with the required state of mind in making allegedly false and

misleading statements about JDSU’s revenue in SEC filings in late 1999 and early 2000. 

See AC ¶¶ 85, 93. Kalkhoven contends that in this connection Plaintiff cites only the

assertions of a confidential informant that a JDSU employee who reported to Kalkhoven

approved fake late-quarter shipments of products to inflate revenues. See AC ¶ 54(a). 

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According to Kalkhoven, this assertion is “the only thing in the complaint about revenue

recognition,” and it is insufficient to support a “strong inference” that Kalkhoven made

any false statements about revenue with scienter. 15 U.S.C. § 78u-4(b)(2); Silicon

Graphics, 183 F.3d at 977. 

The Court concludes that Plaintiff’s allegations of scienter in connection with

these alleged misstatements are insufficient for the reasons presented by Kalkhoven. 

Although Plaintiff does allege with particularity that Kalkhoven had access to and

recieved printouts from JDSU’s Oracle database system showing “customer orders,

shipments, sales, and inventory levels,” AC ¶ 171, the Complaint does not indicate that

the database system contained information about the alleged fraudulent shipment

practice. The assertion that the practice was known to one of Kalkhoven’s subordinates

does not support a strong inference that Kalkhoven also knew about the practice. See 15

U.S.C. § 78u-4(b)(2); Silicon Graphics, 183 F.3d at 979 (requiring factual basis for

“strong inference” that defendant acted with “deliberate or conscious recklessness”). 

Despite the insufficiency, Kalkhoven concedes that it is not apparent from the

Complaint that this defect may not be cured through amendment. The Court therefore

grants Kalkhoven’s motion to dismiss with respect to Kalkhoven’s revenue statements,

with leave to amend, but denies the motion with respect to Kalkhoven’s statements about

demand.

CONCLUSION

For the reasons stated, the JDSU Defendants’ motion to dismiss is DENIED. 

Defendant Kalkhoven’s motion to dismiss is GRANTED in part, with leave to amend

within 20 days.

IT IS SO ORDERED.

Dated: July 13, 2005 _______________________________________

WILLIAM W SCHWARZER

SENIOR UNITED STATES DISTRICT JUDGE

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