Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_08-cv-01689/USCOURTS-casd-3_08-cv-01689-3/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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 Hearings were held on the record for both motions. See Doc. Nos. 392 and 383.

1 08cv1689

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

In re NOVATEL WIRELESS 

SECURITIES LITIGATION

 

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Civil No.08cv1689 AJB RBB

ORDER GRANTING MOTION FOR

JUDGMENT ON THE PLEADINGS 

AND GRANTING IN PART AND

DENYING IN PART MOTION FOR

SUMMARY JUDGMENT

[Doc. Nos. 289 and 290]

Currently before the Court are two motions: (1) Defendant Peter Leparulo’s Motion for

Judgment on the Pleadings, Doc. No. 289; and (2) a Motion for Summary Judgment, Doc. No. 290, by

Defendants Robert Hadley, Peter Leparulo, Novatel Wireless, Inc., Catherine Ratcliffe, Slim Souissi,

and George Weinert. The Plaintiffs filed oppositions, Doc. Nos. 327 and 328 respectively, to these

motions and Defendants filed replies, Doc. Nos.325 and 338 respectively.1

 Based upon the parties

arguments and moving papers, and for the reasons set forth herein, Defendant Leparulo’s Motion for

Judgment on the Pleadings, Doc. No. 289, is hereby GRANTED and Defendants’ Motion for Summary

Judgment, Doc. No. 290, is hereby GRANTED IN PART AND DENIED IN PART as set forth below.

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 The class period as been defined by Plaintiffs is between February 27, 2007 and November 10,

2008.

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Background

I. Factual Background

A. Parties

Lead Plaintiffs, Pension Fund Group is comprised of: (1) Plumbers & Pipefitters’ Local #562

Pension Fund; and (2) Western Pennsylvania Electrical Employees Pension Fund. Plaintiffs brought this

securities class action against Defendants Novatel, Peter V. Leparulo, George B. Weinert, Robert M.

Hadley, Slim S. Souissi, and Catherine F. Ratcliffe claiming that they purchased securities during the

Class Period2

 and were allegedly damaged as a result of these purchases. (Compl. ¶42-48.) 

Plaintiffs alleges that during the Class Period, Novatel employed 300 people company-wide,

with only 44 employees, including all five individually named Defendants, in “operations.” (Id. at ¶34.) 

Plaintiffs allege that the individual Defendants essentially controlled Novatel, including its accounting

practices, earning announcements, and SEC filings. (Id. at ¶34.)

1. Defendant Novatel

Novatel is headquartered in San Diego, California and trades stock under the symbol NVTL on

the Nasdaq. Novatel is a provider of wireless broadband access solutions for the worldwide mobile

communications market and produces about 25 different products for the wireless communications

industry. (Consolidated Complaint (“CC”) Doc. No. 23, filed Jan. 9, 2009), ¶ 43.) In 2007, Novatel

sold the “Ovation” product line, including the first-generation U720 and the next-generation U727

wireless modems. (Ex. 4, at 39-40.) 

2. Defendant Peter V. Leparulo

Leparulo was, at relevant times, Chairman and Chief Executive Officer (“CEO”) of Novatel.

(Compl. ¶44.) During the Class Period, Leparulo prepared and signed Novatel’s Form 10-K, attesting

that he had reviewed the contents of the filings to confirm that they did not contain untrue statements of

a material fact or omit to state a material fact necessary to make the statements made, in light of the

circumstances, not misleading. (Id.) Leparulo issued statements in press releases and led the

Company’s conference calls with analysts and investors, representing himself as the primary person,

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along with Weinert, with knowledge about Novatel’s business, outlook, financial reports, and business

practices. (Id.) Plaintiffs allege that while in possession of non-public material information, Leparulo

sold 473,357 shares of his Novatel stock for insider trading proceeds of $11,530,258 during the Class

Period. (Id.)

3. Defendant George Brad Weinert

Weinert was, at relevant times, President of Novatel. (CC, Doc. No. 23, at ¶45.) During the

Class Period, Weinert prepared and signed the Company’s Form 10-K and 10Q, and Sarbanes-Oxley

Act of 2002 (“SOX”) certifications filed with the SEC, attesting that he had reviewed the contents of the

filings to confirm that they did not contain untrue statements of a material fact or omit to state a material

fact necessary to make the statements made, in light of the circumstances, not misleading. (Id.) Weinert

also issued statements in press releases and led the Company’s conference calls with analysts and

investors, representing himself as the primary person, along with Leparulo, with knowledge about

Novatel’s business, outlook, financial reports, and business practices. (Id.) Plaintiffs allege that while in

possession of non-public material information, Weinert sold 121,985 shares of his Novatel stock for

insider trading proceeds of $3,305,560 during the Class Period. (Id.)

4. Defendant Robert M. Hadley

Hadley was, at all relevant times, Senior Vice President of Worldwide Sales and Marketing of

Novatel. (CC, Doc. No. 23, at ¶46.) Plaintiffs allege that while in possession of non-public material

information, Hadley sold 247,198 shares of his Novatel stock for insider trading proceeds of $4,681,696

during the Class Period. (Id.)

5. Defendant Slim S. Souissi

Souissi was, at all relevant times, Senior Vice President and Chief Technology Officer of

Novatel. (CC, Doc. No. 23, at ¶47.) Plaintiffs allege that while in possession of non-public material

information, Souissi sold 272,560 shares of his Novatel stock for insider trading proceeds of $5,488,870

during the Class Period. (Id.)

6. Defendant Catherine F. Ratcliffe

Ratcliffe was, at all relevant times, Senior Vice President of Business Affairs and General

Counsel of Novatel. (CC, Doc. No. 23, at ¶48.) Plaintiffs allege that while in possession of nonpublic

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material information, Ratcliffe sold 143,366 shares of her Novatel stock for insider trading proceeds of

$3,646,804 during the Class Period. (Id.)

B. Plaintiffs Allegations

Plaintiffs allege that between February 27, 2007 and November 10, 2008 (the “Class Period”),

Defendants engaged in a fraudulent scheme to inflate Novatel’s stock value so that Defendants could

sell their stock in the company for a profit. (Id. at ¶¶1, 12.) Plaintiffs contend that Novatel’s success

was largely dependent on its ability to supply wireless modems to its two largest customers, Sprint and

Verizon, which in 2006 accounted for 38.2% and 19.7% of Novatel’s revenue respectively. (Id. at ¶14.)

According to Plaintiffs, “defendants knew that the market was particularly sensitive to information

about these customers” and “[s]trong financial results would surely spur an increase in Novatel’s stock

price whereas any negative information regarding these customers would reduce it.” (Id. at ¶14.) 

Plaintiffs allege that throughout the Class Period, Defendants Weinert and Leparulo

misrepresented the financial condition of the Company because they told investors that the Company

was seeing strong demand for its products, and did not disclose to investors that Novatel did not have an

adequate “product mix” to meet the needs of its customers. (CC, Doc. No. 23, at ¶¶ 57(a)(iii)), 62(a)(ii),

66(a)(ii), 73(a)(ii)).) Plaintiffs also allege that Novatel covered up the slowdown in its business by

shipping product “early,” which purportedly violated accounting rules governing revenue recognition. 

(Id., ¶¶ 6.) Plaintiffs claim that four specific stock price declines—on July 20, 2007; February 21, 2008;

April 15, 2008; and August 20, 2008—purportedly resulted from the market learning of these allegedly

concealed facts. (Id., ¶¶ 125-28.) Plaintiffs further allege that Defendants sold Novatel stock because

they learned that Sprint would stop placing additional orders for Novatel’s U720 modem. (Id., ¶ 4.) 

1. Financial Condition of Novatel

a. Sprint Cancellation

On January 8, 2007, Tamara Juenger of Sprint forwarded an email to three low-level Novatel

employees stating that Sprint planned to replace the U720 modem. (Ex. 14, at 267.) Ms. Juenger

informed the Novatel employees that the last purchase order for U720s would probably be for the week

of April 1, 2007. (Id.) Within Novatel, word that a customer would no longer be ordering a certain

product was not unusual. (Ex. 16 [Weinert Dep., 79:16:80:6].) In Novatel’s industry it was and is quite

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common, and is most often a prelude to pricing negotiations, particularly when competitive product is

available and next generation product is expected in the near term. (Id.; Exs. 6 [Souissi Expert Dep.,

51:25-10]; 17 [Leparulo Dep., 220:17-222:14].) In this case, Novatel was the first to market, and when

Sierra Wireless (Novatel’s competitor) readied its competing wireless USB modem for sale, Sprint

leveraged the opportunity to negotiate. Mot. at 4. Novatel’s Acting CEO, Mr. Weinert, was upset by

Sprint’s decision, but immediately set out to convince Sprint to continue placing orders for the U720 to

ensure a smooth transition to the successor U727, which was anticipated to be faster and smaller than

Sierra’s Wireless’ product. Id. Just two weeks after Ms. Juenger’s email, representatives of Sprint and

Novatel met, and Tim Hipsher of Sprint said that contrary to Ms. Juenger’s email, the U727 would be

removed from only one channel. (Ex. 18, at 298-99.) Mr. Hipsher also said the end of life plan for the

U720 might drag out for some time. (Id.) On March 1, 2007, Ms. Juenger emailed four lower-level

Novatel employees that the discontinuation of the U720 would be pushed back to the middle or end of

May. (Ex. 19, at 301.) All the while, Sprint kept ordering the U720. As late as May 18, 2007, Sprint

was sending forecasts to Novatel showing product being anticipated for delivery through the third

quarter of 2007. (Ex. 20, at 303.) On May 24, 2007, a Sprint representative finally told Novatel

employees in a conference call that Sprint would not order any more U720s; however, delivery of open

orders for the U720 would continue through June 2007. (Ex. 21, at 309.) Sprint placed its first orders

for the next generation U727 shortly thereafter, in late July 2007. (Ex. 99.)

b. Novatel’s Public Statements

In early 2007, Novatel reported strong financial results. It told investors that its USB modem was

extremely successful in the market, and that Novatel was seeing strong sales to Verizon and Sprint. (CC,

Doc. No. 23, at ¶15). On February 27, 2007, Defendant Weinert, in a press release, stated with respect

to the first quarter of 2007, that Novatel would “continue to ramp to meet increasing demand in the

marketplace.” (Id. at ¶51). Weinert also stated that day, during the Company’s earnings conference call,

that competitors are using “fairly well tried out, older technologies and really the market isn’t ready for

that right now.” (Id. at ¶52). In a press release on May 1, 2007, Novatel reported first quarter revenue

increases of 174% year over year and Weinert stated that “[o]ur first quarter performance was the best in

Company history . . . Sales were even higher than forecasted in our revised guidance due to strong

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end-of-the-quarter momentum for newly introduced ExpressCards and Ovation USB devices.” (Id. at

¶¶53-54). On May 1, 2007, during the Company’s earnings conference call, Defendant Leparulo stated

that “the market for 3G Wireless is taking off and we believe we’re perfectly positioned to take

advantage of that growth.” (Id. ¶55.) Defendant Weinert stated that, “[w]e certainly see strong demand

for [our first generation] products, and we’re leading the way, we’re actually in a leadership position, in

both the express card and the USB markets.” (CC, Doc. No. 23, at ¶55.) On May 10, 2007, Novatel

filed its Quarterly Report on Form 10-Q containing Sarbanes-Oxley Act of 2002 (“SOX”) certifications

with the SEC, which was signed by Defendant Weinert and which reaffirmed Novatel’s financial results

previously announced on May 1, 2007. (Id. 56.) 

Plaintiffs allege that these statements about the Company’s financial results and market share

were false and misleading because they did not fairly present the financial condition of the Company

throughout the first quarter of 2007. (Id. ¶57.) Plaintiffs allege that Novatel failed to disclose it was

prematurely shipping product to meet or exceed its quarterly and yearend forecasts, failed to disclose

that Sprint would discontinue all further orders of the Company’s popular 720 USB card by the end of

July 2007, concealed that the Company’s product mix failed to meet the immediate needs of its two

largest domestic customers, Sprint and Verizon, which was causing Novatel to lose market share, and

signed false SOX certifications attesting to the accuracy of the financial results and effectiveness of

Novatel’s

internal controls, as the Company admitted on November 10, 2008 that there were several control

deficiencies in the Company’s internal control over financial reporting that in the aggregate constituted

a material weakness. (Id. ¶57.) Plaintiffs allege that at the same time, Defendants were selling

significant amounts of their Novatel holdings. (Id.) Plaintiffs allege that during the Class Period,

Defendants sold

1,258,466 shares of Novatel stock for almost $29 million in proceeds. (Id. ¶15.) Plaintiffs allege that

62% of the Defendants’ Class Period sales occurred in June and July 2007, just before the market

learned that Sprint would no longer be purchasing Novatel’s 720 USB modem, information the company

allegedly knew “for some time.” (Id. ¶16.) Defendants sold this stock at the same time that Novatel was

certified by Vodafone to sell its products in late June 2007, and when Novatel was on the verge of being

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 The Complaint only partially quotes the analyst report. The quote goes on to state:

however our sources have indicated that Sprint has ample inventory and that the cards

will continue to be sold at Sprint stores likely through the end of August. We further

believe that NVTL will begin shipping the new smaller form factor USB product in

August (earlier than expected) and that the cards will likely begin showing up on Sprint

shelves in early September, immediately after the EU720 inventory sells out.

We understand this transition has been jointly planned for some time by NVTL and

Sprint. As a result, we think there will be little or no gap in the sales of the two cards

and as a result, no loss of market share. (Doc. No. 79, Ex. A.)

7 08cv1689

certified at Telefonica and T-Mobile. (CC, Doc. No. 23, at ¶18.) Novatel’s stock price fell from $29 in

late July to almost $20 by the beginning of August. (Id. ¶17.) According to an analyst on July 20, 2007,

“NVTL shares were off sharply this morning, we believe in response to a rumor that NVTL may lose

market share at Sprint . . . We agree with the notion making the rounds indicating that the popular EU

720 USB card from NVTL will in fact be end-of-lifed at Sprint as early as next week.”3 (Id. ¶17.)

2. Loss of Market Share

Plaintiffs allege that Novatel not only lost market share with Sprint’s cancellation of the 720

USB modem, but throughout 2007 and continued to mislead investors. (CC, Doc. No. 23, at ¶20.) On

June 8, 2007, Defendant Weinert in a press release stated, “[w]e are currently seeing strong demand

across our major product lines, most notably for our ExpressCards and Ovation USB devices.” (Id. ¶58.)

Novatel reported 113% revenue growth in 2Q07 and 90% revenue growth in 3Q07, which Defendants

emphasized exceeded previous guidance. (Id. ¶¶59, 63.) In a press release dated August 6, 2007,

Weinert stated that, “[d]emand is strong across a wide range of products” and that “[a]doption of USB

wireless modems has been a primary growth driver with over $85 million in sales in the nine months

since its introduction.” (Id. ¶59.) On November 5, 2007, on the Company’s earnings conference call,

Defendant Leparulo stated, “[we] saw strong demand for these products, and beat guidance and

expectations once again. Our market continues to grow rapidly as 3G wireless data proliferates into

mainstream technology.” (CC, Doc. No. 23, at ¶64.) On the same call, Weinert stated that demand for

Novatel’s Next Generation USB products was so strong that, “our major hurdle is tightness in our

supply channel for selected components due to the strong demand.” (Id. ¶64.) Weinert stated on August

6, 2007, on the Company’s earnings conference call that, “[w]e had an exceptionally strong first half of

the year with Sprint.” (Id. ¶60.)

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Plaintiffs allege that these statements and the Company’s 10-Q filings were false and misleading

because Novatel was losing market share to competitors. Other wireless carriers were targeting the

consumer market by slashing monthly service fees. (Id. ¶23.) Novatel did not have a viable USB product

to immediately compete in this retail market and lost market share to its competitors not only at Sprint,

but also at Verizon and in Europe at T-Mobile, Telefonica/O2, and Orange. (Id. ¶24.) Plaintiffs also

allege that Novatel shifted its focus to the European market in the second half of 2007 because

Defendants knew that Novatel was losing market share in the United States. (Id. ¶¶25-27.) Novatel’s

international sales trended upward throughout 2007, even though international sales adversely affected

Novatel’s profit margins. (CC, Doc. No. 23, at ¶¶25-27.)

Plaintiffs allege that Novatel’s statements concerning the demand for its products were also false

and misleading because Defendants failed to disclose that Novatel was prematurely shipping products.

(Id. ¶28.) Plaintiffs allege that in early 2007, Novatel began shipping as much product as it could to its

customers to meet its quarterly and year-end forecasts. (Id. ¶28.) A former Novatel employee explained,

there was always a crunch time at the end of each quarter and that Novatel would frequently ship large

amounts of product up to four weeks early so it allegedly could recognize the revenue up front in the

current quarter and meet or exceed Wall Street expectations. (Id. ¶28.) Novatel sold product on credit

with extended payment terms in 2007 to Sprint and Verizon in order to ship product early and increase

its financial results. (Id. ¶30.) This practice caused Verizon and Sprint to be flush with inventory by

4Q07. (Id. ¶31.) Novatel admitted on November 10, 2008, in its delayed Form 10-Qs for the first and

second quarters of 2008, that there were several control deficiencies in the Company’s internal control

over financial reporting that in the aggregate constituted a material weakness. (CC, Doc. No. 23, at

¶¶28, 62.) Plaintiffs allege that Novatel’s stated financial results misled analysts about end-market

demand and sales execution because of this practice of early shipment to post strong results throughout

2007. (Id. ¶29.)

3. Prematurely Recognized Revenue in Violation of Novatel’s Revenue Cut-Off

Procedures and Generally Accepted Accounting Principles (“GAAP”)

Plaintiffs allege that Defendants’ scheme to inflate revenues began to unravel in the first quarter

of 2008. (Id. ¶32.) On February 20, 2008, Novatel issued a press release forecasting $110 million in

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revenues for 1Q08, which was $10 million below analysts’ estimates. (Id. ¶¶67-68.) Novatel attributed

this guidance to a consolidation issue at its customers who were supposedly focusing on eliminating

inventory from Novatel’s competitors, stating that, “[w]e believe that the major North American carriers

are looking to significantly consolidate vendors down to two suppliers . . . this may have some modest

impact as carriers flush through competitors’ products as they consolidate vendors and lower inventory.”

(CC, Doc. No. 23, at ¶68.) Defendants also disclosed on February 20, 2008 that Novatel was seeing the

market shift to the consumer segment, and that this “is a positive move that increases our addressable

market.” (Id. ¶70.) Defendants’ forecasts for 1Q08 and their explanations for them took analysts by

surprise as none of Novatel’s competitors had mentioned the consolidation issue at Sprint and Verizon

when raising their outlooks for the quarter. (Id. ¶¶67-70.) Plaintiffs allege that in reality, Novatel’s main

customers were overextended because of early shipments and had to clear their inventory. (Id. ¶32.)

Novatel’s stock price dropped from approximately $14 to as low as $10.20, or roughly 27%, after

Defendants’ disclosures. (Id. ¶33.) On March 3, 2008, Novatel filed its Annual Report on Form 10-K

with the SEC largely reaffirming the financial results for 4Q07 and fiscal year 2007 announced on

February 20, 2008, which was signed by Defendants Weinert and Leparulo and contained SOX

certifications. (Id. ¶72.)

Through 1Q08, Defendants repeated the Company’s guidance and told analysts that “we are very

pleased with the long-term trends and how we are positioned to fulfill them.” (CC, Doc. No. 23, at ¶¶33,

74.) On April 14, 2008, Novatel disclosed preliminary results for 1Q08 that were $19 million below the

Company’s original forecast of $110 million, and $29 million below the original analyst estimates of

$120 million. (Id. ¶76.) Defendant Leparulo partially attributed this shortfall to the fact that Novatel was

“between product launch cycles for our USB devices and demand in the current environment has shifted

toward lower end products” and that, “in some cases, we did not have the right products for the right

customers.” (Id. ¶¶76, 77.) On May 1, 2008, Novatel issued a press release which stated that, “revenues

for the first quarter of 2008 were $91.3 million.” (Id. ¶78.) On May 13, 2008, Novatel filed a Form

12b-25 with the SEC for an extension of time to file its Form 10-Q, disclosing that Novatel could not

file its Form 10-Q for the quarter because the Company and its Audit Committee undertook an enhanced

review of the accounting for a specific customer contract, stating that the review was substantially

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completed. (Id. ¶79.) Novatel claimed that the review was not expected to change any previously

reported financial statements or earnings. (CC, Doc. No. 23, at ¶79.)

Plaintiffs allege that Novatel’s financial results concerning 1Q08 revenues and earnings, as

reported in press releases, SEC filings, and conference calls were false and misleading. (Id. ¶80.)

Plaintiffs allege that Novatel failed to disclose that the Company was recognizing revenue in violation

of its own revenue cut-off procedures and GAAP, thus rendering the Company’s publicly reported

financial results materially false. (CC, Doc. No. 23, at ¶80.) On August 19, 2008, Novatel announced

that it had broadened its accounting review and determined to move at least $3.4 million in revenue out

of 1Q08. (Id. ¶81.) Plaintiffs allege that as a result of this disclosure, Novatel’s stock price dropped from

$8.40 to $6.29 in one day. (Id. ¶83.) On November 10, 2008, Novatel issued its delayed Form 10-Qs for

the first and second quarters of 2008, disclosing that the revenues for the first quarter were misstated by

$3.4 million due to improper revenue cut-off procedures and accounting irregularities relating to certain

customer contracts. (Id. ¶84.) The Form 10-Qs also indicated that there were several control deficiencies

in Novatel’s internal control over financial reporting that in the aggregate constituted a material

weakness during the Class Period. (Id. ¶84.) After the November 10 disclosure, Novatel’s stock slid

below $5 per share, trading as low as $3.90 per share by November 17, 2008. (Id. ¶85.)

Discussion

Currently before the Court are Defendant Leparulo’s motion for judgment on the pleadings and a

Motion for Summary Judgment by Defendants Robert Hadley, Peter Leparulo, Novatel Wireless, Inc.,

Catherine Ratcliffe, Slim Souissi, and George Weinert. 

I. Leparulo’s Motion for Judgment on the Pleadings

Defendant Leparulo, filed a Motion for Judgment on the Pleadings, [Doc. No. 289], seeking

judgment on all insider trading claims against him. Leparulo argues that neither of the class

representatives in this case traded Novatel stock contemporaneously with his trades. Inasmuch as

Plaintiffs failed to establish contemporaneousness, Leparulo seeks judgment on the pleadings with

respect to all of Plaintiffs’ insider trading claims against him. 

A. Legal Standard Under Rule 12(c)

Rule 12(c) provides:

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After the pleadings are closed but within such time as not to delay the trial, any

party may move for judgment on the pleadings. If, on a motion for judgment on

the pleadings, matters outside the pleadings are presented to and not excluded by

the court, the motion shall be treated as one for summary judgment and disposed

of as provided in Rule 56, and all parties shall be given reasonable opportunity

to present all material made pertinent to such a motion by Rule 56. Fed. R. Civ. P. 12(c). When deciding a Rule 12(c) motion, "the allegations of the non-moving party

must be accepted as true, while the allegations of the moving party which have been denied are assumed

to be false." Hal Roach Studios, Inc. v. Richard Feiner and Co., Inc., 896 F.2d 1542, 1550 (9th Cir.

1989) (citing Doleman v. Meiji Mutual Life Ins. Co., 727 F.2d 1480, 1482 (9th Cir. 1984); Austad v.

United States, 386 F.2d 147, 149 (9th Cir. 1967)). The court construes all material allegations in the

light most favorable to the non-moving party. Deveraturda v. Globe Aviation Sec. Servs., 454 F.3d

1043, 1046 (9th Cir. 2006). Furthermore, judgment on the pleadings is proper when the moving party

clearly establishes on the face of the pleadings that no material issue of fact remains to be resolved and

that it is entitled to judgment as a matter of law. However, judgment on the pleadings is improper when

the district court goes beyond the pleadings to resolve an issue; such a proceeding must properly be

treated as a motion for summary judgment. Hal Roach Studios, 896 F.2d at 1550 (citations omitted). 

Documents attached to, incorporated by reference in, or integral to the complaint, however, may

be properly considered under Rule 12(c) without converting the motion into one for summary judgment.

Rose v. Chase Manhattan Bank USA, 396 F. Supp. 2d 1116, 1119 (C.D. Cal. 2005) (citing GFF Corp. v.

Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997)).

B. Discussion 

Plaintiffs second cause of action is against all Defendants for insider trading in violation of 

§10(b) and Rule 10b-5 on the basis of Defendants' knowledge about Sprint's cancellation of its orders

for Novatel's 720 USB modem. (CC, Doc. No. 23, at ¶¶146-53.) To establish a violation for insider

trading under §10(b) of the Exchange Act and Rule 10b-5, Plaintiffs must establish that: (1) Defendants

traded in the securities of their corporation on the basis of material nonpublic information; (2)

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4

 United States. v. O’Hagan, 521 U.S. 642, 651-52 (1997); Brody v. Transitional Hospitals

Corp., 280 F.3d 997, 1001 (9th Cir. 2002); United States v. Smith, 155 F.3d 1051, 1067-69 (9th Cir.

1998).

5

 Brody, 280 F.3d at 1002 (holding that trades more than two months apart are not

contemporaneous); see also Neubronner, 6 F.3d at 669- 70 (indicating trades one month apart are not

contemporaneous). 

6

 This Court’s Order of May 10, 2010, Doc. No. 180, at 14-15; See In re Silicon Graphics, Inc.

Sec. Litig., 970 F. Supp. 746, 761 (“Given that stock trades settle within three days . . . [o]nce an

insider's sale settles, other traders are no longer in the market with that insider and risk no relative

disadvantage from that insider's failure to disclose.”). 

7

 Defendant Leparulo traded Novatel stock during the class period on the following dates:

5/18/2007; 5/29/2007; 5/29/2007; 5/30/2007; 7/2/2007; 7/3/2007; 7/5/2007.

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Defendants acted with scienter when making these trades; and (3) these trades were contemporaneous

with the trades of class members.4

To maintain a cause of action for insider trading, Plaintiffs must have traded

“contemporaneously” with Defendants. Neubronner v. Milken, 6 F.3d 666, 669 (9th Cir. 1993). The

Ninth Circuit has not “define[d] the exact contours of the [time] period.” Brody v. Transitional

Hospitals Corp., 280 F.3d 997, 1002 (9th Cir. 2002); see also Neubronner, 6 F.3d at 669 (stating the

time period is “not fixed”).5 This Court previously concluded that Plaintiffs’ trades occurring within

four business days after Defendants’ sales are sufficiently contemporaneous.6 A four day trading period

reasonably protects Plaintiffs and class members, serves as a legitimate proxy for the traditional privity

requirement, and protects Defendants from limitless liability. See e.g. Johnson v. Aljian, 257 F.R.D. 587,

595 (C.D. Cal. 2009) (holding trades within four days of defendant’s sales were contemporaneous).

The Plaintiffs’ proposed Class Period is from February 27, 2007, the date when Novatel issued a

press release announcing Novatel’s financial results for 4Q06 and the full fiscal year, to November 10,

2008, the date when Novatel issued its Form 10-Q and announced the results of its internal accounting

review, disclosing it misstated revenue due to improper cut-off procedures and outlined its internal

control weaknesses. (See Doc. No. 121-1 at 9, 14.) Lead Plaintiffs - Pension Fund Group is comprised

of: (1) Plumbers & Pipefitters' Local 562 Pension Fund; and (2) Western Pennsylvania Electrical

Employees Pension Fund. Upon review of the record, none of the Plaintiffs' trades were made

contemporaneously with trades by Defendant Leparulo.7

 The closest trades by Plaintiffs’ during the

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8

 See Doc. No. 10-4, filed Nov. 17, 2008, p. 4.

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class period were by Western Pennsylvania Electrical Employees Pension Fund.8 Both of these trades,

which occurred on May 3, 2007 and July 20, 2007, were within15 days of trades executed by Defendant

Leparulo.

Plaintiffs concede that: (1) to pursue insider trading claims under Rule 10b-5, at least one class

representative must have traded contemporaneously with each defendant, and (2) neither class

representative traded contemporaneously with Mr. Leparulo. However, in opposing the Defendants’

motion, Plaintiffs instead argue the novel theory that they may sue based on Mr. Leparulo's passive

investment Artis Capital Management ("Artis"), which sold Novatel stock contemporaneously with one

of the class representatives. (See Pla’s. Opp., Doc. No. 327, at 1-2.) The Court finds this argument

unpersuasive and without merit since this argument is being presented for the first time in Plaintiffs’

opposition papers and was never alleged in Complaint. As such, Plaintiffs’ arguments and facts alleged

are outside the pleadings and therefore excluded by the Court. The Court finds judgment on the

pleadings to be proper as Defendant Leparulo has clearly established that on the face of the pleadings,

no material issue of fact remains to be resolved and Defendant Leparulo’s motion is hereby GRANTED. 

II. Defendants’ Motion for Summary Judgment

A. Legal Standard

1. Summary Judgment Standard

Summary judgment is appropriate when “the pleadings, the discovery and disclosure materials

on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant

is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). The moving party bears the burden of

demonstrating the absence of a triable issue of fact. That burden may be satisfied, however, “by showing

– that is, pointing out to the district court – that there is an absence of evidence to support the

non-moving party’s case.” Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party

satisfies that burden, to avoid summary judgment a plaintiff must set forth specific facts showing the

existence of a genuine issue of material fact. It is not sufficient to “simply show that there is some

metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475

U.S. 574, 586 (1986). The non-moving party must point to specific evidence “from which a reasonable

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jury could return a verdict in its favor.” Triton Energy Corp. v. Square D. Co., 68 F.3d 1216, 1221 (9th

Cir. 1995).

2. Plaintiffs’ Claims Under Section 10(b) and Rule 10b-5

Plaintiffs assert claims under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5

against Novatel Wireless, Inc., and individual Defendants Robert Hadley, Peter Leparulo, Catherine

Ratcliffe, Slim Souissi, and George Weinert. Section 10(b) forbids (1) the use or employment of any

deceptive device, (2) in connection with the purchase or sale of any security, and (3) in contravention of

Securities and Exchange Commission (“SEC”) rules and regulations. 15 U.S.C. § 78j(b); see Dura

Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341 (2005). Rule 10b-5, promulgated by the SEC under

§ 10(b), forbids the making of any “untrue statement of a material fact” or the omission of any material

fact “necessary in order to make the statements made not misleading.” 17 C.F.R. § 240.10b-5; see Dura

Pharmaceuticals, Inc., 544 U.S. at 341. In order to succeed in a private civil action under § 10(b) and

Rule 10b-5, a plaintiff must establish “(1) a material misrepresentation (or omission); (2) scienter, i.e., a

wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance . . . ; (5)

economic loss; and (6) loss causation, i.e., a causal connection between the material misrepresentation

and the loss.” Dura Pharmaceuticals, Inc., 544 U.S. at 341-42.

3. Scienter

The Supreme Court has explained that scienter for purposes of § 10(b) and Rule 10b-5 is “the

defendant’s intention to deceive, manipulate or defraud.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,

127 S.Ct. 2499, 2504 (2007). To satisfy this standard, a plaintiff must show that a defendant acted

intentionally or with “deliberate recklessness.” In re Silicon Graphics Inc. Securities Litig., 183 F.3d

970, 974 (9th Cir. 1999). The Ninth Circuit has held that “recklessness only satisfies scienter under §

10(b) to the extent that it reflects some degree of intentional or conscious misconduct.” Id. at 977. 

Deliberate recklessness is “conduct [that] may defined as a highly unreasonable omission, 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

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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); see In re Silicon Graphics, 183 F.3d at 976. “The mere

publication of inaccurate accounting figures, or a failure to follow GAAP [Generally Accepted

Accounting Principles], without more, does not establish scienter.” Provenz v. Miller, 102 F.3d 1478,

1490 (9th Cir. 1996). 

4. Materiality

Defendants’ motion for summary judgment also challenges the materiality element of Plaintiffs’

§ 10(b) and Rule 10b-5 claims. A misrepresentation or omission is material when there is “a substantial

likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as

having significantly altered the total mix of information made available.” Basic Inc. v. Levinson, 485

U.S. 224, 231-32 (1988); Provenz v. Miller, 102 F.3d 1478, 1489 (9th Cir. 1996). The Ninth Circuit has

stated that, as a general matter, “[m]ateriality typically cannot be determined as a matter of summary

judgment because it depends on determining a hypothetical investor’s reaction to the alleged

misstatement.” SEC v. Phan, 500 F.3d 895, 908 (9th Cir. 2007). 

B. Discussion

The Defendants move for summary judgment on four separate grounds: (1) Plaintiffs cannot

prove that any of Defendants’ statements were materially false or misleading and cannot satisfy their

burden of showing scienter with respect to each alleged misrepresentation; (2) Plaintiffs cannot

demonstrate loss causation; (3) Plaintiffs have presented no evidence that any Defendant possessed

material non-public information at the time he or she sold stock; and (4) there is no primary liability on

the part of Defendants for Plaintiffs’ claims under section 20(a). Defendants’ motion for summary

judgment focuses on scienter and materiality.

1. Statements Alleged to be Materially False or Misleading

Defendants contend that summary judgment should be granted on: (1) Plaintiffs’ claims of

accounting fraud due to purported ‘channel stuffing,’ because Novatel’s revenue recognition complied

with GAAP and the Plaintiffs have presented no evidence of falsity, materiality or scienter; (2) the

Plaintiffs’ claims based on fraudulent statements regarding Defendants’ ‘product mix’ omissions; and

(3) Plaintiffs’ claims based on fraudulent statements regarding the alleged Sprint omission.

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9

 The Ninth Circuit definition of ‘channel stuffing’ is “shipping unneeded products to customers

in order to inflate sales and revenue in the short term” and may support a 10b-5 claim only if it involves

“the premature pushing of product into the wholesale channels to artificially inflate sales.” Broudo v.

Dura Pharms., Inc. (“Dura I”), 339 F.3d 933, 940 (9th Cir. 2003), rev’d on other grounds by 544 U.S.

336 (2005); see also In re Connetics Corp. Sec. Litig., 257 F.R.D. 572, 575 (N.D. Cal. 2009). 

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a. Plaintiffs’ Channel Stuffing Claims

Plaintiffs contend that Defendants “did not fairly present the financial condition of the

Company” because of Novatel’s supposed “channel-stuffing”9

 at the ends of quarters. (CC, ¶¶ 57(a)(i)),

62(a)(i), 66(a)(i), 73(a)(i); 80(a)(i); 87). They make two related claims in this regard. First, Plaintiffs

claim that the Company violated accounting rules by prematurely recognizing revenue. Second, they

argue that Novatel inflated perceptions of demand for its product by engaging in undisclosed “channel

stuffing.” Defendants move for summary judgement on these claims arguing that Plaintiffs have

provided no evidence that Novatel’s actions or accounting practices were improper.

Accounting principles are subject to good faith disagreement, and therefore to prove falsity in

financial statements, Plaintiffs must prove that the company’s accounting treatment was wholly outside

the zone of reasonable disagreement. As the Supreme Court has explained:

Accountants long have recognized that “generally accepted

accounting principles” are far from being a canonical set of rules

that will ensure identical accounting treatment of identical

transactions. “Generally accepted accounting principles,” rather,

tolerate a range of “reasonable” treatments, leaving the choice

among alternatives to management.

Thor Power Tool Co. v. C. I. R., 439 U.S. 522, 543 (1979); REMEC, 702 F. Supp. 2d at 1215. As such,

the opinion of an expert that a defendant’s accounting should have been different is not sufficient to

defeat summary judgment. “In order to create a triable issue of fact on falsity, plaintiffs must

demonstrate more than a ‘difference between two permissible judgments, but rather must present facts

explaining that the statement is the result of a falsehood.’” REMEC, 702 F. Supp. 2d at 1215 (quoting In

re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1549 (9th Cir. 1994); cf. In re Ikon Office Solutions, Inc., 277

F.3d 658, 673 (3d Cir. 2002) (“mere second-guessing” of accounting determination is insufficient to

defeat summary judgment on fraud claims). Plaintiffs must further prove that the defendants—who, as

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10 Broudo v. Dura Pharms., Inc. (“Dura I”), 339 F.3d 933, 940 (9th Cir. 2003), rev’d on other

grounds by 544 U.S. 336 (2005); see also In re Connetics Corp. Sec. Litig., 257 F.R.D. 572, 575 (N.D.

Cal. 2009) (channel stuffing is “shipping unneeded products to customers in order to inflate sales and

revenue in the short term”).

11 See In re Watchguard Sec. Litig., No. C05-678LR, 2006 WL 2927663 (W.D. Wash. Oct. 12,

2006) (“‘Channel stuffing’ is merely good business when the customers want or keep the products they

receive; it is bad business when the customers do not want the products and return them.”); In re

Medicis Pharm. Corp. Sec. Litig., 689 F. Supp. 2d 1192 (D. Ariz. 2009) (an “allegation of channel

stuffing might be more indicative of scienter if Defendants had intentionally distributed products they

knew would be returned in an attempt to show increased revenue”). 

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here, may not be accountants themselves knew, or at least recklessly disregarded, that the accounting

was inaccurate. Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990) (en banc)

(defining “recklessness” as conduct “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 and sellers that is either known to the defendant or so obvious that the actor must have been

aware of it.”); In Re Silicon Graphics Sec. Litig., 183 F.3d 970, 977 (9th Cir. 1999) (“recklessness only

satisfies scienter under § 10(b) to the extent that it reflects some degree of intentional or conscious

misconduct.”).

i. Evidence of Falsity

Defendants argue that courts have repeatedly recognized that pressing to make and recognize

sales at the end of a quarter typically does not give rise to a cognizable claim of securities fraud. As the

Ninth Circuit observed recently in Oracle, it is not unusual for even a majority of a company’s sales to

regularly be “made in the final days of a quarter,” after the company “lower[s] prices in attempt to meet

its quarterly projections.” Oracle, 627 F.3d at 383. Accordingly, “[c]hannel stuffing” may support a

10b-5 claim only if it involves “the premature pushing of product into the wholesale channels to

artificially inflate sales.”10 The key terms in these definitions are “artificially” and “unneeded.” Channel

stuffing only crosses the line into securities fraud when it involves a deception of investors. This may

occur when a company ships unneeded or unordered product.11 Practices of “pulling sales forward,

accelerating sales, or incentivizing sales” do not state a claim for a securities fraud. Makor Issues &

Rights, Ltd. v. Tellabs, Inc., --- F. Supp. 2d ----, No. 02 C 4356, 2010 WL 3275284, at *42 (N.D. Ill.

Aug. 13, 2010) (plaintiffs must allege that defendants shipped “unordered products or products that the

customers did not want”).

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12 See Ex. 58 [Regan Report, at 31]; Leddon Decl., ¶ 3.

13 See In re Citric Acid Litig., 191 F.3d 1090, 1102 (9th Cir. 1999) (affirming summary judgment

for defendants “[b]ecause there is no evidence in the record establishing” the factual assertion upon

which the expert’s opinion was “founded”); see also Brooke Group Ltd. v. Brown & Williamson

Tobacco Corp., 509 U.S. 209, 242 (1993) (“[W]hen indisputable record facts contradict or otherwise

render [an expert’s] opinion unreasonable it cannot support a jury’s verdict.”).

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Defendants argue that Plaintiffs have failed to produce any evidence that Novatel shipped

unneeded or unordered product. Representatives of Novatel’s two largest customers—Sprint and

Verizon—both testified that they knew of no instances in which their company purchased product from

Novatel that they did not need. (See Exs. 37 [Hipsher Dep., 159:22-160:21]; 38 [Krolian Dep.,

125:5-22]; 5 [Lendez Report, at 66-67].) Nor can Plaintiffs point to any example of Novatel shipping

product that a customer did not order. Although Novatel once refused to postpone a shipment to

Verizon from December 2007 to January 2008, that merely reflected Novatel’s perfectly permissible

insistence on holding Verizon to a purchase order that had been placed for December delivery. (Ex. 56

[Duckworth Dep., 58:1-61:2]; Ex. 102].) Verizon accepted, and did not return the product, and

Novatel’s auditor concurred with management’s conclusion that the revenue was appropriately

recognized, even after reviewing the transaction in detail during the audit committee investigation. (Ex.

57 [Slaughter Dep., 85:18-86:18].)

In response, the Plaintiffs primarily argue, through their expert D. Paul Regan, that a number of

Novatel’s end-of-quarter transactions were allocated to the wrong quarter because products were

shipped prior to when Mr. Regan believes Novatel was authorized to ship them. (Ex. 58 [Regan Report,

at 28-39].) The Court finds that Mr. Regan’s opinion is based upon an incorrect assumption about when

Novatel was authorized to ship products12 and is not supported by any evidence.13 Even if Mr. Regan’s

opinion were fully supported, which it is not, at most it would establish the existence of “two

permissible judgments,” which amounts to nothing more than a difference of opinion on accounting

practices and is not enough to “create a triable issue of fact on falsity.” REMEC, 702 F. Supp. 2d at 1215

(internal quotation marks omitted).

ii. Evidence of Materiality and Scienter

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14 Plaintiffs allege long term channel-stuffing, under Plaintiffs’ own theory the additional

revenue at the end of any quarter merely offset a comparable amount of beginning-of-quarter revenue

that

would have been moved back to the previous quarter. As Judge Carter has observed:

for channel stuffing to be improper logically it must be a short-lived scheme in which the

wrongdoer attempts to capitalize on artificially increased sales before the resulting drop

in sales. If channel stuffing occurs over time, the pattern of increased sales toward the

end of each quarter and lower sales at the beginning of each quarter would be quite

transparent to investors, and thus could not form the basis for an allegation of fraud. ICN

Pharms, 299 F. Supp. 2d at 1062.

15 If Novatel had accounted for its supposed channel stuffing as Mr. Regan claims, Novatel

would have recorded 4.13% more revenue in Q1 2007, 4.86% more revenue Q2 2008, and 5.08% more

in Q3 2008.

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Even if Mr. Regan’s opinions of the amount of channel stuffing in any given quarter were taken

as true, the channel stuffing alleged by Plaintiffs when the netting effect14 is taken into account, did not

raise the Company’s revenue by more than 5%, the standard measure of materiality, in any quarter

during the class period.15 As such, the Court finds that the Plaintiffs’ have failed to demonstrate

materiality with regard to their channel stuffing claims.

Plaintiffs have also failed to show that Defendants Weinert and Leparulo knew or recklessly

disregarded that the judgments of their accountants or that these judgments were so wrong as to be

outside the bounds of professional disagreement and that the resulting errors were serious enough to

render the Company’s financial statements materially false or misleading. Neither Defendant is an

accountant, and Plaintiffs have presented no evidence that Defendants ever made decisions concerning

how to account for any particular transactions or that they were given reason to believe that any

accounting or auditors’ conclusions were wrong. “[A] CEO’s responsibility to oversee the business[] . .

. does not demonstrate [his] involvement in [accounting determinations]” and does not support a finding

of scienter. See REMEC, 702 F. Supp. 2d at 1240.

Based upon the foregoing the Court concludes that Plaintiffs have failed to satisfy their burden to

come forward with evidence demonstrating falsity, materiality or scienter for their channel stuffing

claims and as such, Defendants’ motion for summary judgment on Plaintiffs’ channel stuffing claims is

hereby GRANTED.

b. Plaintiffs’ ‘Product Mix’ Claims

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16 Defendants Weinert and Leparulo made various statements in press releases and conference

calls during the Class Period that there was strong demand for Novatel's products, including for its USB

products. (CC, Doc. No. 23, at ¶¶51, 52, 54, 55, 57(a)(iii)), i59, 60, 62(a)(ii), 63, 64, 66(a)(ii), 67,

73(a)(ii).) Plaintiffs allege that these statements were false and misleading because during the Class

Period Novatel was losing USB domestic market share to its competitors, because it did not have a

modem to compete in the low-end market, Sprint cancelled its use of the 720 USB modem, Novatel

could not compete for a contract with Sprint to provide WiMax data cards and USB modems, and

Novatel shifted focus to the European market. (Id. ¶¶16-18, 20-27.)

17 Weinert’s response to this news did not mince words – “If it’s true that we loose [sic] this

business to Sierra it would have a major impact on our business. This cannot be allowed to happen.” Ex.

1. In May 2007, Sprint stopped ordering the U720, just as it had promised. Ex. 2 at NOV-E-2796544.

Upon learning this information, Weinert wrote to all the defendants: “THIS IS KILLING ME! And

I am about to return the favor!!!! We cannot loose [sic] all of our SPRINT business. I made this

clear in January didn’t I??????” Id. at NOV-E-2796543.

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Defendants argue that affirmative misrepresentations alleged by Plaintiffs are based on allegedly

misleading omissions regarding “product mix.” (Mot. at 9-11.) However, Plaintiffs contend that

Defendants’ affirmative misrepresentations throughout the Class Period go beyond product mix to the

superiority of Novatel’s products enabling it to outperform the competition in a growing market. 

Plaintiffs contend that every statement Defendants made in 2007 about the financial condition of the

Company was false because Defendants failed to disclose that Novatel’s “product mix” did not “meet

the immediate needs” of Sprint and Verizon.16 Plaintiffs contend that Weinert and Leparulo knew that

Novatel would perform poorly in the new market conditions, but did not disclose this. 

At the start of the Class Period, Defendants told investors that “[Novatel] continue[d] to ramp to

meet increasing demand in the marketplace,” which distinguished Novatel from the competition because

the competition was purportedly using “fairly well tried out, older technologies and really the market

isn’t ready for that right now,” and described Novatel as being “perfectly positioned” for a market that

they claimed was “taking off.” (Ex. 7 at NOV-E-2961556; Ex. 8 at NOV-E-5062387; Ex. 20 at 3; Ex.

34 at NOV-E-4788441.) 

As the Class Period progressed, and simultaneously with reports of “record” financial results,

Defendants claimed that Novatel was “leading the way, we’re certainly in a leadership position, in both

the express card and the USB markets” (Ex. 20 at 7.) and even claimed that Novatel “had an

exceptionally strong first half of the year with Sprint.” (Ex. 27.) However, this statement is directly

contradicted by the January 8, 2007 cancellation notice from Sprint, by Weinert’s response to the news17

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18 Ex. 34 at NOV-E-4788443; Ex. 20 at 7. 

19 These affirmative misrepresentations belie Defendants’ argument that they did not have a 

duty to disclose. Mot. at 11, 21-22, 26; Stransky v. Cummins Engine Co., 51 F.3d 1329, 1331 (7th 

Cir. 1995) (“If one speaks, he must speak the whole truth.”). Defendants cite a handful of cases to 

argue otherwise. Mot. at 11 n.10, 26 n.20. Defendants’ cases are inapposite. The court in Verifone

dismissed a complaint where “[e]very allegation of misrepresentation or material omission ultimately

relie[d] on the failure to disclose a forecast of future sales or revenues” – not the case here. In re

Verifone Sec. Litig., 784 F. Supp. 1471, 1484 (N.D. Cal. 1992), aff’d, 11 F.3d 865 (9th Cir. 1993);

Walker v. Action Indus., 802 F.2d 703, 708-10 (4th Cir. 1986) (same). In FoxHollow and Burlington, the courts rejected the “duty to update” – not at issue here. In re FoxHollow Tech., Inc., No. C 06-4595

PJH, 2008 U.S. Dist. LEXIS 52363, at *46-*47 (N.D. Cal. May 27, 2008), aff’d, 359 F. App’x 802 (9th

Cir. 2009); In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1432 (3d Cir. 1997). And, in

Convergent, the Ninth Circuit affirmed dismissal because “Convergent was not obliged to disclose these

internal projections” – again, not at issue here. In re Convergent Techs. Sec. Litig., 948 F.2d 507, 516

(9th Cir. 1991). While Convergent contained the sound-bite cited in defendants’ brief, it did so in the

context of finding that “[t]he securities laws do not require management ‘to bury the shareholders in an

avalanche of trivial information.’” Id. The facts rendering Defendants’ statements false here – its loss of

market share – were not internal forecasts and certainly were not “trivial.”

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and by the subsequent loss of market share to Sierra Wireless, which was characterized internally as a

“bomb [being] dropped” on Novatel. Ex. 48 at NOV-E-2796853. 

By the end, Defendants were telling investors that demand for Novatel’s second generation USB

727 was so strong that “our major hurdle is tightness in our supply channel for selected components due

to the strong demand.”18 However, the JMP Securities analyst report confirmed the cancellation of the

U720 at Sprint in May, provided new information about when the 727 would be available (Aug. or

Sept.), and expressed the concern that Novatel would be losing market share to Sierra Wireless. Ex.

134, ¶¶33-34.

Defendants argue that even if it could be shown that Novatel had some duty to publicly project

whether its “product mix” was likely to match future developments in the industry,19 which it does not,

Plaintiffs would have the burden of showing that its statements “were known to be false or misleading at

that time by the people who made them.” Ronconi, 253 F.3d at 430; Kaplan v. Rose, 49 F.3d 1363, 1378

(9th Cir. 1994). Defendants also contend that Plaintiffs cannot prove the truth of the allegedly omitted

facts or demonstrate scienter.

The Court concludes that Plaintiffs have met their burden to come forward with evidence

demonstrating the existence of a genuine dispute for trial with respect to scienter and the materiality of

Plaintiffs claims regarding Novatel’s financial condition under § 10(b) and Rule 10b-5. Plaintiffs have

supplied sufficient evidence to demonstrate that Defendants statements “were known to be false or

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misleading at that time by the people who made them.” Ronconi, 253 F.3d at 430; Kaplan v. Rose, 49

F.3d 1363, 1378 (9th Cir. 1994). The parties’ dispute the materiality of the Defendants statements

regarding product mix and superior positioning in the market, and each side can point to evidence that

favors its position. The Ninth Circuit has stated that, as a general matter, “[m]ateriality typically cannot

be determined as a matter of summary judgment because it depends on determining a hypothetical

investor’s reaction to the alleged misstatement.” SEC v. Phan, 500 F.3d 895, 908 (9th Cir. 2007). 

Based upon the foregoing, the Court concludes that genuine disputes of fact exist and the Court,

therefore declines to grant summary judgment on the Plaintiffs’ ‘product mix’ claims.

c. Plaintiffs ‘Sprint Omission’ Claims 

Plaintiffs contend that Novatel’s public statements in early 2007 were materially misleading

because, by failing to disclose that Sprint would stop ordering Novatel’s U720 modem in July 2007, the

statements “did not fairly present the financial condition of the Company.” (CC, ¶ 57(a)(ii).) 

Defendants argue that Plaintiffs cannot identify any statements rendered misleading by this alleged

non-disclosure; cannot establish any basis for a free-standing duty to disclose the expected lifecycle of a

single product with a single customer; and cannot identify evidence of scienter.

“[A] private securities plaintiff proceeding under the PSLRA must plead, in great detail, facts 

that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct.” In re

Silicon Graphics Sec. Litig., 183 F.3d 970, 974 (9th Cir. 1999). But at summary judgment, the standard

is less stringent – the PSLRA requirement of pleading a “strong” inference of scienter “puts securities

fraud claims in the interesting posture of requiring plaintiffs to plead more than they must prove at trial,

where a simple inference of scienter is sufficient to support a jury’s verdict.” Epstein v. Itron, Inc., 993

F. Supp. 1314, 1323-24 n.9 (E.D. Wash. 1998). The Ninth Circuit has confirmed that “the PSLRA did

not alter the substantive requirements for scienter under §10(b)” and that “the standard on summary

judgment or JMOL remains unaltered.” Howard, 228 F.3d at 1064. As long as a reasonable jury could

conclude that the danger of misleading investors was either “known” or “so obvious” that defendants

“must have been aware of it,” a triable issue of fact exists. Id. at 1063.

Defendants’ contention that Sprint’s cancellation of the U720 modem was immaterial as a matter

of law is not well taken. (Mot. at 43-4.) The Ninth Circuit has stated that as a general matter,

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20 On February 20, 2008, Novatel issued a press release forecasting $110 million in revenues for

1Q08, which was $10 million below analysts’ estimates. (CC, Doc. No. 23, at ¶¶67-68.) On the same

day, Novatel disclosed that carriers were emphasizing the consumer market where Novatel “historically

had not placed an emphasis,” which undermined Novatel’s statements concerning product demand and

the superiority of its products. (Id. ¶7.) On February 20, 2008, Novatel’s stock closed at $13.86 per

share and after trading on February 21, 2008 had fallen to $10.69 per share, on trading volume of over

11 million shares. (Doc. No. 84, Ex. 3 at 128; CC, Doc. No. 23, at ¶7.)

21 On April 14, 2008, Novatel announced that 1Q08 revenues were $19 million short of

Novatel’s estimates. (CC, Doc. No. 23, at ¶8.) Defendant Leparulo partially attributed this shortfall to

the fact that Novatel was “between product launch cycles for our USB devices and demand in the

current environment has shifted toward lower end products” and that, “in some cases, we did not have

the right products for the right customers.” (Id. ¶¶76, 77.) These disclosures undercut Defendants’

previous statements concerning product demand and ability to compete. On April 14, 2008, Novatel’s

stock closed at $10.01 per share and after trading on April 15, 2008 had fallen to $7.76 per share, on

trading volume of over 12 million shares. (Doc. No. 84, Ex. 3 at 127-28; CC, Doc. No. 23, at ¶8.) 

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“materiality typically cannot be determined as a matter of summary judgment because it depends on

determining a hypothetical investor’s reaction to the alleged misstatement.” In re Petco Corp. Sec.

Litig., No. 05cv0823 H (RBB), slip op. at 18 (S.D. Cal. Apr. 29, 2008) (Doc. No. 368)(hereinafter,

“Petco”); Ex. F (quoting SEC v. Phan, 500 F.3d 895, 908 (9th Cir. 2007). At the very least, there are

serious questions of fact regarding the overall impact of Sprints’ cancellation and since each side can

readily point to evidence that favors its position, the Court concludes that genuine disputes of fact exist

and, therefore, the Court declines to grant summary judgment on the Plaintiffs’ Sprint cancellation

claims.

2. Evidence of Loss Causation

Plaintiffs allege that they paid an artificially inflated price for Novatel’s stock due to false and

misleading statements concerning Novatel’s relationship with Sprint, financial results, product demand,

and internal controls. Plaintiffs allege that on each of the following dates: July 20, 2007, February 20,

2008, April 14, 2008, August 19, 2008 and November 10, 2008, Novatel’s stock price fell after the truth

regarding these false and misleading statements became known.

Defendants contend that summary judgment should be granted on Plaintiffs claims of loss

causation for February 21, 2008,20 April 15, 200821 and August 19, 2008, because the Plaintiffs’ cannot

prove loss causation under the Ninth Circuit’s decision in Oracle. Defendants’ argue that on three of the

four dates that Plaintiffs allege corrective disclosures occurred: February 20, 2008; April 14, 2008; and

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22 Plaintiffs’ complaint alleges that Novatel’s disclosure on August 19, 2008, stated that Novatel

had broadened its accounting review and determined to move at least $3.4 million in revenue out of

1Q08 revealed the truth concerning a prior misstatement and caused a resulting stock price drop. (CC,

Doc. No. 23, at ¶¶81 and 126-28.)

23 See Stoneridge Inv. Partners, LLC v. Scientific–Atlanta, Inc., 552 U.S. 148, 156–57, 128 S.Ct.

761, 169 L.Ed.2d 627 (2008); Dura, 544 U.S. at 346–48, 125 S.Ct. 1627. 

24 In re Mercury Interactive Corp. Sec. Litig., 2007 WL 2209278, 2007 U.S. Dist. LEXIS 59171

(N.D.Cal. July 30, 2007) (citation omitted). 

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August 19, 2008,22 Novatel’s stock price declined following the disclosure of disappointing results.

(Exs. 35, 66-67.) Defendants argue that all three of these price declines fall squarely within Oracle’s

admonition that “[l]oss causation requires more than an earnings miss,” Oracle, 627 F.3d at 392, and

Plaintiffs have failed to identify evidence from which a jury could reasonably conclude that the market

“learned of and reacted to the practices the plaintiff contends are fraudulent.” Id.

a. Loss Causation Standard 

In order to succeed on a private right of action brought pursuant to § 10(b) of the Securities and

Exchange Act, Plaintiffs must prove, inter alia, “loss causation.”23 To meet this burden, Plaintiffs must

provide sufficient evidence to show “a causal connection between the material misrepresentation and the

loss.” Dura, 544 U.S. at 342, 125 S.Ct. 1627. Price inflation alone is insufficient. Plaintiffs must show

that an economic loss occurred after the truth behind the misrepresentation or omission became known

to the market. Id. at 346–47, 125 S.Ct. 1627. “[L]oss causation is not adequately pled unless a plaintiff

alleges that the market learned of and reacted to the practices the plaintiff contends are fraudulent . . . .

[I]n order to establish loss causation, the market must learn of and react to those particular practices

themselves.” Oracle, 627 F.3d at 392. Furthermore, the decline in stock price caused by the revelation

of that truth must be statistically significant. Id. at 342–47, 125 S.Ct. 1627; Metzler, 540 F.3d at 1063.

Simply put, “loss causation” is an “exotic name” for “the standard rule of tort law that the plaintiff must

allege and prove that, but for the defendant's wrongdoing, the plaintiff would not have incurred the harm

of which he complains.” Bastian v. Petren Resources Corp., 892 F.2d 680, 685 (7th Cir.1990).

In the context of a summary judgment motion, failure to establish that the disclosure of the

relevant wrongdoing played a significant role in a loss merits entry of summary judgment for failure to

show loss causation.24 Plaintiffs can survive the motion if the defendant is unable “to establish that, as a

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25 See Ex. AA at 1 (“a larger impact [than from component shortage] is expected from an

inventory surplus at one of NVTL’s chief North American customers (we believe Verizon)”); Ex. BB at

1 (“[Q1] is plagued by key operator customers’ inventory issues in all connectivity products, including

PC cards and USB modems, which has prompted liquidation activity.”); Ex. CC (same); Ex. 135, ¶71.

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matter of undisputed fact, the depreciation in the value of the [stock] could not have resulted from the

alleged false statement or omission of the defendant.” In re Motorola Sec. Litig., 505 F.Supp.2d 501,

550 (N.D. Ill. 2007) (citing Caremark, Inc. v. Coram Healthcare Corp., 113 F.3d 645, 649–50 (7th Cir.

1997)). In this regard, plaintiffs often hire experts to opine on loss causation. Generally, the starting

point of an expert's analysis on this issue is the identification of one or more corrective disclosures

during the class period. “A ‘corrective disclosure’ is a disclosure that reveals the fraud, or at least some

aspect of the fraud, to the market. It stands to reason then that ‘[a] disclosure that does not reveal

anything new to the market is, by definition, not corrective.’ ” Teamsters Local 617 Pension & Funds v.

Apollo Group, Inc., 633 F.Supp.2d 763, 818 (D. Ariz. 2009) (citations omitted).

b. Plaintiffs Claims of Loss Causation for February 21, 2008

On February 20, 2008, Novatel announced disappointing 4Q07 results and lower than anticipated

1Q08 financial guidance. (Ex. 39 at NOV-E-1192406; Ex. 40; Ex. 135, ¶¶69-70.) The next day,

Novatel’s stock price declined by 22.9% to $10.69. (Ex. 135, ¶72.) Contrary to defendants’ argument

(Mot. at 30), this price decline was substantially related to defendants’ fraudulent accounting practices

and loss of market share to Sierra Wireless, and at least nine different analyst reports attributed

Novatel’s disappointing results to excessive inventory build-up at Sprint and/or Verizon.25 Two other

analyst reports attributed the miss and disappointing guidance to “a loss of share to NVTL’s largest

competitor Sierra Wireless” and the fact that “it is clear Novatel is losing market share to its main rival

[Sierra Wireless].” Ex. 135, ¶71.

c. Plaintiffs Claims of Loss Causation for April 15, 2008

On April 14, 2008, the Company pre-announced its 1Q08 earnings results of $91 million, which

were substantially below the prior guidance of $110 million provided on February 20, 2008. (See Ex.

137; Ex. 135, ¶73.) Defendants blamed the miss on the three factors: (1) “a delayed launch of the

MC930D” with a major European carrier customer; (2) “sales of our Enterprise class MC727 products

were lower than expected” because of a shift to lower end products; and (3) failure to “adequately

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26 According to Peter Balchin, the head of Novatel’s European business (called “EMEA”), “[t]he

reference to O2 [in the press release] is totally wrong! O2 was 10k MC930D in Q1=$2m. EMEA has

been blamed for all the Verizon shit!” Ex. 46 at NOV-E-5121117. Mr. Balchin’s direct report, Bernd

Overbeck, responded:

This is totally unfair, what other truth are they twisting then also?

How can we behave honestly to this email and the press announcement, when the truth is

so different? [A]s questions will be asked by EMEA key customers, who do not see

themselves as the cause of USD10M shortfall, especially as we asked all of them to pull

business forward into Q1, and most EMEA customers did significantly well helping us

out in Q1 for the Verizon issues. Others we probably pushed far too hard when they were

not quite ready, and went into hiding now. Id. This evidence demonstrates that

defendants were publicly “twisting” the truth about the true impact that the Verizon

“issues” were having on the Company.

27 Ex. 51 at 738:20-739:8 (“Q. . . . Well, you didn’t mention [to analysts] that [Verizon] stopped

the shipping [of 727s in Q1] because of technical issues, right? . . . A. No, I certainly didn’t.”). 

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execute both from an operations basis and with our sales effort.” (Ex. 45 at NOV-E-6154567; Ex. 135,

¶74.) Plaintiffs’ evidence creates questions of fact whether these statements were a partial disclosure of

the truth that proximately caused Plaintiffs’ loss. (Ex. 135, ¶¶73-76.)

Plaintiffs’ contend that the April 14 disclosure of “lower than expected sales” because of a “shift

to the low end market” at Verizon was also a revelation that Novatel had misstated its sales of the U727

to Verizon26 that Novatel was in a “revenue-crisis,” and that Novatel’s 727 was “dead” – all facts known

to defendants before the 1Q08 guidance was announced on February 20, 2008. Gilead, 536 F.3d at 1058.

Moreover, as Weinert admitted in his deposition, the February 20, 2008 statements did not fully disclose

the true reasons why Verizon was slashing its demand for the 727, leaving inflation in the stock.27

Whether defendants had knowledge of the Verizon demand collapse and reduced guidance is an issue of

fact. Also, whether Defendants statements that $10 million of the $19 million miss was “not NVTLrelated.” (Mot. at 35.)

d. Plaintiffs Claims of Loss Causation for August 19, 2008

On August 19, 2008, defendants announced preliminary 2Q08 results below analysts’

expectations, lowered 3Q08 guidance, and disclosed the results of the Company’s accounting review.

(Ex. 47 at NOV-E-1216852; Ex. 135, ¶77.) Defendants argue that “undisputed facts show” the resulting

25% drop in Novatel’s share price was not caused by any disclosure of the relevant truth. (Mot. at 36.)

This is a fallacy. The analyst reports following the August 19 disclosure show that, at least, a substantial

portion of the drop was attributable to the results of the accounting investigation, the cost of accounting

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28 In Dr. Tabak’s own words:

Q. The – in your opinion, did the JMP article – the JMP analyst report that came out

on the morning of July 20th, did that disclose new information to the market?

* * *

A. Yes.

Q. Okay. And what was the new information?

A. It was the analyst’s belief about when Novatel’s replacement model would be

available.

* * *

Q. . . . So then, in your opinion, does the fact that the JMP article confirming the

information regarding the cancellation of the U720, that that – that, in and of itself,

constitutes new information. Right?

A. Yes.

* * *

A. In fact, you know, there’s other new information in the next sentence talking

about how Sprint will recommend Sierra Wireless’s 595 modem. 

Ex. 133 at 205:25-206:18, 209:4-21.

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review, and the delayed launch of Novatel’s next-generation products, all of which relate to Plaintiffs’

allegations. (Ex. 135, ¶78.)

e. Plaintiffs Claims of Loss Causation for July 20, 2007

On July 20, 2007, the JMP Securities analyst report confirmed the cancellation of the U720 at

Sprint (information that was not previously known to the market), provided new information about when

the 727 would be available (also new information), and expressed the concern that Novatel would be

losing market share to Sierra Wireless. (Ex. 134, ¶¶33-34.)

Defendants argue that the analyst reports issued on July 20, 2007, “introduced no ‘new’

factual information into the market” and that “the market should have incorporated the information

prior to July 20, 2007” and it was therefore immaterial. (Mot. at 38.) However, Defendants’ own expert

contradicts this claim28 and July 20, 2007 was not a day that analysts were scheduled to issue reports or

receive information from Novatel (as opposed to a scheduled conference call, for example), so the fact

that two analysts took the time to write reports on this issue demonstrates that the information disclosed

that day was material. JDS Uniphase, 2007 U.S. Dist. LEXIS 66085, at *23.

Even if some information had come into the market prior to July 20, 2007 partial disclosures at

an earlier date do not negate loss causation upon fuller disclosure of the relevant truth. Lormond, 565

F.3d at 266 & n.33 (series of partial corrective disclosures); In re LDK Solar Sec. Litig., 255 F.R.D.

519, 528-29 (N.D. Cal. 2009) (same). Learning that Sprint “might” cancel the U720 “is quite

different from knowing they were in fact” canceling Novatel’s flagship modem. Berson v. Applied

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29 Doc. No. 80 at 28.

30 See 17 C.F.R. §240.10b5-1(b) (requiring that the defendant have been “aware” of the material

nonpublic information when he sold stock); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 & n.12

(1976) (defining scienter required under Section 10(b) and Rule 10b-5); Countrywide, 588 F. Supp. 2d

at 1202-03 (“[L]oss causation for insider trading requires that the insider actually use []the inside

information in deciding to make the trade[].”); SEC v. Lipson, 278 F.3d 656, 660 (7th Cir. 2002)

(plaintiff has the “burden of . . . proving that inside information had played a causal role in [the

insider]’s decision to sell the shares in the amount, and when, he did.”); SEC v. Healthsouth Corp., 261

F. Supp. 2d 1298, 1319 (N.D. Ala. 2003) (establishing intent requires proof that defendant “knew or

should have known that he was breaching a fiduciary duty”) (citing SEC v. Unifund SAL, 910 F.2d 1028,

1039 (2d Cir. 1990)); see also Dirks v. SEC, 463 U.S. 646, 660 (1983). Plaintiffs cannot establish any of

these necessary elements.

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Signal Tech., Inc., 527 F.3d 982, 987 (9th Cir. 2008). 

Defendants’ remaining argument that “[t]here . . . is no proof that the July 20, 2007 statements

caused a statistically significant decline in Novatel’s stock price” and, therefore, the 11.6% intra-day

drop was the result of “random chance” is also without merit. (Mot. at 39.) At minimum, a question of

fact clearly exists as to whether the price movement on July 20, 2007, was the result of simple “random

chance” or the Company’s loss of its flagship modem to its biggest competitor. (Mot. at 39.)

While the Defendants have argued that the missed financial expectations alone are an “obvious

alternative explanation” for the stock price drops,29 the Court finds that Plaintiffs have provided

sufficient evidence to support their claims that the market learned of and reacted to the practices the

Plaintiffs contends are fraudulent on February 20, 2008; April 14, 2008; and August 19, 2008. Thus,

Plaintiffs have adequately demonstrated loss causation with respect to Defendants statements which

precludes summary judgment. 

3. Insider Trading Claims

To prove an insider trading claim under Section 10(b) and rule 10b-5, Plaintiffs must establish:

(1) that a Defendant possessed material and nonpublic information at the time he sold Novatel stock; (2)

that a Defendant was aware that the information he possessed was material and nonpublic and had the

“intent to deceive, manipulate, or defraud”; and (3) that the material nonpublic information played a

causal role in the Defendant’s decision to sell Novatel stock.30

Defendants argue that summary judgment should be granted on Plaintiffs’ Insider Trading

Claims because: (1) the allegedly nonpublic information was immaterial as a matter of law; (2) Plaintiffs

have presented no evidence that Defendants were aware of the alleged material non-public information;

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31 Shaw v. Digital Equipment Corp., 82 F. 3d 1194, 1211 (1st Cir. 1996) (nonpublic intra-quarter

information does not have to be disclosed unless the “information about the company's quarter-to-date

performance (e.g., operating results) indicat[es] some substantial likelihood that the quarter would turn

out to be an extreme departure from publicly known trends and uncertainties.”); Oracle, 2009 WL

1709050, at *22, *34 (rejecting an insider trading claim premised on a claim that the defendants were in

possession of material intraquarter data because the intraquarter data did not render the forecast for the

quarter unreliable); In re Oracle Corp. Deriv. Litig., 867 A.2d 904, 940 (Del. Ch. 2004) (“[I]t is only

when the intraquarter information makes it likely that the company will either outperform or

underperform its projections in some markedly unexpected manner that the materiality threshold

is satisfied.”)

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(3) Plaintiffs have presented no evidence that the alleged non-public information played a causal role in

the Defendants’ sales; and (4) Defendants’ 10b5-1 trading plans constitute an undisputed affirmative

defense to the Plaintiffs’ insider trading claims.

a. Allegedly Non-Public Information was Immaterial as a Matter of Law

Defendants argue that the Plaintiffs’ insider trading claims are premised on the contention that

Defendants possessed non-public information about Sprint’s plans to transition Novatel’s U720 modem,

which purportedly undermined existing expectations for Novatel’s performance. Defendants’ argue that

this information was relevant to the market, if at all, only to the extent that it undermined existing

expectations for Novatel’s sales and revenues. Therefore in order to show that undisclosed intra-quarter

information of this sort was material, Plaintiffs must prove that it rendered existing forecasts or

expectations for the quarter unreliable, i.e., that the information made it likely that the Company’s

performance would significantly deviate “from the range of results which could be anticipated based on

currently available information.”31

Defendants argue that Plaintiffs cannot create a triable question of fact on this issue and argue

that there is no evidence that Sprint’s ceasing orders of a single Novatel product had any material impact

on Novatel’s short or long-term prospects, because Novatel: (1) had numerous other products; (2) had

other customers for the same product; and (3) would shortly be selling the next generation U727 to

Sprint. Defendants argue that not only did Sprint’s migration from the U720 not undermine Novatel’s

existing guidance, Novatel substantially exceeded its guidance for the quarter in which the product

transition took place. Under these circumstances, Defendants contend that no reasonable jury could find

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that this information was material. See Oracle, 2009 WL 1709050, at *22, *34; Oracle Deriv. Litig., 867

A.2d at 940.

The Court notes, however, that Defendants' motion is prefaced on the assertion that Sprint's

cancellation of the U720 modem was part of a planned "transition" to Novatel's next generation modem. 

(Mot. at 2-6.) This argument is directly contradicted by the evidence offered by the Plaintiffs. The

January 8, 2007 cancellation notice from Sprint was characterized internally as a "bomb [being]

dropped" on Novatel. (Ex. 48 at NOV-E- 2796853.) Sprint was replacing Novatel's biggest selling

product (the U720 modem) with Novatel's largest competitor's (Sierra Wireless) modem, and the last

Sprint order for the U720 would be in April or May—months before Novatel's next generation modem

would be ready for sale. (Id.) Based upon the foregoing, the Court finds that Plaintiffs’ have

demonstrated a genuine dispute of material fact precluding summary judgment.

b. Whether Defendants Were Aware of Material Non-Public Information

Defendants argue that even if Plaintiffs were able to raise a triable issue of fact regarding the

materiality of the discontinuation of orders by Sprint, that there is no evidence that any Defendant was

aware that he or she possessed material nonpublic information or that anyone at Novatel thought that

Sprint’s decision to transition the U720 would prevent Novatel from meeting revenue projections. 

Defendants argue that since there is no evidence that any Defendant was aware that the information was

material, it follows that no Defendant made use of that information or have the requisite “mental state

embracing intent to deceive, manipulate, or defraud.” Ernst, 425 U.S. at 193 & n.12.

Each defendant sold large amounts of their stock for total proceeds of $23.8 million when they

knew that Sprint had cancelled Novatel’s USB modem and that “a LARGE portion of [Novatel’s]

revenue [was] dependent on the USB devices going forward.” (Ex. 56 at NOV-E-2078292; Exs. I-O;

Ex. P at 31-32.) The evidence is undisputed that each defendant knew this information when they

adopted/amended trading plans to sell, as they were all personally made aware of the Sprint

cancellation. (Exs. 2, 57.) The Ninth Circuit has stated that “unusual or suspicious stock sales by

corporate insiders may constitute circumstantial evidence of scienter.” In re Silicon Graphics, 183 F.3d

at 986; see Provenz v. Miller, 102 F.3d 1478, 1491 (9th Cir. 1996). “Among the relevant factors to

consider are: (1) the amount and percentage of shares sold by insiders; (2) the timing of the sales; and

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32 See Ronconi, 253 F.3d at 435 (“selling stock for $54, when the price subsequently rises to $74

and then sinks to $49, does not support an inference of knowing falsehood”).

33 As Judge Posner explained in Lipson, the defendant “might well have had two purposes, one to

transfer wealth to his son and the other to avoid a loss that his inside information told him was coming.

The existence of the legitimate purpose would not sanitize the illegitimate one.” 278 F.3d at 661.

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(3) whether the sales were consistent with the insider’s prior trading history.” In re Silicon Graphics,

183 F.3d at 986.

Based upon the foregoing, the Court finds that the timing and amount of Defendants’ stock sales as set

forth above, creates a genuine issue of material fact precluding summary judgment. 

c. Whether Nonpublic Information Played A Causal Role In Defendants’ Sales

Defendants argue that Plaintiffs have not identified a single document linking the U720

discontinuation to any Defendant’s stock sales or shown that Defendants entered into trading plans for

the purpose of benefitting from this information. Defendants argue that they adopted or amended their

Rule 10b5-1 trading plans on days when Novatel’s stock traded between $19.92 and $23.70. (Ex. 26, at

404-05; Exs. 46-50.) Plaintiffs contend that Defendants entered the plans to avoid the inevitable decline

in Novatel’s stock price after the market learned of Sprint’s discontinuation of the U720 modem. (CC, ¶

4.) The day that Plaintiffs argue the news about the “end of life” of the U720 hit the market, Novatel

closed at $27.05. Defendants argue that they did not avoid a loss by selling when they did. They could

have made more money had they waited until after the news broke.32

While it is true that “not every sale of stock by a corporate insider shows that the share price is

about to decline,” the Court must look to the timing of the sales to see if they were “at times calculated

to maximize the personal benefit from undisclosed inside information.” Ronconi v. Larkin, 253 F.3d

423, 435 (9th Cir. 2001). However, since Defendants possessed nonpublic information before they

amended their 10b-5 trading plans,33 which showed that Novatel stock was overpriced, and having this

information they sold a large quantity of that stock shortly before the information became public and the

stock dropped sharply in value, common sense tells us that their decision to sell when they did and how

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much they did, rather than sell later or sell less, was influenced by the information.” SEC v. Lipson, 278

F.3d 656, 661 (7th Cir.2002). Based upon the foregoing, the Court finds that Plaintiffs’ evidence creates

a genuine dispute of fact that precludes summary judgment.

d. Defendants’ 10b5-1 Trading Plans 

Under Rule 10b5-1, a trade is not made on the basis of nonpublic information if it was made

pursuant to a trading plan, the individual did not know the inside information at the time he entered into

the plan, and the individual exercised no discretion over his sales after adoption of the plan. See 17

C.F.R. § 240.10b5-1(c)(1)(i). Defendants argue that with regard to several of the challenged trades,

Defendants Souissi and Hadley sales fall within the affirmative defense afforded by 10b5-1 trading

plans. Dr. Souissi and Mr. Hadley entered into trading plans on December 15, 2006. All of Dr. Souissi

and Mr. Hadley’s trades between December 15, 2006 and May 1, 2007 were made pursuant to those

plans. (Exs. 44-45.) Defendants argue that Plaintiffs cannot create a genuine dispute regarding Dr.

Souissi or Mr. Hadley’s knowledge and the 10b5-1 plans are an independent basis for granting partial

summary judgment in favor of Dr. Souissi and Mr. Hadley as to any sales before May 18, 2007. 

Defendants claim this is supported by the Plaintiffs’ counsel’s instruction to Plaintiffs’ damages expert

Mr. Steinholt to assume there would be no liability for Dr. Souissi and Mr. Hadley’s stock sales before

they amended their preexisting 10b5-1 plans on May 18, 2007. (Ex. 75 [Steinholt Dep., 254:6-255:2].)

The Court notes, however, that each defendant entered new or amended 10b5-1 plans during the

May 14-June 13, 2007 time frame that contained accelerator clauses that called for immediate sales, the

next day under the Hadley and Souissi plans, and within two weeks under the Weinert and Ratcliffe

plans. (See Exs. 63-65, 67.) The Court finds Souissi’s use of 10b5-1 was particularly questionable

because he sold 110,000 shares the day after entering his 10b5-1 plan, for proceeds of over $2.2

million. (See also Ex. 68 at 31-44 (analyzing each defendants’ 10b5-1 plan)). He did so because, in his

opinion, an “open-window” insulated his trades. (Ex. 59 at 140:10-141:1.) Improper use of 10b5-1

trading is evidence of scienter. Based upon the foregoing, the Court finds that a genuine issue of

material fact precluding summary judgment.

4. Section 20(a) Claims

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K:\COMMON\BATTAGLI\DJ CASES\Even Numbers - Erin's Cases\In re Novatel Wireless Securities Litiga 33 tion\Final.novatel.MJOP&MSJ.Order.wpd 08cv1689

In their Section 20(a) claims, Plaintiffs contend that Defendants acted as controlling persons of

Novatel within the meaning of §20 of the 1934 Act. By virtue of their positions and their power to

control public statements about Novatel, Defendants had the power and ability to control the actions of

Novatel and its employees. Novatel controlled Defendants and its other officers and employees. Since

Plaintiffs have provided sufficient evidence regarding their allegations that Defendants have violated

Section 10(b), these is arguably liable pursuant to §20(a) of the 1934 Act and Defendants’ motion for

summary judgment on Plaintiffs Section 20(a) claims is DENIED.

Conclusion

For the reasons set forth herein, Defendant Leparulo’s Motion for Judgment on the Pleadings,

Doc. No. 289, is hereby GRANTED and Defendants’ Motion for Summary Judgment, Doc. No. 290,

GRANTED IN PART AND DENIED IN PART.

IT IS SO ORDERED.

DATED: November 23, 2011

Hon. Anthony J. Battaglia

U.S. District Judge

Case 3:08-cv-01689-AJB-RBB Document 414 Filed 11/23/11 Page 33 of 33