Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_02-cv-01486/USCOURTS-cand-4_02-cv-01486-130/pdf.json

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

---

United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In re JDS UNIPHASE CORPORATION

SECURITIES LITIGATION

 /

No. C 02-1486 CW

ORDER DENYING

DEFENDANTS'

MOTION FOR

SANCTIONS

Defendants have filed a motion for sanctions pursuant to

Federal Rule of Civil Procedure 11(b). Plaintiffs oppose the

motion. The matter was decided on the papers. Having considered

all of the papers filed by the parties, the Court denies

Defendants' motion.

BACKGROUND

Plaintiffs filed their first amended consolidated complaint

(FACC) on October 11, 2002, alleging that between July 27, 1999 and

July 26, 2001, Defendants engaged in a scheme to inflate

artificially the price of JDS Uniphase (JDSU) stock by falsely

representing that demand for its products was strong and by

overstating the value of its inventory by failing to write off

excess inventory. Plaintiffs further alleged that Defendants

benefitted from this scheme by selling their stock at inflated

prices and by using the inflated value of JDSU stock to purchase

other companies for less than their worth. On November 3, 2003,

the Court granted in part Defendants' motion to dismiss and granted

Plaintiffs leave to file a second amended consolidated complaint

(SACC). 

Case 4:02-cv-01486-CW Document 1915 Filed 03/19/08 Page 1 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 2

Plaintiffs filed their SACC on January 29, 2004, this time

limiting the class period to October 28, 1999 through July 26,

2001. The SACC alleged that during the class period, Defendants

engaged in a scheme to inflate artificially the price of JDSU stock

by fraudulently recognizing revenue, by falsely representing that

demand for JDSU products was strong and by overstating the value of

its inventory by failing to write off excess inventory. Plaintiffs

again alleged that Defendants benefitted from this scheme by

selling stock at inflated prices and by using the value of JDSU

stock to purchase other companies for less than their worth. On

January 6, 2005, the Court granted a motion to dismiss one of the

Securities Act claims against Defendant Kevin Kalkhoven and denied

the motion to dismiss the remaining claims. 

On February 28, 2005, the JDSU Defendants and Defendant

Kalkhoven filed their answers to the SACC. On April 21, 2005,

Plaintiffs moved pursuant to Federal Rule of Civil Procedure 12 to

strike the JDSU Defendants' answer to eighteen paragraphs of the

SACC. Plaintiffs filed a similar motion on May 20, 2005 seeking to

strike portions of Kalkhoven's answer. On July 21, 2005, the Court

denied Plaintiffs' motions both because they were untimely and

because Plaintiffs' contentions required resolution of questions of

fact in their favor. 

On August 24, 2007, the Court granted in part and denied in

part Defendants' motions for summary judgment. The case proceeded

to trial and the jury returned a verdict in Defendants' favor. 

Defendants now seek sanctions of $150,000, representing a portion

of the reasonable attorneys' fees and expenses incurred as a result

Case 4:02-cv-01486-CW Document 1915 Filed 03/19/08 Page 2 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 3

of three alleged violations of Rule 11. 

LEGAL STANDARD

Both the Securities Act and the Securities Exchange Act

provide, 

In any private action arising under this subchapter,

upon final adjudication of the action, the court shall

include in the record specific findings regarding

compliance by each party and each attorney representing

any party with each requirement of Rule 11(b) of the

Federal Rules of Civil Procedure as to any complaint,

responsive pleading, or dispositive motion. 

15 U.S.C. § 77z-1(c)(1); 15 U.S.C. § 78u-4(c)(1). Civil Local Rule

58-1 further requires that such findings "shall be entered by

separate order" before judgment is entered. Civ. L.R. 58-1. 

Rule 11(b) provides, 

By presenting to the court . . . a pleading, written

motion, or other paper, an attorney . . . is certifying

that to the best of the person's knowledge,

information, and belief, formed after an inquiry

reasonable under the circumstances,--

(1) it is not being presented for any improper

purpose, such as to harass or to cause unnecessary

delay or needless increase in the cost of

litigation;

(2) the claims, defenses, and other legal

contentions therein are warranted by existing law

or by a nonfrivolous argument for the extension,

modification, or reversal of existing law or the

establishment of new law;

(3) the allegations and other factual contentions

have evidentiary support . . . 

Fed. R. Civ. P. 11(b). Under Rule 11(c), a court may impose

sanctions on attorneys, law firms or parties that have violated

Rule 11(b) or are responsible for such a violation.

The standard for determining whether a pleading, motion or

other paper is either frivolous or interposed for an improper

purpose is one of objective reasonableness at the time of the

Case 4:02-cv-01486-CW Document 1915 Filed 03/19/08 Page 3 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 4

attorney's signature. Conn v. Borjorquez, 967 F.2d 1418, 1421 (9th

Cir. 1992) (citing Woodrum v. Woodward County Okla., 866 F.2d 1121,

1127 (9th Cir. 1989); Golden Eagle Distrib. Corp. v. Burroughs

Corp., 801 F.2d 1531, 1538 (9th Cir. 1986). In assessing whether

the filing of a particular paper was frivolous under Rule 11, the

court should not consider the ultimate failure on the merits or the

subjective bad faith of the signer, but rather whether the position

taken was "legally unreasonable" or "without factual foundation." 

Zaldivar v. City of Los Angeles, 780 F.2d 823, 831 (9th Cir. 1986)

overruled on other grounds by Cooter & Gell v. Hartmarx Corp., 496

U.S. 384, 399-405 (1990).

DISCUSSION

I. First Amended Complaint

Defendants first argue that Plaintiffs violated Rule 11 when

they included in their FACC claims of false or misleading

statements regarding demand dating back to July, 1999. Plaintiffs

acknowledged that demand did not decline until the spring or summer

of 2000, but still argued that statements made as early as July,

1999 overstated demand in a manner that made the statements false

or misleading. Defendants filed a motion to dismiss. The Court

described Plaintiffs' claims of false and misleading statements

regarding demand as "simply illogical" for much of the class

period, noting that "JDSU reported significantly increasing revenue

each quarter from the beginning of the claimed class period until

the third quarter of 2001 (January to March 2001)." January 6,

2005 Order at 10. Because Plaintiffs did not "challenge the

accuracy of JDSU’s reported revenues" and did not "provide a

Case 4:02-cv-01486-CW Document 1915 Filed 03/19/08 Page 4 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 5

reasonable explanation for how JDSU could be experiencing this

uncontroverted revenue growth without experiencing strong demand,"

the Court found that "the FACC's allegation that statements

indicating strong demand made prior to Spring 2000 were false and

misleading when made does not state a claim." Id. at 10-11. 

Defendants now argue that a "reasonable investigation would

have shown that it was baseless to allege declining demand for

JDSU's products as far back as July 1999." Motion at 3. 

Plaintiffs counter that these allegations were based on the

statements of three former JDSU employees that JDSU routinely

forced its customers to over-order by scaring the customers into

believing that there might not be sufficient supply to meet future

demand and simultaneously reassuring them that there would be no

penalty for cancelling orders for unneeded products. FACC ¶¶ 99-

102. Plaintiffs also alleged that JDSU further manipulated the

timing of their sales to create the impression of growing demand. 

In particular, Plaintiffs alleged that Defendants "realiz[ed] that

the seemingly insatiable appetite for [JDSU's] products would not

last forever [and therefore] sought to protect themselves from a

downturn in business by intentionally delaying delivery on orders 

. . . so that it could demonstrate sales growth in the future even

as orders started to dry up." Id. at ¶ 103. Plaintiffs again

supported this general allegation with specific examples reported

by current and former JDSU employees. Id. at 104-106. Plaintiffs

note that Defendants have not challenged any of these statements by

JDSU employees. 

Defendants further argue that information publicly available

Case 4:02-cv-01486-CW Document 1915 Filed 03/19/08 Page 5 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

Plaintiffs note that they were not able to recover all of the

documentation of the initial investigation.

6

at the time the FACC was filed demonstrated the strength of the

telecommunications industry in 1999 and 2000. However, as

Plaintiffs point out, the fact that the overall industry was strong

does not render frivolous their reliance on the JDSU employees'

reports of order manipulation. Moreover, as Plaintiffs point out,

the fact that the Court dismissed their claims based on these

allegations is not a basis for imposing sanctions. 

II. Second Amended Complaint

Defendants next argue that Plaintiffs violated 

Rule 11 when they based allegations on statements from confidential

witnesses. According to Defendants, there were significant

discrepancies between the allegations and later sworn testimony. 

Defendants provide specific differences between the quotes in the

SACC attributed to thirty-seven confidential witnesses and later

deposition testimony or declarations from those witnesses. 

Plaintiffs counter that the depositions were not taken and the

declarations were not signed until years after the witnesses

originally spoke to Plaintiffs' investigators and attorneys. In

many cases the confidential witnesses testified or declared that

they did not recall making the specific statements attributed to

them in the SACC but did remember talking to Plaintiffs about the

topics at issue. Moreover, Plaintiffs maintain in their opposition

and supporting declaration that over ninety-five percent of the

statements included in the SACC are corroborated by the notes they

were able to locate.1

 Therefore, as in The Wu Group v. Synopsys,

Case 4:02-cv-01486-CW Document 1915 Filed 03/19/08 Page 6 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 7

Inc., the question of "whether the statements were made is

essentially a credibility question." 2205 WL 1926626, *13 (N.D.

Cal.). Like the The Wu Group court, the Court here finds that Rule

11 sanctions are not appropriate in this context. Id.

III. Motion to Strike the JDSU Defendants' Answer

Finally, Defendants argue that Plaintiffs' motion to strike

certain paragraphs of the JDSU Defendants' answer to the SACC

constituted a violation of Rule 11. In their answer, the JDSU

Defendants asserted that they lacked the knowledge or information

to form a belief as to the veracity of the allegations that various

confidential witnesses reported certain activities occurring at

JDSU facilities around the country. According to Plaintiffs,

Defendants must have known about these activities. Therefore,

Plaintiffs argued, the statements should be deemed admitted by the

JDSU Defendants. The Court denied Plaintiffs' motion because it

was not timely filed and because a determination that Defendants

must have known about the allegations required factual

determinations that the allegations were true and that Defendants

had access to the information that formed the basis of those

allegations. 

Defendants now argue that Plaintiffs should be sanctioned for

filing this motion for the same reasons the Court denied it and

because the allegations Plaintiffs sought to be deemed admitted are

based on the same confidential witnesses discussed above. 

Therefore, Defendants argue, Plaintiffs erroneously sought to have

the Court deem admitted allegations that Plaintiffs should have

known were false. However, as stated above, the question of

Case 4:02-cv-01486-CW Document 1915 Filed 03/19/08 Page 7 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 8

whether the allegations were false and, if they were false, whether 

Plaintiffs should have known that they were, is one of credibility

which does not provide a basis for sanctions. Moreover, while

Plaintiffs proposed a novel application of Rule 12, the Court does

not find that the motion was so lacking in plausibility that it

provides a basis for sanctions.

CONCLUSION

For the foregoing reasons, the Court DENIES Defendants' motion

for sanctions (Docket No. 1891). 

Further, pursuant to its obligations under 15 U.S.C. 

§ 77z-1(c)(1) and 15 U.S.C. § 78u-4(c)(1), the Court finds that,

during the course of the litigation, the parties and their

respective counsel have complied with the requirements of Federal

Rule of Civil Procedure 11.

IT IS SO ORDERED.

Dated: 3/19/08 

CLAUDIA WILKEN

United States District Judge

Case 4:02-cv-01486-CW Document 1915 Filed 03/19/08 Page 8 of 8