Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_12-cv-02268/USCOURTS-cand-5_12-cv-02268-1/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 28:1332 Diversity-Stockholders Suits

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Case No.: 5:12-cv-02268-EJD

ORDER GRANTING MOTION TO DISMISS

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

JAMES KENNEY,

Plaintiff,

v.

EITAN GERTEL, et al.,

Defendants.

Case No. 5:12-cv-02268-EJD 

ORDER GRANTING MOTION TO 

DISMISS 

Re: Dkt. No. 42

I. INTRODUCTION

This is a shareholder derivative action brought by plaintiff on behalf of nominal defendant 

Finisar Corporation (“Finisar” or the “Company”) against certain of its current and former officers 

and directors for breach of fiduciary duty, unjust enrichment, and indemnity and contribution. 

Defendants Eitan Gertel (“Gertel”), Jerry S. Rawls (“Rawls”), Kurt Adzema (“Adzema”), Roger 

C. Ferguson (“Ferguson”), Robert N. Stephens (“Stephens”), Thomas E. Pardun (“Pardun”), 

Michael C. Child (“Child”) and Dominique Trempont (“Trempont”) (collectively the “Individual 

Defendants”) and Finisar move to dismiss Nominal Plaintiff James Kenney’s Verified Amended 

Shareholder Derivative Amended Complaint (“Complaint”) pursuant to Federal Rule of Civil 

Procedure 23.1 (“Rule 23.1”) for failure to adequately plead demand futility.

1

For the reasons set 

 

1 Defendants’ motion to dismiss is accompanied by a Request for Judicial Notice of (1) excerpts 

from Finisar’s Registration Statement on Form S-1, which was filed with the SEC on October 19, 

1999; (2) Finisar’s Annual Report on Form 10-K for Fiscal Year 2010 ended April 30, 2010, filed 

with the SEC on July 1, 2010; (3) a Finisar press release dated December 1, 2010, attached as an 

Exhibit to a Form 8-K filed with the SEC on December 1, 2010; (4) a Finisar press release dated 

March 8, 2011, attached as an Exhibit to a Form 8-K filed with the SEC on March 8, 2011; (5) 

thejudagroup, “Morning Meeting Note” dated January 5, 2011; and (6) documents filed in In re 

Finisar Corporation Securities Litigation, No. 5:11-cv-01252-EJD (the “Securities Action”). Dkt. 

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Case No.: 5:12-cv-02268-EJD

ORDER GRANTING MOTION TO DISMISS

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forth below, the motion is granted.

II. BACKGROUND

2

Finisar develops and sells fiber optic subsystems and components that interconnect various 

types of networked computer equipment. Complaint ¶ 2. The Company supplies its optical 

products through a direct sales force and distribution channels in the United States and 

internationally, including the People’s Republic of China (“China”). Id. For six consecutive 

fiscal quarters, Finisar experienced continued revenue growth. Id. ¶ 3. During that time, 

defendants made misleading statements to investors and analysts suggesting that Finisar’s revenue 

growth was the result of increased demand for Finisar products to be used for immediate 

production by its customers. Id. The Individual Defendants knew, however, that the Company’s 

revenue growth was a temporary byproduct of its customers’ attempts to overstock their inventory. 

Id. 

Every year, Finisar engages in contract negotiations with customers over the last few 

months of the calendar year. Id. ¶ 4. During these negotiations, Finisar and its customers discuss, 

among other things, demand and production needs. Id. In 2011, the Individual Defendants 

confirmed that Finisar’s revenue surge in recent quarters was primarily due to substantial 

inventory build-up and overstocking by the Company’s customers. Id. ¶ 5. The Individual 

Defendants learned that Finisar customers had been ordering additional products (“double 

ordering”) due to fear surrounding short-term supply chain constraints in the optical component 

industry. Id. Therefore, the Individual Defendants knew that the Company’s growth could not be 

sustained over time and would plummet as supply constraints loosened. Id. “When the supply 

restraint fears subsided, Finisar’s customers were left with an oversupply of inventory and, thus, 

would decrease the amount of products they ordered from Finisar in order to reduce their 

 

No. 42-1. Plaintiff does not object to Defendants’ Request for Judicial Notice, so long as the 

documents for which notice is sought are not accepted for the truth of the matters contained

therein. Dkt. No. 45, p. 3, n. 3. Defendants’ Request for Judicial Notice is granted. The Court 

takes judicial notice of the documents, but not for the truth of the matters asserted therein. 

2

The Background is a summary of the allegations in the Complaint. See Dkt. No. 36. 

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inventory levels.” Id. In particular, the Individual Defendants knew that Finisar was experiencing 

a serious slowdown in business from China. Id. ¶ 6. 

“The Individual Defendants also knew prior to December 2, 2010, when the price 

negotiations for the 2011 calendar year were complete, that Finisar was experiencing increasing 

pricing pressures due to intense competition in the industry.” Id. ¶ 7. In particular, the Individual 

Defendants knew that: (i) Finisar’s revenue growth was not due to increased demand, but instead 

was the result of industry-wide concerns over supply restraints and allocations; (ii) concerns over 

supply restraints and allocation had subsided and Finisar’s customers would no longer be ordering 

“extra” product; (iii) Finisar customers would be ordering fewer products in the next quarter and 

future quarters because they had inventory after the build-up in previous quarters; and (iv) global 

sales would drop due to deteriorating financial conditions in China. Id. Finisar offered steeply 

discount pricing in order to retain certain of its customers. Id.

On December 1, 2010, Finisar reported its sixth consecutive quarter of revenue growth: 

$240.9 million in revenue for the second quarter of fiscal 2011 and EPS of $0.44. Id. ¶ 8. 

Defendants estimated that revenues would increase to between $247 million and $262 million in 

the next quarter and projected EPS in a range of $0.45-$0.47. Id. 

Finisar's stock continued to trade at an artificially inflated price, reaching a high of $43.23 

per share on February 14, 2011. Id. ¶ 9. Certain Defendants sold their personally-held shares of 

Finisar stock for proceeds of almost $6.5 million while in possession of material, non-public 

information regarding Finisar’s true financial condition. Id. 

On March 8, 2011, Defendants disclosed that Finisar’s revenues for the fourth fiscal 

quarter 2011 would be lower than Defendants’ previous estimates. Id. ¶ 10. Defendants blamed 

the weak fourth-quarter forecasts on several factors, including: price negotiations with its telecom 

customers that usually take effect January 1; a 10-day shutdown at certain customers to celebrate 

the Chinese New Year; inventory adjustments; and the overall economic slowdown in China and a 

slowdown in Chinese business. Id. 

After the March 8, 2011 disclosure, Finisar's stock price fell approximately 39%, from 

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$40.04 per share on March 8, 2011 to close at $24.61 on March 9, 2011. Id. ¶ 11. A few days 

later, Finisar became the subject of the Securities Action, which remains pending before this 

Court. The Securities Action is based upon a statement made by Finisar’s then-CEO, Gertel, 

during a conference call with analysts, media representatives and investors on December 10, 2010. 

One analyst asked, “Can you help us understand how it’s possible for the company to not only 

sustain that [growth] but continue to grow faster than the end markets?” Id. ¶ 72. Gertel said, 

among other things, “As far as we know we haven’t seen any inventory issues with our product 

with our customers,” and “there can be one or two guys who try to build their own inventory, but 

by far the majority of the customers expediting products and doesn’t look to us, not visible to us at 

all, all these quarters if they are building any inventory.” Id. 

The instant shareholder derivative action was filed in May of 2014. In Count I, Plaintiff 

alleges that the Individual Defendants breached their fiduciary duty by causing the Company to 

improperly misrepresent the business prospects of the Company and failing to correct the 

Company’s publicly reported misstatements and improper sales and earnings guidance despite 

knowing that these statements were false at the time they were made. Id. ¶ 143. Plaintiff alleges 

that the Individual Defendants violated and breached their fiduciary duty of loyalty by 

“intentionally making and permitting to be made multiple, repeated misleading statements” in 

Finisar’s SEC filings and in press releases that they knew did not properly describe Finisar’s 

demand, inventory, sales and earnings prospects, and internal controls.” Id. ¶ 144. The statements 

were made in spite of the Individual Defendants’ knowledge or conscious disregard of facts 

indicating that Finisar’s demand was decreasing and inventory was piling up, which made the 

Company’s previously reported revenue growth unsustainable. Id. 

Plaintiff also alleges that the Individual Defendants violated and breached their fiduciary 

duties of candor, good faith, and loyalty “by creating a culture of lawlessness within Finisar, 

and/or consciously failing to prevent to [sic] Company from engaging in the unlawful acts 

complained of herein.” Id. ¶ 145. In particular, Plaintiff alleges that the Officer Defendants either 

knew, were reckless, or were grossly negligent in not knowing that: (i) the Company’s apparent 

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revenue growth was unsustainable and primarily the result of known but undisclosed overstocking 

of its products by the Company’s customers due to industry-wide rumors of pending supply 

shortages; (ii) as the supply constraints loosened, the Company’s customers were saddled with an 

oversupply of inventory and, thus, would need to decrease the amount of products they ordered 

from Finisar in order to reduce their inventory levels; (iii) Finisar was experiencing increasing 

pricing pressures due to intense competition in the industry and, as a result, the Company was 

forced to provide steep discounts in order to retain certain of its customers; and (iv) sales in China 

had been dwindling for months with no indication of rebounding to previous levels which would 

have a detrimental effect on the Company's ability to continue growing at unprecedented rates. Id. 

Plaintiff alleges that Director Defendants Child, Ferguson, Gertel, Pardun, Rawls, 

Stephens, and Trempont breached their duty of loyalty by “recklessly permitting the improper 

activity concerning the Company’s false statements” and permitting insider trading by Gertel, 

Ferguson, and Adzema. Id. ¶ 146. Plaintiff alleges that the Audit Committee Defendants—

Ferguson, Pardun, Child, and Trempont—breached their fiduciary duty of loyalty by approving 

misleading public statements. Id. ¶¶ 147-48. According to Plaintiff, the Audit Committee 

Defendants failed in their duty of oversight and failed in their duty to appropriately review 

financial results. Id. ¶ 148. Plaintiff alleges that the Insider Selling Defendants—Gertel, Adzema, 

and Ferguson—breached their fiduciary duty of loyalty by selling their Finisar stock while in 

possession of non-public, material information concerning the Company’s inability to meet its 

earnings guidance. Id. ¶¶ 149-150.

In Count II, Plaintiff alleges that the Individual Defendants were unjustly enriched when 

they sold their Finisar stock while in possession of material, adverse non-public information that 

artificially inflated the price of Finisar stock. Id. ¶ 155. In Count III, Plaintiff alleges that Finisar 

is entitled to contribution and indemnification from the Individual Defendants. Id. ¶ 163. 

III. STANDARDS

Under Rule 23.1, “a shareholder must either demand action from the corporation’s 

directors before filing a shareholder derivative suit, or plead with particularity the reasons why 

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ORDER GRANTING MOTION TO DISMISS

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such demand would have been futile.” Arduini v. Hart, 774 F.3d 622, 628 (9th Cir. 2014); see

Fed. R. Civ. P. 23.1(b)(3). “The purpose of this demand requirement in a derivative suit is to 

implement the basic principle of corporate governance that the decisions of a corporation—

including the decision to initiate litigation—should be made by the board of directors or the 

majority of shareholders.” Rosenbloom v. Pyott, 765 F.3d 1137, 1148 (9th Cir. 2014) (internal 

quotations omitted). 

To determine demand futility, courts must look to the substantive law of the entity’s state 

of incorporation to determine whether the demand would have, in fact, been futile. Rosenbloom, 

765 F.3d at 1148. In this case, Finisar is a Delaware corporation, and thus Delaware law applies. 

Under Delaware law, “a shareholder who declines to make a demand on the board of directors 

may not bring a derivative action until he has demonstrated, with particularity, the reasons why 

pre-suit demand would be futile.” Id. (internal quotations omitted). Demand futility “is gauged 

by the circumstances existing at the commencement of a derivative suit and concerns the board of 

directors sitting at the time the complaint is filed.” Id. (internal quotations omitted). The court 

must determine futility on a case-by-case basis, and “[p]laintiffs are entitled to all reasonable 

factual inferences that logically flow from the particularized facts alleged[.]” Id. However, 

“conclusory allegations are not considered as expressly pleaded facts or factual inferences.” Id.

When a shareholder challenges a decision of a board of directors, Delaware law provides a 

two-pronged test to determine demand futility. The first prong “is whether, under the 

particularized facts alleged, a reasonable doubt is created that the directors are disinterested and 

independent.” Id. at 1149. The second prong “is whether the pleading creates a reasonable doubt 

that the challenged transaction was otherwise the product of a valid exercise of business 

judgment.” Id. This two-pronged approach is known as the “Aronson test,” pursuant to Aronson 

v. Lewis, 473 A.2d 805, 814 (Del. 1984), and is in the disjunctive. Id. “Therefore, if either prong 

is satisfied, demand is excused.” Id. 

Under the first prong of the Aronson test, “a director’s interest may be shown by 

demonstrating a potential personal benefit or detriment to the director as a result of the decision.” 

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ORDER GRANTING MOTION TO DISMISS

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Rosenbloom, 765 F.3d at 1149. Thus, “directors who are sued have a disabling interest for presuit demand purposes when the potential for liability may rise to a substantial likelihood.” Id. In 

a motion to dismiss, “plaintiffs must make a threshold showing, through the allegation of 

particularized facts, that their claims have some merit.” Id. (internal quotations omitted). Under 

the second prong of the Aronson test, “the question is whether the pleading creates a reasonable 

doubt that the challenged transaction was the product of a valid exercise of business judgment.” 

Id. The Aronson test is limited to board business decisions. Tindall v. First Solar Inc., 892 F.3d 

1043, 1047 (9th Cir. 2018).

Where the subject of the derivative suit is not a business decision of the board, the test is 

“whether or not the particularized factual allegations of a derivative stockholder complaint create a 

reasonable doubt that, as of the time the complaint is filed, the board of directors could have 

properly exercised its independent and disinterested business judgment in responding to a 

demand.” Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993). The difference between the 

Aronson and Rales may be blurred in cases in which personal liability for breach of fiduciary 

duties implicates the board’s availment of business judgment protections. Rosenbloom, 765 F.3d 

at 1150. “Under either approach, demand is excused if Plaintiffs’ particularized allegations create 

a reasonable doubt as to whether a majority of the board of directors faces a substantial likelihood 

of personal liability for breaching the duty of loyalty.” Id. In turn, the duty of loyalty “is violated 

where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious 

disregard for their responsibilities and failing to discharge the non-exculpable fiduciary duty of 

loyalty in good faith.” Id. (internal quotations omitted). 

Under Delaware law, “directors who knowingly disseminate false information that results 

in corporate injury or damage to an individual stockholder violate their fiduciary duty, and may be 

held accountable in a manner appropriate to the circumstances.” Malone v. Brincat, 722 A.2d 5, 

12 (Del. 1998). Directors may also be held liable for breach of their fiduciary duty if they 

“authorize[] without fault or knowledge a misleading disclosure, later come[] into knowledge of 

the misleading nature of the previous communication, and knowingly and in bad faith (in other 

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ORDER GRANTING MOTION TO DISMISS

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words, “dishonestly”) fail[ ] to correct the misleading impression created by the earlier 

communication.” Metro Communication Corp. BVI v. Advanced Mobilecomm Technologies 

Inc., 854 A.2d 121, 159 (Del. Ch. 2004).

IV. DISCUSSION

When this action was initiated, Finisar's Board consisted of the following six directors: 

Gertel, Rawls, Child, Ferguson, Pardun, and Stephens. As such, demand will be excused as futile 

if there is a reason to doubt that three of the six directors are unable to disinterestedly or 

independently consider a demand. See Aronson, 473 A.2d at 814-15; Rosenbloom, 765 F.3d at 

1148. Plaintiff advances three arguments in support of demand futility. First, Plaintiff contends 

that demand is excused as to the entire Board because “they face a substantial likelihood of 

liability for breaching their fiduciary duty of loyalty for making and/or knowingly permitting 

misrepresentations regarding the nature and sustainability of the Company’s past and future 

revenue growth.” Dkt. 45, p. 15. Second, Plaintiff contends that demand is futile as to Defendants 

Gertel and Ferguson because they face a substantial likelihood of liability for insider trading. 

Third, Plaintiff contends that there is a reasonable doubt that Defendants Gertel and Rawls are 

independent.

A. Allegations re Defendants Knowingly Making and/or Approving False and Misleading 

Statements

Plaintiff asserts that the Board knew Finisar’s revenue growth was unsustainable due to 

oversupply of inventory and slowdown in China. The Board allegedly learned of this information 

from Gertel’s and Rawls’ routine discussions with Finisar’s customers regarding inventory issues 

and during the annual contract negotiations3, which were completed by December 1, 2010. 

Plaintiff also alleges that the entire Board’s knowledge can be inferred from: Defendants’ regular 

assurances to analysts and investors that Finisar had high visibility into product demand (including 

 

3 Defendants request that the Court disregard allegations regarding annual contract negotiations. 

The request is denied because Defendants have not established that Plaintiff violated Federal Rule 

of Civil Procedure 11. 

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ORDER GRANTING MOTION TO DISMISS

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WSS and ROADM line cards), as well as Gertel’s and Rawls’ admissions in the Answer filed in 

the Securities Action. Plaintiff also contends that it is reasonable to expect that Gertel and Rawls 

shared information regarding oversupply issues and declining sales in China with the entire Board 

because of the materiality of such information to Finisar’s projected revenue. Despite knowing 

about inventory issues and declining sales, the entire Board allegedly permitted misleading 

statements that “dismissed analysts’ repeated concerns and suggested that the Company’s recent 

and anticipated future revenue growth was the result of a steady and ongoing increase in demand.” 

Dkt. 45, p. 14. 

Demand Futility Based on Gertel’s December 2, 2010 Statement

Plaintiff’s allegations are insufficient to establish that every member of the Board faces a 

substantial likelihood of personal liability for knowingly making and/or approving Gertel’s 

December 2, 2010 statement. There is no particularized allegation in the Complaint that any other 

Board member knew of adverse information regarding inventory conditions prior to Gertel making 

the December 2, 2010 statement that would have rendered Gertel’s statement false or misleading. 

Plaintiff points to a statement made by defendant Rawls in March 2011 that the Company 

“continually” asked customers about inventory issues. Dkt. No. 45, p. 11. Plaintiff also relies on 

Gertel’s acknowledgement that during annual contract negotiations, the Company would consider, 

among other things “market demand.” Id. These generalized allegations are insufficient to 

establish that each of the individual Defendants face a substantial likelihood of liability for 

Gertel’s December 2, 2010 statement. Plaintiff does not allege with particularized facts what, if 

any, negative information about inventory issues was imparted during communications or contract 

negotiations with customers.4To the contrary, the Complaint includes allegations that suggest 

customers gave positive information. According to Rawls, customers “say ‘No. We’re buying for 

production and we’re not buying for inventory.’” Complaint ¶ 75. Plaintiff also fails to allege 

 

4

Plaintiff does not address Defendants’ rebuttals of several additional purported sources of 

adverse inventory information. See Defendants’ Motion to Dismiss (Dkt. No. 47) at 17:27-18:6 

(operating expenses); 18:7-14 (rolling production forecasts), 18:24-19:14 (visibility as to 

LAN/SAN customers, as distinguished from telecom customers). 

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ORDER GRANTING MOTION TO DISMISS

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with particularized facts what, if any, negative information about inventory issues Rawls or Gertel 

shared with other members of the Board. Furthermore, there is no particularized allegation in the 

Complaint that any Board member had any connection to Gertel’s impromptu oral statement. 

Plaintiff does not allege, for example, that any other Defendant directed Gertel to make the oral 

statement. 

Plaintiff contends that knowledge of such information can be imputed to Defendants under 

the “core operations” doctrine. See e.g. Dkt. No. 45, p. 4. Plaintiff alleges, for example, that 

China sales constituted such a large percentage of Finisar’s business (23%) that the Board would 

have kept informed about inventory developments for Chinese customers. The “core operations” 

doctrine, however, does not excuse Plaintiff from pleading particularized facts to establish demand 

futility. See e.g. In re First Solar Deriv. Litig, No. 12-769 PHX, 2016 WL 3548758, *12-13 (D. 

Ariz. June 30, 2016), aff’d sub nom. Tindall v. First Solar Inc., 892 F.3d 1043 (9th Cir. June 13, 

2018); In re Rocket Fuel Inc., No. 15-4625 PJH, 2016 WL 4492582, *8 (N.D. Cal. August 26, 

2016). Plaintiff fails to allege with particularized facts what negative information, if any, the 

Board members possessed regarding sales to China that contradicted or called into question 

Gertel’s December 1, 2010 statement. 

Citing to Rawls’ statement on March 4, 2010, Plaintiff next alleges that the Company had 

high visibility into ROADM orders. This allegation is similarly insufficient to establish each 

Director’s personal liability. Plaintiff does not explain how the 14-16 week lead time announced 

in early March 2010 rendered Gertel’s December 2, 2010 statement false or misleading. There are 

no particularized facts from which to infer that the 14-16 week lead time was constant and 

continued through the six months leading up to Gertel’s December 2, 2010 statement.

Plaintiff also alleges that on March 8, 2011, Rawls admitted that “the Individual 

Defendants were aware of the slowdown in China sales, and ‘the impact [for] a couple of months 

in terms of reduced order rates, things that we had forecast [] at the end of last year of expected 

orders and capacity demands that were going into 2011.’” Dkt. No. 45, pp. 11-12. Although this 

alleged admission is closer in time, Gertel’s December 2, 2010 statement was made more than 

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three months earlier. Furthermore, even if the Individual Defendants knew of the slowdown in 

China sales on December 2, 2010, Plaintiff does not explain how this slowdown in sales, without 

more, renders Gertel’s statement false or misleading. Although demand and inventory for product 

may be related, they are not the same. 

Plaintiff next asserts that the Audit Committee Defendants are liable for Gertel’s statement 

because they had a duty to review and discuss with management information provided to 

securities analysts. Plaintiff also argues that the entire Board is liable for Gertel’s statement 

because in light of the Company’s history of repeatedly assuring analysts and the public that 

revenue growth was sustainable and not the result of inventory issues, the entire Board had a duty 

to pay attention to any public statements to ensure any newly discovered material information 

regarding revenue was timely disclosed and not continually misrepresented. These allegations 

raise at most a theoretical possibility, not a substantial likelihood, of personal liability arising out 

of Gertel’s December 2, 2010 statement.

Demand Futility Based on Other Alleged Misstatements

Plaintiff alleges that the entire Board faces liability for misstatements other than Gertel’s 

December 2, 2010 statement. As a threshold matter, Plaintiff’s argument is faulty because 

Plaintiff has not alleged damages resulting from any misstatement other than Gertel’s December 2, 

2010 statement. Plaintiff alleges that Finisar is spending money to defend and may be held liable 

for (or settle) the Securities Action. Complaint ¶ 115. The only remaining alleged misstatement 

in the Securities Action is Gertel’s December 2, 2010 statement. Therefore, the only possible 

statement that may have damaged Finisar is Gertel’s December 2, 2010 statement.

Plaintiff also alleges that Finisar was damaged because Board members were paid to serve 

and directors and officers. Id. This argument is circular. If the Board members did not cause 

damage to Finisar, the Board members did not breach their fiduciary duty and hence were not 

unjustly enriched. See Saginaw Police & Fire Pension Fund v. Hewlett-Packard Co., 2012 WL 

967063, *9 (N.D. Cal. Mar. 21, 2012) (no breach of duty means no unjust enrichment).

Even if Plaintiff had alleged damages (which he has not), Plaintiff’s allegations remain 

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deficient to establish demand futility. Plaintiff alleges that the entire Board faces liability for a 

statement Rawls made during an analyst call on September 2, 2010. An analyst asked, “so-in 

terms of inventory, you control, notwithstanding the big increase in inventory in the quarter, of 

course, you would argue is to address increasing demand, you're not concerned?” Complaint ¶ 82. 

Rawls responded, “Not concerned.” Id. Plaintiff argues that there is at least a reasonable 

inference that Defendants knew at this time that Rawls’ statement was misleading. The argument 

is unpersuasive because it is unsupported by any particularized facts to establish that Defendants 

had insight into Rawls’ state of mind or level of concern, much less that Defendants knowingly 

allowed Rawls to disseminate false or misleading information. 

Plaintiff also cites to the Company’s December 1, 2010 press release and December 8, 

2010 Form 10-K, wherein defendant Gertel stated that “‘the market environment continued to be 

very strong for Finisar, driven by increased demand for ... telecom products,’” and that “‘[w]e 

expect revenues for WSS/ROADM line cards to grow another 20% to 30% sequentially in our 

fiscal third quarter.’” Complaint ¶¶ 84, 88. The revenue predictions eventually proved to be 

accurate. Nevertheless, Plaintiff argues that even a literally true statement is actionable where it 

creates a “false impression as to the true state of affairs, and the actor fails to provide qualifying 

information to cure the mistaken belief.” Norton v. Poplos, 443 A.2d 1, 5 (Del. 1982). Plaintiff’s 

argument is unpersuasive. Gertel’s statement simply does not create a false impression: Gertel’s 

revenue prediction was accurate, and Gertel did not make a representation about future trends in 

general, nor did he make forecasts beyond the third quarter.

Lastly, Plaintiff cites to Defendant Rawls’ statements during a December 7, 2010 

program. Rawls highlighted Finisar’s “double-digit, sequential growth.” Complaint ¶ 87. The 

statement was allegedly misleading because Rawls failed to disclose material information thenknown regarding inventory oversupply and an impending, significant decline in sales. These 

allegations do not implicate any Board member other than Rawls. Furthermore, Rawls’ statement 

accurately reported past results; the statement did not include a forecast or prediction about the 

future. 

Case 5:12-cv-02268-EJD Document 52 Filed 09/05/18 Page 12 of 13
Case No.: 5:12-cv-02268-EJD

ORDER GRANTING MOTION TO DISMISS

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In sum, Plaintiff’s allegations fail to establish a substantial likelihood that Defendants face 

personal liability for knowingly disseminating false information on September 2, 2010, December 

1, 2010, or December 7, 2010.

B. Remaining Allegations re Demand Futility

Because Plaintiff has failed to allege that a majority of the Board faces a substantial 

likelihood of personal liability for any alleged misstatement, it is unnecessary for the Court to 

consider Plaintiff’s remaining futility arguments regarding Gertel’s and Ferguson’s alleged insider 

selling and Gertel’s and Rawls’ alleged lack of independence.

V. CONCLUSION

For the reasons set forth above, Defendants’ motion to dismiss is GRANTED with leave to 

amend. Plaintiff shall file and serve an amended complaint no later than September 28, 2018.

IT IS SO ORDERED.

Dated: September 5, 2018

______________________________________

EDWARD J. DAVILA

United States District Judge

Case 5:12-cv-02268-EJD Document 52 Filed 09/05/18 Page 13 of 13