Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_02-cv-01486/USCOURTS-cand-4_02-cv-01486-93/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

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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 GRANTING IN

PART DEFENDANTS

JDS, STRAUS,

MULLER AND ABBE'S

MOTION FOR

SUMMARY JUDGMENT,

GRANTING IN PART

DEFENDANT

KALKHOVEN'S

MOTION FOR

SUMMARY JUDGMENT 

AND DEFERRING

RULING ON

PLAINTIFFS'

CROSS-MOTION FOR

PARTIAL SUMMARY

JUDGMENT

Defendants JDS Uniphase Corporation (JDS), Josef Straus,

Anthony R. Muller and Charles Abbe jointly move for summary

judgment. Defendant Kevin Kalkhoven moves separately for summary

judgment. Lead Plaintiff Connecticut Retirement Plans and Trust

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Funds opposes the motions and cross-moves for partial summary

judgment that Defendants have not met their burden of showing that

the decline in JDS's stock value was based on some event

independent of the alleged misrepresentations for purposes of their

section 11 claims. The matter was heard on July 26, 2007 and the

parties filed supplemental letter briefs following the hearing. 

Having considered the parties' papers, the evidence cited therein

and oral argument on the motions, the Court GRANTS in part

Defendants JDS, Straus, Muller and Abbe's motion for summary

judgment and DENIES it in part. The Court GRANTS in part Defendant

Kalkhoven's motion for summary judgment and DENIES it in part. The

Court DEFERS RULING on Plaintiffs' cross-motion for partial summary

judgment.

BACKGROUND

Defendant JDS manufactures and supplies components of fiberoptic networks to telecommunications and cable television system

providers. Defendants Straus, Muller, Abbe and Kalkhoven are

current and former executive officers and directors of JDS. 

Kalkhoven retired from his position as director and officer of JDS

in late September, 1999, although he continued to be employed fulltime by JDS until July 31, 2000, and part-time until July 31, 2001. 

He received a $400,000 salary for the year ending July 31, 2000,

and $200,000 for the subsequent year of part-time work; Lead

Plaintiff alleges that he continued to be employed at the San Jose

headquarters of JDS and consulted with upper management on

strategic and operational issues throughout the class period.

Lead Plaintiff represents a class of persons and entities that

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1The second amended consolidated complaint (SACC) includes

revenue recognition claims, which Plaintiffs are no longer

pursuing. 

2

Plaintiffs do not produce any evidence based on the testimony

of the confidential witnesses. Defendants provide declarations and

deposition testimony from some of the confidential witnesses

denying the statements Plaintiffs allege in the SACC that they

made.

3

purchased or otherwise acquired securities of JDS between October

28, 1999 and July 26, 2001, including sub-classes of plaintiffs who

acquired securities of JDS through its mergers with Optical Coating

Laboratory, Inc., E-TEK Dynamics, Inc. and SDL, Inc.(the OCLI, ETEK and SDL subclasses). Plaintiffs allege that, during the class

period, Defendants engaged in a scheme to inflate artificially the

price of JDS stock by falsely representing that demand for JDS

products was strong and by overstating the value of its inventory

by failing to write off excess inventory.1

 Plaintiffs allege that

Defendants benefitted from this scheme by selling stock at inflated

prices and by using the value of JDS stock to purchase other

companies for less than their worth.

In the SACC, Plaintiffs allege that, beginning in March, 2000,

demand for JDS products began to decrease substantially across the

country, as reported by confidential witnesses employed at a

majority of JDS manufacturing plants in North America.2 Plaintiffs

further allege that as demand decreased, increased numbers of order

cancellations occurred at JDS facilities, resulting in large

stockpiles of excess inventory. In response, JDS plants did not

stop manufacturing goods, but rather continued to ship products on

canceled orders and to ship goods prematurely in anticipation of

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3Plaintiffs originally challenged statements made as early as

July, 1999. The April, 2000 conference call included the earliest

statements they now challenge. 

4In their motion for summary judgment Defendants argue that

they are entitled to summary judgment on all claims made by the

OCLI subclass because Plaintiffs no longer challenge any statements

made before JDS acquired OCLI. Plaintiffs do not contest this

4

future orders. 

Plaintiffs allege that the decrease in demand for JDS products

continued to worsen throughout the summer of 2000. Excess

inventory also continued to accumulate. Plaintiffs allege that, as

a result, JDS began discussions about a wide-scale company

downsizing as early as June, 2000; cost-cutting measures were

already being implemented on a smaller scale at individual plants,

most notably in Ottawa, one of JDS's headquarters. On August 18,

2000, manager of demand management Thomas Pitre sent an internal

email to twenty upper-level management employees that stated, in

pertinent part, "Considering all the recent demand changes over the

past few weeks . . . a major disconnect exists between future

forecasted demand and our growth curve. It seems that we have a

divergence between our overarching growth of 25% QTR/QTR and the

forecast demand out in Q3 and Q4."

Meanwhile, in a conference call with securities analysts on

April 25, 2000, Defendants Kalkhoven and Muller reported strong

demand for JDS products and strong visibility regarding future

demand.3 In conference calls with securities analysts on July 26,

2000, October 26, 2000 and January 25, 2001, Defendants Straus,

Muller and Abbe similarly reported strong demand for JDS products. 

On November 4, 1999, JDS had acquired OCLI.4 JDS acquired ECase 4:02-cv-01486-CW Document 1374 Filed 08/24/07 Page 4 of 42
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argument. The Court grants summary judgment on all claims made by

the OCLI subclass. 

5

TEK on June 30, 2000, and recorded approximately $15.7 billion in

good will in connection with the acquisition. Plaintiffs allege

that Defendants knew or were reckless in not knowing that $15.7

billion was a vast overstatement of E-TEK's good will; Defendants

wrote off $13 billion of it in the third quarter of 2001. 

Defendants also announced a $41 billion dollar acquisition of SDL

on July 10, 2000, although JDS did not obtain shareholder consent

for the merger until February, 2001. Defendants made all three

acquisitions by exchanging shares of stock with the acquired

companies, and it was thus in Defendants' best interest to keep the

JDS stock price artificially high in order to secure a more

favorable exchange rate. JDS's stock price was near an all-time

high in June, 2000, and had increased significantly just before the

OCLI acquisition, as well. Additionally, Plaintiffs allege that

proxy-prospectuses that JDS filed with the Securities and Exchange

Commission (SEC) in connection with the acquisition of E-TEK were

fraudulent in that they identified strong demand based in part on

JDS's faulty accounting practices. The original E-TEK statement

was signed by Defendants Kalkhoven, Straus and Muller, although an

amended version was signed only by Straus and Muller.

According to Plaintiffs, it was in the interests of Defendants

Kalkhoven, Abbe, Muller and Straus to inflate artificially JDS

share prices for another reason. Plaintiffs allege that during a

time when JDS stock prices were near all-time highs, and with

knowledge of wide-spread declining demand for JDS products, these

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Defendants sold millions of shares of JDS stock for profits in the

hundreds of millions of dollars in the month of August, 2000 alone.

On January 25, 2001, JDS publicly announced that its quarterly

sales would not meet projections, marking the first time that JDS

or its agents acknowledged publicly that business was turning sour. 

Plaintiffs allege that, at the same time, JDS stated falsely that

sales in the March quarter were projected to exceed sales for the

quarter ending December 30, 2000 by as much as ten percent. 

Plaintiffs allege that Defendants continued to mislead investors

and analysts in January, 2001 because it had yet to obtain

shareholder approval of its SDL acquisition. Indeed, immediately

after it obtained shareholder approval on February 12, 2001, JDS

significantly adjusted downward its projections for the thencurrent quarter. JDS thereafter revealed additional bad financial

forecasts, including on July 26, 2001, when it announced a $44.8

billion write-down of good will and, for the first time, claimed

excess inventory ($270 million worth).

On the basis of these allegations, Plaintiffs claim that

Defendants JDS, Straus, Muller and Kalkhoven violated section 11 of

the Securities Act of 1933 (Securities Act); Defendants Straus,

Kalkhoven and Muller violated section 15 of the Securities Act;

Defendants JDS, Kalkhoven, Muller, Abbe and Straus violated section

10(b) of the Securities Exchange Act of 1934 (Exchange Act) and

Rule 10b-5 promulgated thereunder; Defendants Kalkhoven, Muller and

Straus violated section 14 of the Exchange Act and Rule 14a-9

promulgated thereunder; Defendants Kalkhoven, Muller, Straus and

Abbe violated section 20(a) of the Exchange Act; and Defendants

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Kalkhoven, Muller, Straus and Abbe violated section 20A of the

Exchange Act.

On October 11, 2002, Lead Plaintiff filed a first amended

consolidated complaint (FACC). Defendants filed motions to

dismiss, which the Court granted in part and with leave to amend on

November 3, 2003. On January 9, 2004, Lead Plaintiff filed the

SACC. Defendants filed motions to dismiss, which the Court denied. 

The class and subclasses were certified by stipulation. 

LEGAL STANDARD

Summary judgment is properly granted when no genuine and

disputed issues of material fact remain, and when, viewing the

evidence most favorably to the non-moving party, the movant is

clearly entitled to prevail as a matter of law. Fed. R. Civ. P.

56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);

Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir.

1987).

The moving party bears the burden of showing that there is no

material factual dispute. Therefore, the court must regard as true

the opposing party's evidence, if supported by affidavits or other

evidentiary material. Celotex, 477 U.S. at 324; Eisenberg, 815

F.2d at 1289. The court must draw all reasonable inferences in

favor of the party against whom summary judgment is sought. 

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

587 (1986); Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d

1551, 1558 (9th Cir. 1991). 

Material facts which would preclude entry of summary judgment

are those which, under applicable substantive law, may affect the

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outcome of the case. The substantive law will identify which facts

are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

(1986).

Where the moving party does not bear the burden of proof on an

issue at trial, the moving party may discharge its burden of

production by either of two methods. Nissan Fire & Marine Ins.

Co., Ltd., v. Fritz Cos., Inc., 210 F.3d 1099, 1106 (9th Cir.

2000). 

The moving party may produce evidence negating an

essential element of the nonmoving party’s case, or,

after suitable discovery, the moving party may show that

the nonmoving party does not have enough evidence of an

essential element of its claim or defense to carry its

ultimate burden of persuasion at trial. 

Id. 

If the moving party discharges its burden by showing an

absence of evidence to support an essential element of a claim or

defense, it is not required to produce evidence showing the absence

of a material fact on such issues, or to support its motion with

evidence negating the non-moving party's claim. Id.; see also

Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 885 (1990); Bhan v.

NME Hosps., Inc., 929 F.2d 1404, 1409 (9th Cir. 1991). If the

moving party shows an absence of evidence to support the non-moving

party's case, the burden then shifts to the non-moving party to

produce "specific evidence, through affidavits or admissible

discovery material, to show that the dispute exists." Bhan, 929

F.2d at 1409. 

If the moving party discharges its burden by negating an

essential element of the non-moving party’s claim or defense, it

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must produce affirmative evidence of such negation. Nissan, 210

F.3d at 1105. If the moving party produces such evidence, the

burden then shifts to the non-moving party to produce specific

evidence to show that a dispute of material fact exists. Id.

If the moving party does not meet its initial burden of

production by either method, the non-moving party is under no

obligation to offer any evidence in support of its opposition. Id.

This is true even though the non-moving party bears the ultimate

burden of persuasion at trial. Id. at 1107.

Where the moving party bears the burden of proof on an issue

at trial, it must, in order to discharge its burden of showing that

no genuine issue of material fact remains, make a prima facie

showing in support of its position on that issue. UA Local 343 v.

Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1471 (9th Cir. 1994). That

is, the moving party must present evidence that, if uncontroverted

at trial, would entitle it to prevail on that issue. Id.; see also

Int’l Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1264-65 (5th

Cir. 1991). Once it has done so, the non-moving party must set

forth specific facts controverting the moving party's prima facie

case. UA Local 343, 48 F.3d at 1471. The non-moving party's

"burden of contradicting [the moving party's] evidence is not

negligible." Id. This standard does not change merely because

resolution of the relevant issue is "highly fact specific." Id.

DISCUSSION

I. Claims Properly Before the Court

Defendants first argue that many of the statements Plaintiffs

challenge are not properly at issue in this case either because

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5

Plaintiffs no longer challenge any statements made before

April 25, 2000, including all statements supporting their revenue

recognition claims. 

6

The Court refers to the alleged false or misleading

statements according to the statement numbers assigned by

Plaintiffs in exhibit A to the declaration of Jon Adams. 

10

they were not identified in the SACC or because Plaintiffs have

abandoned them. Defendants do not clearly indicate which

statements they challenge on each basis. However, of the fifty-six

statements Plaintiffs continue to challenge, Defendants appear to

attack twenty-four on these bases.5

Statements six, twenty-six, twenty-seven, thirty-nine and

fifty-one6 were clearly addressed in the SACC. Therefore,

Defendants apparently believe that these claims were abandoned

because Plaintiffs did not include them in their responses to

Defendants' interrogatories. As evidenced by their inclusion in

Plaintiffs' complaint, their opposition to Defendants' motion and

the chart of challenged statements filed with their opposition,

Plaintiffs clearly intend to pursue their claims based on these

statements. The Court finds that they are properly at issue.

The remaining nineteen statements do not appear in the SACC. 

Therefore, Defendants argue that Plaintiffs are barred from raising

them under Kaplan v. Rose, 49 F.3d 1363 (9th Cir. 1994). In

Kaplan, the Ninth Circuit held that, in considering the parties'

motions for summary judgment, the district court had properly

excluded statements which did not appear in the complaint. Because

the statements were missing from any pleading other than the

plaintiff's motion, the court held that they were not fairly

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reflected in the complaint pursuant to Federal Rule of Civil

Procedure 9(b). Id. at 1370. The court noted that the "addition

of new issues during the pendency of a summary judgment motion can

be treated as a motion for leave to amend," but held that the

district court did not abuse its discretion in precluding the

plaintiff from pursuing claims based on the new statements because

it found that the defendants would be prejudiced if the plaintiff

was allowed to amend its complaint. Id. (citing Roberts v. Arizona

Bd. of Regents, 661 F.2d 796, 798 n.1 (9th Cir. 1981). 

Plaintiffs counter that Defendants were on notice that they

were challenging the disputed statements because they included them

in their responses to Defendants' contention interrogatories. The

responses at issue were signed by Plaintiffs' counsel in February

and March, 2007. Therefore, Defendants were on notice of the

additional claims almost three months before their motion for

summary judgment was filed and over seven months before trial. In

Kaplan, the plaintiff first challenged the statements in his motion

for summary judgment, only two months before trial and after the

close of discovery. Id. In this case, Defendants did not seek

additional discovery; nor did they seek to strike the interrogatory

responses as the defendants did in In re Cypress Semiconductor

Securities Litigation, 1995 WL 241441 (N.D. Cal. 1995).

Federal Rule of Civil Procedure 15(a) provides that leave of

the court allowing a party to amend its pleading "shall be freely

given when justice so requires." Leave to amend lies within the

sound discretion of the trial court, which discretion "must be

guided by the underlying purpose of Rule 15 to facilitate decision

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7Defendants do argue that allowing amendment would be futile

because the claims based on these statements are without merit. 

However, the Court will determine the merit of the claims when it

considers them in deciding the motion for summary judgment.

12

on the merits, rather than on the pleadings or technicalities." 

United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981) (citations

omitted). Thus, Rule 15's policy of favoring amendments to

pleadings should be applied with "extreme liberality." Id.; DCD

Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987)

(citations omitted). 

 The Supreme Court has identified four factors relevant to

whether a motion for leave to amend should be denied: undue delay,

bad faith or dilatory motive, futility of amendment, and prejudice

to the opposing party. Foman v. Davis, 371 U.S. 178, 182 (1962). 

Defendants do not argue that allowing amendment would prejudice

them or that Plaintiffs have demonstrated undue delay, bad faith or

dilatory motive.7 Therefore, the Court will consider statements

four, ten, eleven, twelve, twenty-eight through thirty, thirty-two,

forty, forty-two, forty-eight through fifty, fifty-two, fifty-three

and fifty-six in deciding the motion for summary judgment. These

statements are deemed part of the complaint. Defendants are not

required to answer. 

At the hearing and its supplemental letter brief, Defendants

indicated that if the Court allowed Plaintiffs to pursue claims

related to ADVA, they likely would file a motion to dismiss those

claims. Defendants may include a motion to dismiss the claims

related to ADVA with their motions in limine if they have grounds

to do so that were not raised or addressed in their motion for

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summary judgment.

The Court finds that statements forty-one, forty-six and

fifty-five are not properly at issue in this case because the

documents in which they were made were not cited in the relevant

sections of the SACC or interrogatory responses. For that reason,

leave to amend to add them is denied.

II. Statements About Demand

Defendants argue that all of Plaintiffs' claims fail because

they cannot establish that any of the challenged statements were

materially false or misleading when made in that each statement was

either true, too vague to be misleading, or reasonably supported by

internal forecasts, which took into account the negative

information Plaintiffs cite. 

A. Historical Statements about Demand

Defendants first argue that the statements they characterize

as historical statements regarding demand in 2000 were true, noting

that JDS met or exceeded each of its revenue projections for the

calendar year 2000. Therefore, Defendants contend that statements 

in which they asserted that revenue and earnings during the 2000

calendar year were attributable to strong or increasing demand were

true and not materially misleading. Plaintiffs counter that on May

15, 2000, Defendants were already aware of declining demand when

they issued their Form 10-Q for the third quarter of fiscal year

2000 stating, "Strong demand for virtually all of our optical

components and modules products combined with the increased

operations resulting from the JDS merger contributed to the

increases in gross profit." Hrvatin Declaration, Exhibit 6 at 14. 

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For example, Plaintiffs point to evidence that demand was declining

for various products during the first three quarters of fiscal year

2000. Even so, the fact remains that demand was strong enough for

JDS to continue to grow throughout calendar year 2000. Defendants

provide evidence, which Plaintiffs do not rebut, that overall

demand for JDS's products was strong during calendar year 2000.

Defendants also argue that their statements in the E-TEK and

SDL prospectuses--that the mergers with E-TEK in June, 2000 and SDL

in July, 2000 were "in response to unprecedented growth in the

telecommunications industry and demand for the fiber optic networks

that are enabling such growth"--were based on accurate historical

assessments of demand in calendar year 2000. Statements 7, 8, 17,

35. Again, Plaintiffs do not provide evidence to rebut Defendants'

demonstration that overall growth in the industry and demand for

JDS's product were strong during calendar year 2000. 

Therefore, the Court grants Defendants' motion for summary

judgment to the extent it contests Plaintiffs' claims based on

historical statements regarding demand for JDS's products in

calendar year 2000. The Court grants summary judgment on

statements five, seven, eight, nine, twelve, thirteen, seventeen,

twenty-one, twenty-three and thirty-three. 

B. Optimistic Statements

Defendants next argue that the optimistic predictions about

future demand and revenue projections for 2000 and 2001 are not

actionable. In the Ninth Circuit, expressions of optimism and

projections "are only actionable as misrepresentations if (1) the

statement is not genuinely believed, (2) there is no reasonable

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basis for such expression, or (3) the speaker is aware of

undisclosed facts undermining the statement." Paracor Finance,

Inc. v. General Elec. Capital Corp., 96 F.3d 1151, 1158 (9th Cir.

1996) (citing In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113

(9th Cir. 1989), cert. denied, 496 U.S. 943 (1990)).

Plaintiffs contend that the statements are misleading because

Defendants were aware at the time the statements were made

that demand was declining and inventory was increasing, but did not

disclose that information. 

1. Demand Predictions Made in 2000

Plaintiffs challenge statements regarding existing and future

demand that Defendants made in conference calls with analysts on

April 25, July 26 and October 26, 2000. Statements 1-4, 11, 19,

20, 22, 24, 26-31. Plaintiffs also challenge a similar statement

made in the May 18, 200 press release, announcing Kalkhoven's

departure from the company. Statement 6. However, Plaintiffs do

not challenge Defendants' actual revenue projections for 2000. 

Defendants argue that their general statements, for example that

"the demand for bandwidth technology and components remains

incredibly strong," Statement 3, and that JDS's "growth remains

determined by the rate at which we can expand capacity," Statement

9, are too vague to mislead investors. See In re Syntex Corp. Sec.

Litig., 855 F. Supp. 1086, 1096 (N.D. Cal. 1994), aff'd, 95 F.3d

922 (9th Cir. 1996). 

Plaintiffs counter that they have produced evidence of

specific problems sufficient to undermine the optimistic

statements. See In re Syntex Corp. Sec. Litig., 95 F.3d 922, 926

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8

Plaintiffs produce evidence that the FPG made up between 49%

and 73% of the company's total revenue throughout calendar year

2000. 

16

(9th Cir. 1996). Plaintiffs cite declines in demand and increases

in inventory starting in early 2000. For example, they note that

one of Defendants' biggest customers was interested in changing

from a 2.5 gigabit product to a 10 gigabit product. Therefore,

demand for the 2.5 gigabit product declined and inventory

increased, but JDS was not yet able to produce the 10 gigabit

product. Plaintiffs note significant drops in demand for other

specific products as well, particularly within the fiberoptic

products group (FPG), JDS's largest department.8

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counter that, while demand declined and inventory increased for

some products, growth continued for the company as a whole and cite

evidence demonstrating that JDS continued to meet its projections

each quarter. Indeed, many of the exhibits Plaintiffs cite as

evidence that demand for specific products was declining address

those declines and cite gains in other areas that offset them. 

For example, Plaintiffs argue that Defendants misled the

public by stating that declines in inventory turnover were due to

increased growth. Statement 14. Plaintiffs note that the declines

in inventory turnover in the Transmission Systems Group (TSG) were

due to a slow-down in purchasing by one of JDS's customers rather

than increased growth. However, other documents indicate that the

company was also seeing declines in inventory turnover in other

groups, which were attributed to increased growth. See, e.g., Okun

Declaration, Exhibit 21 (email from Muller stating, "Our business

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is booming, and I know each of you is focused on meeting customer

demand. However, during this time of production increases our

inventories have been growing faster than sales. This is a real

problem and we must get our inventory turns back into line at 4.5

turns annualized."). 

Other specific statements that Plaintiffs challenge also are 

either supported by the evidence that Plaintiffs cite to establish

that they are untrue or are mis-cited. For example, Plaintiffs

point to Abbe's statement, "We do not see double bookings," at the

July 26, 2000 conference call with analysts. Hrvatin Declaration,

Exhibit 13 at 5. Plaintiffs cite testimony by Russell Johnson,

JDS's Vice President of Sales and Marketing from May, 1998 through

August, 2000 and Vice President of Special Projects from August,

2000 through January, 2001, to support their claim that the

statement was false. However, while Johnson stated that there had

been double bookings, he recalled that they had been "resolved

within the month of July." Further, an email chain Plaintiffs cite

regarding double bookings establishes that JDS began addressing

double bookings in July, 2000 and that by August 14, 2000, JDS was

"continu[ing] to keep track of any potential product overlap." 

Okun Declaration, Exhibit 47 (emphasis added). Plaintiff has not

provided any evidence of double bookings between August and

October, 2000 when the allegedly misleading statement was made.

Similarly, Plaintiffs challenge Straus's statement regarding

inventory, which they cite as stating that JDS did "not see any

inventory buildup at customers." Plaintiffs' Opposition at 19

(emphasis added by Plaintiffs). However, the transcript actually

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states that "we do not see any inventory buildup by our customers

for our products beyond the normal ebb and flow of good supplychain management and new product introductions." Hrvatin

Declaration, Exhibit 13 at 2 (emphasis added). Although Plaintiffs

provide evidence of various cancelled orders and indications that

there would be some instances in which JDS could "be stuck with a

very large inventory at quarter's end," Okun Declaration, Exhibit

77, they do not indicate that this is evidence of anything beyond

what Defendants describe as the "normal ebb and flow." 

Because Plaintiffs have not provided evidence demonstrating

that Defendants' company-wide statements regarding demand were

false or misleading, Defendants' motion for summary judgment is

granted with respect to statements one, four, six, fourteen,

eighteen, nineteen, twenty, twenty-two, twenty-four, twenty-seven,

twenty-eight and thirty-one.

However, Plaintiffs also challenge several of Defendants'

statements with respect to demand for specific products or by

specific customers and provide evidence that Defendants were aware

that demand in those areas was decreasing. First, Defendants made

optimistic statements about demand for long haul and metro products

in their April 25, 2000 conference call. Statement 3. Plaintiffs

provide evidence that at the time Defendants made this statement,

they had evidence of upcoming reductions in demand for both types

of products. On March 23, 2000, Defendants reduced their

projections for Lucent's metro product by sixty-five percent for

the next six months. Okun Declaration, Exhibit 27. The president

of the FPG described that product as "a huge cost sinkhole." Okun

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Declaration, Exhibit 26. Similarly, Defendants saw significant

reductions in forecasts for Nortel's long haul product, with the

president of the FPG noting a "dramatic reduction in requirements

starting in March 00." Okun Declaration, Exhibit 12. Therefore,

the Court denies Defendants' motion for summary judgment with

respect to statement three.

Defendants also stated in their July 26, 2000 conference call

that "2.5Gb modulators continue to demonstrate strong growth". 

Statement 11. However, Plaintiffs provide evidence that Lucent,

JDS's largest customer, had informed it as early as January, 2000

that it was no longer interested in the 2.5 gigabit product. The

Court denies Defendants' motion for summary judgment with respect

to statement eleven. 

Similarly, in the same conference call, Straus responded to a

question regarding a "loss of momentum" with respect to product

transitions from Lucent and Nortel by stating, "No, we are firing

on all cylinders." Statement 29. Given the changes in forecasts,

and JDS's inability to transition quickly from production of the

2.5 gigabit to the 10 gigabit product, there is a triable question

of fact whether this statement is misleading. These same factors

also call into question Defendants' more general statement

regarding JDS's progress "in expanding capacity to enable [it] to

meet customer demand and serve the needs of [its] markets." 

Statement 30. Similarly, Defendants' statement in April, 2000 that

the "market is exceeding [JDS's] ability to ramp up" and their

statement in October, 2000 that JDS was "capacity constrained" had

the potential to mislead investors inappropriately to believe that

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the company was not having any problems with transitions in

products. Statements 2 and 26. The Court denies Defendants'

motion for summary judgment with respect to statements two, twentysix, twenty-nine and thirty.

2. Revenue Predictions Made in 2000

Plaintiffs also challenge Defendants' statements about

guidance made in the July 26, 2000 conference call. Statement 10. 

During that call, Muller stated that JDS was increasing its revenue

guidance to the high teens from previous quarters based on the

strength of the company's business. Hrvatin Declaration, Exhibit 9

at 8. Plaintiffs allege that this was a false statement because

the guidance in the last quarter had been twenty percent. However,

it is clear that Muller was comparing the high teens to the ususal

guidance which was "sequential growth of 15 percent in sales,

except where our forecast was affected by acquisition-related

purchase accounting, such as last quarter." Id. (emphasis added). 

Therefore Plaintiffs' challenge is unavailing. Muller's "high

teens" prediction was higher than the past quarters' guidance of

fifteen percent. 

Similarly Plaintiffs challenge Defendants' earnings

projections for the fiscal year ending June 30, 2000, which they

announced during the October 26, 2000 conference call with

analysts. Statement 25. Plaintiffs note that JDS had originally

projected earnings of $.70 per share in the annual plan approved by

the board on August 2, 2000 but raised its projections to $.80 per

share prior to the call. However, as Defendants point out, the

monthly forecast prepared for the October, 2000 Operations

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Committee (OpCom) meeting projected earnings of $.83 per share for

fiscal year 2001. Plaintiffs do not challenge the accuracy of the

later monthly forecast. Defendants' motion for summary judgment is

granted with respect to revenue predictions made in 2000 in

statements ten and twenty-five. 

3. Projections Made in 2001

Plaintiffs also challenge Defendants' earnings projections and

revenue growth projections made in a conference call with analysts

on January 25, 2001 and in a press release issued February 13,

2001. Hrvatin Declaration, Exhibits 16, 17. Plaintiffs'

challenges are based on conflicts between Defendants' statements

and projections made in an earlier OpCom report. As with the

revenue prediction statements made in 2000, there were intervening

reports that support Defendants' public statements. However,

Plaintiffs have produced evidence that creates a triable question

of fact regarding Defendants' motivation in creating the

intervening reports. 

On January 11, 2001, Defendants issued an OpCom report that

projected negative 2.4% growth and revenues of $903 million for the

third quarter of fiscal year 2001. Okun Declaration, Exhibit 166.

During that meeting Abbe asked the president of each of the

company's groups to create a "Q3 challenge plan" for exceeding the

$903 million growth by $150 million. Okun Declaration, Exhibit

135. One week later, on January 18, 2001, the OpCom met again to

review the Q3 challenge plan. Although the fiberoptic products

group (FPG), which was responsible for meeting $75 million of the

$150 million target, stated that it was still in the process of

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"identifying opportunities" to "achieve the [$75 million] stretch

target," Defendants issued a new OpCom report on January 18

projecting 7% growth. Okun Declaration, Exhibit 8. 

In the January 25 conference call with analysts, Defendants

projected seven to ten percent growth for the third quarter of

fiscal year 2001. Hrvatin Declaration, Exhibit 16. One week

later, E-TEK reported that its $63 million share of the FPG's $75

million target was "too high, double counting, and wishful

thinking." Okun Declaration at 140. E-TEK estimated that its Q3

"upsides" were closer to $39 million. Id. Nonetheless, Defendants

issued a press release on February 13, 2001, projecting revenues

"at or above $1 billion." Hrvatin Declaration, Exhibit 17. 

Plaintiffs have demonstrated that there is a triable question

of fact regarding the misleading nature of Defendants' earnings and

growth projections made in January and February, 2001. Statements

36-39, 43. 

III. Forward-Looking Statements

Defendants also argue that all of the challenged forwardlooking statements discussed above are protected under the safe

harbor in the Private Securities Litigation Reform Act (PSLRA) of

1995. Pursuant to the PSLRA's statutory safe harbor, liability in

a private securities action cannot be based on a forward-looking

statement if the statement is identified as such and is accompanied

by "meaningful cautionary statements identifying important factors

that could cause actual results to differ materially from those in

the forward-looking statement." See 15 U.S.C. § 78u-5(c)(A)(I). 

Moreover, even if the statement is not accompanied by meaningful

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cautionary statements, a person will be liable for making such a

statement only if the plaintiff proves that the statement was made

with actual knowledge that the statement was false or misleading. 

See id. § 78u-5(c)(B).

Independent of the statutory safe harbor, the judiciallycreated "bespeaks caution" doctrine immunizes certain forwardlooking statements. "The bespeaks caution doctrine provides a

mechanism by which a court can rule as a matter of law (typically

in a motion to dismiss for failure to state a cause of action or a

motion for summary judgment) that defendants' forward-looking

representations contained enough cautionary language or risk

disclosure to protect the defendant against claims of securities

fraud." In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413

(9th Cir. 1994) (citation and quotation marks omitted). In order

to invoke the bespeaks-caution doctrine, it is not enough that the

defendants included some cautionary language. Rather, the

defendants must "include enough cautionary language or risk

disclosure that reasonable minds could not disagree that the

challenged statements were not misleading." Fecht v. Price Co., 70

F.3d 1078, 1082 (9th Cir. 1995) (emphasis, citation, and internal

quotation marks omitted).

The PSLRA defines the phrase "forward-looking statement" to

include, among other things, a projection of revenues, income,

earnings per share, capital expenditures, dividends, capital

structure or other financial items. See 15 U.S.C. § 78u5(i)(1)(A). A statement of the assumptions underlying such

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5(i)(1)(D). Case law applying the bespeaks-caution doctrine

defines "forward-looking statement" in a similar manner. See,

e.g., Worlds of Wonder, 35 F.3d at 1414 (doctrine applies to future

projections, estimates and forecasts).

Plaintiffs counter that cautionary statements may only

immunize Defendants' forward-looking statements if they are

"precise and directly address the defendants' future projections." 

Provenz v. Miller, 102 F.3d 1478, 1493 (9th Cir. 1996) (quoting

Worlds of Wonder, 35 F.3d at 1414 (internal modifications

omitted)). Because the Court grants summary judgment to Defendants

on each of the forward-looking statement claims, aside from those

made in the April 25, 2000, July 26, 2000, October 26, 2000 and

January 25, 2001 conference calls and the February 13, 2001 press

release, the applicability of the safe harbor and bespeaks caution

doctrine is only considered with respect to these statements. 

A. April 25, 2000 Conference Call

At the beginning of the April 25, 2000 conference call, Muller

stated generally, 

All forward-looking statements mentioned are subject to

risks and uncertainties that could cause the actual

results to differ, possibly materially, from those

projected in the forward-looking statements. The risks

and uncertainties related to any forward-looking

statements are described in our required SEC filings

including our annual report on Form 10-K, our 10-Q's and

various registration statements.

Hrvatin Declaration, Exhibit 5 at 1-2. The documents referenced do

mention that demand is a possible source of risk. For example, the

form 10-Q for the quarter ending March 30, 2000 acknowledges that

"Lucent and Nortel each accounted for over 10% of our net sales"

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Defendants did not attach the Form S-3 registration statement

to their declarations in support of their motion for summary

judgment and the Court was unable to locate the document.

25

and that "sales would suffer if one or more of our key customers

substantially reduced orders for our products." Hrvatin

Declaration, Exhibit 6 at 23. However, nowhere in the conference

call is there any suggestion that future demand might be

questionable. The only projection that Defendants exhibit any

uncertainty about at all is their ability to expand capacity. 

Therefore, the general statements regarding the risks of forwardlooking statements and the general warning regarding changes in

demand in the document cited are insufficient to establish as a

matter of law that Defendants' statements made in the April 25,

2000 conference call are protected by the bespeaks-caution

doctrine. 

B. July 26, 2000 Conference Call

Muller made a similar general warning about forward-looking

statements at the beginning of the July 26, 2000 conference call,

but also specifically pointed analysts to "the risk factor section

of [JDS's] Form S-3 registration statement that [it] filed with

respect to the Canadian securities that [it] issued in the E-TEK

acquisition." Hrvatin Declaration, Exhibit 9 at 1. The remaining

challenged statement from the July 26, 2000 conference call is

specifically related to demand for 2.5 gigabit modulators. The

Court finds that the general warning is not sufficient to establish

as a matter of law that this statement is protected by the

bespeaks-caution doctrine.9

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C. October 26, 2000 Conference Call

As in the earlier conference calls, Muller made a general

warning about forward-looking statements at the beginning of the

October 26, 2000 conference call. He also directed analysts to the

"risk factor section of [JDS's] Form 10-K filed on September 28,

2000 and [its] Form S-4 filed in conjunction with the SDL

transaction on September 7th." Hrvatin Declaration, Exhibit 13. 

Both of the cited documents include more specific warnings,

including the acknowledgment that Lucent and Nortel comprised a

significant part of JDS's business and that JDS would suffer if

either of those customers substantially reduced its orders. 

Hrvatin Declaration, Exhibit 11 at 32. These general warnings were

overshadowed by JDS's specific statements that there was no loss of

momentum with respect to its business with either Lucent or Nortel. 

Further, any general statements regarding the volatility of the

market or the need to meet precise demands by customers were

undermined by more specific statements about "a continuing surge of

demand in the fiberoptics communications industry" and JDS's

"substantial progress in expanding capacity to enable us to meet

customer demand and serve the needs of the market." Hrvatin

Declaration, Exhibit 13 at 2. Defendants have not established as a

matter of law that the forward-looking statements they made in the

October 26, 2000 conference call are protected by the bespeakscaution doctrine. 

D. January 25, 2001 Conference Call

Muller again gave a general warning about forward-looking

statements at the beginning of the January 25, 2001 conference

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call, but specifically directed analysts to "the risk factors

section of our Form 10-Q filed on November 14, 2000, and our Form

S4-A filed in conjunction with the SDL transaction on November 17."

Hrvatin Declaration, Exhibit 16 at 1. In turn, each of the two

cited documents contains multiple pages of risk factors. For

example, the Form 10-Q warned,

Recently, the Nasdaq National Market, in general, and our

stock and the stock of our customers and competitors, in

particular has experienced substantial price and volume

fluctuations, in many cases without any direct

relationship to the affected companies' operating

performance. . . . Consequently, these multiples and,

hence, market prices may not be sustainable. These broad

market and industry factors have and may in the future

cause the market price of our stock to decline, 

regardless of the actual operating performance or the

operating performance of our customers.

Hrvatin Declaration, Exhibit 14 at 26. Further, the statement

noted that JDS's "customer base is highly concentrated;" that

"[s]ales to any single customer may vary significantly from quarter

to quarter;" and that "[i]f current customers do not continue to

place orders, we may not be able to replace these orders from new

customers." Id. The form 10-Q also stated, "We anticipate that

average selling prices will decrease in the future." Id. at 28.

On the call, Straus went on to state that JDS's "optimistic

outlook for the March quarter" was "prudently tempered only by

uncertain carrier spending prospects, customer inventory

adjustments and the sometimes lower level of near-term sales

visibility." Id. at 2. Abbe later stated,

Notwithstanding some near-term slowing and order growth

rates for certain product lines due to [inventory

issues] . . ., the underlying growth in

telecommunications bandwidth [] we believe continues

unabated.

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Id. at 5. Finally Muller stated that the reduction in guidance to

a seven to ten percent increase in sales over the quarter ended

December 30, 2000 "reflects uncertain near-term carrier capital

spending plans, customer inventory adjustments, and the somewhat

lower level of near-term sales visibility than we and our customers

have experienced in recent periods." Id. at 6.

Although the cautionary statements in the Form 10-Q and Form

s4-A contained general warnings that could ostensibly address the

declines that Plaintiffs allege should have been disclosed, they

were overshadowed by the more specific and more limited warnings

included in the call itself, each of which was accompanied by more

optimism. For example, Straus stated that the company's optimistic

outlook was tempered only by certain issues. Further, Abbe's

warning was not really a warning at all. He stated that,

notwithstanding some near-term slowing and inventory issues, the

company continued to expect growth. Finally, any caution attached

to Muller's report of the decreased guidance entirely masked the

fact that the company was "stretching" to reach even that guidance,

as discussed above. 

Although the cautionary language might have mentioned the

"important factors that could cause actual results to differ

materially from those in the forward-looking statement" as required

by 15 U.S.C. § 77z-2(c)(1)(A)(I), all of those factors were

overshadowed by language limiting the emphasis on the cautions. 

The Court denies Defendants' motion for summary judgment to the

extent it is based on cautionary statements made in the January 25,

2001 conference call.

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10JDS wrote down $274 million for excess inventory and $236.6

million for obsolete inventory in its June 30, 2001 Form 10-K. 

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E. February 13, 2001 Press Release

The February 13, 2001 press release contained only a general

warning that the forward-looking statements "involve risks and

uncertainties" and informed readers how to request SEC filings from

the company. Hrvatin Declaration, Exhibit 17. However, this type

of blanket reference to previous warnings is not sufficient to

invoke the safe harbor or bespeaks-caution doctrine. "In order for

the safe harbor or bespeaks caution doctrine to apply, a cautionary

statement must 'accompan[y]' or be 'contained' in the statement

that is the basis for a plaintiff's claim." In re Apple Computer,

Inc., Sec. Litig., 243 F. Supp. 2d 1012, 1025 (N.D. Cal. 2002). 

Defendants' motion for summary judgment is denied to the extent it

relies upon cautionary statements made in the February 13, 2001

press release. 

IV. Accounting Claims

A. Inventory

Plaintiffs' sole remaining accounting claim related to

inventory is that Defendants should have written down $254 million

of inventory during the quarter ending December 30, 2000 instead of

waiting until the end of the fiscal year,10 because Plaintiffs

allege that in August, 2000, the FPG, JDS's largest product group,

forecasted a $532 million decline in demand over the next twelve

months. Therefore, Plaintiffs challenge statements forty, fortyfive, forty-nine, fifty, fifty-two and fifty-four in which, they

allege, Defendants misstated JDS's inventory or overstated its

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profits because it failed to reserve for its inventory. Plaintiffs

submit the report of their expert Steven Henning in support of

their claim. 

Defendants argue that Plaintiffs' claim fails because it is

based only on the FPG, rather than a company-wide forecast, and

because Henning's report is unreliable under Daubert v. Merrell Dow

Pharmeceuticals, Inc., 509 U.S. 579 (1993). Defendants cite

various pages from Henning's deposition to support their argument

that his report is not based upon sufficient facts or data and is

not the product of reliable principles and methods as required by

Federal Rule of Evidence 702. However, the deposition testimony

establishes that Henning used a methodology he thought was

consistent with JDS's policy for writing down inventory. 

Defendants also cite testimony that the FPG forecast was unreliable

because it was "unconstrained," meaning that it was not limited by

variables such as capacity, lead times, or technical issues. 

However, Defendants do not offer any expert testimony establishing

an alternative interpretation of the FPG forecast or which

materials Henning should have considered instead of that forecast. 

Further, Defendants' Daubert challenge was raised only in a

footnote in their reply brief. The Court finds that, for purposes

of these motions, Henning's report is sufficiently relevant and

reliable to satisfy the Daubert standard. Defendants may renew

their Daubert challenge in their motions in limine prior to trial. 

There remains a triable question of fact whether JDS should

have written down its inventory prior to June, 2001. The Court

denies Defendants' motion for summary judgment with respect to

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statements forty, forty-five, forty-nine, fifty, fifty-two and

fifty-four.

B. Good Will

Plaintiffs next claim that Defendants overstated the good will

arising from the acquisition of E-TEK and SDL beginning in the

quarters in which the companies were acquired. 

1. Acquisition of E-TEK

Plaintiffs acquired E-TEK on January 17, 2000 in an agreement

requiring an exchange of 2.2 shares of JDS stock for each common

share and outstanding option of E-TEK. Based on the value of JDS

stock at that time, the purchase price was $17.5 billion. $15.6

billion of the purchase price was allocated to good will. 

According to Henning, even if Defendants' internal forecasts

showing increasing revenues for E-TEK were accurate, the allocation

of eighty-nine percent of the purchase price to good will was an

overstatement. Further, Henning opines that at the time of the

acquisition, there was a decrease in customer spending, which is a

significant adverse change in the business climate requiring an

assessment of impairment. 

Defendants counter that JDS's auditors, relying on JDS

management's own assessment of whether there were indicators of

impairment, did not believe that there was any reason to evaluate

whether the good will was impaired prior to the close of the

quarter ending March 31, 2001. Further, Defendants point out that

the SEC did not state that JDS should have written down the good

will earlier once it declared its intent to do so at the close of

the quarter ending March 31, 2001. However, neither the auditors'

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reliance on JDS management's own assessment of the situation nor

the SEC's failure to question JDS's earlier accounting is

sufficient to rebut Plaintiffs' expert's testimony. There remains

a triable question of fact with respect to Defendants' decision not

to write down the good will related to the acquisition of E-TEK

until the close of the quarter ending March 31, 2001. Defendants'

motion for summary judgment is denied with respect to statements

fifteen, sixteen, thirty-two, thirty-four, thirty-five, forty-two,

forty-seven, forty-eight and fifty-one.

2. Merger with SDL

JDS's merger with SDL closed on February 13, 2001. However,

the merger agreement had been signed in July, 2000, calling for the

exchange of 3.8 shares of JDS common stock and options for each

common share and outstanding option of SDL. When the sale closed,

JDS recorded the price as $41.2 billion based on an average of the

higher July, 2000 stock prices and the lower February, 2001 prices. 

$39.2 billion was allocated to good will. According to Plaintiffs'

expert, the purchase price would have been only $13 billion if it

had been based on the February, 2001 stock price. As early as May

11, 2001, when it filed its Form 10-Q for the quarter ending March

31, 2001, JDS acknowledged that its good will, including that

associated with the acquisition of SDL, was impaired. Plaintiffs

argue that the good will was overstated and therefore impaired at

the time the merger closed.

Defendants argue that JDS's acknowledgment in an April 24,

2001 press release and conference call that its good will was

impaired is sufficient to inform investors of the issue. 

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Therefore, Defendants argue that Plaintiffs' claim that JDS's May,

2001 Form 10-Q, which acknowledged the need to write down good

will, but did not actually record the write-down, is barred by In

re Convergent Technologies Security Litigation, 948 F.2d 507 (9th

Cir. 1991). In Convergent, the Ninth Circuit held that "an

omission is materially misleading only if the information has not

already entered the market." Id. at 513. 

Defendants' April 24, 2001 press release states that as of

"March 31, 2001, the value of the Company's net assets, including

unamortized goodwill exceeded the Company's market capitalization

by approximately $40 billion." Hrvatin Declaration, Exhibit 30 at

3. During the conference call on the same day, Muller predicted

that "we will be writing down the value of our goodwill so that our

net assets are no higher than our market capitalization at the end

of March." Hrvatin Declaration, Exhibit 33 at 9. Further, the

May, 2001 Form 10-Q states that JDS "is currently evaluating the

carrying value of certain long-lived assets and acquired equity

method investments, consisting primarily of $56.2 billion of

goodwill." Hrvatin Declaration, Exhibit 20 at 4. The Form 10-Q

also acknowledged, "Goodwill will be reduced to the extent that net

assets are greater than market capitalization. At March 31, 2001,

the value of the Company's assets . . . exceeded the Company's

market capitalization by approximately $39.5 billion." Id. at 11. 

Therefore, the Court grants Defendants' motion for summary judgment

with respect to Plaintiffs' claims based on the reporting of good

will in the May, 2001 Form 10-Q. Statement 55. However,

Plaintiffs also challenge the inclusion of the SDL good will on the

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Form 8-K related to the acquisition of SDL filed on March 23, 2001. 

Statement 48. Defendants do not specifically address Plaintiffs'

claim based on that document. 

C. Carrying Value of ADVA

Plaintiffs' final accounting claim is based on Defendants'

valuation of ADVA, a company in which JDS acquired a twenty-nine

percent interest through its acquisition of E-TEK. Plaintiffs

claim that Defendants should have written down the carrying value

of ADVA during the quarter ending December 31, 2000. In their

motion, Defendants argue only that Plaintiffs' claims related to

ADVA are barred because they were not included in the complaint. 

However, as discussed above, Defendants were on notice of the claim

because Plaintiffs included it in their interrogatory responses. 

See Adams Declaration, Exhibit B at 147-148. Therefore Defendants'

April 24, 2001 press release and JDS's Form 10-Q for the quarter

ended March 31, 2001, which reported assets of $65,039.5 million,

including $714.5 million based on JDS's valuation of its investment

in ADVA, are properly before the Court. Statements 53 and 56. 

Plaintiffs argue that JDS was required to write down its

interest in ADVA beginning in the quarter ended December 30, 2000

because of declines in ADVA's stock prices. Defendants challenge

the substance of the claim in their reply brief, arguing that JDS

was not required to write down its interest in ADVA under Generally

Accepted Accounting Principles (GAAP) because ADVA performed

strongly in the December, 2000 quarter. Under GAAP, a write-down

is necessary only when the decline in the stock price of the equity

investment is not temporary. Defendants argue that the later

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strong performance precludes a finding that the decline was

anything other than temporary and fault Henning for failing to

consider that strong performance. However, Defendants provide no

evidence of the strong performance or of any increase in ADVA's

stock prices. Therefore, the Court finds that there remains a

disputed issue of fact and denies Defendants' motion for summary

judgment with respect to statements fifty-three and fifty-six.

V. Scienter

Section 10(b) of the Exchange Act 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 in contravention of such rules and regulations as the

[SEC] may prescribe." 15 U.S.C. § 78j(b); see also 17 C.F.R.

§ 240.10b-5 (Rule 10b-5). To state a claim under section 10(b), a

plaintiff must allege: "(1) a misrepresentation or omission of

material fact, (2) reliance, (3) scienter, and (4) resulting

damages." Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d

1151, 1157 (9th Cir. 1996); see also McCormick v. Fund Am. Cos., 26

F.3d 869, 875 (9th Cir. 1994). The question of a defendant's

mental state is so subjective that summary judgment is rarely

appropriate. See, e.g., White v. Roper, 901 F.2d 1501, 1505 (9th

Cir. 1990) ("Where the defendant's intent is at issue, summary

judgment is appropriate 'only if all reasonable inferences defeat

the plaintiff's claims.'" (quoting SEC v. Seaboard Corp., 677 F.2d

1297, 1299 (9th Cir. 1982)). 

Defendants argue that Plaintiffs have failed to set forth

significant evidence that Defendants acted with the requisite

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scienter to support any of Plaintiffs' section 10(b) claims. 

Further, Defendants argue that their approval of capital

investments during the class period undermines any claim of

scienter. Plaintiffs counter that Defendants' stock sales and

evidence of their knowledge of declining demand are sufficient to

establish a triable question of fact regarding Defendants' state of

mind. 

In evaluating stock sales as evidence of scienter, the Ninth

Circuit considers "three factors: (1) the amount and percentage of

shares sold; (2) timing of the sales; and (3) consistency with

prior trading history." Nursing Home Pension Fund, Local 144 v.

Oracle Corp., 380 F.3d 1226, 1232 (9th Cir. 2004) (citing In re

Silicon Graphics Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999)). 

Plaintiffs note that during the trading window that opened on July

31, 2000 and closed on August 31, 2000, the individual Defendants

sold a total of $391 million of JDS stock. Plaintiffs also provide

evidence that fourteen non-defendant insiders sold $503 million of

JDS stock during the same period. Further, Plaintiffs argue that

the stock sales were made at a time when insiders had material

information regarding declines in demand for specific products,

which they withheld from investors. 

Defendants argue that each of the individual Defendants'

August, 2000 sales are consistent with his earlier sales and that

the timing of the sales is explained by the trading window. 

Further, Defendants argue that the fact that JDS continued to meet

expectations for several months following the stock sales

undermines any finding of scienter. However, this is consistent

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11Defendants state that they also seek summary judgment in

their favor on Plaintiffs' insider trading claims but do not

provide written argument in support of that motion. As stated

above, the Court finds that there are triable questions of fact

with respect to whether three statements made prior to the

allegedly improper sales were false or misleading. Therefore,

there remains a triable question of fact whether Defendants had

material non-public information, which they had wrongfully failed

to disclose, when they sold stocks in August, 2000. The Court

denies Defendants' motion for summary judgment with respect to

Plaintiffs' insider trading claims. 

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with Plaintiffs' overall theory that Defendants were aware of

declines in demand for specific products and withheld that

information from investors. That it took several more months for

the declines that began in early 2000 to impact the company as a

whole does not undermine the scienter that can be inferred from the

failure to disclose those declines when they began. 

The Court finds that Defendants' stock sales, standing alone,

are not sufficient to create a triable question of fact with

respect to Defendants' scienter. However, the stock sales

contribute to the quantum of evidence needed. Given the triable

questions of fact with respect to false or misleading statements

made prior to the sales, the size and timing of the sales are

sufficient to establish a triable question of fact related to

Defendants' scienter throughout the class period.11 

In addition to the stock sales, Plaintiffs have presented

further evidence to support a finding of scienter with respect to

the statements made in 2001. As discussed above, there is a

triable question of fact whether on January 18, 2001 Defendants

purposely created a "challenge" to increase projections in spite of

projections established just days earlier. 

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Some forms of recklessness are sufficient to satisfy the

element of scienter in a section 10(b) action. See Nelson v.

Serwold, 576 F.2d 1332, 1337 (9th Cir. 1978). Within the context

of section 10(b) claims, the Ninth Circuit defines "recklessness"

as

a highly unreasonable omission [or misrepresentation],

involving not merely simple, or even inexcusable

negligence, but an extreme departure from the standards

of ordinary care, and which presents a danger of

misleading buyers or sellers that is either known to the

defendant or is so obvious that the actor must have been

aware of it.

Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir.

1990) (en banc) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553

F.2d 1033, 1045 (7th Cir. 1977)). As explained by the Ninth

Circuit in In re Silicon Graphics, 183 F.3d at 976-77,

recklessness, as defined by Hollinger, is a form of intentional

conduct, not merely an extreme form of negligence. Thus, although

section 10(b) claims can be based on reckless conduct, the

recklessness must "reflect[] some degree of intentional or

conscious misconduct." Id. at 977. The Silicon Graphics court

refers to this subspecies of recklessness as "deliberate

recklessness." Id.

The evidence of the January, 2001 efforts to increase

projections despite Defendants' knowledge of declining demand,

growing inventory, overstated good will and understated inventory

reserves is sufficient to support an inference that Defendants were

reckless in later publicizing the more optimistic statements. This

is sufficient to create a triable question of fact with respect to

Defendants' scienter for statements made in 2001. 

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Defendants also argue that their continued investment in JDS's

growth undermines any evidence of scienter. However, there is a

triable question of fact whether what Defendants cite as investment

was actually a result of the acquisition of other companies.

VI. Loss Causation

Finally, Defendants argue that they are entitled to summary

judgment on all claims because Plaintiffs cannot demonstrate loss

causation. However, the Court has already rejected Defendants'

interpretation of Dura Pharmeceuticals, Inc. v. Broudo, 544 U.S.

336 (2005). See July 21, 2005 Order denying Defendants' Motion for

Judgment on the Pleadings. Defendants do not cite any intervening

Ninth Circuit or Supreme Court precedent undermining the Court's

earlier decision. 

Plaintiffs cross-move for partial summary judgment, arguing

that Defendants failed to meet their burden to rebut the

presumption of loss causation for Plaintiffs' Section 11 claims and

therefore should not be permitted to raise loss causation as an

affirmative defense to those claims. Defendants counter that they

are not required to show that JDS's stock declines were caused by

something other than the alleged misrepresentation because

Plaintiffs failed to identify the "alleged truth" that Defendants

should have disclosed instead of the alleged misstatements. 

Although Plaintiffs do not identify any specific announcements

that were made prior to the later declines in stock prices, it is

implicit in their argument that various "truths" were disclosed in

2001 that preceded the drop in the value of JDS stock. For

example, JDS wrote down $44.8 billion of good will and claimed $270

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million of excess inventory. Counsel for Defendants represented at

the hearing on these motions that Defendants' expert could provide

analysis to support their defense that some or all of the loss was

caused by factors other than the alleged misleading statements. In

the interest of justice the Court will allow Defendants to continue

to pursue the affirmative defense of loss causation if they are

able to produce expert opinion to meet their burden. 

The Court defers ruling on Plaintiffs' cross-motion for

summary judgment. Defendants may file an expert declaration by

September 5, 2007. Defendants may also file a supplemental brief

of five pages or less. Plaintiffs may file a supplemental

opposition of five pages or less by September 19, 2007. 

VII. Claims Against Kalkhoven

A. False or Misleading Statements

As discussed above, the Court has found that there are triable

questions of fact related to statements made in the April 25, 2000

conference call prior to Kalkhoven's retirement from JDS on May 18,

2000. Therefore, the Court denies Kalkhoven's motion for summary

judgment with respect to statements two and three. 

Plaintiffs acknowledge that Kalkhoven was not involved in the

company's management after May 18, 2000. Further, Plaintiffs do

not argue that Kalkhoven made any statements after May 18, 2000

giving rise to liability. Therefore, the Court grants Kalkhoven's

motion for summary judgment with respect to all other statements. 

B. Insider Trading Claims

Plaintiffs base their insider trading claim only on

Defendants' trading during August, 2000. Kalkhoven argues that

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Plaintiffs have not established that he actually received any

inside information after May 18, 2000. He submits the affidavit of

Sandra Thompson, the individual identified as confidential witness

8, who Plaintiffs alleged would testify that Kalkhoven continued to

work in San Jose following his retirement. Thompson now declares

that she "does not recall ever seeing [Kalkhoven] there after his

retirement." Caro Declaration, Exhibit 6 at ¶ 6. Further,

Thompson states that she does not know whether Kalkhoven ever

received reports following his retirement as asserted in the SACC. 

Id. at ¶ 7. 

However, Plaintiffs provide evidence that Kalkhoven received 

at least some reports regarding JDS's performance following his

retirement. See Supplemental Briefing, Exhibit K (June 30, 2000

email including June FLASH Reports sent to Kalkhoven). Further,

that there are triable questions of fact related to whether

statements made prior to Kalkhoven's departure from the company

were misleading. Thus there are triable questions of fact related

to whether Kalkhoven had material non-public information that he

had wrongfully failed to disclose when he sold JDS stock in August,

2000. Therefore, the Court denies Kalkhoven's motion for summary

judgment with respect to Plaintiffs' insider trading claims. 

CONCLUSION

For the foregoing reasons, the Court GRANTS in part and DENIES

in part Defendants JDS, Muller, Straus and Abbe's motion for

summary judgment (Docket No. 1090) and GRANTS in part and DENIES in

part Defendant Kalkhoven's motion for summary judgment (Docket No.

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12Defendants request that the Court take judicial notice of a

table setting forth the price of JDS stock as recorded by the Dow

News Service. This information is "capable of accurate and ready

determination by resort to sources whose accuracy cannot reasonably

be requested." Fed. R. Evid. 201(b)(2). The Court GRANTS

Defendants' request for judicial notice (Docket No. 1100). 

Defendants' objections to evidence submitted by Plaintiffs are

DENIED as moot. The Court did not consider any improper or

inadmissible evidence in deciding these motions. The Court DENIES

Plaintiffs' motion challenging the designation of documents and

deposition testimony as confidential and highly confidential

without prejudice to renewing it after they have met and conferred

with Defendants (Docket No. 1300). The Court GRANTS Plaintiffs'

motion for leave to supplement its summary judgment submissions

(Docket No. 1303).

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1103).12 The Court DEFERS RULING on Plaintiffs' cross-motion for

partial summary judgment (Docket No. 1194).

IT IS SO ORDERED.

Dated: 8/24/07 

CLAUDIA WILKEN

United States District Judge

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